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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 3, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 23103
APPLIED FILMS CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1311581
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9586 I-25 Frontage Road, Longmont CO 80504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 774-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Each Class on Which Registered
Common Stock Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. X
The aggregate market value of the common stock held by non-affiliates of the
Registrant, based on a per share price of $3.625 as of September 1, 1999, was
$12,633,568. As of September 1, 1999, there were outstanding 3,493,398 shares of
the Company's Common Stock (no par value).
Documents Incorporated by Reference: Portions of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held October 26, 1999 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. The Company's actual results could differ materially from the
Company's historical results of operations and those discussed in the
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "ITEM 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the section entitled "Certain Factors." All period references
are to the Company's fiscal periods ended July 3, 1999, June 27, 1998 or June
28, 1997, unless otherwise indicated.
ITEM 1(a): General Development of Business
General
Applied Films Corporation ("Applied Films" or the "Company") utilizes and
is a pioneer in developing thin film technology for the flat panel display
("FPD") industry. The Company supplies thin film coated glass for use primarily
in liquid crystal displays ("LCDs") as well as other applications. In fiscal
1997, the Company began selling its proprietary thin film coating equipment to
FPD manufacturers. Applied Films believes that it is able to address a broad
array of the FPD market through the combination of its thin film coated glass
business and its thin film coating equipment business.
FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, calculators, laptop computers, pagers, scientific
instruments, televisions, video games, gasoline pumps, automotive instruments,
point-of-sale terminals and a number of other electronic devices. Most FPDs
require optically transparent, electrically conductive thin films coated on
glass substrates. These thin films transmit electrical power to picture elements
of the displays and allow light to pass to the viewer. As FPDs become larger,
thinner, and more information intensive, the thin film coated glass used in the
displays must meet more demanding performance standards.
The Company primarily supplies thin film coated glass for TN LCDs. Applied
Films also sells a smaller portion of thin film coated glass for black and white
STN LCDs. Lower information content TN LCDs are most commonly used for simple
displays such as those found on watches and calculators. Higher information
content STN LCDs are typically larger displays with higher information content
and are used for applications such as displays for cellular telephones, pagers
and personal digital assistants. Applied Films believes its position as a
leading supplier of thin film coated glass for lower information content LCDs
provides it with continued growth opportunities in the TN and STN LCD markets.
The coating of thin films onto glass for certain higher information content
FPDs, such as the plasma display panels ("PDPs") used in displaying high
definition television, involves a number of intermediate process steps, and is
therefore more suitably performed in-house by certain display manufacturers.
Therefore, the Company has begun offering its proprietary thin film coating
equipment to manufacturers of FPDs such as PDPs, as well as manufacturers of
LCDs. Since entering the thin film coating equipment business in fiscal 1997,
the Company has sold seven systems with an aggregate sales price of
approximately $21.3 million. As of July 3, 1999, the Company's backlog from such
equipment sales was approximately $423,000. Applied Films has also developed and
applied for, a patent on a process for sputtering (a form of physical vapor
deposition) magnesium oxide ("MgO") which the Company believes may represent a
significant competitive advantage in the emerging market for thin film coating
equipment for PDPs. During fiscal 1999, Applied Films developed its latest
configuration of coating equipment, the ATX-700 series, featuring vertical
sputtering of glass substrates, minimized footprint, lower particulate levels,
and reduced labor content. Its unique horseshoe design allows for easy loading
and unloading of material from the same side, reducing labor which in turn
reduces particulates if the process is in a clean room.
1
The Company was originally incorporated in Colorado as Applied Films Lab,
Inc. on March 2, 1976. On May 1, 1992, the Company merged with Donnelly Coated
Corporation, a wholly owned subsidiary of Donnelly Corporation of Holland,
Michigan. During fiscal 1994, the Company ceased using capacity in Holland,
Michigan and began operating solely in Boulder, Colorado. During fiscal 1998 and
1999, the Company moved all of its office and manufacturing facilities to
Longmont, Colorado.
During fiscal 1999, the Company expanded its thin film coated glass
business to the far east by forming a joint venture with Nippon Sheet Glass in
Suzhou, China.
Strategy
The Company's objective is to continue its global leadership as a provider
of thin film solutions to the FPD industry through both thin film coated glass,
as well as thin film coating equipment. The Company stands alone as the only
thin film coated glass manufacturer that develops, uses and sells its
proprietary process equipment The following are key elements of the Company's
strategy to achieve this objective:
Leverage Technology and Process Leadership. The Company intends to leverage
its thin film technology and process capabilities to address the evolving
requirements for more sophisticated, technologically advanced FPDs.
Specifically, the Company intends to continue to enhance its own thin film
coating systems, both in terms of the production efficiency of the systems and
the technical characteristics obtained with certain coatings. The Company also
intends to continue to develop and offer thin film coating equipment that is
cost effective, capable of achieving high productivity and providing
technologically advanced thin film solutions.
Expand Thin Film Coating Equipment Business. Due to the anticipated growth
in demand for higher information content FPDs, Applied Films believes there is
opportunity for the Company to sell thin film coating equipment to FPD
manufacturers. Since entering the coating equipment business in fiscal 1997, the
Company has sold seven systems (at an average selling price of $3.0 million per
system) for applications which include PDPs, electrochromic automotive mirrors
and LCDs. The Company believes its technological capabilities, its history of
designing, developing and improving its own thin film manufacturing systems, and
its extensive operational experience provide it with competitive advantages in
selling thin film coating equipment to others.
Applied Films' goal is to become a major supplier of thin film coating
equipment to the emerging PDP market. The Company intends to address this market
by offering both pilot systems and full scale production systems for the
sputtering of the three thin film layers required by PDPs (indium tin oxide
("ITO"), MgO, and chrome-copper-chrome ("CrCuCr")) utilizing its new hardware
platform, the ATX-700. Currently the main production method used for applying
the MgO layer is vacuum evaporation which, as displays become larger, presents
difficulties for film uniformity. A major drawback of the sputtering process for
MgO has been its very slow sputtering rate. However, the Company recently
developed, a patent pending process which allows MgO glass coatings to be
applied at lower cost, with increased throughput, and with greater uniformity
than the current evaporation method. This process is incorporated in the ATX-700
series platform. The Company has delivered one pilot system to a Korean PDP
manufacturer for use in applying CrCuCr and is presently providing MgO film
samples to other prospective PDP customers. See "Certain Factors --
Uncertainties Related to Coating Equipment Business."
Capture Increased Share of Thin Film Coated Glass Market. Applied Films
believes its position as a leading supplier of thin film coated glass for the
FPD market provides it with continued growth opportunities in that market. The
Company will pursue continued growth of its thin film coated glass business by
seeking to be a low cost producer, by building its own coating systems and
achieving technology-based manufacturing efficiencies. The Company will also
seek continued growth of its thin film coated glass business by leveraging the
Company's long-standing relationships with many of the world's key FPD
customers, and pursuing strategic business relationships to expand the Company's
customer base and manufacturing capacity. For instance, the Company has entered
into a joint venture with Nippon Sheet Glass Co., Ltd. ("NSG"), a major Japanese
glass manufacturer to supply the TN and black and white STN coated glass market
from a production base in Suzhou, China. This joint venture, Suzhou NSG - AFC
Thin Film Electronics LTD ("STEC"), involved the transfer of thin film coated
glass manufacturing capacity to China, closer to the Company's customer base in
Asia. In its first three months of operations, STEC became cash flow positive
and profitable. The Company will be seeking to leverage STEC's strategic
position by expanding its manufacturing capacity in the future. The Company will
also continue to evaluate business opportunities that strengthen our position
with our customers.
2
Develop New Coatings. The growth of new large area coatings will build on
the Company's expertise in process control integrated with systems hardware. One
key area is defined by the expertise gained in the patent-pending, reactive
deposition process of MgO. The Company's reactive process capability provides a
good potential fit for such applications. In August 1999, the Company entered
into an exclusive agreement with Information Products, Inc. whereby the
companies agreed to work together to develop coatings for thin film coated glass
products in the touch screen market. Applied Films is currently evaluating other
markets and partners, both FPD and non-FPD, for the development of thin film
coatings as well.
Strengthen Equipment Service and Support Capabilities. With seven coating
equipment systems in the field, the Company has been faced with service and
support challenges. Although the Company's customers go through extensive
training on the operation and maintenance of the equipment, the need for Company
support technicians has become apparent and the Company is responding to this
need. The Company is organizing the equipment service and support to meet the
needs of customers and does not expect material revenues from this group.
ITEM 1(b): Financial Information About Industry Segments
The Company supplies thin film coated glass and thin film coating equipment
primarily to LCD manufacturers, which are currently considered to be separate
industry segments. For further discussion see "ITEM 8: Financial Statements and
Supplementary Data -- Note 10: Segment Information."
ITEM 1(c): Narrative Description of Business
Products and Manufacturing
The following table sets forth the Company's gross sales by (excluding
returns and allowances) its major product categories and industry segments for
its last three fiscal years:
Fiscal Year Ended
July 3, 1999 June 27, 1998 June 28, 1997
(In thousands)
TN Glass.............................................. $19,963 $29,189 $24,366
STN Glass............................................. 4,703 4,844 3,676
Other Coated Glass.................................... 3,450 7,210 4,257
------- ------- -------
Total Thin Film Coated Glass.......................... 28,116 41,243 32,299
Thin Film Coating Equipment........................... 4,617 13,908 2,784
Thin Film Coated Glass. The Company considers all thin film coated glass as
a segment for reporting purposes due to factors such as the nature of the
products, the raw material, the production process, the type of customers, and
the distribution method.
Thin Film Coated Glass used for TN LCDs. Thin film coated glass for TN LCDs
is manufactured by depositing silicon dioxide ("SiO2") and indium tin oxide
("ITO") onto glass purchased primarily in four thicknesses, 1.1 millime ters,
0.7 millimeters, 0.55 millimeters, and 0.4 millimeters. The thin film coated
glass is sold in a variety of sizes ranging from roughly 300 millimeters square
to 400 millimeters by 500 millimeters. TN LCDs are most commonly used for simple
displays such as those found on watches, calculators and electronic instruments.
They offer good contrast and acceptable response time for simple readout
operations, are relatively inexpensive to produce and require very low power to
operate. TN LCDs typically are not used for high information content displays
such as those used in laptop computers. However, TN LCDs are the best all around
choice for many products, and current advances in display technologies are
permitting this lower cost glass to be used for other, new applications such as
in the automotive industry.
Thin Film Coated Glass used for Black and White STN LCDs. This product is
more complex and expensive to manufacture than thin film coated glass for TN
LCDs. The STN LCD product in most instances, requires that the Company purchase
higher quality, flatter glass. In addition, glass for many STN LCDs requires a
thicker ITO coating to improve conductivity, commonly requiring a longer
production cycle time. The Company has converted one of its TN LCD coating
systems to meet these needs and, during fiscal 1998, Applied Films commenced
production on a new
3
coating system capable of manufacturing thin film coated glass for black and
white STN LCDs. During fiscal 1999, the Company further increased its STN
capacity through its STEC joint venture in China.
Other Thin Film Coated Glass. The Company's other thin film coated glass
consists primarily of ITO thin film coated glass for automatically dimming
electrochromic automotive mirrors, chrome and rhodium thin film coated glass for
dental mirrors, CrCuCr coatings for PDPs, and gold, silver and other coatings
for certain small orders and applications under development. Although sales of
other coated glass were down 52% in fiscal 1999 versus 1998, sales of
electrochromic coated glass improved during the year.
Thin Film Coating Equipment. The Company has designed and built several
generations of high volume thin film coating equipment capable of meeting the
needs of customers requiring in-house production of thin film coated glass,
primarily in the FPD industry. The Company has supplied thin film coating
equipment for use in producing LCDs, PDPs, automatically dimming
(electrochromic) automotive mirrors and touch panel displays. The Company's
present coating equipment product line includes two standard platforms: (i) the
Venture Series in-line vertical system which provides reduced particle defect
levels and high throughput for use in FPD and other high volume applications,
and (ii) the ATX Series, which is a new proprietary platform designed and built
by the Company. A pre-production version of each system can be upgraded to a
full production system as customer requirements increase. The ATX Series is an
advanced concept thin film coating equipment system addressing automation,
increasing display size and low-particulate requirements of FPD and PDP display
manufacturers. The design and building of the ATX Series accounted for a
significant portion of the Company's capital expenditures in fiscal 1999.
