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 June 30, 2001
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 or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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: None
Securities registered pursuant to Section 12(g) of the Act
Common Stock, no par value (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 total outstanding common stock of the
Registrant, based on a per share price of $21.00 as of June 29, 2001, was
$143,486,721. As of June 29, 2001, there were outstanding 6,832,701 shares of
the Company's Common Stock (no par value). The aggregate market value of the
common stock held by non-affiliates of the Registrant, based on a per share
price of $21.00 as of June 29, 2001, was $112,699,692.
Documents Incorporated by Reference: Portions of the Company's Proxy Statement
for the 2001 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 "Risk Factors." All period references are to our fiscal periods ended
June 30, 2001, July 1, 2000, or July 3, 1999, unless otherwise indicated.
ITEM 1(a): General Development of Business
General
We are a leading provider of thin film deposition equipment to the Flat
Panel Display ("FPD") industry, the Architectural, Automotive and Solar Glass
industry, the Web Packaging industry and are pursuing the market for coatings on
PET (polyethylene terephthalate) bottles. Our high volume, large area deposition
systems are used by our customers to deposit thin films that enhance the
material properties of the base substrate. These thin films provide conductive,
electronic, reflective, filter, barrier and other properties that become
critical elements of the composition of our customers' products.
Additionally, we sell coated glass substrates to the FPD industry. These
products are used by our customers as a component in the manufacturing of black
and white liquid crystal displays ("LCD").
Since our inception in 1976, we have manufactured our own deposition
equipment for use in our coated glass production process. In 1996, when high end
flat panel technologies demanded that LCD manufacturers process their own glass
substrates in their factory, we expanded our product offering to include our
deposition equipment. Since that time, we began investing in the
commercialization of our thin film deposition equipment and coating processes
for the high end of the LCD market. The recent growth in the equipment side of
our business has been enhanced by an acquisition of our largest competitor at
the end of calendar 2000.
On December 31, 2000, we acquired the Large Area Coatings division ("LAC")
of Unaxis. The LAC division is now operating as Applied Films Germany, a
wholly-owned subsidiary of Applied Films Corporation with manufacturing in
Alzenau, Germany and sales and service offices in Asia, Europe and the United
States. Applied Films Germany designs, manufactures and sells large area coating
equipment in four product areas with global markets. The principal Applied Films
Germany product areas are display, architectural glass, automotive glass, solar
and web coaters. We are also pursuing the market for coatings on PET bottles for
soft drinks and other beverage markets.
Industry Background
Flat Panel Displays. FPDs are found in a wide variety of consumer and
industrial products, including cellular telephones, personal digital assistants,
calculators, laptop computers, pagers, scientific instruments, televisions,
portable video games, gasoline pumps, automotive instruments, point-of-sale
terminals and a number of other electronic devices. According to DisplaySearch,
the FPD market is expected to grow from approximately $11.8 billion in 1998 to
approximately $80 billion by 2007, an annual growth rate in excess of 27.0%.
Growth in the FPD industry is being driven by a number of market and
technological forces, including:
- the strong growth in wireless and portable communication devices;
- increased consumer demand for displayed information, driven largely by
the accessibility of information and entertainment on the Internet;
- technical characteristics of FPDs that make them ideally suited for
portable display applications, including thin profile, low weight,
high resolution and lower power consumption; and
- the emergence of larger high resolution displays such as active matrix
LCDs and plasma displays as attractive and viable alternatives to
CRTs.
1
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 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 high information content color displays, such as high
resolution liquid crystal displays ("LCD") and plasma display panels ("PDP")
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 high volume 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.
With shorter product development cycles and rapidly evolving technologies,
manufacturers are seeking relationships with suppliers that can clearly
demonstrate technical expertise in complex thin films with the ability to meet
performance expectations and decrease time to market.
Web Applications. The markets using web coated products are broad and
varied and often completely independent of one another. The products
manufactured using our web coating technology are large rolls of flexible
substrate, usually thin plastic or a thin metal foil that require a barrier,
conductive or decorative layer to be utilized in an end product. The majority of
the market growth is driven from two markets, consumer products and electronics.
The growth engine for each of these markets is different. Growth in the consumer
products market as it relates to web coaters is driven by:
- demand for products packaged in bags
- demand for decorative packaging using foils to enhance consumer appeal
- growth in demand for decorative packaging from developing countries.
Growth in the electronics market as it relates to web coaters is as follows:
- demand for anti-reflective films for FPD's for the laptop and AMLCD
markets
- demand for touch panel applications
- demand for capacitors as the capacitor market migrates toward dry
capacitors.
Web coaters deposit a thin film that adheres to paper, plastic or foil,
which creates a barrier coated substrate to enhance the product shelf life or
the opportunity for decorative applications used to enhance the look of packaged
food. An example would be the barrier film on a potato chip bag. In addition,
films are used for certain electronic applications, including capacitors where a
specialized thin film coated foil is produced and used as a key component of
this new market. The acquisition of LAC introduces flexible substrates
evaporative deposition and barrier coating technology to our product lineup. Our
products deposit thin film layers on rolled material, both plastics and foil, as
the substrate moves through our machines at high speed through a series of
rollers from a source roll to a take up roll where the material exits the
system.
We offer our customers a fully integrated solution and we have the largest
installed base of web coating systems with over 400 systems installed across the
broad line of product offerings for this industry.
Architectural, Automotive and Solar Glass Market. These markets are
addressed by our large glass systems. The products manufactured using these
systems are large glass substrates that through the use of thin films become an
integral component for the performance of the end product. The majority of the
market growth is driven from three markets: architectural, automotive and solar
glass. Growth in these markets is driven by the following:
- demand for energy conservation
- economic expansion driving commercial and residential growth
- expansion in automotive demand
- demand for alternative energy sources.
2
Glass is used in building and construction throughout the world and the
manufacturers of these products are constantly challenged to improve the
properties of the glass to resist environmental factors such as UV light and
enhance the functionality of the building by using coated glass for heat/solar
control (low-e coatings).
Automotive glass manufacturers seek to incorporate heat/solar control
properties in their glass as a means of improving the efficiency of their
heating and/or air conditioning systems. The architectural and automotive glass
markets are well established markets. In these markets, large glass
manufacturers install thin film coating technology in their glass production
process to enable them to sell a higher value added product to their customer.
These markets are mature and we expect growth rates to be lower than our other
markets.
The most recent addition to this product area is equipment that addresses
the solar market. Solar energy has been a mainstay in the alternative energy
segment for a number of years. As energy costs rise and as demand surpasses
supply, solar power becomes a viable alternative. Solar cells require a complex
thin film stack and, as this market develops, we will continue to position
ourselves with the thin film coating technology and equipment required to enable
the commercialization of these products.
Barrier Coatings for PET bottles. PET bottles have been used in the soft
drink industry for a number of years, particularly in the United States. Outside
the United States, glass bottles are widely used in all segments of the beverage
industry. The beverage industry continues to experience pricing pressures and
pressure to reduce costs. Glass bottles are heavy and the cost of the raw bottle
as well as the costs associated with the transportation, material handling and
logistics of glass bottles will, we believe, cause bottlers to increasingly use
PET bottles in other parts of the world.
According to Petrochemical Consulting International, carbonated beverage
bottlers consume 44% of the worlds PET production. This consumption is expected
to grow at a rate of 10% per year throughout 2007. Additionally, the beer
bottling industry which currently consumes less than 0.5% of the worlds PET
production is expected to grow to 4% by 2007.
Factors driving this growth are the bottlers' desire to:
- reduce weight
- save transportation and component costs
- increase safety
- produce PET bottles with materially the same barrier characteristics
as a glass bottle
PET bottles are widely accepted in many carbonated beverage markets around
the world, but the latest entrance is in the beer market.
Approximately five years ago, The Coca-Cola Company invested in the base
technology for applying barrier layers to the outside of PET bottles. Coca-Cola
acquired various intellectual property rights and began working with engineers
at Krones AG and the LAC division to develop a high speed method for depositing
barrier layers on PET bottles to improve the shelf life of the product. After
several years of research and development, the LAC division developed a viable
production method.
We have agreed to make the barrier coating deposition equipment and sell it
through Krones AG to Coca-Cola and other beverage companies. We jointly share
rights to the technology and anticipate expansion of these products into other
markets such as the beer industry.
Strategy
Our objective is to be the leading global supplier of coating process
technology and thin film deposition equipment to the markets we serve. Essential
elements of our strategy include the following:
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 our markets. 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 and microdisplay markets, and initiated
sample testing of thin films for use in organic LEDs ("OLEDs"). Our coated glass
operations in Longmont support these and other process development efforts as we
use those capabilities in the commercialization of thin films. We pioneered
silicon barrier coatings on PET bottles, and other thin film applications on
flexible substrates. We hold
3
over 200 patents and we intend to continue to develop new coating and process
technologies to meet the evolving needs of our customers.
Leverage and Extend Our Leadership By Continuing To Invest In Research and
Development. We leverage our thin film technology and process capabilities to
address the evolving requirements for more sophisticated, technologically
advanced products and applications. We must continue to invest in research and
development to ensure that we stay on the leading edge of deposition technology
for our markets. We believe our technological capabilities, history of
designing, developing and improving our own thin film manufacturing systems, and
extensive operational experience provide us with competitive advantages in
selling coated glass to FPD manufacturers and thin film coating equipment to
several industries.
Capture Market Share and Opportunities Created by Growing Demand in Our End
Markets. As consumers continue to demand more sophisticated displays, FPD
manufacturers are focusing on and increasing capacity to produce high resolution
displays. Food packaging companies continue to focus on reducing their packaging
costs through thin film development and are expanding their markets to areas
where packaged products are growing rapidly. Automotive, architectural and solar
glass manufacturers are challenging existing technology to reduce cost and
enhance their low-e products. The conversion from glass beverage bottles to PET
bottles and the ongoing issues of product freshness continue to challenge the
technology in that market. We will continue to align our products and technology
with our customers to ensure that we have the technology of choice, which will
enable us to grow with these markets.
Capitalize On Our Global Customer Support Network. We realize the
importance of our equipment to our customers' success. We meet our customers'
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. 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 primarily to LCD manufacturers and thin
film coating equipment to several markets, which are currently considered to be
two separate industry segments. For further discussion see "ITEM 8: Financial
Statements and Supplementary Data -- Note 12: Segment Information".
ITEM 1(c): Narrative Description of Business
Products
Our thin film coating systems are used in many different applications
spanning four distinct markets. We design and manufacture thin film coating
equipment for our own in-house production of coated glass both in Longmont and
in China. We also supply thin film coated glass primarily for LCDs used in
wireless communication devices and other electronic devices.
4
The following table illustrates our principal products:
Market Product Line Deposition Method General Price Range *
- ------------------- ----------------- ---------------------
Display Systems:
ATX-700 Physical Vapor Deposition $4-7 million
New Aristo Physical Vapor Deposition $4-7 million
ZV350 Physical Vapor Deposition $2-3 million
BTX Physical Vapor Deposition $1-3 million
Web Coaters:
Multiweb Physical Vapor Deposition $4-8 million
Top Met Evaporative Deposition $1-3 million
Top Beam Evaporative Deposition $4-6 million
Multi Met Evaporative Deposition $1-3 million
Architectural, Automotive and Solar Coaters:
Terra-G Physical Vapor Deposition $10-20 million
A-Series Physical Vapor Deposition $7-15 million
Solaristo Physical Vapor Deposition $4-7 million
PET Bottle Barrier Technology:
BestPET(TM)LG-20 Evaporative Deposition $1-3 million
* The price for a particular system may be greater or less than the general
price range, depending on the specific configuration and specifications.
The following table sets forth our net revenue (net of returns and
allowances) by our major product categories and industry segments for our last
three fiscal years:
Fiscal Year Ended
-----------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
-----------------------------------------------------
(in thousands)
Total Thin Film Coated Glass $ 27,523 $ 35,159 $ 26,906
Thin Film Coating Equipment 85,192 7,133 4,617
-----------------------------------------------------
Total Net Sales $ 112,715 $ 42,292 $ 31,523
=====================================================
Thin Film Coating Equipment
Display Systems
The ATX-700 Series. The ATX-700 is an advanced thin film coating system
that provides a 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 minimized footprint (half of a traditional
in-line system), lower particulate levels, and reduced manual labor requirements
because of robotic handling. The ATX-700 is particularly well suited for
handling the large sheets of glass processed in the PDP manufacturing process.
The ATX-700 is modular and can be configured to meet multiple thin film coating
requirements for the high-end FPD market. 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 New ARISTO. The recently introduced New Aristo is an advanced thin film
coating system that provides a solution to the increasing display size driving
larger mother glass sizes and low particulate requirements of the active matrix
LCD and color STN markets. The New Aristo is designed to apply critical coatings
such as low-temperature ITO and black matrix chrome for the Active Matrix LCD
market to the glass substrate. The New Aristo features high throughput, low cost
of ownership and the capability for double-sided coatings.
The ZV350. The ZV series is a thin film coating system that provides a
solution for pilot production LCD fabrication operations. The ZV 350 features
low throughput, low particulate requirements and smaller glass sizes. The ZV350
is able to coat, on a small scale, all materials coated by the ATX-700 and New
Aristo.
5
The BTX Series Batch Coaters. The BTX series is a small sputtering system
that consists of a single chamber designed to deposit high quality films on
display glass at a very low rate. These machines are ideally suited for the
color filter manufacturers supplying coated substrates to the color STN market.
Web Coating Systems
Our web coating technology is designed to use thin films to enhance the
material properties on flexible substrates used in various markets such as food
packaging, decorative packaging or electronic applications such as EMI
shielding, dry capacitors, and touch panel applications.
Multiweb. Our multiweb systems use physical vapor deposition processes to
apply conductive coatings primarily for touch panel applications.
Top Met. Our Top Met Web Coater is an advanced thin film coating system
that provides a solution for coating metal materials on flexible substrates. The
Top Met uses thermal evaporation to deposit thin layers of aluminum in vacuum on
to flexible substrates, usually film, paper or textiles in roll format.
Top Beam. Our Top Beam Web Coater is an advanced thin film coating system
that uses electron beam evaporation technology to produce transparent barrier
coatings used in the food packaging industry. The Top Beam Web Coaters use high
powered electron beam guns to evaporate metal or metal oxide.
Multi Met. The Multi Met Web Coater is an advanced film coating system that
uses evaporative deposition technology to deposit thin films on very thin foil
at high speed in vacuum for the capacitor market. The Multi Met offers the
ability to mask specific patterns on substrates.
Architectural and Automotive Coating Systems
Architectural and Automotive Coating Equipment. Our Architectural Glass
Coating technology is designed to apply low-e coatings on large glass substrates
used in building glass and automotive windshields.
Terra-G. Our Terra-G glass coater is our most advanced coating system
designed for the large glass market. The Terra-G uses large planar magnetron
cathodes and uniformly deposits multiple thin films across a large area at very
high volume. The Terra-G can be up to 150 meters long and can deposit up to 20
different thin films on a single side during the process.
A-Series. Our A Series glass coater is a smaller glass coating system
capable of handling large substrates sizes. The A-series uses planar magnetron
cathodes and deposits multiple thin film on the glass which is moving
horizontally through the system. The A-Series can be up to 50 meters long.
Barrier Coating Systems
PET Bottle Barrier Technology. Our PET Bottle barrier technology is
designed to enhance the material properties on PET beverage bottles to extend
the shelf life of the beverage within.
BestPET(TM) - LG20. Our BestPET(TM) LG20 System is a leading technology for
coating barrier properties including silicon oxide on plastic bottles at a rate
of 20,000 bottles per hour. The coatings are deposited on the outside of the
bottle using evaporation technology and the coatings are transparent. We are
actively pursuing this new market.