Included within each of the Company's platforms is the Company's proprietary,
user-friendly software using computer touch screens. The Company's thin film
coating equipment provides for all coating and heat treating within the
equipment using proprietary processes pioneered and developed by the Company.
The Company's thin film coating equipment average selling price is approximately
$3.0 million and can range up to $7.0 million..
Production Process and Quality Control. One of the Company's primary
process elements and core competencies in the manufacture of thin film coated
glass is the preparation of the glass for coating in high volumes. The cleaning
process, the lack of pinholes in the coating, and the absence of any
contamination on or under the coating are critical in the manufacturing process.
After cleaning and preparation, the glass enters a HEPA filtered Class 1000
clean room where it is loaded into the coating system. After removal of the
substrate from the system, it must be inspected for defects and optical,
electrical and thickness properties. This is done using various devices and in
some cases visually. The Company continually works to improve its glass cleaning
and product inspection capabilities.
Sales, Marketing, and Customers
Most of the Company's thin film coated glass sales are handled by an
internal sales force of four individuals based in Longmont and one based in
China. Sales in Taiwan, Japan and Korea are handled through outside sales
representatives who are supported by the Company's internal personnel. Other
Company personnel, including its Chief Executive Officer and Vice President -
Sales & Marketing, make regular trips to visit foreign customers to ensure
proper customer service. The Company generally sells its thin film coated glass
products on open account or letter of credit and its customer payment history
has been excellent.
Sales of the Company's equipment involve a broad-based effort at various
levels within the Company. Much of the sales effort in the equipment area is
undertaken by the Company's technical and marketing groups, including sales
offices in Japan and China. 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, including providing product samples that meet
customer specifications. 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. The Company
generally sells its thin film coating equipment on a progress payment basis.
Approximately 85% of the Company's fiscal 1999 gross sales were derived
from exports, primarily to Asia. See "Certain Factors -- International Markets."
In the same period, the Company served 122 customers in 16 countries. In fiscal
1999, the Company's ten largest customers accounted for approximately 62 % of
the Company's gross sales. The principal demand for thin film coated glass is in
Asia and the Company's customers for thin film coating equipment have been in
Korea, China, Taiwan and the United States. The Company believes its potential
geographic market for
4
thin film coating equipment includes all the major geographic regions in which
FPD manufacturing takes place. See "Certain Factors -- Uncertainties Related to
Coating Equipment Business" and "-- Dependence on Key Customers, Limited Number
of Customers." Sales to two customers, NSG and Varitronix, represented
approximately 15% and 11% of gross sales for fiscal 1999, respectively. Sales to
both customers for fiscal 1999 consisted solely of sales of thin film coated
glass.
The Company's gross sales (before returns and allowances) of thin film
coated glass by geographic region during each of the last three fiscal years
were as set forth below. Sales are assigned to a region based upon where the
contract for purchase is formed.
Fiscal Year Ended
July 3, June 27, June 28,
1999 1998 1997
------ ------ -----
(In thousands)
Asia (other than Japan)..................................... $15,391 $24,124 $17,059
Japan....................................................... $7,645 7,824 6,611
United States............................................... $3,817 6,991 5,688
Europe and Other............................................ $1,263 2,304 2,941
A key aspect to serving the needs of its international customers is
just-in-time delivery of its products. The Company utilizes warehouses in Japan
and Hong Kong to meet this need. The Company has entered into the STEC joint
venture to produce thin film coated glass in Suzhou, China, for use in LCD
displays. The joint venture provides Applied Films with closer access to its key
customer base in Southeast Asia and use of an existing production facility,
while reducing operating and transportation costs.
Although international markets provide the Company with significant growth
opportunities, periodic economic downturns, trade balance issues, political
instability and fluctuations in interest and foreign currency exchange rates are
all risks that could affect global products and service demand. Many Pacific Rim
countries are currently experiencing banking and currency difficulties that have
led to economic recession in those countries. These difficulties are continuing
to have a material adverse effect on the Company's business. See "Certain
Factors -- International Markets" and see "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Sales and purchases are generally denominated in U.S. dollars and Japanese
yen. The Company does not currently engage in currency hedging transactions. To
the extent the Company must transact business in foreign currencies and is
unable to match revenue received in foreign currencies with expenses paid in the
same currency, it is exposed to possible losses in foreign currency
transactions.
Seasonality
The Company's business is not especially seasonal. However, production
output is affected by holidays, vacations and available workdays. The Company's
business is subject to significant quarterly and annual fluctuations. See
"Certain Factors -- Fluctuations in Demand and Annual and Quarterly Operating
Results."
Working Capital
The Company extends credit to its thin film coated glass customers, either
through open accounts or through letters of credit. The majority of the
Company's foreign accounts that are sold on open terms are insured. Thin film
coating equipment customers generally make a significant advance deposit
followed by progress payments based upon milestones for equipment completion and
delivery.
5
Backlog of Orders
The Company generally does not maintain a material backlog of orders for
thin film coated glass sales. Orders are generally shipped within 30 to 60 days
of order receipt. Backlog of orders are maintained for thin film coating
equipment sales due to the longer lead and construction times. Backlog for
equipment sales totaled $423,000 as of July 3, 1999, versus $950,000 as of June
27, 1998.
Environmental Matters
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). As such, the nature of the Company's
operations exposes it to the risk of claims with respect to such matters and
there can be no assurances that material costs or liabilities will not be
incurred in connection with such claims.
Certain Environmental Laws regulate air emissions, water discharges,
hazardous materials and wastes and require public disclosure related to the use
of various hazardous or toxic materials. The Company's operations are also
governed by Environmental Laws relating to workplace safety and worker health.
Compliance with Environmental Laws may require the acquisition of permits or
other authorizations for certain activities and compliance with various
standards or procedural requirements.
Based upon its experience to date, the Company believes that the future
cost of compliance with existing Environmental Laws, and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new information,
changes in existing Environmental Laws or their interpretation, and more
vigorous enforcement policies of regulatory authorities, may give rise to
additional expenditures or liabilities that could be material.
Suppliers
Thin Film Coated Glass. The raw glass used by the Company in its
manufacturing process represents its most significant material cost. The
required quality, in terms of thickness, flatness and visible imperfections,
limits the number of available suppliers. Five companies worldwide currently
manufacture to these quality standards. The Company currently purchases glass
from four of these suppliers. The Company is vulnerable to increased costs of
raw glass. The Company regularly evaluates methods of reducing its cost of
glass. The Company's other primary raw materials for thin film coated glass are
SiO2 and ITO. The Company currently purchases SiO2 from two suppliers, and it
believes alternative sources of supply could be developed if necessary. The
Company purchases ITO from two suppliers, while at least one additional supplier
remains qualified and ready to supply the Company. Other coating materials,
currently used to a lesser extent by the Company, include materials which are
available from few suppliers. See "Certain Factors -- Limited Sources of
Supply."
Thin Film Coating Equipment. In its thin film coating equipment business,
the Company uses various suppliers of machined components, pump systems, logic
controllers and other commercially available components and features. It has no
single source for any principal components in this aspect of its business. The
company owns and controls the proprietary parts of the process. For the
proprietary fabricated parts there are various suppliers who can produce
components to the Company's specifications.
To date, the Company has not experienced any material interruption in the
supply of its raw materials or components; however, if the Company were to
experience significant delays, interruptions, reductions in the supply of raw
materials, or material supplier price increases, the Company's business,
operating results, or financial condition could be materially adversely
affected.
6
Competition
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, the Company believes the
ability to anticipate shifts in the market and customer needs for thin film
coated glass features are important competitive factors. Although certain of the
Company's potential competitors have considerably greater financial, research,
technical, and sales and marketing resources than the Company, the Company
believes that it competes favorably with respect to each of these factors. The
Company is 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 the Company's
principal thin film coated glass competitors are located outside the United
States, primarily in Asia. The Company is aware of new capacity brought online
by competitors and manufacturers of FPD's during calendar years 1998 and 1999.
This new capacity, coupled with weakening demand and lower prices, is having an
adverse effect on the Company's sales. See "Certain Factors -- Highly
Competitive Market Environment." The Company's primary competitors for thin film
coated glass are Samsung/Corning, Merck Display Technology, Wellite, and
Shenzhen Leybold.
Both suppliers and customers of the Company could, conceivably, engage with
a coating equipment manufacturer to vertically integrate and manufacture the
products produced by the Company.
In manufacturing thin film coating equipment, the Company competes against
two established equipment manufacturers which are much larger than the Company:
Ulvac Japan, Ltd. in Japan and Balzers Process Systems in Germany. Competition
is based on performance and process technology, after-sales support and service
and price, and the Company believes it competes 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. The Company is also the only major thin film coating equipment
manufacturer that also manufactures thin film coated glass for the FPD market.
The Company believes the experience, expertise and synergy resulting from this
provide it with a competitive advantage.
Research and Development
The Company's success can be attributed to its success of focused research
and development programs in thin film technology, processes and equipment. The
Company will continue to emphasize improvements in current technology, the
growth of new film deposition capabilities, and the modification of thin film
material properties. The foundations of the Company's success are based on
engineering solutions for efficient ITO deposition for the FPD industry. These
solutions included cost effective reactive depositions, simplified process
control, and innovative coater designs. The Company continues to build on these
traditions in the development of process control and coater design which have
led to superior cost of machine ownership for the Company's customers.
Research and development efforts will continue to focus on providing large
area thin films and supporting the thin film equipment production required for
these films. Through the continued diversification of coating capabilities the
Company intends to offer large area films required in the fields of optical
coatings, AMLCDs, electrochromics, and photovoltaics. These films will be
focused on high technology value-added products requiring specific material
properties.
Continued emphasis will be placed on growth through a combination of solid
fundamental understanding and rapid engineering implementation. Critical
resources include manpower and equipment. The research and development effort
led by the Advanced Development Group will add manpower commensurate with
improvements in business climate. In addition to fully utilizing the newest
coating platform, the ATX-700, as its core development platform, the Company
will refurbish existing equipment for parallel development programs. In fiscal
1997, 1998 and 1999, research and development expenditures were 2.2%, 2.3%, and
3.3% of the Company's net sales.
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Proprietary Rights
The Company's proprietary technology is principally related to the design
of its processes, its process control, and the transfer of this knowledge to the
design of new equipment. Historically, the Company has relied primarily on trade
secret laws and third-party nondisclosure agreements, as opposed to patent
protection, to protect its proprietary technology. Nevertheless, in specific
cases where the Company believes that it has a decided advantage over current
technology, patent protection is being sought. For example, the Company has
applied for patent protection for a broad range of reactively deposited metal
oxide films. The use of specific hardware configurations allows the stable
deposition of films that are typically quite difficult to deposit. International
protection is expected after a positive evaluation given in the International
Preliminary Examination Report. Also, trade secret protection can be preferable
over patent protection in part due to the expense and difficulty of obtaining
and enforcing foreign patent applications and due to the fact that patents
become part of the public record. The Company's success is heavily dependent
upon its proprietary processes. The Company believes that due to the rapid pace
of innovation within its industry, factors such as technological and creative
skilled personnel, the ability to develop and enhance systems, knowledge and
experience of management, reputation, product quality and customer service and
support are more important for establishing and maintaining a competitive
position within the industry than are patent or other legal protections for its
technology. There can be no assurance, however, that the steps taken by the
Company to protect its 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.
Employees
As of fiscal year end 1999, the Company employed 161 people, versus 296
people at the end of fiscal 1998, including 126 in thin film coated glass
production, 7 in thin film coating equipment systems, 7 in marketing and sales,
9 in research and development and 12 in accounting, human resources, and other
administrative personnel. None of the employees are unionized. The Company
considers its relationship with its employees to be good.
The Company focuses on enhancing sound manufacturing systems and applying
key concepts of high performance work systems to improve its ability to grow
rapidly, excel at product cost, quality, and delivery, and encourage continuous
improvement and innovation. The Company's fundamental work units are teams,
including multi-skilled production teams responsible for start-to-completion
manufacturing and teams focused on technology development, and innovation.
Coordination and direction are established through extensive work force
education, participative leadership and management, and shared goal setting,
communication, and performance feedback.
The Company operates under a participative management system which the
Company believes enhances productivity by emphasizing individual employee
opportunity and participation both in operating decisions and in the Company's
profitability. The Company maintains a discretionary monthly profit sharing plan
for full-time nonexecutive employees. The Company believes this emphasis assists
with enhanced productivity, cost control, and product quality and has helped the
Company attract and retain capable employees.
One Time Charges
The Company restructured its workforce twice during the 1999 fiscal year,
due to reduced customer demand. This restructuring along with the cost to
complete the move of the company to its current manufacturing and headquarters
site generated one time charges to earnings totaling $433,000.
8
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of the Company are as
follows:
Name Age Position
Cecil Van Alsburg.............................. 62 Director, Chairman of the Board
Thomas T. Edman................................ 37 Director, President, Chief Executive Officer
John S. Chapin................................. 58 Director, Vice President - Research, Secretary
C. Richard Condon.............................. 54 Vice President - Engineering
Graeme Hennessey............................... 61 Vice President - Sales and Marketing
Lawrence D. Firestone.......................... 41 Chief Financial Officer and Treasurer
Chad D. Quist.................................. 37 Director
Richard P. Beck................................ 66 Director
Roger Smith.................................... 58 Director of Materials
Jim Scholhamer................................. 33 Director of Operations - Thin Film Coatings
Russell W. Black............................... 39 Director of Operations - Thin Films Systems
John J. Kester................................. 49 Director of Advanced Development
James A. Knister ............................. 61 Director - Resigned his position effective October 26,
1999
Jeffrey K. Fergason............................ 40 Director - Resigned his position effective July 28, 1999
Cecil Van Alsburg co-founded Applied Films Lab, Inc. in 1976 and served as
President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg has
also served as a director of Applied Films Corporation since its inception and
has been Chairman of the Board since January 1998. Prior to 1976, Mr. Van
Alsburg was employed in various capacities by Donnelly Corporation for which he
had worked since 1957. Mr. Van Alsburg majored in civil engineering and
architecture at the University of Michigan.
Thomas T. Edman has been employed by the Company since June 1996 and has
served as its President and Chief Executive Officer since May 1998. From June
1996 until May 1998, Mr. Edman served as Chief Operating Officer and Executive
Vice President. Mr. Edman has also served as a director of Applied Films
Corporation from July 1998 to the present. From 1993 until joining the 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 obtained a bachelors of arts in East Asian studies
(Japan) from Yale and, in June 1993, a masters degree in business administration
from The Wharton School at the University of Pennsylvania.
John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and has
continuously served as Vice President - Research, Corporate Secretary, and a
director of Applied Films Corporation since its inception. Mr. Chapin is the
inventor of the planar magnetron and co-inventor of a reactive sputtering
process control. Mr. Chapin obtained 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.
C. Richard Condon co-founded Applied Films Lab, Inc. in 1976 and has
continuously served as its Vice President - Engineering since its inception. Mr.
Condon also served as a director of Applied Films Corporation from 1976 until
July 1998. Mr. Condon is responsible for the Company's advanced coating systems
design, with over 25 years experience in the thin film industry. Mr. Condon
obtained a bachelors of science degree in physics from the University of
Colorado and an associates degree in mechanical engineering from the Wentworth
Institute.
Graeme Hennessey has served as the Company's Vice President - Sales and
Marketing since April 1993. From 1980 until he joined the Company, Mr. Hennessey
was employed by Donnelly Corporation as a product line manager where he was
responsible for sales and marketing as well as manufacturing. Mr. Hennessey
obtained a bachelors of science degree in physics from Catholic University of
America and a masters degree in physics from Fordham University.
Lawrence D. Firestone has been employed by the Company since July 1999 and
serves as Chief Financial Officer and Treasurer. 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 CFO for TechniStar
Corporation, a manufacturer
9
of robotic automation equipment. From 1981 to 1988, Mr. Firestone served in
various capacities and finally as Vice President and CFO at Colorado
Manufacturing Technology, a contract manufacturer that specialized in PC board
and cable assembly. Mr. Firestone obtained a bachelors of science degree in
business/accounting from Slippery Rock State College.
Chad D. Quist has been a director of the Company since April 1997. Mr.
Quist is the President of Information Products, Inc., a wholly-owned subsidiary
of Donnelly Corporation, and has recently assumed responsibility for the
electrochromic business unit for Donnelly Corporation as its Vice President. Mr.
Quist has been employed by Donnelly since 1995. Information Products, Inc. is a
leading supplier of glass components for the touch screen industry. From 1989 to
1995, Mr. Quist served as Vice President of Fisher-Rosemont, Inc., an industrial
instrumentation company. Mr. Quist obtained 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 the 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
obtained a bachelors of science degree in accounting and a masters degree in
business administration in finance from Babson College.
Roger Smith has served the Company since July 1998 as its Director of
Materials. From May 1993 until July 1998 Mr. Smith served as the Company's
Treasurer. Prior to joining the Company, Mr. Smith was employed for 33 years by
Donnelly Corporation in various capacities, including controller and project
manager.
Jim Scholhamer has been employed by the Company since August 1997. Mr.
Scholhamer currently is the Director of Operations for Thin Film Coatings. Prior
to being promoted to Director, Mr. Scholhamer served as the Engineering Manager.
From 1992 until he joined the Company, Mr. Scholhamer held the titles of
Manufacturing Manager and Process Engineer at Viratec Thin Films, Inc., located
in Minnesota. From 1989 to 1992, Mr. Scholhamer served as Production Manager,
and Process Engineer at Ovonic Synthetic Materials, Inc., a division of Energy
Conversion Devices, located in Michigan. Mr. Scholhamer obtained his bachelors
of science degree in engineering from the University of Michigan.
Russell W. Black has been employed by the Company since December 1996 as
its Director of Operations -- Thin Film Systems. From 1994 until March 1996, Mr.
Black served as Engineering Manger at Applied Komatsu Technology, a capital
equipment supplier to the FPD industry, and from 1990 to 1993, as an Engineering
Manager at Varian Associates, Inc., a capital equipment supplier to the
semiconductor industry. Mr. Black obtained a bachelors of science degree in
engineering technology from California State Polytechnic University. In 1995,
Mr. Black pleaded guilty to one count of wire fraud in United States District
Court. Mr. Black was sentenced to 18 months probation and 50 hours of community
service and was ordered to pay approximately $7,500 in fines and restitution.
Mr. Black's probation was terminated by the court after 10 months.
John J. Kester Advanced Development Director, has been employed by the
Company since June 1997. From 1995 until he joined the company, Dr. Kester
served as Research and Development Manager for the photovoltaic module
manufacturer, Golden Photon Inc., a subsidiary of ACX Inc. From 1989 to 1995 he
was the Physics Division Chief at the Seiler Research Laboratory at the United
States Air Force Academy. From 1982 to 1989 he worked in the Central Research
Laboratory of Dow Chemical Company. Dr. Kester obtained a bachelors degree from
The Colorado College and a masters and doctorate in physics from Washington
University in St. Louis, Missouri.
James A. Knister has been a director of the Company since 1992 and served
as the Company's non-employee Chairman from 1996 until January 1998. Mr. Knister
has been the Group Managing Director of Ventures at Donnelly Corporation since
January 1997. From 1967 until December 1996, Mr. Knister served in various
capacities at Donnelly Corporation including, from 1981 to 1994, as Senior Vice
President and Chief Financial Officer and, from 1994 until December 1996, as a
Senior Vice President. Mr. Knister also serves on the Board of Directors of
X-Rite, Incorporated. Mr. Knister obtained a bachelors of science degree in
industrial engineering and a masters degree in business administra tion from the
University of Michigan.
10
The Company's Board of Directors is currently composed of six directors,
divided into three classes. Messrs. Beck, and Quist serve in the class whose
term expires in 1999; Messrs. Edman and Knister serve in the class whose term
expires in 2000, and Messrs. Van Alsburg and Chapin serve in the class whose
term expires in 2001. Mr. Knister has resigned his position as a director of the
Company effective as of October 26, 1999. Upon the expiration of the term of
each class of directors, directors comprising that class will be elected for a
three-year term at the next succeeding annual meeting of shareholders. Upon the
expiration of the term of a director appointed to fill a vacancy, that director
will be elected to an appropriate term at the next succeeding annual meeting of
shareholders. Each director holds office until that director's successor has
been duly elected and qualified. Selection of the nominees for the Board of
Directors is made by the entire Board of Directors.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and 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."
ITEM 2: Properties
The Company's headquarters and the majority of its manufacturing facilities
are located in Longmont, Colorado in approximately 127,000 square feet of leased
space. The Company has sales offices in China and Japan and utilizes inventory
warehouses in Japan and Hong Kong.
The Company believes its facilities are modern, well-maintained and
adequately insured and are well-utilized.
ITEM 3: Legal Proceedings
The Company is not presently involved in any legal proceedings which, if
not settled in favor of the Company, would individually or collectively, have a
material adverse impact on its financial condition.
ITEM 4: Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1999 to a
vote of the Company Shareholders.
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.
CERTAIN FACTORS
Fluctuations in Demand and Annual and Quarterly Operating Results
The Company has experienced and may continue to experience significant
annual and quarter- to-quarter fluctuations in its operating results. The
Company's annual and quarterly operating results may fluctuate as a result of a
variety of factors including: (i) customer demand, such as general economic
conditions in the FPD industry, market acceptance of products of both the
Company and its customers, changes in product mix, and the timing, cancellation
11
or delay of customer orders and shipments; (ii) competition, such as competitive
pressures on prices of the Company's products, as well as those of its
customers, and the introduction or announcement of new products by competitors;
and new production capacity added by competitors; (iii) manufacturing and
operations, such as fluctuations in availability and cost of raw materials and
production capacity, the transfer of equipment and personnel to the Company's
new manufacturing facilities, and the hiring and training of additional staff;
(iv) fluctuations in foreign currency exchange rates; (v) new product
development, such as increased research, development and engineering, as well as
marketing expenses associated with new product introductions and the Company's
ability to introduce new products and technologies on a timely basis; (vi) sales
and marketing, such as concentration of customers and discounts that may be
granted to certain customers; and (vii) the cyclical nature of the capital
equipment market. Because a significant portion of the Company's overhead is
fixed, at least in the short-term, the Company's results of operations may be
materially adversely affected if net sales decline for any reason. Further,
although the Company has achieved productivity improvements in recent quarters,
there can be no assurance of any future productivity improvements. See "ITEM 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
Highly Competitive Market Environment
Competition in the thin film coated glass for the LCD market is, and is
expected to remain, intense. Several of the Company's competitors have
substantially greater financial, technical, marketing and sales resources than
the Company. There can be no assurance that the Company's present or future
competitors will not exert increased competitive pressures on the Company. In
particular, the Company 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, and such price
competition could adversely affect the Company's business, operating results,
financial condition and prospects. Prices for much of the Company's TN thin film
coated glass products supplied to the LCD market have declined in past years.
Although prices declined 29% during fiscal 1999, the Company saw prices
stabilize late in the fiscal year. It's too early to determine whether this
pricing stabilization will continue. The Company is aware of several competitors
who increased production capacity during 1998 and 1999. Increases in industry
capacity may result in intensified pricing pressures on the Company's products.
The Company's competitive position also could be adversely affected by raw
material price increases, which the Company may not be able to pass on to its
customers but which certain of its vertically integrated current and potential
competitors may be able to better absorb. To remain competitive, the Company
must continue to invest in and focus upon research and development, product and
process innovation, as well as sales and customer support. There can be no
assurance that the Company will be successful in such efforts or that such
factors will not have a material adverse effect on the Company's business,
operating results, financial condition or prospects. The Company's suppliers
and/or customers could vertically integrate to manufacture the products produced
by the Company. The Company's suppliers of thin glass are large,
well-capitalized companies which could enter the LCD market by coating the glass
they produce and supplying LCD manufacturers directly. Because glass is by far
the Company's largest material cost, a manufacturer of glass desiring to enter
this market could have a significant cost advantage. The Company is aware of two
manufacturers of thin glass that also coat glass for the LCD market, Asahi Glass
Company and Nippon Sheet Glass. Further, companies that manufacture equipment
for coating thin film glass could begin producing thin film coated glass. In
addition, certain LCD manufacturers have vertically integrated to coat glass for
LCDs and further vertical integration into certain areas of LCD manufacturing is
expected. Any such vertical integration could have a material adverse effect on
the Company's business, operating results, financial condition and prospects.