GMS Tester. Our GMS Tester is a leading technology for testing the Barrier
Improvement Factor ("BIF") for PET bottles. These systems use gas and vacuum to
test the permeability of the PET bottles produced and coated on the LG-20.
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 SiO(2) 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. One 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,
6
portable video games and related products. The market for STN coated glass is
particularly impacted by 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.
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. To produce the coatings used in touch screens, we deposit a very thin,
highly uniform layer of ITO. In addition, we are developing optical coatings to
meet anti-reflection requirements in this market.
Microdisplay Coated Glass. The most rapidly growing portion of our coated
glass business is the market for microdisplay coated glass. In fiscal 2001, we
gained market acceptance and began shipping coated glass to this emerging
industry. Microdisplays are used in several applications such as DLP projection
LCD devices, projection televisions and high quality small displays used on
devices such as digital cameras and hand held video recorders. We are providing
a coated substrate with thin films on both sides of the glass, consisting of an
index matched ITO on one side and anti-reflective coatings on the other.
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 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
Germany, Hong Kong, Belgium, Taiwan, Korea, Japan and China. Other personnel,
including our Chief Executive Officer, Executive Vice President and Vice
President, make regular trips to visit our customers around the world to
finalize contracts and ensure proper customer service. The sales cycle for thin
film coating equipment is long, involving multiple visits to and by the customer
and up to twelve 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 usually sell our thin film coating equipment on a
progress payment basis. We generally sell our thin film coated glass on open
account, most of which are insured, or backed by letter of credit. Our customer
payment history has been excellent.
Approximately 67% of our fiscal 2001 gross sales were derived from exports
to our customers outside of our manufacturing centers in the United Sates and
Europe, primarily to Asia. In fiscal 2001, our ten largest customers accounted
for approximately 35% of our gross sales. The principal demand for FPD thin film
coated glass is in Asia, and our customers for thin film coating equipment have
historically been located in Japan, Korea, China, Taiwan and the United States.
We believe our potential geographic market for thin film coating equipment
includes all the major geographic regions.
We schedule production of our systems based upon order backlog and customer
requested delivery. Because shipment dates may be changed and customers may
cancel or delay orders with little or no penalty, our backlog as of any
particular date may not be a reliable indicator of actual sales for any
succeeding period. At June 30, 2001, we had a backlog of approximately $99.2
million compared with a backlog of approximately $8.8 million at July 1, 2000.
7
The following table sets forth our net revenues by geographic region:
Fiscal Year Ended
----------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
----------------------------------------------------
(in thousands)
Asia (other than Japan) $ 48,206 $ 24,641 $ 17,691
Japan 27,552 13,929 7,645
United States 13,764 2,934 4,924
Europe and Other 23,193 788 1,263
----------------------------------------------------
Total $ 112,715 $ 42,292 $ 31,523
====================================================
Technology
We believe that our expertise in process and product engineering, as well
as research and development enables us to rapidly develop new technologies and
products in response to emerging industry trends. The breadth of our technology
enables us to offer our customers a combination of thin film technology
solutions, which we believe is critical for today's rapidly evolving thin film
applications markets.
Our deposition technology solutions offer highly specialized performance
functions that enhance thin film characteristics for the electrical and optical
quality of finished products used in various industries. For example, the
development of solar control layer systems (based on Si3N4 and TiO2) offers our
customers the choice between deposition of low-e and solar control architecture
glass layers with the most economical production system. The principal methods
of deposition that we install with our systems are physical vapor deposition
("PVD"), evaporation, and plasma enhanced chemical vapor deposition ("PECVD").
While coating systems are essential to our customers' production process,
they are usually just one part of our customers' production process. Our
customers' products are sold in highly competitive global markets subject to
price pressures. In many cases, our R&D efforts result in tangible cost savings
in time and development effort for the customer. For example, the recent
development and optimization of on-site process control with a Lambda sensor
saved one customer significantly in their annual production costs.
The coating equipment that 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 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 SiO(2) to prevent sodium in glass
from leeching into the thin film conductive coatings which are subsequently
applied. After the SiO(2) is applied, 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. We continue to work on the
conductivity of our ITO coatings and the barrier qualities of our SiO(2). We are
also continuing to work on improving our systems not only to obtain better
quality coatings, but also to obtain better utilization of coating materials.
Technological Foundations. John S. Chapin, Director 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
8
advantage because we design, build and operate our own thin film coating
equipment for thin film coated glass. Further, because our primary business was
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.
Manufacturing and Facilities
Our Longmont, Colorado headquarters contains 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 this facility. In Longmont, we currently
operate two coated glass production lines and four development lines for
developing coating and equipment processes. We can concurrently build multiple
systems at our Longmont facility.
Our Alzenau, Germany manufacturing facility contains approximately 190,000
square feet and include 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 at this facility. We can concurrently build multiple thin film
deposition systems at our Alzenau Germany facility.
We also lease space in the Hanau, Germany facility. We are in the process
of transferring operations from Hanau to Alzenau and anticipate that this
transfer will be complete by the end of fiscal 2002.
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 60,000 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. In the
second half of calendar 2000, we transferred a Venture 5000 system from our
Longmont facility to the STEC facilities, bringing the number of coating systems
to three. 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. We
intend to continue to leverage STEC's strategic position by expanding its
manufacturing capacity in the future including an announced expansion into the
color STN market by the Joint Venture that will be producing low temperature ITO
glass by December 2001. We will also continue to evaluate business opportunities
that strengthen our position with our customers.
In addition to our Longmont, Alzenau, Hanau 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. We also have sales offices in Belgium, Hong
Kong, Korea, Japan, Taiwan, and China.
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. Four companies worldwide currently manufacture to these
quality standards. We currently purchase glass from four of these suppliers. We
are vulnerable to increased costs of raw glass. We have multiple sources for our
other primary raw materials used in the process for thin film coated glass.
Competition
Our markets are highly competitive and each market that we serve has major
competitors that do not generally cross over our markets.
FPD Thin Film Coating Equipment. For FPD thin film coating equipment, we
compete against Ulvac Japan, Ltd., and Anelva Ltd. Japan, both established
equipment manufacturers. 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,
9
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 outside the United States, primarily
in Asia. Our primary competitors for thin film coated glass are Samsung/Corning,
Merck Display Technology, and Wellite.
Web Coating Equipment. We are aware of several web coating competitors
worldwide, some of which are large companies with significant resources. Our
most significant competitors for web coating equipment are General Vacuum, of
the United Kingdom, and Von Ardenne, a company headquartered in Dresden,
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.
Architectural/Automotive/Solar Glass Equipment. In manufacturing
architectural glass coaters we compete against Von Ardenne, a German thin film
coatings company, and BOCTC, British Oxygen Coating Technologies Corporation,
located in California. 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.
PET Bottle Coating Equipment. In manufacturing barrier coating systems for
PET Bottles we compete with the Sidel division of Tetra-Pak, an established
manufacturer of food packaging products headquartered in Sweden. Our arc
evaporation process applies a barrier coating to the outside of the bottle while
Tetra-Pak's chemical vapor deposition ("CVD") process coats a barrier layer on
the inside of the bottle. Competition is based on technology, 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, source utilization and throughput.
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, extensive
experience with vacuum technologies, and the depth of our commercial coating
experience. Our customer oriented 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 to the customer.
The December 31, 2000 acquisition of the LAC business significantly
expanded our research and development capabilities. We plan to continue our
commitment to new product development in the future. Our level of research and
development activity and expenditures has increased significantly as a result of
the recent acquisition of the LAC business. Our research and development
expertise comprises a wide range of coating technologies, including:
- Thermal evaporation by direct heating for organics and anorganics
- Electron beam evaporation for dielectrics
- Direct current, radio frequency and radio frequency superimposed
direct current magnetron for reactive and non-reactive sputtering
- Alternating current magnetron (TwinMag(TM)) for fully reactive
sputtering
- Hollow cathode source for highly reactive coatings
10
- Direct current, radio frequency and microwave sources for PECVD
- Cleaning with direct current glow discharge, radio frequency etch and
ion assisted etch.
We use teams of electrical and mechanical engineers and process engineers
to work out appropriate solutions to meet our customers' requirements.
- These project teams are supported by the R&D department's thin film
functionality design group, a computer-aided engineering group and a
surface and thin film analytical group. Our analytical group has
access to sophisticated thin film test and measurement equipment.
Our research and development expenditures in 1999, 2000 and 2001 were $1.0
million, $1.4 million and $6.4 million, respectively. In addition, during fiscal
2001, the Company recognized $11.5 of acquired in-process research and
development obtained in the acquisition of LAC which is included in amortization
of goodwill and other intangible assets on the accompanying consolidated
statement of operations.
Intellectual Property
We believe that due to the rapid pace of innovation within our industry,
factors such as technologically and creatively skilled personnel, the ability to
develop and enhance systems, knowledge and experience of management, reputation,
product quality and customer service and support are important for establishing
and maintaining a competitive position within the industry, along with patent or
other legal protections for our technology. As part of the December 31, 2000,
acquisition of the LAC Business, we acquired over 200 issued patents and over
200 patent applications and trademarks. In addition, we entered into a license
agreement with Unaxis pursuant to which we license certain intellectual property
rights owned by Unaxis. We also entered into a second licensing agreement
pursuant to which we license certain technology back to Unaxis.
Under the Newco Intellectual Property License Agreement, we license certain
intellectual property owned by us to Balzers Process Systems GmbH, an indirect
subsidiary of Unaxis Holdings AG. The license is an irrevocable, royalty-free,
perpetual and world-wide license to make and sell products in the areas of dry
etch applications, the thin film process for the back glass of TFT displays,
cluster tools and stationary sputtering and is exclusive in these fields until
December 31, 2002. The license also may be used by Balzers Process Systems in
areas in addition to the specified areas provided, however, that for a two year
period ending December 31, 2002, the license does not extend to certain areas
reserved to us. The areas reserved to us until December 31, 2002, include
architectural glass coating and inline automotive glass coating, web coating for
capacitors and decorative and packaging applications, diffusion barriers for
certain bottles and containers and certain display coating systems used to coat
the non-active portion of a display. After December 31, 2002, neither party has
an exclusive field under the license and either party is able to use the
intellectual property to compete in all markets.
Under the Bravo Intellectual Property License Agreement, we license certain
intellectual property from Balzers Process Systems GmbH, an indirect subsidiary
of Unaxis Holdings AG. The license is an irrevocable, royalty-free, perpetual
and world-wide license to make and sell products in the areas of architectural
glass coating and inline automotive glass coating, web coating for capacitors
and decorative and packaging applications, diffusion barriers for certain
bottles and containers and certain display coating systems used to coat the
non-active portion of a display and is exclusive in these fields until December
31, 2002. The license also may be used by us in areas in addition to the
specified areas provided, however, that for a two year period ending December
31, 2002, the license does not extend to certain areas reserved to Balzers
Process Systems GmbH. The areas reserved to Balzers Process Systems include dry
etch applications, TFT displays, cluster tools and stationary sputtering. After
December 31, 2002, neither party has an exclusive field under the license and
either party is able to use the intellectual property to compete in all markets.
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.
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 investment plan for STEC involves $27.1
11
million, of which $19.6 million is currently in equity and $7.5 million in debt.
Each party has made $3.2 million equity contribution in cash, and the balance
was derived from the conversion of retained earnings to paid in capital.
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.
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. The purchase price for SNSG glass substrate
is at the lowest price and on competitive terms and conditions with respect to
quality and delivery compared to those offered to us by any third party.
Financing. If the Board approves third party debt financing with a lender
who requires the guaranty of the parties, each party must provide a separate
guaranty of such borrowings in accordance with its then current equity interest.
Guarantors will receive a guaranty fee to be agreed by the parties, and STEC
will indemnify the guarantors. Effective July 1, 2001, STEC has entered into a
$10.0 million revolving credit agreement with Sumitomo Bank, which we and NSG
have guaranteed. NSG's guaranty 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 June 30, 2001, we employed approximately 642 people. Our United
States workforce of approximately 200 people is non-union. We have approximately
398 people in Germany, a majority of which are represented by a works council
that has employee representation. Most companies in Germany are required to be
represented by works councils. We have 44 people in sales and service in other
countries around the world. We negotiate wages and benefits annually with our
German workforce. We consider our relationship with our employees to be good.
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 believe
this emphasis assists with enhanced productivity, cost control, and product
quality and has helped us attract and retain capable employees.
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 increasing regulation.
12
Legal Proceedings
We are not presently involved in any legal proceedings which, if not
settled in our favor, would, individually or collectively, have a material
adverse impact on our financial condition.
Executive Officers and Directors
Our executive officers and directors are as follows:
Name Age Position
---- --- --------
Thomas T. Edman 39 Director, President and Chief Executive Officer
Graeme Hennessey 63 Vice President
Lawrence D. Firestone 43 Chief Financial Officer and Treasurer
Helmut Frankenberger 44 Executive Vice President - Thin Film Systems
Jim Scholhamer 34 Vice President - Thin Film Coatings
Cecil Van Alsburg 64 Director, Chairman of the Board
John S. Chapin 60 Director
Chad D. Quist 39 Director
Richard P. Beck 68 Director
Vincent Sollitto, Jr. 53 Director
Aitor Galdos 46 Director
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 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 degree in East Asian studies (Japan) from Yale and received a masters
degree in business administration from The Wharton School at the University of
Pennsylvania.
Graeme Hennessey has served as our Vice President - Sales and Marketing
since April 1993 and is currently President of Applied Films Asia Pacific. 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 has 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 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.
Helmut Frankenberger has served as the Executive Vice President, Thin Film
Systems for us since the acquisition of the Leybold Large Area Coatings division
of Unaxis Corporation on December 31, 2000. Prior to the acquisition, Mr.
Frankenberger served as President of Balzers Process Systems, located in
Germany, since 2000, and the Vice President of Large Area Display Division since
1999. From 1997 through 1998, he served as the Division Manager of Display
Products, and from 1996 through 1997, served as the Division Manager of Data
Storage at Balzers Process Systems. From 1969 to 1987 Mr. Frankenberger served
in various capacities related to sales, marketing and equipment service for
Leybold Deutschland in Germany, Japan and the United States. Mr. Frankenberger
obtained his bachelors degree in Electronic and Computer Science from University
Darmstadt in Germany.
Jim Scholhamer has been employed by us since August 1997. Mr. Scholhamer
currently is the Vice President - Thin Film Coatings and was previously the
Director of Operations for Thin Film Coatings. 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
13
Ovonic Synthetic Materials, Inc., a division of Energy Conversion Devices,
located in Michigan. Mr. Scholhamer has a bachelors of science degree in
engineering from the University of Michigan.
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 of 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.
John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and has served as
Vice President - Research, Corporate Secretary from 1976 to November 2000. Mr.
Chapin has also served as 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.
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. 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
serves as a director of Photon Dynamics Corporation and TTM Incorporated. 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. and Ultratek Steppers. Mr. Sollitto
is a graduate of Tufts College where he received a B.S.E.E. in 1970.
Aitor Galdos has been a director of our company since January, 2001,
following the acquisition of the Large Area Coatings Division of Unaxis. Mr.
Galdos has served as Vice President and Corporate Development Manager at Unaxis
Corporation since 1999, and served in various positions, including Division
Manager of Development of TFT Displays Division at Unaxis (formerly Balzers)
since 1988. Mr. Galdos was appointed to serve on our Board of Directors by
Unaxis pursuant to an agreement providing that Unaxis will have the right to
nominate one director as long as they own 10% or more of our outstanding common
stock subject to certain terms and conditions.