See "ITEM 1(c): Narrative Description of Business -- Competition."
Uncertainties Related to Thin Film Coating Equipment Business
Until fiscal 1997, the Company's business was focused almost exclusively on
the sale of thin film coated glass. Although the Company expects to continue to
produce and sell thin film coated glass to the world FPD market, the Company's
future growth potential depends in part upon the Company's success in the market
for thin film coating equipment. Sales of the Company's 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. Further, customers for
the Company's thin film coated glass could decide to purchase thin film coating
equipment to bring some or all of their thin film coated glass requirements
in-house, thus adversely affecting sales of thin film coated glass by the
Company to such customers. The Company has built equipment for seven such
customers. Thin film coating equipment sales also may be affected by changes in
the market for different types of displays and customers' decisions to begin
internal production of glass
12
coatings rather than rely on an outside supplier such as the Company. The sales
cycle of the Company's thin film coating equipment is lengthy due to the
customer's evaluation of its ordered system and completion of any necessary
upgrades, expansion or construction of facilities. The Company may expend
substantial funds and management effort during the sales cycle. In addition, the
cyclicality and rapid technological change in the thin film coated glass
industry may cause prospective customers to postpone decisions regarding major
capital expenditures, such as the Company's coating equipment. With respect to
the development of its equipment business, the Company is subject to the risks
inherent in the operation or the development of a new business, including risks
associated with attracting and servicing a customer base, manufacturing products
in a cost-effective and profitable manner, managing the expansion of a business
operation and attracting and retaining qualified engineering, manufacturing
service, and marketing personnel. Because of rapid changes in the FPD market,
which are expected to continue, it is difficult to predict whether or where
future growth may occur, or at what rate certain aspects will grow, if at all.
Further, changes in technology could render the Company's systems less
attractive. If the market for the Company's thin film coating equipment fails to
grow, or grows more slowly than anticipated, the Company's business, operating
results, financial condition and prospects could be materially adversely
affected. See "ITEM 1(c): Narrative Description of Business -- Competition." The
Company's equipment business is subject to capital spending levels in Asia.
Certain plasma display manufacturers announced during fiscal 1999 plans to delay
capital spending for new equipment. This announcement, together with overall
economic conditions in Asia will negatively impact fiscal 2000 results. Backlog
for equipment sales totaled $423,000 as of July 3, 1999, versus $950,000 as of
June 27, 1998.
International Markets
Sales to international customers represented approximately 83%,78%, and 85%
of the Company's gross sales in fiscal 1997,1998, and 1999, respectively. The
Company's principal international markets are China (including Hong Kong),
Korea, Japan, Taiwan and Malaysia. Recent banking and currency problems in the
Asian regions, however, have had and will continue to have an adverse impact on
the Company's revenue and operations. The Company believes that international
sales will continue to represent a significant portion of its gross sales, and
that, in addition to the aforementioned banking and currency problems, it will
be subject to the normal risks of conducting business internationally, including
unexpected changes in regulatory requirements, imposition of government
controls, political and economic instabilities, export license requirements,
foreign exchange risks, tariffs and other barriers, difficulties in staffing and
managing foreign sales operations and potentially adverse tax consequences. The
Company has taken steps to mitigate some risk by insuring its foreign accounts
receivables. In addition, the laws of certain foreign countries may not protect
the Company's proprietary rights to the same extent as do the laws of the United
States. See "ITEM 1(c): Narrative Description of Business -- Proprietary
Rights." Other risks inherent in the Company's international business include
greater difficulties in accounts receivable collection, the potential of
protective trade activities or laws and the burdens of complying with a wide
variety of foreign laws. See "ITEM 1(c): Narrative Description of Business --
Sales, Marketing, and Customers." The Company's business, operating results,
financial condition or growth could be materially adversely affected by these
risks.
The Company's international sales are generally denominated in dollars,
although a portion of its sales to Japanese customers are denominated in yen. In
fiscal 1999, approximately 21% and 79% of the Company's total gross sales were
denominated in yen and dollars, respectively. Any strengthening of the dollar in
relation to the currencies of the Company's competitors or customers could
adversely affect the Company's competitiveness. Although a strengthening dollar
may result in some offsetting cost reductions on the raw materials imported by
the Company, there can be no assurance that such cost reductions would enable
the Company to remain competitive. Moreover, a strengthening of the dollar or
other competitive factors could put pressure on the Company to denominate a
greater portion of its Japanese sales in yen, thereby increasing the Company's
exposure to fluctuations in the dollar-yen exchange rate. In addition, the
Company's joint venture in China transacts much of its business in Chinese Yuan
Renminbi, which has remained fairly constant in value, however, any devaluation
of the Chinese Yuan Renminbi would adversely affect the Company's business,
operating results, financial conditions and prospects. There can be no assurance
that fluctuations in exchange rates will not adversely affect the Company's
competitive position or result in foreign exchange losses, either of which could
materially adversely affect the Company's business, operating results, financial
conditions and prospects. See "ITEM 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Overview."
13
Limited Sources of Supply
There are relatively few manufacturers of thin glass, which raw material
accounts for a majority of the Company's materials cost. The Company currently
relies primarily on four glass suppliers, Pilkington Micronics, Ltd., Glaverbel
Societe Anonyme, Central Glass Co., Ltd., and Nippon Sheet Glass Co., Ltd., all
of which are located outside the United States. The Company does not have
long-term supply contracts with any of these suppliers, and thus has no
contractual assurance of a firm price, over an extended term, or of a long-term
commitment to supply product. In periods of short supply, the Company 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. In
addition, the Company may not be able to pass raw material price increases along
to its customers, especially in periods of soft demand for the Company's
products or excess capacity. Current and potential competitors of the Company
that both manufacture and coat glass could be able to better absorb such raw
material cost increases due to their vertical integration. If the Company were
to experience significant delays, interruptions, or shortages in its material
supply or material supplier price increases, the Company's business, operating
results, financial condition and prospects could be materially adversely
affected. See "ITEM 1(c): Narrative Description of Business -- Suppliers."
Rapid Technological Change
The market for thin film coated glass is characterized by rapid change. The
Company's future success depends upon its 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 its customers. In order to remain competitive, the Company believes it
must continue to invest in research and development. The Company expects to
increase its research and development expenditures in fiscal 2000 which could
adversely affect fiscal 2000 operating results. Technological changes, process
improvements, or operating improvements which could adversely affect the Company
include: (i) development of new technologies which improve manufacturing
efficiency of the Company's competitors; (ii) changes in product requirements of
the Company's customers; (iii) significant changes in the way coatings are
applied to glass for LCDs; and (iv) other changes such as improvements in the
design of cathodes. If the Company does not adapt to such changes or
improvements, the Company's competitive position, operations and prospects would
be materially, adversely affected. In addition, there are alternative
technologies to sputtering technology for three of the thin film coating layers
used in PDPs. Materials applied by the Company to thin glass to provide
conductivity or other properties are generally available and are not patented.
Development of a new material which improves the performance of thin film coated
glass and better addresses customer needs could, if not adopted by the Company,
have a material adverse effect on the Company's operations and prospects. There
can be no assurance that the Company will be successful in meeting the demands
of the marketplace or that one or more of these factors will not have a material
adverse effect on the Company's business, operating results, financial condition
or prospects. See "ITEM 1(c): Narrative Description of Business -- Products and
Manufacturing."
Evolving FPD Market
The Company believes that much of the growth in the FPD market will be in
higher information content FPDs, such as STN LCDs, active matrix LCDs ("AM
LCDs"), and PDPs. See "ITEM 1(c): Narrative Description of Business -- Products
and Manufacturing." During fiscal 1999, 17% of the Company's thin film coated
glass revenues were derived from the sale of thin film coated glass used in
black and white STN displays. The Company has to date directed most of its
production capacity to TN thin film coated glass which represented 71% of the
Company's thin film coated glass sales in 1999 and is presently used in lower
information content applications. While the Company has recently made
investments in additional production capacity for STN thin film coated glass,
there can be no assurance that the Company will be able to successfully expand
its position in the market for thin film coated glass for higher information
content FPDs. A reduction in the market for thin film coated glass for TN LCDs
as a result of a shift in demand toward higher information content displays
could materially adversely affect the Company's results of operations and could
be to the advantage of competitors of the Company who may currently have greater
capacity to produce thin film coated glass for STN or AM LCDs. This could affect
the Company's operating results while it transfers resources to the manufacture
of thin film coated glass for STN LCDs. See "ITEM 1(a): General Development of
Business -- Strategy" and "ITEM 1(c): Narrative Description of Business --
Products and Manufacturing." The Company's business depends substantially on the
purchasing requirements of manufacturers of FPDs, which, in turn, depend upon
the current and anticipated market demand for FPDs. Sales of thin film coated
glass to these manufacturers are expected to continue to represent a significant
portion of the Company's net sales. Although the market for FPDs has experienced
significant growth, there can be no assurance that such growth will continue at
all, or that any growth will have a positive impact on the Company's future
business or results of operations. The Company's business, operating results,
financial condition and prospects would be materially adversely affected by any
future downturns in the FPD market.
14
Dependence on Key Customers, Limited Number of Customers
The Company's ten largest customers accounted for, in the aggregate,
approximately 59%, 78% and 62% of the Company's gross sales in fiscal years
1997, 1998 and 1999, respectively. In fiscal 1999, sales to NSG and Varitronix
represented 15% and 11% of gross sales, respectively. Sales to both customers
for fiscal 1999 consisted solely of sales of thin film coated glass. The loss
of, or a significant reduction of purchases by, one or more of these customers
would materially adversely affect the Company's business, operating results,
financial condition and prospects. The Company expects that sales of its
products to relatively few customers, particularly in the LCD market, will
continue to account for a high percentage of its revenue in the foreseeable
future. In addition, in the LCD market, there are a limited number of potential
customers. The Company has not entered into long-term agreements with its
customers and none are obligated to continue to buy their thin film coated glass
from the Company. Moreover, in the event that customers purchase thin film
coating equipment from the Company or one of its competitors and begin coating
the 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 capital equipment from other customers, the Company's business, operating
results, financial condition and prospects could be materially adversely
affected. See "-- Fluctuations in Demand and Annual and Quarterly Operating
Results" and "ITEM 1(c): Narrative Description of Business -- Sales, Marketing,
and Customers."
Management of Growth
In order to support potential future growth, the Company will need to
improve its productivity, invest in additional research and development, enhance
its management information systems and add additional management personnel.
There can be no assurance that the Company will continue to grow or be effective
in managing its future growth, expanding its facilities and operations or
attracting and retaining additional qualified personnel. Any failure to
effectively manage growth, expand its operations or attract and retain personnel
could have a material adverse effect on the Company's business, operating
results, financial condition, and prospects. See "-- Fluctuations in Demand and
Annual and Quarterly Operating Results," "-- Dependence on Management and Other
Key Personnel," and "ITEM 1(c):
Narrative Description of Business -- Employees."
Declining Average Selling Prices; Dependence upon Productivity Improvements
Many of the Company's customers are under continuous pressure to reduce
prices and, therefore, the Company expects to continue to experience downward
pricing pressures on its thin film coated glass products. The Company is
frequently required to commit to price reductions before it has determined that
assumed cost reductions can be achieved. To offset declining average sales
prices, the Company must achieve manufacturing efficiencies and cost reductions
and obtain orders for higher volume products. If the Company is unable to offset
declining average sales prices, the Company's gross margins will decline, and
such decline will materially adversely affect the Company's business, operating
results, financial condition and prospects. See "-- Fluctuations in Demand and
Annual and Quarterly Operating Results" and "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company has
improved its manufacturing productivity in recent years, enabling increased
capacity and sales. The continued growth of the Company is substantially
dependent upon the Company's ability to continue to improve the productivity of
its existing manufacturing assets. The inability of the Company to improve
productivity could have a material adverse effect on the Company's business,
operating results, financial condition and prospects.
Dependence on Management and Other Key Employees
The Company's success during the foreseeable future will depend largely
upon the continued services of its executive officers, and certain other key
employees. These executive officers and key employees include:; President and
Chief Executive Officer, Thomas T. Edman; Vice President -- Research, John S.
Chapin; Vice President -- Engineering, C. Richard Condon; Vice President --
Sales and Marketing, Graeme Hennessey; Chief Financial Officer and Treasurer,
Lawrence D. Firestone; Director of Materials, Roger Smith; Director of
Operations Thin Film Coatings, Jim Scholhamer; Director of Operations -- Thin
Film Systems, Russell W. Black; and Advanced Development Manager, John J.
Kester. The loss of the services of one or more of the executive officers or
other key employees could materially adversely affect the Company's business.
The Company does not have employment agreements or key-man life insurance on any
of its executive officers or other key employees. The Company's future success
will be dependent in part upon the Company's ability to attract and retain
additional qualified managers, engineers and other employees. The Company's
business, operating results, financial condition or growth could be materially
adversely affected if the Company were unable to attract, hire, assimilate, and
train these employees in a timely manner. See "ITEM 1(c): Narrative Description
of Business -- Employees" and "ITEM 1(c): Narrative Description of Business --
Executive Officers, Directors and Key Employees."
15
China Expansion
Much of the Company's success in its fiscal fourth quarter ended July 3,
1999, was largely attributed to its STEC joint venture with NSG. The Company
relies on its joint venture partner, NSG, to house the STEC joint venture within
its glass fabrication facility that includes cutting, polishing, and
distribution. Continued adverse economic conditions in Asia could result in
lower revenues from STEC which would have an adverse effect on the Company's
business and results of operations. In pursuing the joint venture, the Company
also relies on Management personnel from its joint venture partner, NSG. The
managing director of STEC is under the employ of the joint venture as well as
NSG. The Company does not have employment agreements with any of the management
at STEC. STEC's future success will be dependent in part upon its ability to
attract and retain additional qualified managers, engineers and other employees.
The joint venture's business, operating results, financial condition or growth
could be materially adversely affected if the Company were unable to attract,
hire, assimilate, and train these employees in a timely manner. See "ITEM 1(c):
Narrative Description of Business", and "ITEM 1(c): Narrative Description of
Business".
Limited Protection of Proprietary Rights
The Company relies primarily upon trade secret laws and employee and
third-party nondisclosure agreements to protect its proprietary technology.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of such rights
or that third parties will not independently develop a functional equivalent or
superior technology. The Company is not aware that its products or other
proprietary rights infringe the proprietary rights of third parties. There can
be no assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not require the
Company to enter into license agreements or result in protracted and costly
litigation, regardless of the merits of such claims. In addition, there can be
no assurance that the Company will be able to obtain licenses to dispute a
third-party technology or that such licenses, if available, would be available
on commercially reasonable terms. There can be no assurance that these factors
will not adversely affect the Company's business, operating results, financial
condition or growth. See "ITEM 1(c): Narrative Description of Business --
Proprietary Rights."
General Economic Conditions
A deterioration in the level of consumer confidence and general economic
conditions could result in a decline of purchases and production by the
Company's customers and thus have an adverse effect on the sale of the Company's
products. A high percentage of the Company's products are used in LCDs for many
consumer electronic products. In addition, the Company's products are used in
certain displays used for commercial and industrial purposes. Unfavorable
economic conditions or factors that relate to these industries, particularly any
conditions that might result in reductions in capital expenditures by end
customers, could have a material adverse effect on the Company's business,
operating results, financial conditions or growth. See "ITEM 1(c): Narrative
Description of Business -- Products and Manufacturing" and see "-- International
Markets."
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 the Company's
Common Stock. The Common Stock was approved for quotation on the Nasdaq National
Market under the symbol AFCO, beginning November 21, 1997. At September 1, 1999,
the number of common Shareholders of record was 2,061.
The range of high and low bid quotations for the Company's 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.
16
High Bid Low Bid
Fiscal 1998 -------- -------
Second Quarter (since November 21, 1997) 9 1/8 8 1/4
Third Quarter 11 5/16 7 1/8
Fourth Quarter 9 5/8 4 9/16
Fiscal 1999
First Quarter 5 5/8 2 7/8
Second Quarter 3 7/8 2 5/8
Third Quarter 4 1/4 1 13/16
Fourth Quarter 4 1/4 21/2
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain all future earnings to finance
its business. Accordingly, the Company does not anticipate paying cash or other
dividends on its Common Stock in the foreseeable future. Furthermore, the
Company's revolving credit facility prohibits the declaration or payment of any
cash dividends on the Common Stock. See "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ITEM 6: Selected Financial Data
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, the Company's fiscal 1999
Consolidated Financial Statements and notes thereto and the discussion thereof
included elsewhere in this Form 10-K. The selected consolidated statements of
operations for the fiscal years ended June 1997,1998, and July 1999 and the
related balance sheet data as of the fiscal years ended June 1997,1998, and July
1999 derived from consolidated financial statements have been audited by Arthur
Andersen LLP, independent public accountants, whose report with respect thereto
is included elsewhere in this Form 10-K. The selected consolidated statements of
operations data for the fiscal year ended June 1995 and 1996 and the related
consolidated balance sheet data as of June 1995 and 1996 have been derived from
audited consolidated financial statements of the Company not included in this
Form 10-K.
Summary Consolidated Financial Data
(In thousands, except per share data)
Fiscal Year Ended
July 3, June 27, June 28, June 29, July 1,
1999 1998 1997 1996 1995
Statement of Operations Data
Net sales........................................ $31,523 $53,041 $34,050 $21,738 $30,990
Gross profit..................................... 4,453 10,891 6,698 2,720 6,702
Operating income (loss).......................... (351) 4,581 2,953 (478) 2,190
Net income (loss)................................ (224) 2,857 1,621 (1,078) 1,102
Diluted net income (loss) per common share....... $ (.06) $ 0.85 $ 0.58 $ (0.39) $ 0.39
Weighted average common shares outstanding....... 3,478 3,375 2,814 2,798 2,800
Balance Sheet Data
Working capital.................................. $11,955 $ 10,747 $ 5,534 $ 6,232 $ 5,312
Total assets..................................... 30,195 28,697 21,541 18,198 20,128
Long term debt, net of current portion........... 7,180 4,175 6,448 8,501 7,464
Total shareholders' equity....................... 14,658 14,826 6,740 5,058 6,020
17
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this Report.
This Report, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used herein, the terms "believe," "anticipate," "intend," "goal," "expect"
and similar expressions may identify forward-looking statements. The Company's
actual results, performance or achievements may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such material differences include those disclosed in the
"Certain Factors" section of this Report.
Overview
The Company was founded in Colorado as Applied Films Labs, Inc. on March 2,
1976 and was involved in both applied thin films research and development and
limited thin films production. On May 1, 1992, the Company merged with Donnelly
Coated Corporation, a wholly owned subsidiary of Donnelly Corporation of
Holland, Michigan which was primarily involved in the manufacture and sale of
thin film coated glass for LCDs. The Company maintained manufacturing facilities
and production capacity in both Boulder, Colorado and Michigan, until the end of
1993 when the Michigan facility and production capacity were no longer utilized.
Since 1994, the Company had maintained all of its manufacturing operations in
Boulder, Colorado. During fiscal years 1998 and 1999, the Company relocated its
Boulder operations to a new Headquarters and Manufacturing facility in Longmont,
Colorado. During fiscal 1999, the Company expanded its thin film coated glass
business to the far east by forming a joint venture with Nippon Sheet Glass in
Suzhou, China.
The Company's sales have been derived primarily from the sale of thin film
coated glass to manufacturers of LCDs. Sales and related costs of thin film
coated glass sales are recognized when products are shipped. Historically, sales
have varied substantially from quarter to quarter, and the Company expects such
variations to continue. Because a significant portion of the Company's overhead
is fixed in the short term, the Company's gross profit and results of operations
may be adversely affected by unexpected fluctuations in sales. The Company is
typically able to ship its thin film coated glass within 30 days of receipt of
the order and, therefore, does not customarily have a significant long-term
backlog of thin film coated glass orders. The Company's ten largest customers
for thin film coated glass accounted for, in the aggregate, approximately 59%,
78% and 62% of gross sales in fiscal 1997, 1998 and 1999 respectively. Prices
for much of the Company's TN thin film coated glass supplied to the LCD market
have declined over the years, and the decline in prices slowed in the third
quarter of fiscal 1999. The Company expects continued downward pressure on its
selling prices, which will negatively impact sales, gross profit and net income.
The principal demand for the Company's thin film coated glass is by LCD
manufacturers, most of which are located in Asia. Total gross sales to
international customers represented approximately 83%, 78% and 85% of the
Company's gross sales in fiscal 1997, 1998 and 1999, respectively. The Company
expects international sales will continue to represent a significant portion of
its net sales. The Company sells most of its thin film coated glass to foreign
customers in U.S. dollars except for sales to certain Japanese customers which
are in yen. Gross sales in yen were approximately$4.4 million, $6.0 million and
$6.7 million in fiscal 1997, 1998 and 1999, respectively. The Company does not
currently engage in international currency hedging transactions to mitigate its
foreign exchange exposure, however, the Company does purchase raw glass in yen
from Japan which partially offsets foreign currency risks on thin film coated
glass sales. The Company's purchases of raw material denominated in yen were
approximately$4.6 million, $8.9 million and $5.8 million in fiscal 1997, 1998
and 1999, respectively. At July 3, 1999, accounts receivable denominated in yen
were approximately $605,000 or approximately 9% of total accounts receivables
versus $839,000 and 11% for fiscal year end 1998. The Company is generally paid
by its customers for its yen denominated sales within approximately 15 to 45
days of the date of sale. The Company does occasionally offer cash discounts for
early payment and pre-payment. See "Certain Factors -- International Markets."
During fiscal 1997, the Company began selling thin film coating equipment
to FPD manufacturers, which sales totaled $2.8 million. During fiscal 1999,
sales of thin film coating equipment totaled $4.6 million versus $13.9 million
for 1998. Net sales of thin film coating systems are recognized primarily on the
percentage-of-completion method, measured by the percentage of the total costs
incurred and applied to date in relation to the estimated total costs to be
incurred for each contract. The lead time for the sale of thin film coating
equipment is generally six to twelve months. To date, the Company has priced its
coating equipment in U.S. dollars. Many Pacific Rim countries continue to
18
experience banking and currency difficulties that have led to economic recession
in those countries. The Asian financial situation has affected capital spending
plans by LCD and plasma display manufacturers. Certain plasma display
manufacturers in Japan and Korea announced plans in fiscal 1999 to delay, by up
to a year, commercialization of plasma displays which may impact their capital
equipment purchases and resulting sale of equipment by the Company. As of July
3, 1999, the Company's backlog from systems sales was approximately $423,000
versus $950,000 as of June 27, 1998.
Sales of thin film coated glass were derived primarily from demand by LCD
manufacturers for low information content displays used in applications such as
games, watches, calculators, cell phones etc. The Asian financial situation
reduced demand and prices for thin film coated glass used by LCD manufacturers
in fiscal 1999.
Results of Operations
The following table sets forth information derived from the consolidated
statements of operations of the Company expressed as a percentage of net sales
for the periods indicated.
Fiscal Year Ended
July 3, June 27, June 28,
1999 1998 1997
------ -------- -------
Statement of Operations Data:
Net sales.............................................. 100.0% 100.0% 100.0%
Cost of goods sold..................................... 85.9 79.5 80.3
------- ------- -------
Gross profit.............................................. 14.1 20.5 19.7
Operating expenses:
Selling, general & administrative....................... 11.9 9.6 8.8
Research and development................................ 3.3 2.3 2.2
------- ------- -------
Operating income (loss)................................... (1.1) 8.6 8.7
Interest expense.......................................... (1.8) (0.9) (2.4)
Other income (expense).................................... .0 0.5 0.3
Income from joint venture 1.4 - -
------- ------ -------
Income (loss) before income taxes......................... (1.5) 8.2 6.6
Income tax benefit (provision)............................ .8 (2.8) (1.8)
------- ------ -------
Net income (loss)......................................... (.7)% 5.4% 4.8%
======= ====== =======
Sales
Net sales were $34 million, $53 million and $31.5 million in fiscal years
1997, 1998 and 1999, respectively. This represented an increase of 56% from 1997
to 1998 and a 41% decrease from 1998 to 1999. Thin film coated glass sales
increased from $31.2 million to $39.1 million from 1997 to 1998 and dropped from
$39.1 million to $26.9 million from 1998 to 1999. The increase in thin film
coated glass sales from 1997 to 1998 resulted from increasing demand as well as
new production capacity added by the Company during fiscal 1998. The 31%
decrease from 1998 to 1999 was caused by a softening in demand from the
Company's customers and industry-wide, which caused surplus of inventory at the
Company and in the industry. This condition fueled a price war and the industry
experienced a drop in thin film coated glass prices of up to 29%. Sales of thin
film coating equipment, which began in fiscal 1997, increased from $2.8 million
in 1997 to $13.9 million in 1998, and decreased 67% from $13.9 million in 1998
to $4.6 million in fiscal 1999 due to the Asian economic crisis. The crisis
caused a postponement in a number of customers in capital equipment spending.