Our Board of Directors is currently composed of seven directors, divided
into three classes. Messrs. Edman and Sollitto serve in the class whose term
expires in 2003; Messrs. Beck and Quist serve in the class whose term expires in
2002; and Messrs. Van Alsburg, Chapin and Galdos serve in the class whose term
expires in 2001. 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 stockholders. Each director holds office until
that director's successor has been duly elected and qualified. Selection of
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".
14
ITEM 2: Properties
Our headquarters and our domestic manufacturing facilities are located in
Longmont, Colorado in approximately 127,000 square feet of leased space. We have
leased facilities in Alzenau, Germany consisting of approximately 190,000 square
feet which includes production facilities, general offices and research and
development facilities. We have sales and service offices in China, Hong Kong,
Taiwan, Korea, Belgium 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 not presently involved in any legal proceedings which, if not
settled in our favor, would individually or collectively have a material adverse
impact on our financial condition.
ITEM 4: Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 2001 to a
vote of our Shareholders.
RISK FACTORS
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 industries we serve, 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, thin film coated glass prices
declined approximately 29% during fiscal 1999, adversely affecting our
net income), 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;
- the accuracy of the estimation of our costs can materially impact our
operating results on a quarterly basis
15
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. We have
experienced further pricing pressures in fiscal 2001, 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. Several of our competitors increased production capacity during
1999 and 2000, which we believe has contributed to pricing pressures on our
products. 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 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,
which 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 recent entry into the thin film coating equipment business through internal
development and by acquisition 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. Although the acquisition of the Large Area Coating business provided
additional coating equipment products and expertise, we must effectively manage
that business or our performance may be adversely affected.
We are subject to the risks inherent in the operation or the development of
a new or existing 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. Among other markets, we are anticipating
growth in AMLCD and PDP applications over the next three 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 their marketing. 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
16
requirements in-house, thus adversely affecting our sales of thin film coated
glass to such customers. Equipment sales also may be affected by customers'
decisions to begin internal production of glass coatings rather than relying on
an outside supplier such as ourselves.
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 operating
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 thin film deposition 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 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 high
resolution color STN, active matrix LCDs and plasma displays;
- changes in the way coatings are applied to glass, film and bottles;
- development of new materials that improve the performance of the
coated substrate; and
- improvements in the alternatives to our technologies.
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.
Even if we are able to develop new products that gain market acceptance, sales
of new products could impair our ability to sell existing product lines.
Competition from our new systems could have a negative effect on sales of
our existing thin film coating systems and the prices we could charge for these
systems. We may also divert sales and marketing resources from our current
systems in order to successfully launch and promote our new systems. This
diversion of resources could have a further negative effect on sales of our
current systems.
A significant part of our business is done in Asia and any downturn in the Asian
economy could adversely affect us.
Export revenues to customers outside of our manufacturing centers in the
United States and Europe represented approximately 85%, 93% and 67% of our net
revenues in fiscal 1999, 2000 and 2001, respectively. The principal
international markets in which we and our STEC joint venture have historically
operated are China (including Hong Kong), Korea, Japan, Taiwan and Malaysia.
Banking and currency problems in Asia have had and may continue to have an
adverse impact on our revenue and operations. Although the acquisition of the
Large Area Coating business has diversified our products and markets, 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;
17
- 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
a portion of 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 50%
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 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 managing director 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.
Recent 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. We
cannot assure that the market price at any particular date will remain the
market price in the future. The closing market price of our common stock has
fluctuated dramatically. For example, the closing market price of our common
stock fluctuated from $24.00 on January 3, 2001, to a low of $7.78 on April 4,
2001, and then to $22.50 on May 21, 2001.
Our operating results depend on market conditions in the industries we serve.
Our business depends on the purchasing requirements of manufacturers of
FPDs and our customers in the web coating, architectural glass and PET bottle
markets. We cannot assure you that the markets we serve 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 these markets. Our business,
18
operating results, financial condition and prospects would be materially
adversely affected by any future downturns in the markets we serve.
We are dependent on a small number of suppliers of certain raw materials and are
vulnerable to increased prices for raw materials.
We currently rely on three glass suppliers, 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 long term, firm price, or 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.
Our largest customers are expected to account for a significant portion of our
revenues for certain types of coating equipment and our revenues would
significantly decline if one or more of these customers were to purchase
significantly fewer of our systems or they delayed or cancelled a large order.
We operate in the highly concentrated, capital intensive coating equipment
industry. For certain products such as our BESTPET(TM) system for coating PET
bottles, we anticipate that our largest customers will account for a significant
portion of our revenue. If any of our key customers were to purchase
significantly fewer of our systems in the future, or if a large order were
delayed or cancelled, our revenues would significantly decline. Accordingly, for
certain types of coating equipment, we expect that we will continue to depend on
a small number of large customers for a significant portion of our revenues for
at least the next several years.
Our ten largest customers accounted for 62%, 79% and 35% of our gross
revenues in fiscal 1999, 2000 and 2001, respectively. Although the acquisition
of the Large Area Coating business has diversified our products and markets, the
loss of, or a significant reduction of purchases by one or more of our
significant customers would materially adversely affect our business, operating
results, financial condition and prospects. There are a limited number of
potential customers in our 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 those markets 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.
If we deliver systems with defects or that fail to meet specifications, our
credibility will be harmed and the sales and market acceptance of our systems
will decrease.
Our systems are complex, are often customized and sometimes have contained
defects or failed to meet contractual specifications. If we deliver systems with
defects or fail to meet specifications, our credibility and the market
acceptance and sales of our systems could be harmed. In addition, if our systems
contain defects or fail to meet specifications, we may incur contractual
penalties and be required to expend significant capital and resources to
alleviate such problems. Such problems could also damage our relationships with
specific customers and impair market acceptance of our products.
We conduct business in foreign currencies, and fluctuation in the values of
those currencies could result in foreign exchange losses.
In fiscal 2001, approximately 6%, 54% and 40% of our total gross sales were
denominated in yen, marks 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 or mark 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.
19
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 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.
In order to support potential future growth, we will need to improve
ourproductivity, 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.
Our current and potential competitors have significantly greater resources than
we do, and increased competition could impair sales of our products or cause us
to reduce our prices.
The market for thin film coating equipment is highly competitive. We face
substantial competition from established companies in many of the markets we
serve. Some of our competitors have greater financial, engineering,
manufacturing and marketing resources, broader product offerings and service
capabilities and larger installed customer bases than we do. As a result, our
competitors may be able to respond more quickly to new or emerging technologies
or market developments by devoting greater resources to the development,
promotion and sale of products which could impair sales of our products. Many of
our customers and potential customers that purchase coating equipment are large
companies that require global support and service for their thin film deposition
capital equipment. While we believe that our support and service infrastructure
is sufficient to meet the needs of our customers and potential customers, our
larger competitors have more extensive infrastructures than we do, which could
place us at a disadvantage when competing for the business of global
manufacturers and other purchasers of thin film depositions equipment.
We may not be able to adequately protect or enforce our intellectual property
rights.
We rely extensively 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.
Successful infringement claims by third parties could result in substantial
damages, lost product sales and the loss of important intellectual property
rights by us.
Our commercial success depends in part on our ability to avoid infringing
or misappropriating patents or other proprietary rights owned by third parties.
From time to time we may receive communications from third parties asserting
that our products or systems infringe, or may infringe, the proprietary rights
of these third parties. These claims of infringement may lead to protracted and
costly litigation which could require us to pay substantial damages or have the
sale of our products or systems stopped by injunction. Infringement claims could
also cause product or system delays or require us to redesign our products or
systems, and these delays could result in the loss of substantial revenues. We
20
may also be required to obtain a license from the third party or cease
activities utilizing the third party's proprietary rights. We may not be able to
enter into such a license or such license may not be available on commercially
reasonable terms. The loss of important intellectual property rights could
therefore prevent our ability to sell our systems, or make the sale of such
systems more expensive for us.
Our efforts to protect our intellectual property may be less effective in some
foreign countries where intellectual property rights are not as well protected
as in the United States.
The majority of our revenue is derived from sales outside the United States
and Europe, including certain countries in Asia such as China, Taiwan, Korea and
Japan. The laws of some foreign countries do not protect our proprietary rights
to as great an extent as do the laws of the United States and Europe, and many
U.S. companies have encountered substantial problems in protecting their
proprietary rights against infringement in such countries, some of which are
countries in which we have sold and continue to sell systems. There is a risk
that our means of protecting our proprietary rights may not be adequate in these
countries. For example, our competitors in these countries may independently
develop similar technology or duplicate our systems. If we fail to adequately
protect our intellectual property in these countries, it would be easier for our
competitors to sell competing products in those countries.
Protection of our intellectual property rights, or the efforts of third parties
to enforce their own intellectual property rights against us, may in the future
result in costly and time-consuming litigation.
We may be required to initiate litigation in order to enforce any patents
issued to or licensed by us, or to determine the scope or validity of a third
party's patent or other proprietary rights. In addition, we may be subject to
lawsuits by third parties seeking to enforce their own intellectual property
rights. Any such litigation, regardless of outcome, could be expensive and time
consuming, and could subject us to significant liabilities or require us to
re-engineer our product or obtain expensive licenses from third parties.
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 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.
Future sales of our common stock may cause our stock price to decline.
All of our outstanding shares, other than shares owned by affiliates, are
freely tradable without restriction or further registration. Affiliates must
comply with the volume and other requirements of Rule 144, except for the
holding period requirements, in the sale of their shares. Sales of substantial
amounts of common stock by our stockholders, or even the potential for such
sales, may have a depressive effect on the market price of our common stock and
could impair our ability to raise capital through the sale of our equity
securities.
Failure to successfully integrate the LAC business may adversely affect us.
On December 31, 2000, we completed the acquisition of the LAC business
formerly owned by Unaxis Holdings, Ltd. The process of integrating acquired
operations into our existing operations may result in unforeseen operating
difficulties and may require significant financial resources that would
otherwise be available for the ongoing development or expansion of existing
operations. We have limited experience managing production operations outside
the United States. Our future performance may be adversely affected if we fail
to successfully manage the LAC business operations in Germany and related sales
offices. Some of the risks associated with acquisitions include:
- Unexpected losses of key employees or customers of the LAC business;
21
- Conforming the standards, processes, procedures and controls of the
LAC business with our operations;
- Coordinating new product and process development;
- Resolving disputes the LAC business has or may have with certain
customers;
- Hiring additional management and other critical personnel; and
- Increasing the scope, geographic diversity and complexity of our
operations.
The realization of potential operating synergies may prove difficult and
may cause management's attention to be diverted from other business concerns. In
addition, the combined businesses may fail to achieve the desired synergies of
the combination and other expected benefits of the transaction.
Financial performance of LAC business.
The LAC business was not profitable for the years ended 1999 and 2000 and
there can be no assurance that the LAC business will be profitable in future
years. The success of the acquisition of the LAC business will depend in part on
our ability to successfully integrate and manage the LAC business. Failure to
successfully integrate and manage the LAC business could have a material adverse
effect on the Company and its stock price.
Operation Separate From Unaxis.
Because the LAC business was previously operated as parts of two divisions
of Unaxis, the costs of operating the LAC business separate from Unaxis may be
significantly greater than initially estimated. The operation of the LAC
business may result in our incurring operating costs and expenses significantly
greater than we anticipated prior to the acquisition.
Risks related to the Series A Convertible Preferred Stock.
The conversion of the Series A convertible preferred shares into shares of
common stock and the exercise of the related warrants could result in
substantial numbers of additional shares being issued.
To the extent the Series A preferred shares are converted or dividends on
the Series A preferred shares are added to the stated value, a significant
number of shares of common stock may be sold into the market, which could
decrease the price of our common stock and encourage short sales by selling
security holders or others. Short sales could place further downward pressure on
the price of our common stock. In that case, we could be required to issue an
increasingly greater number of shares of our common stock upon future
conversions of the Series A preferred shares, sales of which could further
depress the price of our common stock.
The conversion of and the payment of dividends by adding to the stated
value in lieu of cash on the Series A preferred shares may result in substantial
dilution to the interests of other holders of our common stock.
We may issue additional shares and dilute your ownership percentage.
Some events over which you have no control could result in the issuance of
additional shares of our common stock, which would dilute the ownership
percentage of holders of our common stock. We may issue additional shares of
common stock or preferred stock:
- to raise additional capital or finance acquisitions,
- upon the exercise or conversion of outstanding options, warrants and
shares of convertible preferred stock, and/or
- in lieu of cash payment of dividends.
Substantial sales of our common stock could cause our stock price to fall.
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options and upon conversion of
and issuance of common stock dividends on the Series A preferred shares and
exercise of the related warrants, the market price of our common stock could
fall. Such sales also might make it more difficult for us to sell equity or
equity-related securities in the future at a time and price that we deem
appropriate.
22
We may be required to pay substantial penalties to the holders of the Series A
preferred shares and related warrants if specific events occur.
In accordance with the terms of the documents relating to the issuance of
the Series A preferred shares and the related warrants, we are required to pay
substantial penalties to a holder of the Series A preferred shares under
specified circumstances, including, among others:
- the nonpayment of dividends on the Series A preferred shares in a
timely manner,
- our failure to deliver shares of our common stock upon conversion of
the Series A preferred shares or upon exercise of the related warrants
after a proper request, and
- a registration statement relating to the Series A preferred shares and
related warrants, if after being declared effective, is unable to
cover the resale of the shares of common stock underlying such
securities.
Such penalties are generally paid in the form of additions to the stated
value of the Series A preferred shares, subject to any restrictions imposed by
applicable law, on the amount that a holder of Series A preferred shares was
entitled to receive on the date of determination.
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 June 30, 2001, the number
of common Shareholders of record was 69.
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 Low
Fiscal 1998 ---- ---
Second Quarter (since November 21, 1997)......... $ 9.13 $ 8.25
Third Quarter.................................... 11.31 7.13
Fourth Quarter................................... 9.63 4.56
Fiscal 1999
First Quarter.................................... $ 5.63 $ 2.88
Second Quarter................................... 3.88 2.63
Third Quarter.................................... 4.25 1.81
Fourth Quarter................................... 4.25 2.50
Fiscal 2000
First Quarter.................................... $ 4.00 $ 3.13
Second Quarter................................... 14.75 3.00
Third Quarter ................................... 35.75 12.88
Fourth Quarter .................................. 39.88 13.13
Fiscal 2001
First Quarter.................................... $ 42.00 $ 21.06
Second Quarter................................... 37.94 14.75
Third Quarter.................................... 25.00 10.06
Fourth Quarter................................... 22.50 7.69
ITEM 6: Selected Consolidated Financial Data
The following selected consolidated financial data with respect to our balance
sheet data as of July 1, 2000 and June 30, 2001, and, with respect to our
consolidated statement of operations data for each of the three years in the
period ended June 30, 2001, have been derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in its report included elsewhere in this report. The
consolidated balance sheet data as of June 28, 1997, June 27, 1998 and July 3,
1999 and the consolidated statement of
23
operations data for the years ended June 28, 1997, June 27, 1998 and July 3,
1999 have been derived from audited consolidated financial statements that are
not included in this report. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes included
elsewhere in this report.