Gross Profits
The Company's gross profits were $6.7 million, $10.9 million and $4.4
million in fiscal years 1997, 1998 and 1999, respectively. As a percentage of
net sales, gross profit margins were 19.7%, 20.5% and 14.1% in fiscal years
1997, 1998 and 1999, respectively. Gross profits increased from 1997 to 1998 due
primarily to increasing sales levels of thin film coated glass as well as gross
profit contribution from thin film coating equipment sales, which began in
fiscal 1997. Between 1997 and 1998, gross profit margins as a percent of net
sales increased for thin film equipment
19
and declined for thin film coated glass. The drop in thin film coated glass
margins was primarily due to the price decline of 29% that the Company
experienced in fiscal 1999.
Selling, General and Administrative
The Company's selling, general and administrative expenses totaled $3.0
million, $5.1 million and $3.8 million for fiscal years 1997, 1998 and 1999,
respectively. Selling, general and administrative expenses ("SG&A") increased
from 1997 to 1998 due to higher salaries, additional personnel and related
expenses, sales commissions, including commissions on increased thin film
equipment sales, as well as increased employee profit sharing expenses. SG&A
decreased 26% from $5.1 million in fiscal 1998 to $3.8 million in fiscal 1999
due to a concentrated cost reduction effort. Commissions from system sales were
lower as well due to the reduced sales level in the systems business. As a
percentage of sales, selling, general and administrative costs were 8.8%, 9.6%
and 11.9% for fiscal years 1997, 1998 and 1999, respectively.
Research and Development
Research and development expenses totaled $0.7 million, $1.2 million and
$1.0 million for fiscal years 1997, 1998 and 1999, respectively. In fiscal 1997,
research and development costs were net of reimbursements for research
contracts. Research and development expenditures consisted primarily of
salaries, outside contractor expenses and other expenses related to the
Company's ongoing product development efforts. The changes from 1997 to 1998 and
from 1998 to 1999 were primarily attributable to changes in staffing and
material and supplies expense related to advanced development projects. The
advanced development team completed the design, fabrication, process proving and
debugging of the Company's latest ATX-700 technology during fiscal 1999. As a
percentage of net sales, research and development expenses were 2.2%, 2.3% and
3.3% in fiscal years 1997,1998 and 1999, respectively.
Interest Expense
The Company's interest expense was $822,000, $496,000 and $572,000 for
fiscal years 1997, 1998 and 1999, respectively. The increase in long-term
borrowings by the Company in 1999 funded the $3.2 million up front capital
infusion of the STEC joint venture in China. Total bank debt was $9.9 million,
$7.6 million,$4.3 million and $7.0 million as of fiscal year end 1996, 1997,
1998 and 1999, respectively. In addition, the Company incurred debt guarantee
fees paid to Donnelly Corporation of $250,000 and $103,000 for fiscal years 1997
and 1998, respectively.
Other Income (Expense)
Other income (expense) was $95,000, $252,000 and $8,000 in fiscal years
1997, 1998 and 1999, respectively. This fluctuation was due primarily to the
fact that the Company had foreign exchange gains in fiscal 1997 and 1998 and a
small foreign exchange loss in 1999. It is uncertain whether foreign exchange
gains or losses will be incurred in the future.
Income Tax Benefit (Provision)
The income tax provision was $605,000 and $1,480,000 for fiscal years 1997
and 1998, respectively. The effective tax rate for fiscal 1998 was 34% versus
27% for fiscal 1997 due to utilization of net operating loss carry forwards in
fiscal 1997. The Company recorded a $258,000 tax benefit during fiscal year
1999. Applied Films anticipates receiving a refund of $744,000 for fiscal 1999
estimated payments and from applying the tax loss carryback to previous fiscal
years.
Quarterly Results of Operations
The following table sets forth summary unaudited quarterly financial
information for the last eight fiscal quarters. In the opinion of management,
such information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Report and reflects all necessary
adjustments (consisting of only normal, recurring adjustments) for a fair
presentation of such unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period and
there can be no assurance that any trends reflected in such results will
continue in the future. The Company's results of operations may be subject to
significant quarterly variations. See "Certain Factors -- Fluctuations in Demand
and Annual and Quarterly Operating Results."
20
Quarter Ended Quarter Ended
------------------------------------------------ -------------------------------------------------
Fiscal 1998 Fiscal 1999
------------------------------------------------ -------------------------------------------------
Sept. Dec. March June Sept. Dec. March July
1997 1997 1998 1998 1998 1998 1999 1999
------ ------ ------ ------ ------ ------ ------ -----
Net sales.................... $11,251 $13,173 $15,312 $13,305 $9,351 $6,176 $8,216 $7,779
Cost of goods sold........... 8,801 10,588 12,355 10,406 8,158 5,493 6,622 6,798
--------- --------- -------- -------- -------- -------- -------- --------
Gross profit................. 2,450 2,585 2,957 2,899 1,193 683 1,594 981
Operating expenses:
Selling, general and
administrative............ 986 1,109 1,336 1,636 1,304 794 911 750
Research and development... 330 287 324 302 260 212 274 297
--------- --------- --------- ---------- --------- --------- --------- --------
Operating income (loss)...... 1,134 1,189 1,297 961 (371) (323) 409 (66)
Interest expense............. (171) (87) (103) (135) (112) (140) (167) (147)
Other income (expense)....... 24 29 86 113 136 (135) (27) 27
Other income from Joint
Venture...................... 0 0 0 433
--------- --------- --------- ---------- ----------- ----------- ----------- ----------
Income (loss) before income
taxes.................. 987 1,131 1,280 939 (347) (598) 215 247
Income tax benefit
(provision).................. (328) (385) (435) (332) 130 286 (72) (86)
--------- ---------- --------- --------- --------- -------- --------- -----------
Net income (loss)............ $ 659 $ 746 $ 845 $ 607 $ (217) $(312) $ 143 $ 161
========= ========== ========= ========= ========= ======== ========= ===========
The following table sets forth the above unaudited information as a percentage
of total net sales.
Quarter Ended Quarter Ended
Fiscal 1998 Fiscal 1999
Sept. Dec. March June Sept. Dec. March July
1997 1997 1998 1998 1998 1998 1999 1999
------ ------ ------- ------ ------ ------ -------- -----
Net sales..................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold............ 78.2 80.4 80.7 78.2 87.2 88.9 80.6 87.4
------ ------ ------ ------ ------ ------- ------- -------
Gross profit.................. 21.8 19.6 19.3 21.8 12.8 11.1 19.4 12.6
Operating Expenses:
Selling, general and
administrative............ 8.8 8.4 8.7 12.3 13.9 12.9 11.1 9.6
Research and development.... 2.9 2.2 2.1 2.3 2.8 3.4 3.3 3.8
------- ------- ------- ------- ------- ------- ------- ------
Operating income (loss)....... 10.1 9.0 8.5 7.2 (4.0) (5.2) 0.6 (0.08)
Interest expense.............. (1.5) (0.7) (0.7) (1.0) (1.2) (2.3) (2.0) (1.9)
-------
Other income (expense)........ 0.2 0.3 0.6 0.9 1.5 (2.2) (0.3) 0.3
Other income from Joint
Venture....................... 0 0 0 5.6
-------- --------- --------- ------- ------- ------- -------- ------
Income (loss) before income
taxes........................ 8.8 8.6 8.4 7.1 (3.7) (9.7) 2.6 3.2
Income tax benefit
(provision)................. (2.9) (2.9) (2.9) (2.5) 1.4 4.6 (0.9) (1.1)
-------- -------- -------- -------- -------- ------- ------ -------
Net income (loss)............. 5.9 % 5.7% 5.5% 4.6% (2.3)% (5.1)% 1.7% 2.1%
======== ======== ======== ======== ========= ======== ====== =======
The variation in quarterly sales during fiscal 1998 and fiscal 1999 was due
to reduced demand from customers for thin film coated glass and the resulting
excess inventories of thin film coated glass as well as a reduction in capital
spending and equipment purchases in the thin film coated glass industry. Net
sales of thin film coated glass for fiscal 1999 totaled $26.9 million versus
$39.1 million during fiscal year 1998. Sales and related costs of thin film
coated glass products are recognized when products are shipped. Sales of thin
film coating equipment totaled $4.6 million in fiscal 1999 versus $13.9 million
in fiscal 1998. During the first quarter of fiscal 1997, the Company began
recognizing revenue from the sale thin film coating equipment. The Company
utilizes the percentage of completion accounting method for recognizing sales of
equipment. See "ITEM 8: Financial Statements and Supplementary Data -- Note 2:
Significant Accounting Policies -- System Sales." For fiscal year 1999,
quarterly sales of thin film coating equipment were $1.2 million for the first
fiscal quarter, $.5 million during the second fiscal quarter, $2.5 million
during the third fiscal quarter and $.4 million during the fourth fiscal
quarter. In comparison, sales of thin film coating equipment for
21
fiscal year 1998 totaled $2.1 million in the first fiscal quarter, $3.3 million
in the second fiscal quarter, $5.1 million in the third fiscal quarter and $3.4
million in the fourth fiscal quarter.
Total gross profits decreased quarter over quarter from fiscal 1998 to
fiscal 1999. As a percentage of sales, gross profits decreased in the first and
second quarters of fiscal 1999 versus the first and second quarters of fiscal
1998. Gross profits as a percentage of sales increased in the third quarter and
decreased again in the fourth quarter of fiscal 1999 versus the third and fourth
quarters of fiscal 1998. As a percent of sales, gross profits declined 31% from
20.5% in 1998 to 14.1% in 1999. This drop corresponds to the 29% overall drop in
selling prices for the thin film coated glass industry as well as the reduced
revenues in the thin film coating equipment business.
Selling, general and administrative expenses decreased 26% during the
quarters of fiscal 1999 due to a concentrated cost reduction effort that
included controls on overhead spending during the year as well as reduced
commissions for thin film equipment sales. Included in the SG&A expenses are one
time charges totaling $433,000 for the completion of the relocation of its
facilities to Longmont and severance charges during fiscal 1999.
Interest expense was higher during fiscal 1999 versus fiscal 1998 due
primarily to increased debt levels in fiscal 1999. Other income increased for
fiscal 1998 due primarily to higher foreign exchange gains.
Income from Joint Venture was a new addition to Applied Films profit
picture. The STEC joint venture was funded in January 1999, began production in
April 1999, and closed its first quarter of operations as of July 3, 1999
profitably, contributing $433,000 to Applied Films bottom line.
Because a significant portion of the Company's overhead is fixed the
Company's quarterly results of operations may be materially affected if sales of
thin film coated glass or thin film coating equipment decline for any reason.
The Company expects fiscal 2000 quarterly sales, gross profits, operating income
and net income to be at levels slightly ahead of the comparable quarters of
fiscal 1999.
Liquidity and Capital Resources
The Company has primarily funded its operations with cash generated from
operations, proceeds from an initial public offering of the Company's Common
Stock, and with borrowings. Cash provided by operating activities for fiscal
year 1999 was $3.9 million compared to $.2 million for the corresponding period
in fiscal 1998 due primarily to the reduction in inventory and proceeds from
sale to the joint venture. The Company borrowed $3.2 million against its line of
credit to fund the initial capital requirements of its STEC joint venture. As of
July 3, 1999, the Company had cash and cash equivalents of approximately $1.2
million and working capital of $12.0 million. As of July 3, 1999, accounts
receivable were approximately $7.1 million.
The Company has recently extended its $11.5 million credit facility with a
commercial bank. The credit facility will expire on September 17, 2002. As of
July 3, 1999, the Company had approximately $7.0 million outstanding on its
credit facility.
Capital expenditures for the fiscal year ended July 3, 1999 were $1.9
million, compared to $5.4 million for the fiscal year ended June 27, 1998. The
majority of capital spending in fiscal 1999 went to the development and
construction of the new ATX-700 platform which was built and is located in
Applied Films Longmont facility. Capital expenditures of $1.0 million in fiscal
2000 will consist primarily of expenditures to complete the new ATX-700 coating
system as well as other thin film coating test equipment and support equipment.
The Company believes that its working capital and capital resource needs
will continue to be met by operations and borrowings under the existing credit
facility. The credit facility generally restricts the Company's ability to make
capital expenditures, incur additional indebtedness, enter into capital leases
or guarantee such obligations. To remain in compliance with the credit
agreement, the Company must also maintain certain financial ratios. The Company
expects cash flow from operations to improve in fiscal year 2000 versus fiscal
year 1999 and expects its borrowings to remain constant under its credit
facility.
22
Year 2000 Compliance
The Year 2000 issue is the result of computer systems that use two digits
rather than four to define the applicable year, which may prevent such systems
from accurately processing dates ending in the year 2000 and after. This could
result in system failures or in miscalculations causing disruption of
operations, including, but not limited to, an inability to process transactions,
to send and receive electronic data, or to engage in routine business activities
and operations.
The Company has completed a full assessment of all currently used computer
systems as well as production and coating equipment systems and has corrected
those areas that will be affected by the year 2000 issue. The Company did
utilize outside vendors to assist in the upgrade of certain systems and
estimates that the Company is approximately 95% complete with respect to its
systems. The Company's goal is to have tested each of these systems for year
2000 compliance by the end of the first quarter of fiscal 2000.
In addition to reviewing its internal systems, the Company has begun formal
communications with its significant vendors concerning Year 2000 compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be sufficiently Year 2000 compliant so as to avoid an adverse
impact on the Company's operations, financial condition and results of
operations. The Company does not believe that its products and services involve
any material Year 2000 risks.
The Company does not presently anticipate that the costs to address the
Year 2000 issue will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company intends to prepare a contingency plan early in
the calendar fourth quarter addressing the steps to be taken if important
external companies such as suppliers are not Year 2000 compliant in a timely
manner.
Recent Financial Accounting Standards Board Statement
Several new accounting standards have been issued in fiscal 1997 and 1998
that have impacted the Company in fiscal year 1999 and will impact the Company
going forward. Management believes that these accounting standards will not have
a material impact on the operating results of the Company when implemented.
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
Approximately $7.0 million of the Company's borrowed debt is subject to
changes in interest rates; however, the Company does not use derivatives to
manage this risk. This exposure is linked primarily to the Eurodollar rate, and
secondarily to the prime rate. The Company has historically locked in Eurodollar
rates on 30-60 day intervals, and has not experienced major fluctuations in
rate. The Company believes that a moderate change in either the Eurodollar rate
or the prime rate would not materially affect operating results or financial
condition of the Company.
23
Foreign Exchange Exposure
The Company is exposed to foreign exchange risk associated with its
accounts receivable and payable denominated in foreign currencies, primarily in
Japanese yen. At July 3, 1999, the Company had approximately $605,000 of its
accounts receivable and $1.1 million of its accounts payable denominated in yen
versus June 27, 1998, when the Company had approximately $839,000 of its
accounts receivable and $2,027,000 of its accounts payable denominated in yen.
The Company believes that a moderate change in the Japanese yen/U.S. dollar
exchange rate would not materially affect operating results or financial
condition of the Company.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect the Company's operating results or
financial condition. The potential impact is likely greater the greater the
magnitude of the rate change. See also "ITEM 8: Financial Statements and
Supplementary Data -- Note 10: Significant Accounting Policies -- Fair Value of
Financial Instruments."
24
ITEM 8: Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.................................... 26
Consolidated Balance Sheets as of July 3, 1999 and June 27, 1998............ 27
Consolidated Statements of Operations for the fiscal years ended
July 3, 1999, June 27, 1998 and June 28, 1997............................ 29
Consolidated Statements of Stockholders' Equity for the fiscal
years ended July 3, 1999, June 27, 1998 and June 28, 1997................ 30
Consolidated Statements of Cash Flows for the fiscal years ended
July 3, 1999, June 27, 1998, and June 28, 1997........................... 31
Notes to Consolidated Financial Statements.................................. 33
25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Applied
Films Corporation:
We have audited the accompanying consolidated balance sheets of APPLIED FILMS
CORPORATION (a Colorado corporation) and subsidiary as of July 3, 1999 and June
27, 1998 and the related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal years ended July 3, 1999, June 27, 1998 and
June 28, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Applied
Films Corporation and subsidiary, as of July 3, 1999 and June 27, 1998, and the
consolidated results of their operations and their cash flows for the fiscal
years ended July 3, 1999, June 27, 1998 and June 28, 1997, in conformity with
generally accepted accounting principles.
Denver, Colorado,
July 27, 1999.
26
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
July 3, June 27,
ASSETS 1999 1998
------ --------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 1,163 $ 81
Accounts and trade notes receivable, net-
Coated glass and other 5,501 6,010
Income earned, not yet billed 1,560 1,436
Inventories, net 8,152 10,055
Prepaid expenses and other 675 948
Income tax receivable 711 -
Deferred tax asset, net 169 837
-------- ---------
Total current assets 17,931 19,367
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land 270 270
Building 226 240
Machinery and equipment 15,211 16,477
Office furniture and equipment 444 502
Leasehold improvements 1,340 1,022
Construction-in-progress 280 877
-------- ---------
17,771 19,388
Accumulated depreciation (9,144) (10,129)
-------- ---------
8,627 9,259
-------- ---------
INVESTMENT IN AFFILIATE 3,637 71
-------- ---------
$30,195 $ 28,697
======== =========
The accompanying notes are an integral part of these consolidated balance
sheets.
27
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
July 3, June 27,
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
------------------------------------ --------- --------
CURRENT LIABILITIES:
Trade accounts payable $ 3,950 $ 5,241
Accrued expenses 1,712 2,955
Income taxes payable - 291
Current portion of-
Deferred revenue 37 -
Deferred gain 56 56
Long-term debt 221 77
-------- -------
Total current liabilities 5,976 8,620
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion 7,180 4,175
Deferred revenue, net of current portion 1,499 -
Deferred gain, net of current portion 700 756
Deferred tax liability, net 182 320
-------- -------
Total liabilities 15,537 13,871
-------- -------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, no par value, 10,000,000 shares authorized; 3,487,058 and
3,472,688 shares issued and outstanding at July 3, 1999 and
June 27, 1998, respectively 9,471 9,424
Accumulated comprehensive income (loss) 2 (7)
Retained earnings 5,185 5,409
-------- -------
Total stockholders' equity 14,658 14,826
-------- -------
$30,195 $28,697
======== =======
The accompanying notes are an integral part of these consolidated balance
sheets.
28
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
For The Fiscal Years Ended
-----------------------------------------
July 3, June 27, June 28,
1999 1998 1997
------------ -------------- -----------
NET SALES:
Non-affiliated $28,582 $53,041 $34,050
Joint venture 2,941 - -
COST OF GOODS SOLD 27,070 42,150 27,352
------- -------- --------
GROSS PROFIT 4,453 10,891 6,698
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 3,760 5,067 2,996
RESEARCH AND DEVELOPMENT EXPENSES 1,044 1,243 749
------- -------- --------
(LOSS) INCOME FROM OPERATIONS (351) 4,581 2,953
------- -------- --------
OTHER (EXPENSE) INCOME:
Gain on foreign currency exchange 24 174 96
Equity earnings in affiliate 433 - -
Other (loss) income, net (35) 23 (20)
Interest income 19 55 19
Interest expense (572) (496) (822)
------- -------- --------
(131) (244) (727)
------- ----- -----
(LOSS) INCOME BEFORE INCOME TAXES (482) 4,337 2,226
INCOME TAX (BENEFIT) PROVISION (258) 1,480 605
-------- ------- --------
NET (LOSS) INCOME $ (224) $ 2,857 $ 1,621
NET (LOSS) INCOME PER SHARE:
Basic $ (0.06) $ 0.90 $ 0.58
======== ====== ======
Diluted $ (0.06) $ 0.85 $ 0.58
======== ====== ======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 3,478 3,181 2,796
======= ===== =====
Diluted 3,478 3,375 2,814
======= ===== =====
The accompanying notes are an integral part of these consolidated
statements.
29
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JULY 3, 1999, JUNE 27, 1998 AND JUNE 28, 1997
(In thousands, except share data)
Accumu-
lated Total
Other Stock-
Common Stock Held by Affiliate Compre- Compre- holders'
----------------------- --------------------- hensive hensive Retained Equity
Shares Amount Shares Amount Income Income Earnings Equity
---------- --------- --------- --------- --------- ---------- ---------- ---------
BALANCES, June 29, 1996 2,799,998 $4,245 (3,749) $(26) $ -- $(92) $ 931 $ 5,058
Comprehensive income-
Net income -- -- -- -- 1,621 -- 1,621 1,621
Amortization of
deferred
compensation -- -- -- -- 61 61 -- 61
---------- -------- --------- ------- ------- ------- -------
BALANCES, June 28, 1997 2,799,998 4,245 (3,749) (26) 1,682 (31) 2,552 6,740
=======
Issuance of shares in
connection with IPO
net of underwriters'
commissions of $297) 676,439 5,205 -- -- -- -- 5,205
Liquidation of affiliate (3,749) (26) 3,749 26 -- -- --
Comprehensive income-
Net income -- -- -- -- 2,857 -- 2,857 2,857
Amortization of deferred
compensation -- -- -- -- 24 24 -- 24
---------- -------- -------- ------- ------- ------- ------- ----------
BALANCES, June 27, 1998 3,472,688 9,424 -- -- 2,881 (7) 5,409 14,826
=======
Net (loss) -- -- -- -- (224) (224) (224)
ESPP stock issuance 10,564 33 -- -- 33
Exercise of stock option 3,806 14 -- -- -- 14
Comprehensive income-
Amortization of
deferred
compensation -- -- -- -- 7 7 -- 7
Unrealized gain on
foreign currency
translation -- -- -- -- 2 2 -- 2
-------- -------- ------- ------- ------- ----------
BALANCES, July 3, 1999 3,487,058 $9,471 -- $ -- $(215) $ 2 $ 5,185 $14,658
========== ======== ======== ======== ======= ======= ======= ==========
The accompanying notes are an integral part of these consolidated
statements.
30
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For The Fiscal Years Ended
-------------------------------------
July 3, June 27, June 28,
1999 1998 1997
----------- ----------- -----------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net (loss) income $ (224) $ 2,857 $ 1,621
Adjustments to reconcile net (loss) income
to net cash flows from operating activities-
Depreciation 1,759 1,800 1,473
Amortization of deferred compensation 7 24 61
Amortization of deferred gain on lease (56) (22) -
Amortization of deferred revenue on sale
to joint venture (52) - -
Deferred income tax provision (benefit) 530 (558) (112)
(Gain) loss on disposals of property,
plant and equipment (20) (4) 6
Equity in earnings of affiliate (330) (50) (7)
Deferred revenue on equipment sale to joint venture 1,588 - -
Proceeds from sale to Joint Venture 1,695 - -
Changes in-
Accounts and trade notes receivable, net 385 (985) (3,656)
Inventories 1,903 (3,895) 654
Prepaid expenses and other 273 (520) (385)
Accounts payable-trade (1,291) 1,439 1,401
Deferred revenue - (1,500) 1,500
Accrued expenses (1,243) 1,683 798
Income taxes payable (receivable) (1,002) (61) 684
-------- --------- --------
Net cash flows from operating activities 3,922 208 4,038
-------- --------- --------
The accompanying notes are an integral part of these consolidated
statements.
31
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For The Fiscal Years Ended
----------------------------------------
July 3, June 27, June 28,
1999 1998 1997
----------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land $ - $ - $ (269)
Purchase of building - - (270)
Purchases of machinery and equipment (671) (4,007) (1,320)
Reimbursement of equipment costs - - 161
Purchases of office furniture and equipment (25) (53) (73)
Purchases of leasehold improvements (198) (1,023) (4)
Cost incurred for construction in progress (2,065) (332) -
Proceeds from sale of equipment 159 12 60
Proceeds from sale of building - 2,172 -
Investment in joint venture (3,236) (71) -
Proceeds from liquidation of investment in affiliate - 172 -
Proceeds from sale of lease purchase option - 834 -
Other - - 20
--------- --------- ---------
Net cash flows from investing activities (6,036) (2,296) (1,695)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the extension of long-term debt 12,747 16,715 8,128
Repayment of long-term debt (9,598) (20,048) (10,434)
Issuance of common stock 47 5,205 -
--------- --------- ---------
Net cash flows from financing activities 3,196 1,872 (2,306)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH 1,082 (216) 37
CASH AND CASH EQUIVALENTS, beginning of period 81 297 260
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 1,163 $ 81 $ 297
======== ========== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts capitalized $ 735 $ 767 $ 593
======== ========= =========
Cash paid (received) for income taxes, net $ (100) $ 2,109 $ 123
======== ======== =========
The accompanying notes are an integral part of these consolidated
statements.