Fiscal Year Ended
------------------------------------------------------
June 28, June 27, July 3, July 1, June 30,
1997 1998 1999 2000 2001
--------- -------- --------- --------- ---------
Consolidated Statement of Operations
Data:
Net revenues........................ $ 34,050 $ 53,041 $ 31,523 $ 42,292 $112,715
Cost of goods sold.................. 27,352 42,150 27,070 36,633 90,021
--------- -------- -------- --------- ---------
Gross profit........................ 6,698 10,891 4,453 5,659 22,694
Operating expenses:
Selling, general and administrative 2,996 5,067 3,760 4,324 16,027
Research and development......... 749 1,243 1,044 1,409 6,484
Amortization of goodwill and other
intangible assets.................. -- -- -- -- 16,536
--------- --------- --------- --------- ---------
Operating income (loss)............. 2,953 4,581 (351) (74) (16,353)
Interest income (expense)........... (822) (496) (553) 447 1,034
Other income (expense), net......... 95 252 40 272 805
Equity earnings in affiliate........ -- -- 382 2,381 4,421
--------- --------- --------- ---------- ---------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle................. 2,226 4,337 (482) 3,026 (10,093)
Income tax benefit (provision)...... (605) (1,480) 258 97 5,760
-------- -------- -------- --------- ---------
Net income (loss) before cumulative effect
of change in accounting principle.... 1,621 2,857 (224) 3,123 (4,333)
-------- -------- -------- --------- ----------
Cumulative effect of change in accounting
principle............................ -- -- -- (50) --
--------- --------- --------- ---------- ---------
Net income (loss)................... 1,621 2,857 (224) 3,073 (4,333)
Preferred dividends................. -- -- -- -- (367)
Net income (loss) per common share.. $ 1,621 $ 2,857 $ (224) $ 3,073 $ (4,700)
========= ========= ========= ========= ==========
Net income (loss) per common share
Basic............................ $ 0.58 $ 0.90 $ (0.06) $ 0.72 $ (0.73)
======== ======== ======== ======== =========
Diluted.......................... $ 0.58 $ 0.85 $ (0.06) $ 0.69 $ (0.73)
======== ======== ======== ======== =========
Weighted average common shares outstanding
Basic............................ 2,796 3,181 3,478 4,255 6,414
======== ======== ======== ======== ========
Diluted.......................... 2,814 3,375 3,478 4,439 6,414
======== ======== ======== ======== ========
Consolidated Balance Sheet Data
Working capital..................... $ 5,534 $ 10,747 $ 11,812 $ 63,785 $ 15,684
Total assets........................ 21,541 28,697 30,195 87,478 169,426
Long-term debt, net of current portion 6,448 4,175 7,180 -- 6,483
Total stockholders' equity.......... 6,740 14,826 14,658 73,197 89,192
24
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operation
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,"
"expects," and similar expressions may identify forward-looking statements. Our
actual results, performance or achievements may differ materially from those
anticipated or implied by such forward-looking statements. Factors that could
cause or contribute to such material differences include those disclosed in the
"Risk Factors" section of this report, which should be considered carefully.
Overview
We are a leading provider of thin film deposition equipment to the FPD
industry, the Architectural, Automotive and Solar Glass industry and the Web
Packaging industry, and are pursuing the market for coatings on PET bottles. Our
high volume, large area deposition systems are used by our customers to deposit
thin films that enhance the material properties of the base substrate. These
thin films provide conductive, electronic, reflective, filter, barrier and other
properties that become critical elements of the composition of our customers'
products.
Additionally, we sell coated glass substrates to the FPD industry. These
products are used by our customers as a component in the manufacturing of black
and white liquid crystal displays ("LCD").
Since our inception in 1976, we have manufactured our own deposition
equipment for use in our coated glass production process. In 1996, when high end
flat panel technologies demanded that LCD manufacturers process their own glass
substrates in their factory, we expanded our product offering to include our
deposition equipment. Since that time, we began investing in the
commercialization of our thin film deposition equipment and coating processes
for the high end of the LCD market. The recent growth in the equipment side of
our business has been enhanced by an acquisition of our largest competitor at
the end of calendar 2000.
On December 31, 2000, we acquired the Large Area Coatings division ("LAC")
of Unaxis. The LAC division is now operating as Applied Films Germany, a
wholly-owned subsidiary of Applied Films Corporation with manufacturing in
Alzenau, Germany and sales and service offices in Asia, Europe and the United
States. Applied Films Germany designs, manufactures and sells large area coating
equipment in four product areas with global markets. The principal Applied Films
Germany product areas are display, architectural glass, automotive glass, solar
and web coaters. We are also pursuing the market for coatings on PET bottles for
soft drinks and other beverage markets.
The Applied Films Germany operations consist of the sale of equipment,
significantly increasing the revenue base from sales of equipment, customer base
and employee base of Applied Films.
The acquisition of the LAC business substantially changed the amount and
nature of our revenues. The majority of our revenues are now derived from the
sale of thin film coating equipment to manufacturers serving the display,
architectural glass and packaging markets. The equipment we sell to the display
industry is sold to manufacturers of Flat Panel Displays ("FPD") with various
end markets such as Active Matrix LCDs ("AMLCD") used in laptop and flat desktop
monitors and Plasma Display Panels ("PDP") for hang on the wall televisions, as
well as other emerging FPD technologies. The equipment we sell to the
architectural glass industry is sold to manufacturers of large glass panels used
in the construction of commercial buildings, skyscrapers, and automobiles, as
well as to the solar industry for the generation of power using light from the
sun or other sources. The equipment we sell to the web packaging industry is
sold to manufacturers of rolled films for the packaging industry. These films
are usually either plastic or thin foil requiring a thin film layer application
to enhance the barrier properties of the final package addressing product
freshness or shelf life if it is a perishable food packaging application. Other
uses for this equipment platform include decorative packaging where a thin film
layer enhances the color or the texture of the package and touch panels where a
conductive thin film layer is applied. The equipment we are developing and
marketing to the soft drink and beer bottling industries applies an exterior
barrier coating designed to enhance the shelf life for beverages packaged in
plastic ("PET") bottles. This high-speed deposition equipment reduces the
permeability of the bottle preventing the carbonation from escaping or
contaminating gases from entering the bottle.
Revenues for thin film coating equipment are generally recognized 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
25
incurred for each contract. The lead-time for completion of the thin film
coating equipment is generally six to twelve months, depending on the product
line. To date, we have primarily priced our thin film coating equipment in U.S.
dollars and German marks. Coating equipment backlog increased substantially as a
result of the acquisition to $99.2 million at the end of fiscal 2001 versus $8.8
million at fiscal year end 2000.
Sales of thin film coated glass to manufacturers of LCDs comprise the
balance of our revenues. Most of our LCD manufacturing customers are located in
Asia. In June of 1998, we formed a 50/50 joint venture in China with Nippon
Sheet Glass Co. ("NSG"), to process, sell and export certain types of thin film
coated glass.
For fiscal 2001, 67% of our revenues were generated from exports to
customers outside of our manufacturing centers in the United States and Europe,
compared to 93% exported to customers outside of our manufacturing center, in
the United States for fiscal 2000.
Coated glass sales and related costs are recognized when products are
shipped to the customer. Historically, 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;
therefore, the Company does not customarily have a significant long-term backlog
for coated glass sales. Historically, we have experienced significant price
pressure from time to time in our thin film coated glass business. We expect
continued downward pressure on our selling prices in the future.
We sell most of our glass and equipment products to customers in the local
currency of the location of manufacture. For Longmont, in U.S. dollars and for
Alzenau, in German marks or Euros, except for sales to certain Japanese
customers which are denominated in Japanese yen. Gross sales in Japanese yen and
German marks were approximately $12.7 million and $0, respectively, for fiscal
2000, and $6.9 million and $61.5 million, respectively, for fiscal 2001.
Currently, we engage in international currency hedging transactions to mitigate
our foreign exchange exposure. We also purchase raw glass from certain Japanese
suppliers in transactions denominated in yen, which partially offsets foreign
currency risks on thin film coated glass sales. Our purchases of raw material
denominated in Japanese yen were approximately $2.4 million in fiscal 2000 and
$1.8 million for fiscal 2001. As of June 30, 2001, accounts receivable
denominated in Japanese yen and German marks were approximately $1.3 million and
$4.7 million, or approximately 10% and 39%, respectively, of total accounts
receivable. As of June 30, 2001, accounts payable denominated in Japanese yen
and German marks were approximately $0.9 million and $5.8 million, or 7% and
45%, respectively, of total accounts payable. We are generally paid by customers
for Japanese yen denominated sales within approximately 15 to 45 days following
the date of sale.
As of June 30, 2001, our outstanding bank debt was approximately $6.5
million on our line of credit, compared to $0 at the end of fiscal 2000. This
level of borrowings, together with our $2.5 million debt guarantees with our
joint venture, represents the use of the entire available credit under this
credit facility.
26
Results of Operations
The following table sets forth information derived from the consolidated
statements of operations expressed as a percentage of net revenues for the
periods indicated.
Fiscal Year Ended
-----------------------------
July 3, July 1, June 30,
1999 2000 2001
--------- --------- ---------
Consolidated Statement of Operations Data:
Net revenues............................ 100.0% 100.0% 100.0%
Cost of goods sold...................... 85.9 86.6 79.9
-------- -------- --------
Gross profit............................ 14.1 13.4 20.1
Operating expenses:
Selling, general and administrative 11.9 10.2 14.2
Research and development........... 3.3 3.3 5.7
Amortization of goodwill and other
intangible assets.................. -- -- 14.7
-------- -------- --------
Operating income (loss)................. (1.1) (0.1) (14.5)
Interest income (expense)............... (1.8) 1.1 0.9
Other income (expense).................. 0.2 0.6 0.7
Equity earnings in affiliate............ 1.2 5.6 3.9
-------- -------- --------
Income (loss) before income taxes....... (1.5) 7.2 (9.0)
Income tax benefit (provision).......... 0.8 0.2 5.1
-------- -------- --------
Net income (loss) before cumulative effect
of change in accounting principle.... (.7) 7.4 (3.9)
Cumulative effect of change in accounting
Principle............................. -- (0.1) --
--------- --------- --------
Net income (loss)....................... (.7)% 7.3% (3.9)%
========== ========= ========
Net revenues. Net revenues were $112.7 million, $42.3 million, and $31.5
million in fiscal years 2001, 2000, and 1999, respectively. Net revenues rose
167% from fiscal 2000 to fiscal 2001, due to the acquisition. Net revenues
increased 34% from fiscal 1999 to fiscal 2000 due to the growth in equipment
revenues driven by the sales of the ATX-700 into the Plasma Display market as
well as growth during fiscal 2000 in the coated glass segment of the market.
Thin film coated glass sales decreased 22% from $35.2 million in fiscal 2000 to
$27.5 million in fiscal 2001 This reduction was caused by reduced demand for STN
Glass used in cellular phones as well as the transfer of a coating system to our
joint venture in China. Due to the 50% ownership of the joint venture in China
we do not consolidate the revenues so any capacity shift to the joint venture
will result in a reduction of revenue. Thin film coated glass sales increased
from $26.9 million to $35.2 million from fiscal 1999 to fiscal 2000, mainly as a
result of the increase in STN Glass demand used in cellular phones in the second
half of fiscal 2000.
Revenues from thin film coating equipment increased 1,100% to $85.2 million
for fiscal 2001 compared with $7.1 million for fiscal 2000, due to the
acquisition of the Leybold Large Area Coatings division of Unaxis. The revenues
of the LAC group consist entirely of the sale of equipment. This growth was also
caused in part by the sales of the ATX-700. During fiscal 2000 and shortly
after, we sold three ATX-700 systems and recognized revenue on a percentage of
completion basis and profit margin on two of those systems in the second half of
fiscal 2000. We had no bookings for revenue for ATX-700 systems for fiscal 1999,
and the equipment revenue in fiscal 1999 was generated mainly by the sale of a
refurbished coating system that was in operation in Longmont to the Joint
Venture.
Gross Profit. Gross profits increased almost fourfold to $22.7 million in
fiscal 2001 from $5.7 million in fiscal 2000, driven by the increase in the
equipment revenues from the acquisition. Gross profits increased to $5.7 million
in fiscal 2000 from $4.5 million in fiscal year 1999 driven by the addition of
the margins from the revenue recognized on the ATX-700 systems. As a percentage
of net revenues, gross profit margins were 20.1%, 13.4%, and 14.1% in fiscal
years 2001, 2000, and 1999, respectively. This improvement in gross margins as a
percent of sales for fiscal 2001 was driven by the increase in the equipment
revenues which generally have higher profit margins than coated glass revenues.
Selling, General and Administrative. Selling, general and administrative
expenses totaled $16.0 million, $4.3 million, and $3.8 million for fiscal years
2001, 2000, and 1999, respectively. The substantial increase in fiscal 2001 was
driven by the additions to the administration, sales and marketing teams through
the acquisition. Fiscal 1999 and 2000,
27
SG&A expenses remained sequentially fairly constant. As a percentage of sales,
selling, general and administrative costs were 14.2%, 10.2%, and 11.9% for
fiscal years 2001, 2000, and 1999, respectively.
Research and Development. Research and development expenses in fiscal 2001
grew to $6.5 million, up from $1.4 million in fiscal 2000, and $1.0 million for
fiscal years 2001, 2000, and 1999, respectively. The increase in Research and
Development expenses was driven by the additional staff and capabilities added
in Germany through the acquisition. Research and development expenditures
consisted primarily of salaries, outside contractor expenses, lab expenses, and
other expenses related to our ongoing product development efforts. As a
percentage of net revenues, research and development expenses were 5.7%, 3.3%,
and 3.3% in fiscal years 2001, 2000, and 1999, respectively.
Interest Income (Expense). Interest income (expense) was $1.0 million,
$447,000, and ($553,000) for fiscal years 2001, 2000, and 1999, respectively.
The interest income generated in both fiscal 2000 and 2001 was from investments
on excess cash from the approximately $55 million raised in the follow-on common
stock offering that closed in March 2000. In fiscal 1999 we had interest expense
on the approximately $7.2 million in bank debt that was outstanding as of the
fiscal year end.
Other Income (Expense). Other income (expense) was $805,000, $272,000, and
$40,000 in fiscal years 2001, 2000, and 1999 respectively. Our other income is
generated from realized foreign currency translation adjustments as well as
royalties earned from our Joint Venture.
Income Tax Benefit (Provision). We recorded a tax benefit during fiscal
2001 of approximately $5.7 million. The goodwill and other intangibles portions
of the purchase price paid for the acquisition will be deductible when
amortized. The charge to earnings for in-process R&D that was taken in the third
fiscal quarter related to the acquisition was also deductible. As a result, our
tax benefit in fiscal 2001 is substantial. 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 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. The
tax benefit of $5.7 million for fiscal 2001 was the result of goodwill
amortization and accrued Research and Development. Another contributing factor
is that the equity in the earnings of the Joint Venture is not subject to
taxation.
29
Quarterly Results of Operations
The following table sets forth summary unaudited quarterly financial
information for the eight fiscal quarters ended June 30, 2001. 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)
necessary for a fair presentation of 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 any trends reflected in such results may not continue in
the future. Our results of operations may be subject to significant quarterly
variations (in thousands).
Fiscal 2000 Fiscal 2001
----------- -----------
Quarter Ended Quarter Ended
-------------------------------------- ---------------------------------------
Sep Jan Apr Jul Sep Dec Mar Jun
1999 2000 2000 2000 2000 2000 2001 2001
--------------------------------------- ---------- ---------------------------
Net revenues.................... $7,388 $ 8,308 $11,759 $14,837 $16,870 $10,309 $44,981 $40,528
Cost of goods sold.............. 6,475 7,042 10,301 12,815 14,322 9,861 35,293 30,518
----- ------- ------- ------- ------- ------ ------ ------
Gross profit.................... 913 1,266 1,458 2,022 2,548 448 9,688 10,010
Operating expenses:
Selling, general and
administrative.................. 809 902 1,084 1,529 1,689 1,536 6,354 6,446
Research and development..... 349 315 360 385 413 485 2,632 2,955
Amortization of goodwill and
other intangible assets..... -- -- -- -- -- -- 13,969 2,568
------ ------- ------- ------- ------- ------ ------ ------
Operating income (loss)......... (245) 49 14 108 446 (1,573) (13,267) (1,959)
Interest income (expense)....... (139) (101) 32 655 536 666 (90) (78)
Other income (expense).......... 180 14 125 (47) 107 230 108 358
Equity earnings in affiliate.... 449 369 697 866 1,285 1,647 1,041 448
------ ------- -------- ------- ------- ------ ------ -------
Income (loss) before income taxes 245 331 868 1,582 2,374 970 (12,208) (1,231)
Income tax benefit (provision).. (83) 343 (61) (102) (120) 483 5,399 (2)
------ ------- -------- -------- -------- ------ ------ --------
Net income (loss) before
cumulative effect of change
in accounting principle....... 162 674 807 1,480 2,254 1,453 (6,809) (1,233)
Cumulative effect of change in
accounting principle......... (50) -- -- -- -- -- -- --
------ ------- ------- ------- ------- ------ ------ ------
Net income (loss)............... $ 112 $ 674 $ 807 $ 1,480 $ 2,254 $1,453 $(6,809) $(1,233)
====== ======= ======= ======= ======= ====== ======== ========
The following table sets forth the above unaudited information as a
percentage of total net revenues.
Fiscal 2000 Fiscal 2001
----------- -----------
Quarter Ended Quarter Ended
-------------------------------------- ------------------------------------
Sept. Jan. Apr. July Sep. Dec. March June
1999 2000 2000 2000 2000 2000 2001 2001
-------- -------- -------- -------- -------- -------- ------- -------
Net revenues.................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.............. 87.6 84.8 87.6 86.4 84.9 95.7 78.5 75.3
---- ------ ------ ------ ------ ------ ------ ------
Gross profit.................... 12.4 15.2 12.4 13.6 15.1 4.3 21.5 24.7
Operating expenses:
Selling, general and
administrative.................. 11.0 10.8 9.2 10.3 10.0 14.9 14.1 15.9
Research and development..... 4.7 3.8 3.1 2.6 2.5 4.7 5.9 7.3
Amortization of goodwill and
other intangible assets...... -- -- -- -- -- -- 31.0 6.3
----- ---- ----- ---- ---- ----- ----- -----
Operating income (loss)......... (3.3) 0.6 0.1 0.7 2.6 (15.3) (29.5) (4.8)
Interest income (expense)....... (1.9) (1.2) 0.3 4.4 3.2 6.5 (0.2) (0.2)
Other income (expense).......... 2.4 0.2 1.1 (0.2) .7 2.2 0.2 0.9
Equity earnings in affiliate.... 6.1 4.4 5.9 5.8 7.6 16.0 2.3 1.1
--- --- --- --- --- ---- --- ------
Income (loss) before income taxes 3.3 4.0 7.4 10.7 14.1 9.4 (27.2) (3.0)
Income tax benefit (provision).. (1.1) 4.1 (.5) (.7) (.7) 4.7 12.0 --
----- --- ---- ---- ---- --- ---- ----
Net income (loss) before cumulative
effect of change in accounting
principle.................... 2.2 8.1 6.9 10.0 13.4 14.1 (15.2) (3.0)
Cumulative effect of change in
accounting principle......... (0.7) -- -- -- -- -- -- --
--- --- --- ---- ---- ---- ---- ----
Net income (loss)............... 1.5% 8.1% 6.9% 10.0% 13.4% 14.1% (15.2)% (3.0)%
==== ==== ==== ===== ===== ===== ======= ========
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 revenues of thin film coated
glass for fiscal 2001 decreased to $27.6 million versus $35.2 million during
fiscal year 2000. This reduction in sales for coated glass products was driven
by the transfer of a refurbished coating machine that was producing revenue in
Longmont during fiscal 2000 to our Joint Venture in China. Additionally, coated
glass revenues were negatively affected
29
by a reduced demand for STN glass used in cellular phones and PDAs in the second
half of fiscal 2001. Sales and related costs of thin film coated glass products
are recognized when products are shipped.
Revenue of thin film coating equipment totaled $85.2 million in fiscal 2001
versus $7.1 million in fiscal 2000. This increase in revenue as well as the
concentration in equipment was due to the acquisition of the LAC business. In
the second half of fiscal 2001 greater than 85% of our revenues were generated
from the equipment side of the business compared to 25% for the second half of
fiscal 2000 when the ATX-700 revenues began to be recognized.
Equity earnings in affiliate have grown substantially since the joint
venture commenced production in April 1999, to a high of $1.6 million for the
second quarter of fiscal 2001. The joint venture benefited from increased demand
for STN coated glass which allowed STEC to shift production to the higher margin
STN product through the second quarter of fiscal 2001. During the second half of
fiscal 2001, Joint Venture earnings fell dramatically as cell phone
manufacturers experienced a surplus inventory of handsets and reduced the demand
for STN coated glass. This industry situation negatively affected our profits at
STEC for the third and fourth quarters of fiscal 2001.
Because a significant portion of our overhead is fixed, our quarterly
results of operations may be materially affected if sales of thin film coated
glass or thin film coating equipment decline for any reason.
Liquidity and Capital Resources
We have funded our operations with cash generated from operations, proceeds
from public offerings of our common stock, a private offering of Series A
Convertible Preferred Stock, and with borrowings. Cash provided by operating
activities for fiscal 2001 was $20.2 million compared to $3.9 million for the
corresponding period in fiscal 2000. As of June 30, 2001, we had cash and cash
equivalents of approximately $26.2 million and working capital of $15.7 million.
As of June 30, 2001, accounts receivable were approximately $12.3 million.
On October 18, 2000, we entered into a Share Purchase and Exchange
Agreement agreeing to purchase the LAC business and the acquisition was
completed on December 31, 2000. The purchase price was $65.5 million in cash and
673,353 shares of our common stock, subject to further post-closing adjustments
based upon a final closing balance sheet for LAC business. As of June 30, 2001,
we paid Unaxis $58.0 million in cash and delivered the 673,353 shares of our
common stock. In addition, we have accrued $7.5 million pending resolution of
the final closing balance sheet for the LAC business.
The acquired LAC business includes operations and work in process which has
increased the amount of working capital we need to conduct our business in
future periods.
Our $11.5 million credit facility with a commercial bank will expire on
September 17, 2002. As of June 30, 2001, we had $8,982,556 outstanding in both
borrowing and letters of credit, compared with $0 outstanding on July 1, 2000.
Approximately $2.5 million of the outstanding borrowings and letters of credit
under this facility is pledged to guarantee the debt at our Joint Venture.
Cash used by investing activities for fiscal 2001 was $42.0 million
compared to $21.1 million for fiscal 2000. Capital expenditures for fiscal 2001
were approximately $1.4, compared to $484,000 for fiscal 2000.
We believe that our working capital and operating capital needs will
continue to be met by operations, borrowings under the existing credit facility
and the proceeds from the $10 million convertible preferred offering that was
closed subsequent to the quarter ended December 30, 2000. Our capital
requirements depend on a number of factors, including, but not limited to, the
amount and timing of orders we receive and the timing of payments received from
customers. If we require additional capital, we may consider various
alternatives such as additional bank financing or the public or private sale of
debt or equity securities. There can be no assurance that we will be able to
raise such funds on satisfactory terms if and when such funds are needed.
Recent Financial Accounting Standards Board Statement.
In July 2001 the Financial Accounting Standards Board issued SFAS No. 141
and No. 142 "Accounting for Business Combinations and Accounting for Goodwill
and Other Intangible Assets". These pronouncements establish new accounting
standards for goodwill acquired in a business combination. It continues to
require recognition of goodwill as an asset but does not permit amortization of
goodwill as previously required by Accounting Principles Board ("APB") Opinion
No. 17, "Intangible Assets." Furthermore, certain intangible assets that are not
separable from goodwill will also not be amortized under the new standards.
30
SFAS Nos. 141 and 142 establish a new method of testing goodwill for
impairment, requiring that goodwill be separately tested for impairment using a
fair-value-based approach. The provisions apply not only to goodwill arising
from acquisitions completed after June 30, 2001 but also to the unamortized
balance of goodwill at the date of adoption. The Company is required to adopt
the proposed standard beginning with the first quarter of fiscal 2003; however,
it expects to adopt the standard early effective July 1, 2001. The Company has
not fully evaluated the impact upon future operating results from the proposed
standard. However, based upon the preliminary allocation of the LAC purchase
price, and assuming the Company had adopted the proposed standard, the Company
would not have recorded the full amortization expense related to goodwill from
the LAC acquisition.
In April 1998, the AICPA 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 had been deferring certain start-up costs
related to the Joint Venture in China (see Note 5). 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 on 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 adoption of SFAS No. 133 as amended by
SFAS No. 137 and SFAS No. 138, did not have a material impact on the Company's
consolidated financial statements.
ITEM 7A: Quantitative and Qualitative Disclosures about Market Risk
Market Risk Exposure
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 its normal funding and investing
activities.
Approximately $6.5 million of our borrowed debt is subject to changes in
interest rates; however, we do not use derivatives to manage this risk. This
exposure is linked primarily to the Eurodollar rate and secondarily to the prime
rate. We believe that a moderate change in either the Eurodollar rate or the
prime rate would not materially affect our operating results or financial
condition. A one percent change in interest rates would result in an approximate
$65,000 annual impact on pre-tax income based on the quarters and borrowing
level of debt subject to interest rate fluctuations.
Foreign Exchange Exposure
We are exposed to foreign exchange risk associated with accounts receivable
and payable denominated in foreign currencies, primarily in Japanese yen. At
June 30, 2001, we had approximately $1.3 million in accounts receivable and $0.9
million of accounts payable denominated in Japanese yen. A one percent change in
exchange rates would result in an approximate $4,000 net impact on pre-tax
income based on the quarter end foreign currency denominated accounts receivable
and accounts payable balances.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect our operating results or financial
condition. The potential impact depends upon the magnitude of the rate change.
We are exposed to changes in interest rates and foreign currency exchange
primarily in our cash, foreign currency transactions and operating results of
our foreign affiliates.
International manufacturing operations are primarily based in Germany and
constitute a significant portion of our revenues and identifiable assets. A
predominant portion of these identifiable assets are based in German marks.
International operations result in a large volume of foreign currency commitment
and transaction exposures and significant foreign currency net asset exposures.
31
Our cash position includes amounts denominated in foreign currencies. The
repatriation of cash balances from certain of our affiliates could have adverse
consequences to the statement of operations as well as tax consequences.
However, those balances are generally available without legal restrictions to
fund ordinary business operations.
Effective January 1, 1999, eleven of fifteen member countries of the
European Union established permanent rates of exchange between the members'
national currency and a new common currency, the "euro". In this first phase,
the euro is available for non-cash transactions in the monetary, capital,
foreign exchange and interbank markets. National currencies will continue to
exist as legal tender and may continue to be used in commercial transactions
until the euro currency is issued in January 2002 and the participating members'
national currency is withdrawn by July 2002. Our European operations are located
in Germany which is participating in this monetary union.
We anticipate benefiting from the introduction of the euro through a
reduction of foreign currency exposure and administration costs on transactions
within Europe. We have commenced conversion of our European operations from
marks to the euro. The change in functional currency is proceeding as planned
and is expected to be completed by the end of calendar 2001.
Any costs associated with the introduction of the euro will be expensed as
incurred. We do not believe that the introduction of the euro will have a
material impact on our results of operations or financial position.
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.
32
ITEM 8: Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Historical:
Applied Films Corporation and Subsidiaries
Consolidated Balance Sheets as of June 30, 2001 and July 1, 2000....... 35
Consolidated Statements of Operations for the fiscal years ended
June 30, 2001, July 1, 2000, and July 3, 1999....................... 36
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 30, 2001, July 1, 2000, and July 3, 1999........... 37
Consolidated Statements of Cash Flows for the fiscal years
ended June 30, 2001, July 1, 2000, and July 3, 1999................. 38
Notes to Consolidated Financial Statements............................. 39
33
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 subsidiaries as of June 30, 2001
and July 1, 2000 and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended June 30, 2001,
July 1, 2000, and July 3, 1999. 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 subsidiaries, as of June 30, 2001 and July 1, 2000
and the consolidated results of their operations and their cash flows for the
fiscal years ended June 30, 2001, July 1, 2000, and July 3, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
July 19, 2001.
34
APPLIED FILMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
June 30, 2001 July 1, 2000
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 26,236 $ 32,058
Marketable securities - 20,167
Accounts and trade notes receivable, net of allowance of $1,142 and $188 12,267 6,273
Costs and profit in excess of billings 29,717 4,571
Due from Joint Venture - 219
Inventories, net of allowance of $613 and $261 16,599 10,006
Assets held for sale - 2,251
Prepaid expenses and other 836 187
Deferred tax asset, net 989 480
------------------ ------------------
Total current assets 86,644 76,212
Property, plant and equipment, net of accumulated depreciation of $9,998 and $8,479 7,746 5,320
Goodwill and other intangible assets, net of accumulated amortization of $5,036 and $0 58,097 -
Investment in Joint Venture 9,852 5,746
Deferred tax asset, net 6,780 136
Other assets 307 64
------------------ ------------------
Total assets $ 169,426 $ 87,478
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 13,063 $ 9,971
Accrued expenses 39,841 2,138
Accrued pension benefit obligation 6,876 -
Income taxes payable - 98
Billings in excess of revenue 8,716 -
Current portion of:
Deferred revenue 279 164
Deferred gain 56 56
Deferred tax liability 2,129 -
------------------ ------------------
Total current liabilities 70,960 12,427
Long-term debt 6,483 -
Deferred revenue, net of current portion 2,202 1,210
Deferred gain, net of current portion 589 644
------------------ ------------------
Total liabilities 80,234 14,281
------------------ ------------------
STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock, no par value, 1,000,000 shares authorized;
1,000 and 0 shares outstanding at June 30, 2001 and July 1, 2000, respectively 8,571 -
Common Stock, no par value, 40,000,000 shares authorized, 6,832,701 and
6,040,856 shares issued and outstanding at June 30, 2001 and July 1, 2000, respectively 83,207 64,959
Warrants and stock options 876 -
Other cumulative comprehensive loss (7,020) (20)
Retained earnings 3,558 8,258
------------------ ------------------
Total stockholders' equity 89,192 73,197
------------------ ------------------
Total liabilities & stockholders' equity $ 169,426 $ 87,478
================== ==================
See Accompanying Notes to Consolidated Financial Statements.
35
APPLIED FILMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For The Fiscal Years Ended
-------------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
----------------- ------------------ ------------------
Net revenues $ 112,715 $ 42,292 $ 31,523
Cost of goods sold 90,021 36,633 27,070
----------------- ------------------ ------------------
Gross profit 22,694 5,659 4,453
Operating expenses:
Selling, general and administrative expenses 16,027 4,324 3,760
Research and development expenses 6,484 1,409 1,044
Amortization of goodwill and other intangible assets 16,536 - -
----------------- ------------------ ------------------
Income (loss) from operations (16,353) (74) (351)
Other (expense) income:
Interest income (expense) 1,034 447 (553)
Other income 805 272 40
Equity in earnings of Joint Venture 4,421 2,381 382
----------------- ------------------ ------------------
Income (loss) before income taxes and
cumulative effect of change in accounting principle (10,093) 3,026 (482)
Income tax benefit 5,760 97 258
----------------- ------------------ ------------------
Income (loss) before cumulative effect
of change in accounting principle (4,333) 3,123 (224)
----------------- ------------------ ------------------
Cumulative effect of change in
accounting principle, net of taxes - (50) -
Net income (loss) (4,333) 3,073 (224)
----------------- ------------------ ------------------
Preferred stock dividends (367) - -
----------------- ------------------ ------------------
Net income (loss) applicable to common stockholders $ (4,700) $ 3,073 $ (224)
================= ================== ==================
Net income (loss) per common share:
Basic $ (0.73) $ 0.72 $ (0.06)
================= ================== ==================
Diluted $ (0.73) $ 0.69 $ (0.06)
================= ================== ==================
Weighted average common shares outstanding:
Basic 6,414 4,255 3,478
================= ================== ==================
Diluted 6,414 4,439 3,478
================= ================== ==================
See Accompanying Notes to Consolidated Financial Statements.
36
APPLIED FILMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 30, 2001, JULY 1, 2000, AND JULY 3, 1999
(In thousands, except share data)
Other
Cumulative Common Total
Common Stock Preferred Stock Comprehensive Stock Deferred Retained Stockholder's
Shares Amount Shares Amount Gain (Loss) Warrants Compensation Earnings Equity
- -------------------------------------------------------------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
Net income............... -- -- -- -- -- -- -- (4,333) (4,333)
ESPP stock issuance...... 3,916 55 -- -- -- -- -- -- 55
Stock options, including
income tax benefits of
$515 114,576 847 -- -- -- -- -- -- 847
Issuance of stock in
connection with
acquisition of LAC...... 673,353 17,346 -- -- -- -- -- -- 17,346
Issuance of Series A
convertible preferred
stock................... -- -- 1,000 8,571 -- -- -- -- 8,571
Issuance of common stock
warrants in connection
with issuance of Series
A convertible preferred
stock................... -- -- -- -- -- 876 -- -- 876
Preferred stock dividends -- -- -- -- -- -- -- (367) (367)
Comprehensive income:
Unrealized gain (loss)
on foreign currency
translation............. -- -- -- -- (7,000) -- -- -- (7,000)
- -------------------------------------------------------------------------------------------------------------------------------
Balances, June 30, 2001 6,832,701 $83,207 1,000 $ 8,571 $ (7,020) $ 876 $ -- $ 3,558 $89,192
- -------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements.
37
APPLIED FILMS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For The Fiscal Years Ended
--------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
--------------- -------------- -------------
Cash Flows from Operating Activities:
Net income (loss) $ (4,333) $ 3,073 $ (224)
Adjustments to reconcile net income (loss) to net cash flows
from operating activities -
Depreciation 2,094 1,826 1,759
Amortization of deferred compensation & new cash
compensation expense 143 - 7
Amortization of deferred gain on lease and Joint Venture (334) (220) (108)
Amortization of goodwill and other intangible assets 16,536 - -
Deferred income tax (benefit) provision (4,509) (628) 530
Equity in earnings of affiliate (4,106) (2,217) (330)
Deferred gain on equipment sale to Joint Venture 1,386 - 1,588
Cost of equipment sale to Joint Venture 2,251 - 1,693
Changes in:
Accounts and trade notes receivable, net 4,224 (991) 385
Costs and profits in excess of billings (7,203) (3,011) -
Inventories 8,469 (1,872) 1,903
Prepaid expenses and other 299 622 253
Accounts payable - and accrued expenses (3,339) 6,503 (2,534)
Billings in excess of revenue 8,716 - -
Income taxes (receivable) payable (98) 809 (1,002)
--------------- -------------- -------------
Net cash flows from operating activities 20,196 3,894 3,920
--------------- -------------- -------------
Cash Flows from Investing Activities:
Purchases of property, plant, and equipment (1,350) (484) (2,800)
Acquisition of LAC (60,857) - -
Purchase of assets held for sale - (369) -
Investment in Joint Venture - - (3,236)
Purchases of marketable securities - (21,367) -
Proceeds from sale of marketable securities 20,167 1,200 -
Other - (64) -
--------------- -------------- -------------
Net cash flows from investing activities (42,040) (21,084) (6,036)
--------------- -------------- -------------
Cash flows from Financing Activities:
Proceeds from borrowings of long-term debt 18,862 3,623 12,747
Repayment of long-term debt (12,379) (11,024) (9,598)
Stock issuance on stock purchase plan, and stock options 387 422 49
Proceeds from issuance of preferred stock and warrants, net 9,304 - -
Proceeds from secondary offering - 55,525 -
Dividends paid on preferred stock (322) - -
Offering costs - (461) -
--------------- -------------- -------------
Net cash flows from financing activities 15,852 48,085 3,198
--------------- -------------- -------------
Effect of exchange rate changes on cash and cash equivalents 170 - -
Net (decrease) increase in cash (5,822) 30,895 1,082
Cash and cash equivalents, beginning of period 32,058 1,163 81
--------------- -------------- ------------
Cash and cash equivalents, end of period $ 26,236 $ 32,058 $ 1,163
=============== ============== =============
Supplemental cash flow information:
Cash paid for interest, net of amounts capitalized $ 489 $ 366 $ 735
=============== ============== =============
Cash received for income taxes, net $ (15) $ (560) $ (100)
=============== ============== =============
The accompanying notes are an integral part of these consolidated statements.
38
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation (the "Company" or "AFCO") is a leading provider
of thin film deposition equipment to the Flat Panel Display ("FPD") industry,
the Architectural, Automotive and Solar Glass industry, the Web Packaging
industry and are pursuing the market for coatings on PET (polyethylene
terephthalate) bottles. The Company's high volume, large area deposition systems
are used by its customers to deposit thin films that enhance the material
properties of the base substrate. These thin films provide conductive,
electronic, reflective, filter, barrier and other properties that become
critical elements of the composition of its customers' products.
Additionally, the Company sells coated glass substrates to the FPD
industry. These products are used by its customers as a component in the
manufacturing of black and white liquid crystal displays ("LCD").
Since inception in 1976, the Company has manufactured its own deposition
equipment for use in our coated glass production process. In 1996, when high end
flat panel technologies demanded that LCD manufacturers process their own glass
substrates in their factory, the Company expanded its product offerings to
include its proprietary deposition equipment. Since that time, the Company began
investing in the commercialization of thin film deposition equipment and coating
processes for the high end of the LCD market. The recent growth in the equipment
side of the business has been enhanced by an acquisition of the Company's
largest competitor at the end of calendar 2000.
On December 31, 2000, the Company acquired the Large Area Coatings division
("LAC") of Unaxis. The LAC division is now operating as Applied Films Germany, a
wholly-owned subsidiary of the Company with manufacturing in Alzenau, Germany
and sales and service offices in Asia, Europe and the United States. Applied
Films Germany designs, manufactures and sells large area coating equipment in
four product areas with global markets. The principal Applied Films Germany
product areas are display, architectural glass, automotive glass, solar and web
coaters. The Company is also pursuing the market for coatings on PET bottles for
soft drinks and other beverage markets.
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 5).
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures 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.
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 from the Joint Venture at a rate of
34%. Based on the fiscal year 2000 determinations, the taxes originally 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. No provision for taxes on Joint
Venture earnings has been accrued during fiscal year 2001.
39
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
2001, 2000, and 1999 include 52, 52, and 53 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 and unrealized gains and losses on such securities are reflected as
other income in the accompanying statements 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 in corporate bonds and
approximately $16.7 million in municipal debt securities. The Company had no
significant concentration of credit risk arising from investments and had no
significant unrealized gains or losses at July 1, 2000. The Company did not have
any marketable securities at June 30, 2001.
Inventories
Inventories consist of glass related materials used in the production of
coated glass, and materials used in the construction of systems. Inventories are
stated at the lower of cost (first-in, first-out) or market. Inventories at June
30, 2001 and July 1, 2000 consist of the following (in thousands):
June 30, 2001 July 1, 2000
------------- ------------
Raw materials, net............................ $ 5,116 $ 4,003
Work-in-process............................... 5,822 --
Materials for manufacturing systems........... 733 195
Finished goods, net........................... 4,928 5,808
---------- ----------
$ 16,599 $ 10,006
========== ==========
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 using the straight-line method
over the following estimated useful lives. Leasehold improvements are
depreciated using the straight-line method over the lesser of the useful life of
the asset or lease term.
Estimated
Useful Lives
------------
Building............................................ 30 years
Machinery and equipment............................. 3-10 years
Office furniture and equipment...................... 3-5 years
Depreciation expense was approximately $2.1 million, $1.8 million and $1.8
million for the years ended June 30, 2001, July 1, 2000 and July 3, 1999,
respectively
Income Taxes
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes."
SFAS No. 109 requires deferred tax assets and liabilities to be recognized for
temporary differences between the tax basis and financial reporting basis of
assets and liabilities, computed at current tax rates. Also, the Company's
deferred income tax assets include certain future tax benefits. The Company
records a valuation allowance against any portion of those deferred income tax
assets which it believes it will more likely than not fail to realize.
40
Deferred Gain
During 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 which includes a purchase option (Note 11). The Company received
$834,000 from the original purchase option, which is deferred and is being
amortized on a straight-line basis over the term of the lease of 15 years.
Recoverability of Tangible and Intangible Assets
The Company evaluates the carrying value of all long-lived assets wherever
events or circumstances indicate the carrying value of assets may exceed their
recoverable amounts. An impairment loss is recognized when the estimated future
cash flows (undiscounted and without interest) expected to result from the use
of an asset are less than the carrying amount of the asset. Measurement of an
impairment loss is based on fair value of the asset computed using discounted
cash flows if the asset is expected to be held and used. Measurement of an
impairment loss for an asset held for sale would be based on fair market value
less estimated costs to sell.
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 on a substantial majority of contracts relating to the
construction and sale 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 ("SOP") 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 represent amounts billed 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 represent revenues earned prior to billing.
Contracts in progress at June 30, 2001 and July 1, 2000 are as follows (in
thousands):
June 30, 2001 July 1, 2000
------------- ------------
Costs incurred on contracts in progress and estimated profit ..... $ 100,013 $ 6,211
Less: billings to date............................................ (79,012) (1,640)
------------ -----------
Costs and profit in excess of billings, net....................... $ 21,001 $ 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 of the
contract. Retainage amounts, that are actually billed, are included in accounts
receivable in the accompanying balance sheets.
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 and are adjusted if necessary.
41
Contracts that do not qualify for the percentage of completion method under
SOP 81-1 are accounted for using the completed contract method. Revenues are
recognized when all provisions of the contract are fulfilled. Costs to complete
the contract are deferred until the related revenue is recognized.
Losses on contracts in process are recognized in their entirety when the
loss becomes evident and the amount of loss can be reasonably estimated. As of
June 30, 2001, the Company had accrued approximately $10 million for loss
contracts. No such losses were identified for contracts in progress at July 1,
2000.
Spare Parts Revenue Recognition
Spare parts revenues are recognized upon shipment to the customer.
Deferred Revenue
During fiscal 1999 and 2001, the Company sold certain thin film coating
equipment to the Joint Venture (Note 5). Because the Company owns 50% of the
Joint Venture, the Company recorded 50% of the revenue and related cost of the
sales and has deferred 50% of the gross margins, approximately $1.4 and $1.3
million, respectively, which will be recognized on a straight-line basis over
ten years, the estimated depreciable life of the equipment. The amortization of
the gross margins are included with equity in earnings of Joint Venture in the
accompanying consolidated statements of operations.
Research and Development Expenses
Research and development costs are expensed as incurred and consist
primarily of salaries, supplies, lab costs, and depreciation of equipment used
in research and development activities. The Company incurred approximately $6.5
million, $1.4 million and $1.0 million of research and development expenses for
the fiscal years ended June 30, 2001, July 1, 2000, and July 3, 1999,
respectively, net of reimbursements received from a contracting research
organization.
In addition, during fiscal 2001, the Company recognized $11.5 million of
acquired in-process research and development obtained in the acquisition of LAC,
which is included in amortization of goodwill and other intangible assets on the
companying consolidated statement of operations.
Foreign Currency Transactions
The Company generated 67% and 93% of its revenues in fiscal years 2001 and
2000, respectively, from sales to foreign corporations located outside of the
Company's manufacturing centers in the United States and Europe, primarily in
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 the functional
currency 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.
Foreign Currency Translation
The results of the Company's foreign subsidiaries are translated to U.S.
Dollars using the current-rate method. Assets and liabilities are translated at
the year end spot exchange rate, revenue and expenses at average exchange rates
and equity transactions at historical exchange rates. Exchange differences
arising on translation are recorded as a component of other cumulative
comprehensive loss.
Other Cumulative Comprehensive Loss
SFAS 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 its foreign
subsidiaries and the Joint Venture.
42
Net Income (Loss) Income Per Common Share
The Company follows 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 income or loss available to common stockholders by the
weighted average number of shares of common stock outstanding. Diluted earnings
(loss) per share is determined by dividing the income or loss available to
common stockholders by the sum of (1) the weighted average number of common
shares outstanding and (2) the dilutive effect of outstanding potentially
dilutive securities, including convertible preferred stock, stock options and
warrants determined utilizing the treasury stock method.
A reconciliation between the number of shares used to calculate basic and
diluted earnings per share is as follows (in thousands of shares):
Fiscal Years Ended
---------------------------------
2001 2000 1999
---- ---- ----
Weighted average number of common shares outstanding 6,414 4,255 3,478
(shares used in basic earnings per share computation)..
Effect of potentially dilutive securities................. N/A 184 N/A
------ ------- -------
Shares used in diluted earnings per share
Computation............................................ 6,414 4,439 3,478
====== ======= =======
As all potentially dilutive securities were antidilutive for fiscal years
2001 and 1999, the effect of common stock issuable upon the conversion of
convertible preferred stock and exercise of all options and warrants has been
excluded from the computation of diluted earnings per share for fiscal years
2001 and 1999.
Goodwill and Other Intangible Assets
Goodwill resulting from acquisitions is being amortized using the
straight-line method over an estimated useful life of seven years. Specifically
identified intangible assets are being amortized over estimated lives ranging
from five to seven years.
Shipping and Handling Costs
Shipping and handling costs are included as a reduction of revenue in the
attached consolidated financial statements. Shipping and handling costs for
fiscal years 2001, 2000 and 1999 were approximately $613,000, $1.3 million, and
$1.2 million, respectively.
Recent Accounting Standards
In April 1998, the AICPA issued SOP No. 98-5, "Reporting on the Costs of
Start-up Activities." SOP No. 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 No. 98-5 should be reported
as the cumulative effect of a change in accounting principle. SOP No. 98-5 is
effective for financial statements for fiscal years beginning after December 15,
1998. Through the end of fiscal 1999, the Company had been deferring certain
start-up costs related to the Joint Venture in China (Note 5). A charge for the
application of SOP No. 98-5 was recorded as a change in accounting principle
during fiscal 2000.
In June 1998, the Financial Accounting Standards Board ("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 adoption of the standard did not have a material impact on the
Company.
Following the acquisition of LAC on December 31, 2000, the Company has
entered into foreign currency forward contracts to mitigate the risk of changes
in exchange rates on firm sale commitments denominated in foreign currencies.
43
These contracts qualify as fair value hedges pursuant to SFAS No. 133.
Accordingly, the fair value of the derivative instruments are recorded on the
balance sheet and are offset by changes in the fair value of the related firm
commitments. The ineffective portion of the derivative instruments are recorded
currently in income. Such amounts have not been significant.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations", and
SFAS No. 142, "Goodwill and Other Intangible Assets". These statements establish
new accounting standards for goodwill acquired in a business combination. It
continues to require recognition of goodwill as an asset but does not permit
amortization of goodwill as previously required by Accounting Principles Board
("APB") Opinion No. 17, "Intangible Assets." Furthermore, certain intangible
assets that are not separable from goodwill will also not be amortized under the
new standards.
SFAS Nos. 141 and 142 establish a new method of testing goodwill for
impairment, requiring that goodwill be separately tested for impairment using a
fair-value-based approach. The provisions apply not only to goodwill arising
from acquisitions completed after June 30, 2001 but also to the unamortized
balance of goodwill at the date of adoption. The Company is required to adopt
the proposed standard beginning with the first quarter of fiscal 2003; however,
it expects to adopt the standard early effective July 1, 2001. The Company has
not fully evaluated the impact upon future operating results from the proposed
standard. However, based upon the preliminary allocation of the LAC purchase
price, and assuming the Company had adopted the proposed standard, the Company
would not have recorded the full amortization expense related to goodwill from
the LAC acquisition.
Related Parties
In addition to the Company's Joint Venture investment described in Note 5,
the Company has engaged in certain related party transactions. During fiscal
2001 and 2000, the Company recognized approximately $1.5 million and $245,000,
respectively, of sales revenue to a company of which a member of the Company's
board of directors is an officer, and the Company had $1.3 million and $583,000,
respectively, of purchases from a company of which a member of the Company's
board of directors is an officer.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) ACQUISITION OF LAC
The Company completed the acquisition of LAC on December 31, 2000. Pursuant
to the purchase agreement, the purchase price is estimated to be $85,700,000,
which is comprised of $65,500,000 of cash and 673,353 shares of Applied Films
Corporation common stock valued at $25.76 per share (total value of $17,345,000,
based upon the average of the closing market prices for the three days before
and after, and the day of, the public announcement of the transaction, October
18, 2000), plus approximately $2,855,000 of transaction costs. The acquisition
has been accounted for under the purchase method of accounting. The final
purchase price is subject to adjustment based upon the closing balance sheet
prepared on a post closing basis. The final determination of such balance sheet
has not been made.
The accounts of this acquisition have been included in the Company's
consolidated financial statements from the acquisition date. The purchase price
has been allocated based upon the estimated fair value of the identifiable
assets acquired and liabilities assumed. The excess of the purchase price over
fair value of net identifiable assets has been allocated to goodwill. The
estimated $85,700,000 purchase price has been allocated as follows (in
thousands):
Net current assets $ 10,170
Long-term liabilities (9,029)
Goodwill 49,892
Other intangible assets 20,000
Property, plant and equipment 3,167
In-process research and development 11,500
---------------
Total allocation of estimated purchase price $ 85,700
===============
The allocation is preliminary and subject to adjustment based upon the
final determination of the purchase consideration and the fair value of the
assets acquired and liabilities assumed. Goodwill is being amortized on a
straight-line basis over a seven year period. Other intangible assets are being
amortized on a straight line basis over periods of
44
5 to 7 years. In-process research and development represents the intangible
value of in-process research and development projects that had not yet reached
technical feasibility. The related technology had no alternative use and
required substantial additional development by the Company. In-process research
and development was charged to operations during the quarter ended March 31,
2001.
The following unaudited pro forma information reflects the pro forma
consolidated results of operations for the Company giving effect to the LAC
acquisition and related issuance of Series A convertible preferred stock and
warrants as if the transactions occurred on July 2, 2000 and July 4, 1999,
respectively. The unaudited pro forma results include the unaudited historical
operating results of LAC for six months ended December 31, 2000 and 12 months
ended July 1, 2000, respectively. The unaudited pro forma data is not
necessarily indicative of the Company's results of operations that would
actually have been reported if the transaction in fact had occurred on July 2,
2000 and July 4, 1999, respectively, and is not necessarily representative of
the Company's consolidated results of operations for any future period.
Fiscal Year Ended
------------------------------------------------------------
June 30, 2001 July 1, 2000
----------------------------- ------------------------------
(in thousands, except per share data)
Historical Pro Forma Historical Pro Forma
------------- --------------- -------------- ---------------
(unaudited)
Net revenues $ 112,715 $ 174,740 $ 42,292 $ 119,460
Operating income (loss) (16,353) (23,371) (74) (20,387)
Net loss (4,333) (12,330) (3,073) (10,412)
Income (loss) per common share - basic and diluted ($0.73) $ (2.04) ($0.72) $ (2.28)
(4) LONG-TERM DEBT
June 30, 2001 July 1, 2000
------------- ------------
(in thousands)
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 accrued 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 (5.99% and
8% at June 30, 2001 and July 1, 2000,
respectively)................................................. $ 6,483 $ --
---------- ----------
6,483 --
Less-current portion............................................. -- --
---------- ----------
Total long-term debt.......................................... $ 6,483 $ --
========== ==========
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") and a ratio of total
liabilities to tangible net worth, and maintain a certain amount of tangible net
worth, all as defined in the Agreement. At June 30, 2001, the Company was in
compliance with all covenants. Approximately $2.5 million of the facility is
used to guaranty the debt of the Joint Venture. Interest expense was
approximately $489,000, $328,000 and $557,000 for the years ended June 30, 2001,
July 1, 2000, and July 3, 1999, respectively.
(5) 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 fiscal
1999 and the first quarter of fiscal 2001, the Company sold refurbished
equipment to the Joint Venture for use in the process of thin film coating of
glass. The sales prices were approximately $5.1 and $4.7 million, respectively.
During
45
the fourth quarter of fiscal 2001, the Company manufactured an upgrade to its
existing equipment and sold it to the Joint Venture for $915,000.
The Joint Venture began operations during the fourth quarter of fiscal
1999. The Company records 50% of 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 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 consolidated
financial statements.
During fiscal years 2001 and 2000, the Company purchased coated glass
totaling $5.8 million and $7.7 million, respectively, from the Joint Venture, of
which $1.1 million and $1.2 million, respectively, remained in inventory. In
addition, the Company received royalties totaling $278,000 for the year ended
June 30, 2001, $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 approximately
$2.5 million of the debt of the Joint Venture.
Summarized statement of operations information for the Joint Venture for
the fiscal years ended June 30, 2001, July 1, 2000 and July 3, 1999, is
presented below (in thousands):
Fiscal Year Ended
-----------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
------------- ------------ ------------
Joint Venture:
Operating revenues $ 32,360 $ 23,882 $ 4,139
=========== =========== ===========
Net income $ 8,202 $ 4,095 $ 660
=========== =========== ===========
AFCO's equity in earnings:
Proportionate share of net income
after eliminations $ 4,087 $ 2,217 $ 330
Amortization of deferred gain on sale
of equipment 334 164 52
----------- ----------- -----------
Equity in earnings of Joint Venture $ 4,421 $ 2,381 $ 382
=========== =========== ===========
Summarized balance sheet information for the Joint Venture as of June 30,
2001, July 1, 2000, and July 3, 1999, is presented below (in thousands):
June 30, 2001 July 1, 2000 July 3, 1999
------------- ------------ ------------
Assets:
Current assets.......................... $ 8,410 $ 9,956 $ 5,411
Property, plant, and equipment, net..... 27,860 9,921 10,414
----------- ----------- -----------
$ 36,270 $ 19,877 $ 15,825
=========== =========== ===========
Capitalization and liabilities:
Current liabilities...................... $ 9,239 $ 5,397 $ 7,125
Long-term debt........................... 7,321 2,800 1,596
Common shareholders' equity.............. 19,710 11,680 7,104
----------- ----------- -----------
$ 36,270 $ 19,877 $ 15,825
=========== =========== ===========
As of June 30, 2001 and July 1, 2000, the Company had accounts payable to
the Joint Venture of approximately $42,000 and $2.7 million, and receivables
from the Joint Venture approximately $265,000 million and $218,000,
respectively.
(6) 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
equipment had been used in the Company's thin film coated glass segment. The
sale was subject to customary terms, including installation and acceptance at
the Joint Venture's premises. The Company
46
recorded the sale during the first quarter of fiscal 2001. Accordingly, the
equipment was classified as assets held for sale at July 1, 2000.
(7) STOCKHOLDERS' EQUITY
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.
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 1999, the shareholders of the Company approved an
increase of 100,000 shares to the 1997 Plan, increasing the shares available for
granting to 372,500 shares. In October 2000, the shareholders of the Company
approved an increase of 650,000 shares to the 1997 Stock Option Plan, increasing
the shares available to 1,022,500 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 2001,
2000, and 1999 using the Black-Scholes pricing model and the following weighted
average assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate......................... 5.99% 6.24% 5.21%
Expected lives.................................. 7 years 7 years 7 years
Expected volatility............................. 161% 136% 77%
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
both the 1993 and 1995 option grants, the expected life of the options has been
extended to seven years in 1999. Cumulative
47
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
$4.1 million, $738,000, and $51,000 for the years ended June 30, 2001, July 1,
2000, and July 3, 1999, 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 $894,000, $220,000, and $88,000 for the fiscal years
ended June 30, 2001, July 1, 2000, and July 3, 1999, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income (loss) would have been
reported as follows (in thousands, except share data):
For The Fiscal Year Ended
-------------- -------------- ----------------
June 2001 July 2000 July 1999
--------- --------- ---------
Net income (loss):
As reported................................. $ (4,333) $ 3,073 $ (224)
========== ========== ==========
Pro forma................................... $ (5,227) $ 2,853 $ (313)
========== ========== ==========
Basic earnings (loss) per share:
As reported................................. $ (.73) $ 0.72 $ (0.06)
========== ========== ===========
Pro forma................................... $ (.87) $ 0.67 $ (0.09)
========== ========== ===========
A summary of the 1993 and 1997 Plans is as follows:
For the Fiscal Years Ended
--------------------------------------------------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
--------------------------- ---------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- -------------- ------- -------------- ------- --------------
Outstanding at beginning of year 455,076 $ 4.22 384,296 $ 3.42 379,645 $ 3.77
Granted 230,236 18.31 124,160 6.30 89,568 3.02
Forfeited (8,900) 29.73 (5,063) (3.16) (81,111) 4.65
Exercised (114,576) 2.94 (48,317) (2.88) (3,806) 2.87
Outstanding at end of year 561,836 9.88 455,076 4.22 384,296 3.42
======= ========= ======= ========= ======= ========
Exercisable at end of year 228,778 4.16 268,076 3.45 260,288 3.25
======= ========= ======= ========= ======= ========
Weighted average fair value of
options granted $ 11.87 $ 5.94 $ 2.05
========= ========= ========
The following table summarizes information about employee stock options
outstanding and exercisable at June 30, 2001:
Options Outstanding Options Exercisable
-------------------------------------------------- -------------------------------
Number of Weighted
Options Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of June 30, Contractual Exercise June 30, Exercise
Exercise Prices 2001 Life in Years Price 2001 Price
- ---------------------------- ---------------- --------------- ------------ --------------- ------------
$2.32 - $3.00 151,471 6.29 $ 2.75 85,181 $ 2.59
$3.01 - 5.26 161,814 5.70 4.06 131,586 4.24
$5.27 - 13.99 11,515 6.18 7.20 8,636 7.20
$14.00 - 38.50 237,036 9.47 18.59 3,375 32.75
------------ -----------
561,836 228,778
============ ===========
48
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"). On September 8, 2000, the board of
directors adopted the third amendment to the Applied Films Employee Stock
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 85% of the fair market value of the common stock on the last
trading day in each six month purchase period. Up to 100,000 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 2001 and 2000, the Company issued shares to employees under
this plan at a purchase price ranging from $3.15 to $32.96 per share. A total of
19,961 shares have been issued under the plan since inception.
Series A Convertible Preferred Stock
Overview
On January 18, 2001, the Company sold $10.0 million in Series A Convertible
Preferred Stock ("Series A") that is convertible into common stock at a
conversion price of $19.75 per common share. The conversion price of the Series
A is subject to adjustment under certain circumstances. The Series A carries a
dividend rate of 7% until October 16, 2001, and then the rate increases to 8.5%
unless certain conditions are satisfied. During fiscal year 2001, the Company
accrued $366,722, or $367 per share, of Series A in dividends. The Series A may
be exchanged at the Company's option for a 5% subordinated convertible debenture
due January 16, 2004. The Company also issued two grants of warrants in
connection with this offering: warrants to purchase 75,949 shares of common
stock at $22.33 per share and warrants to purchase 17,468 shares at $20.09 per
share. The warrants are immediately exercisable, and may be exercised any time
over a five and three year period, respectively. The Company determined the fair
value of these warrants to be approximately $733,623 using the Black-Scholes
option pricing model using the following weighted average assumptions:
Risk-free interest rate 4.99%
Expected life 1.5 years
Expected volatility 100%
Expected dividend yield 0.0%
The estimated fair value of these warrants was recorded in stockholders'
equity with an offset to the amount attributed to the Series A. These securities
also contain certain registration rights with respect to the underlying shares
of common stock.
Repurchase Option
The Company has the right, provided that certain conditions are satisfied,
to repurchase some or all of the outstanding Series A for cash equal to 114% of
the price paid for each preferred share plus accrued dividends.
Preferred Stockholder's Annual and Special Put Options
On January 16, 2002, and January 16, 2003, the holders of Series A have an
annual put right, at their discretion, to convert all or any portion of their
Series A into common stock at an amended conversion price equal to the average
of closing price for the Company's common stock on the ten trading days
immediately preceding the annual put date.
If at any time after July 16, 2001, the Company's equity market
capitalization is less than $50.0 million for 20 consecutive trading days, then
the holders of Series A have a special put right at their discretion to convert
all or a portion of the then outstanding Series A into common stock at a
conversion price equal to the average of the closing price for the ten trading
days immediately preceding the date on which they exercise their special put
option.
However, in lieu of allowing the holders of Series A convertible preferred
stock to exercise their annual put option or their special put option, the
Company may elect to repurchase all or a portion of the outstanding Series A at
114%
49
of the stated value of the Series A plus all accrued but unpaid dividends in the
case of a special put option and at 100% of the stated value of the Series A
plus all accrued but unpaid dividends in the case of the annual put option.
Required Conversion
Subject to certain conditions, on or after the date the registration
statement related to the common stock underlying the Series A is declared
effective, the Company has the right to require conversion of any or all of the
outstanding Series A based on the then applicable conversion price. Among the
conditions to the Company's ability to require conversion of the Series A is the
condition that the closing price of the Company's common stock must for thirty
consecutive trading days exceed 135% of the conversion price applicable on each
such day.
Exchange for Debentures
The Company has the option at any time to exchange all (but not less than
all) of the outstanding shares of Series A for 5% Convertible Debentures of the
Company due January 16, 2004, having an aggregate principal amount equal to the
stated value of the Series A plus all accrued but unpaid dividends. The
Convertible Debentures, when and if issued, will be convertible into common
stock at a conversion price of $19.75 per share, subject to certain adjustments.
Subordination
The Convertible Debentures, when and if issued, will rank junior to the
Company's existing bank debt and to any extensions, refinancings or replacements
of that debt.
(8) INCOME TAXES
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 (in
thousands):
June 30, 2001 July 1, 2000
------------- ------------
Inventories.................................................. $ 276 $ 160
Accrued expenses............................................. 2,839 335
Deferred compensation........................................ 202 181
Deferred gain................................................ 240 261
Deferred revenue............................................. 373 513
Goodwill and other intangible assets 4,601 --
Net operating loss carry forwards 2,159 --
------- -------
Total deferred tax assets............................. 10,690 1,450
------- -------
Property, plant and equipment................................ (771) (794)
Uncompleted contracts........................................ (4,255) --
Other ...................................................... (24) (41)
------- -------
Total deferred tax liabilities........................ (5,050) (835)
------- -------
Total deferred tax asset, net......................... $ 5,640 $ 615
======= =======
50
Income tax (benefit) provision for the fiscal years ended June 30, 2001,
July 1, 2000, and July 3, 1999 consist of the following (in thousands):
Fiscal Years Ended
--------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
------------- ------------ ------------
Current provision (benefit):
Federal................................................... $ (95) $ 484 $ (718)
State..................................................... (9) 47 (70)
Foreign................................................... (1,147) -- --
------- ------- ------
Total current provision (benefit)...................... (1,251) 531 (788)
Deferred provision (benefit):
Federal................................................... (1,848) (572) 483
State..................................................... (180) (56) 47
Foreign................................................... (2,481) -- --
------- ------- ------
Total deferred provision (benefit)..................... (4,509) (628) 530
------- ------- ------
Total tax provision (benefit).......................... $(5,760) $ (97) $ (258)
======== ======= =======
Reconciliations between the effective statutory federal income tax
provision (benefit) rate and the Company's effective income tax provision
(benefit) rate as a percentage of net income (loss) before taxes were as
follows:
Fiscal Years Ended
----------------------------------------------
June 30, July 1, July 3,
2001 2000 1999
-------------- -------------- --------------
Statutory federal income tax (benefit) provision rate............ (34.0)% 34.0% (34.0)%
State income taxes............................................... (3.3) 3.3 (3.3)
Foreign income taxes and other................................... (1.8) 0.1 2.0
Equity earnings in Joint Venture................................. (14.3) (33.2) --
Tax exempt interest income....................................... (3.7) (6.4) --
Effect of foreign sales corporation.............................. -- (1.1) (18.1)
------ ------ ------
Effective income tax provision (benefit) (57.1)% (3.3)% (53.4)%
======= ======= ======
As of June 30, 2001, the Company had Federal net operating losses available
to offset future taxable income of approximately $5.7 million. Such net
operating loss carryforwards expire through 2021. Under the provisions of the
Internal Revenue Code, as amended, the Company's foreign sales corporation may
exempt a portion of its export related taxable income from federal and state
income taxes.
(9) EMPLOYEE BENEFIT PLANS
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 interest income, royalty income and profit sharing
expense. Profit sharing is paid to employees in cash quarterly based on a
combination of their length of service with the Company and their pay level. The
Company expensed approximately $539,000, $299,000, and $0 in fiscal years 2001,
2000, and 1999, respectively, related to this plan.
51
Pension Plan
LAC maintains a noncontributory defined benefit pension plan covering
substantially all employees of LAC. Benefits are based primarily on compensation
during a specified period before retirement of specified amount for each year of
service. The assumed pension liability of approximately $6.9 million is
reflected in the accompanying consolidated balance sheet as of June 30, 2001,
and is subject to adjustment based upon an assessment of the actuarial value of
the obligation. This plan has no assets as of June 30, 2001.
The following table sets forth the benefit obligation, the funded status of
the pension plan, amounts recognized on the Company's consolidated financial
statements, and the principle weighted average assumptions used (in thousands):
Year end
June 30, 2001
------------------
Change in Benefit Obligation:
Benefit obligation at beginning of year $ -
Service costs 485
Interest costs 428
Actuarial losses 338
Foreign exchange losses 153
Acquisition 5,810
Benefits paid
------------------
Benefit obligation at end of year $ 7,214
------------------
Funded Status:
Unrecognized net actuarial gain $ (7,214)
Unrecognized prior service cost 338
------------------
Net amount recognized $ (6,876)
------------------
Amounts Recognized in the Balance Sheets:
Accrued Benefit Liability $ (6,876)
------------------
Net amount recognized $ (6,876)
------------------
Weighted-average Assumptions as of June 30, 2001:
Discount rate 6.0%
Expected return on plan assets N/A
Rate of compensation increase:
Employee 2.75%
Retired 2.25%
Components of Net Periodic Benefit Cost:
Service Cost $ 485
Interest Cost 428
Expected Return on plan assets -
Amortization of prior service costs -
Recognition of actuarial loss 338
------------------
Net periodic benefit costs $ 1,251
------------------
(10) SIGNIFICANT CUSTOMERS
During fiscal years 2001, 2000, and 1999, approximately 67%, 93%, and 85%,
respectively, of the Company's net revenues were exported to customers outside
of the Company's manufacturing region. The Company's ten largest customers
accounted for, in the aggregate, approximately 35%, 79%, and 62%, of the
Company's net revenues in fiscal 2001, 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.
52
The breakdown of net revenues by geographic region is as follows (in
thousands):
Fiscal Years Ended
-------------------------------------------
June 30, July 1, July 3,
2001 2000 1999
-------------- ------------- --------------
Asia (other than Japan) $48,206 $24,641 $17,691
Japan 27,552 13,929 7,645
United States 13,764 2,934 4,924
Europe and other 23,193 788 1,263
------- ------- -------
Net revenues $112,715 $42,292 $31,523
======== ======= =======
The Company's sales are typically denominated in U.S. dollars. However,
certain customers of the Company currently pay in Japanese Yen and German Marks.
As a result, the Company recognized approximately $19,000, ($43,000), and
$24,000, of foreign currency exchange rate gain (loss) on foreign currency
exchange rate fluctuations for the fiscal years ended June 30, 2001, July 1,
2000, and July 3, 1999, respectively. The Company has approximately $1.3 million
and $2.0 million of its accounts receivable and $0.9 and $2.4 million of its
accounts payable denominated in Japanese Yen as of June 30, 2001 and July 1,
2000, respectively.
(11) COMMITMENTS
The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities, and various equipment. 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
2002................................. $ 957
2003................................. 952
2004................................. 894
2005................................. 890
2006................................. 903
Thereafter........................... 6,293
-----
$ 10,889
53
(12) SEGMENT INFORMATION
The Company manages its business and has segregated its activities into two
business segments, the revenues of "Thin Film Coated Glass" and the revenues of
"Thin Film Coating Equipment." Certain financial information for each segment is
provided below (in thousands):
Fiscal Years Ended
--------------------------------------------------
June 30, 2001 July 1, 2000 July 3, 1999
------------- ------------ ------------
Net revenues:
Thin film coated glass................................. $ 27,523 $ 35,159 $ 26,906
Thin film coating equipment............................ 85,192 7,133 4,617
------------- ------------- -------------
Total net revenues................................. $ 112,715 $ 42,292 $ 31,523
============= ============= =============
Operating (loss) income:
Thin film coated glass................................. $ (1,798) $ 1,628 $ (148)
Thin film coating equipment............................ 1,981 (1,702) (203)
Amortization of goodwill and other intangible assets... (16,536) -- --
-------------- ------------- -------------
Total operating (loss) income...................... $ (16,353) $ (74) $ (351)
============== ============== ==============
Identifiable assets:
Thin film coated glass................................. $ 3,311 $ 3,734 $ 6,634
Thin film coating equipment............................ 3,936 1,403 38
Corporate and other.................................... 478 180 1,955
------------- ------------- -------------
Total identifiable assets.......................... $ 7,725 $ 5,317 $ 8,627
============= ============= =============
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
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.
(14) QUARTERLY INFORMATION (unaudited)
The following table sets forth summary unaudited quarterly financial
information for the eight fiscal quarters ended June 30, 2001.
Fiscal 2001 Quarter Ended Fiscal 2000 Quarter Ended
----------------------------------------- -----------------------------------------
Jun 2001 Mar 2001 Dec 2000 Sep 2000 Jul 2000 Apr 2000 Jan 2000 Sep 1999
-------- -------- -------- -------- -------- -------- -------- --------
Net revenues....................... $40,528 $44,981 $10,309 $16,870 $14,837 $11,759 $8,308 $7,388
Cost of goods sold................. 30,518 35,293 9,861 14,322 12,815 10,301 7,042 6,475
------ ------ ------ ------ ------ ------ ------ ------
Gross profit....................... 10,010 9,688 448 2,548 2,022 1,458 1,266 913
Operating expenses:
Selling, general and
administrative..................... 6,446 6,354 1,536 1,689 1,529 1,084 902 809
Research and development........ 2,955 2,632 485 413 385 360 315 349
Amortization of goodwill and
other intangible assets........ 2,568 13,969 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Operating income (loss)............ (1,959) (13,267) (1,573) 446 108 14 49 (245)
Interest income (expense).......... (78) (90) 666 536 655 32 (101) (139)
Other income (expense)............. 358 108 230 107 (47) 125 14 180
Equity earnings in affiliate....... 448 1,041 1,647 1,285 866 697 369 449
--- ------- ------- ------ ------ ------ ------ -------
Income (loss) before income taxes.. (1,231) (12,208) 970 2,374 1,582 868 331 245
Income tax benefit (provision)..... (2) 5,399 483 (120) (102) (61) 343 (83)
--- ------ ------ ------- ------- ------- ------ -------
Net income (loss) before
cumulative effect of change in
accounting principle............... (1,233) (6,809) 1,453 2,254 1,480 807 674 162
Cumulative effect of change in
accounting principle............ - -- -- -- -- -- -- (50)
------- ------ ------ ------ ------ ------ ------ ------
Net income (loss).................. $(1,233) $(6,809) $1,453 $2,254 $1,480 $ 807 $ 674 $ 112
======== ======== ====== ====== ====== ====== ======= ======
(15) SUBSEQUENT EVENTS
On July 1, 2001, the Company increased the amount of the guarantee for the
debt of the Joint Venture to $5.0 million.
54
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 2001 annual meeting of
shareholders to be filed with the Securities and Exchange Commission within 120
days after the end of the fiscal year to which this report relates (the "2001
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 2001 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 403 of Regulation S-K is
included in our 2001 Proxy Statement and is incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
Information required to be furnished by Item 404 of Regulation S-K is
included in our 2001 Proxy Statement and is incorporated herein by reference.
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.
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 The Registrant did not file any reports on Form 8-K
during the last quarter of the fiscal year ended June 30, 2001.
(c) Exhibits The response to this portion of Item 14 is submitted as a
separate section of this report.
55
(d) Financial Statement Schedules
The response to this section of Item 14 is submitted as a separate
section of this report.
56
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 16, 2001
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 16, 2001. 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.
Signature Title
/s/ Cecil Van Alsburg Director, Chairman of the Board
Cecil Van Alsburg
/s/ Thomas T. Edman Director, President, and Chief Executive
Thomas T. Edman Officer (principal executive officer)
/s/ Lawrence D. Firestone Treasurer and Chief Financial Officer and
Lawrence D. Firestone Secretary (principal financial officer)
/s/ Richard P. Beck Director
Richard P. Beck
/s/ John S. Chapin Director
John S. Chapin
/s/ Vincent Sollitto Director
Vincent Sollitto
/s/ Chad D. Quist Director
Chad D. Quist
/s/ Aitor Galdos Director
Aitor Galdos
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Articles of Incorporation of Applied Films
Corporation are incorporated by reference to Exhibit 3.1 of
Registrant's Current Report on Form 8-K dated January 16, 2001.
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).
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), by reference to Exhibit 4.2
of Registrant's Registration Statement on Form S-8 (Reg. No.
333-47967) by reference to Exhibit 4.2 of Registrant's
Registration Statement on Form S-8 (Reg. No. 333-38426) any by
reference to Exhibits 4.2 and 4.3 of Registrant's Registration
Statement on Form S-8 (Reg. No. 333-56376).
10.3 Employee Stock Purchase Plan, as amended, is incorporated by
reference to Exhibit 10.3 of Registrant's Registration Statement
on Form S-1, as amended (Reg. No. 333-35331), by reference to
Exhibit 4 to the Registrant's Registration Statement on Form S-8
(Reg. No. 333-47951) and by reference to Exhibit 4.2 on
Registrant's Registration Statement on Form S-8 (Reg. No.
333-56378).
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 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 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).
10.10 Share Purchase and Exchange Agreement dated October 18, 2000,
between Registrant, AFCO GmbH & Co. KG, Balzers Process Systems
GmbH and Unaxis Holding AG is incorporated by reference to
Exhibit 2.1 of Registrant's Current Report on Form 8-K/A dated
December 31, 2000.
10.11 Amendment Agreement dated December 29, 2000, between Registrant,
AFCO GmbH & Co. KG, Balzers Process Systems GmbH and Unaxis
Holding AG is incorporated by reference to Exhibit 2.2 of
Registrant's Current Report on Form 8-K/A dated December 31,
2000.
10.12 Contribution Agreement dated December 29, 2000, between Balzers
Process Systems GmbH and Leybold Coating GmbH & Co. KG is
incorporated by reference to Exhibit 2.3 of Registrant's Current
Report on Form 8-K/A dated December 31, 2000.
10.13 Bravo Intellectual Property License Agreement dated December 31,
2000, between Balzers Process Systems GmbH and Leybold Coating
GmbH & Co. KG is incorporated by reference to Exhibit 2.4 of
Registrant's Current Report on Form 8-K/A dated December 31,
2000.
10.14 Newco Intellectual Property License Agreement dated December 31,
2000, between Balzers Process Systems GmbH and Leybold Coating
GmbH & Co. KG is incorporated by reference to Exhibit 2.5 of
Registrant's Current Report on Form 8-K/A dated December 31,
2000.
10.15 Registration Rights Agreement dated December 31, 2000, between
Registrant and Balzers Process Systems GmbH is incorporated by
reference to Exhibit 2.6 of Registrant's Current Report on Form
8-K/A dated December 31, 2000.
10.16 Securities Purchase Agreement dated January 16, 2001, between
Registrant and the purchasers identified on the signature pages
thereto is incorporated by reference to Exhibit 10.1 of
Registrant's Current Report on Form 8-K dated January 16, 2001.
10.17 Registration Rights Agreement dated January 16, 2001, between
Registrant and the investors identified on the signature pages
thereto is incorporated by reference to Exhibit 10.2 of
Registrant's Current Report on Form 8-K dated January 16, 2001.
10.18 Common Stock Warrant No. 1 dated January 16, 2001 is incorporated
by reference to Exhibit 10.3 of Registrant's Current Report on
Form 8-K dated January 16, 2001.
10.19 Common Stock Warrant No. 2 dated January 16, 2001 is incorporated
by reference to Exhibit 10.4 of Registrant's Current Report on
Form 8-K dated January 16, 2001.
10.20 Common Stock Warrant No. 3 dated January 16, 2001 is incorporated
by reference to Exhibit 10.5 of Registrant's Current Report on
Form 8-K dated January 16, 2001.
10.21 Common Stock Warrant No. 4 dated January 16, 2001 is incorporated
by reference to Exhibit 10.6 of Registrant's Current Report on
Form 8-K dated January 16, 2001.
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 (Reg. No. 333-59984).
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on page 56).
Exhibit 11.1
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
June 30, 2001
-------------
BASIC EARNINGS PER SHARE
Net income applicable to common stockholder (loss) $ (4,700)
Weighted average number of common shares outstanding 6,413,802
Basic earnings per share $ (.73)
DILUTED EARNINGS PER SHARE
Net income (loss) $ (4,333)
Weighted average number of common shares outstanding 6,666,966
Assuming exercise of stock options 655,253
Assuming repurchase of treasury stock (352,449)
----------------------
Net incremental shares 302,804
Weighted average number of common shares
Outstanding, as adjusted 6,969,770
Diluted earnings per share $ (.62)
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated July 19, 2001 included in this Form 10-K, into the Company's
previously filed Registration Statement file numbers 333-47951, 333-47967,
333-38426, 333-51175, 333-95367, 333-56376 and 333-56378.
/s/ARTHUR ANDERSEN LLP
Denver, Colorado,
August 16, 2001