32
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation, (the "Company"), was originally incorporated in 1992
as a Michigan corporation. In June 1995, the Company reincorporated in Colorado.
The Company's principal line of business is the manufacture and sale of thin
film glass for use in flat panel and liquid crystal displays. During 1997, the
Company began selling its thin film coating glass manufacturing equipment to
flat panel display manufacturers. The Company experiences risks common to
technology companies, including highly competitive and evolving markets for its
products.
The Company was formed in May 1992 as the result of a merger between Applied
Films, Inc. ("AFI") and a wholly owned subsidiary of Donnelly Corporation
("Donnelly"), Donnelly Coated Corporation ("DCC"). As a result of the merger,
Donnelly owned 50% of the outstanding common stock of the Company, with the
remaining 50% owned by the former shareholders of AFI.
Initial Public Offering
In November 1997, the Company completed an initial public offering (the
"Offering") of 1,900,000 shares. In connection with this offering, Donnelly sold
its 50% interest in the Company, consisting of 1,400,000 shares. An additional
500,000 shares were newly issued in the Offering. In December 1997, an
additional 176,439 shares were issued to the underwriters in connection with
completion of the Offering. Donnelly paid substantially all costs of this
underwriting, other than commissions related to the 500,000 new shares.
Joint Venture
In June of 1998, the Company formed a 50/50 Joint Venture (the "Joint Venture")
in China with Nippon Sheet Glass Co. ("NSG"), to process, sell and export
certain types of thin film coated glass (Note 4).
(2) SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the Company's wholly
owned subsidiary, DAF Export Corporation, which is treated as a Foreign Sales
Corporation ("FSC") for federal income tax purposes. The accounts of the
subsidiary have been consolidated with the accounts of the Company in the
accompanying financial statements. All intercompany accounts and transactions
have been eliminated in the consolidation.
33
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 1999,
1998 and 1997 include 53, 52 and 52 weeks, respectively.
Cash and Cash Equivalents
The Company generally considers all highly liquid investments with an original
maturity of less than ninety days to be cash equivalents.
Concentration of Credit Risk
The Company provides credit, in the normal course of business, to large
electronics manufacturers, located primarily in Asia. Due to the recent monetary
crisis in Asia, the Company experienced a slowdown in orders during fiscal 1998
and continuing through most of 1999. To limit the Company's credit risk,
management performs ongoing credit evaluations of its customers and requires
letters of credit from certain of its foreign customers prior to shipment. Sales
within Asia totaled approximately $26,545,000, $40,624,000 and $26,145,000 in
the years ended July 3, 1999, June 27, 1998 and June 28, 1997, respectively. At
July 3, 1999, approximately $5,215,824 of the Company's coated glass sales were
receivable from Asian companies. Although the Company is directly impacted by
economic conditions in Asia and in the electronics industry, management does not
believe significant credit risk exists at July 3, 1999.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories at July 3, 1999 and June 27, 1998, consist of the following:
July 3, June 27,
1999 1998
Raw materials, net $4,195,000 $ 6,555,000
Work-in-process 23,000 11,000
Materials for manufacturing systems 192,000 302,000
Finished goods 3,742,000 3,187,000
------------- --------------
$8,152,000 $10,055,000
============= ==============
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. For construction-in-progress, the Company capitalizes interest
based on its weighted average borrowing rate on the amount of additional
investment. Depreciation is computed on straight-line or accelerated methods
over the following estimated useful lives.
34
Estimated
Useful Lives
Building 30 years
Machinery and equipment 3-10 years
Office furniture and equipment 3-5 years
Leasehold improvements 5-10 years
Deferred Gain
During June 1997, the Company entered into a lease transaction with a third
party for the Company's new 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 facilities (see Note 9). The Company received $834,000 for this purchase
option, which is being deferred and amortized over the term of the lease of 15
years.
Coated Glass Revenue Recognition
Coated glass revenues are recognized upon shipment to the customer. A provision
for estimated sales returns and allowances is recognized in the period of the
sale.
Equipment Sales Revenue Recognition
Revenues relating to the sales of thin film coating equipment are recognized on
the percentage-of-completion method, 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 an 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. Income received
but not yet earned, represents amounts received pursuant to the contract terms
which occur prior to the Company's recognition of revenues on the contract for
financial reporting purposes. Income earned, but not yet billed, which totaled
$1,560,000 and $1,436,000 at July 3, 1999 and June 27, 1998, respectively,
represents revenues earned prior to billing. The entire balance at July 3, 1999
relates to the Joint Venture. The Company offers warranty coverage for equipment
sales for a period ranging from 3 to 12 months after final acceptance. The
Company estimates the anticipated costs to be incurred during the warranty
period and accrues a reserve as a percentage of revenue as revenue is
recognized. These reserves are evaluated periodically based on actual experience
and anticipated activity. Provisions for anticipated losses on contracts, if
any, are made in the period they become evident.
35
Deferred Revenue
During fiscal 1999, the Company sold refurbished thin film coating equipment to
a 50% owned Joint Venture (see Note 4). Because the Company owns 50% of the
Joint Venture, the Company recorded 50% of the revenue and related cost of the
sale and has deferred 50% of the gross margin, approximately $1.4 million,
(representing the Company's intercompany profit due to its ownership of the
Joint Venture), which will be recognized over seven years, the estimated
depreciable life of the equipment.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of
salaries and supplies. The Company incurred approximately $1,044,000, $1,243,000
and $749,000 of research and development costs for the years ended July 3, 1999,
June 27, 1998 and June 28, 1997, respectively, net of reimbursements received in
1997 from a contracting research organization.
Foreign Currency Transactions
The Company generated 85% and 78% of its revenues in fiscal years 1999 and 1998,
respectively, from sales to foreign corporations. In addition, many of its raw
materials are purchased from foreign corporations. The majority of the Company's
sales and purchases are denominated in U.S. dollars, with the remainder
denominated in Japanese Yen. For those transactions denominated in Japanese Yen,
the Company records the sale or purchase at the spot exchange rate in effect on
the date of sale. Receivables from such sales or payables for such purchases are
translated to U.S. dollars using the end of the period spot exchange rate.
Transaction gains and losses are charged or credited to income during the year,
and any unrealized gains or losses are recorded as other comprehensive income.
Net (Loss) Income Per Share
The Company follows Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share", SFAS No. 128 establishes standards for computing and
presenting basic and diluted earnings per share (EPS). Under this statement,
basic earnings (loss) per share is computed by dividing the net earnings or loss
by the weighted average number of shares of common stock outstanding. Diluted
earnings (loss) per share is determined by dividing the net earnings or loss by
the sum of (1) the weighted average number of common shares outstanding and (2)
if not anti-dilutive, the effect of outstanding warrants and stock options
determined utilizing the treasury stock method.
A reconciliation between the number of shares used to calculated basic and
diluted earnings per share is as follows (in thousands of shares):
36
1999 1998 1997
Weighted average number of
common shares outstanding
(shares used in basic earnings per
share computation) 3,478 3,181 2,796
Effect of stock options (treasury
stock method) - 194 18
----- ----- -----
Shares used in diluted earnings per
share computation 3,478 3,375 2,814
===== ===== =====
Adoption of New Accounting Standards
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in fiscal
year 1999. Under SFAS No. 130, the Company reports comprehensive income, which
in addition to net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. The Company has
adopted this statement retroactively.
In June 1997, the Financial Accounting Standard Boards ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information." SFAS
No. 131 requires that public companies report information about their operating
segments based on the financial information used by the chief operating decision
maker in their annual financial statements and requires those companies to
report selected information in their interim statements. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management
evaluates the business of the Company through analysis of the coated glass and
thin films coating equipment lines of business (see Note 11).
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Once the
capitalization criteria of SOP 98-1 have been met, certain internal and external
direct costs of materials, service and interest should be capitalized. SOP 98-1
is effective for financial statements for fiscal years beginning after December
15, 1998, which is fiscal year 2000 for the Company. The Company believes that
the application of SOP 98-1 will not have a material impact on its financial
statements.
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the Costs of Start-up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs and requires such costs to be expensed as incurred.
Generally, initial application of SOP 98-5 should be reported as the cumulative
effect of a change in accounting principle. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. Presently, the
Company is deferring certain start-up costs related to the Joint Venture in
China (see Note 4). The Company expects that the effect of the application of
SOP 98-5 in the first quarter of fiscal 2000 to be approximately $100,000, net
of tax. This item will be recorded as a change in accounting principle at the
time of adoption.
37
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
years beginning after June 15, 2000. The Company has not yet quantified the
impact of adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of its adoption of SFAS No. 133. However,
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(3) LONG-TERM DEBT
July 3, June 27,
1999 1998
Revolving credit facility, due September 30, 2000, secured
by eligible accounts receivable, inventory, equipment and
fixtures, as defined in the agreement; interest payable
quarterly and accruing based on the Prime rate and/or the
Eurodollar rate, at the election of the Company at the
beginning of each month, plus a factor varying based on
earnings before interest, taxes, depreciation and
amortization, as defined by the agreement (7.71% and 8%, at
July 3, 1999 and June 27, 1998, respectively) $7,000,000 $3,910,000
38
July 3, June 27,
1999 1998
Note payable secured by a deed of trust on land and
buildings, payable in 60 monthly installments of principal
and interest of $7,692 (final payment due June 27, 2002);
with interest accruing at 8.79% $ 241,000 $ 310,000
Note payable for insurance policy secured by any insurance
proceeds and dividends, payable in 17 monthly installments
of principal and interest of $13,984 (final payment due
April 18, 2000); with interest accruing at 7.17% 137,000 -
Other capital leases of equipment 23,000 32,000
---------- ----------
7,401,000 4,252,000
Less-current portion (221,000) (77,000)
---------- ----------
Total long-term debt $7,180,000 $4,175,000
========== ==========
On March 27, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Agreement"), which consolidated all outstanding debt into a
revolving credit facility with maximum availability of $11,500,000, due on June
30, 2000. Effective July 1999, the maturity Agreement was extended to September
30, 2000. The Company must maintain certain financial ratios to remain in
compliance with the Agreement, including a ratio of debt to earnings before
interest, taxes, depreciation and amortization EBITDA"); a ratio of total
liabilities to tangible net worth and maintain a certain amount of tangible net
worth, all as defined in the Agreement. At yearend, the Company was not in
compliance with the ratio of debt to EBITDA. However, the Company obtained a
waiver on the covenant from the bank. An amendment fee of $5,000 was paid for
the waiver. As such, as of July 3, 1999, the entire facility was available to
the Company in accordance with these provisions. At the beginning of each month,
the Company may elect to have a portion of the borrowings bear interest at the
Eurodollar rate and any additional borrowings bear interest at the Prime rate.
As of July 3, 1999, all of the borrowings on the revolving credit facility are
held at the Eurodollar rate.
Maturities of debt at July 3, 1999, are as follows:
Fiscal Year-
2000 $ 221,000
2001 7,092,000
2002 88,000
-----------
Total $ 7,401,000
===========
39
(4) INVESTMENT IN JOINT VENTURE
In June 1998, the Company formed a 50/50 Joint Venture with NSG in China to
manufacture, process, sell and export certain types of thin film coated glass.
Each party contributed $3.2 million in cash to the Joint Venture. During the
third quarter 1999, the Company sold refurbished equipment to the Joint Venture
for use in the process of thin film coating of glass. The sales price of
approximately $5.1 million, is payable in February, June and August 1999. The
company received the first two payments in February and June of 1999. The
balance sheet reflects a receivable of $1.5 million from the Joint Venture for
the final payment due in August.
The Joint Venture began operations during the fourth quarter of fiscal 1999. The
Company recorded 50% of income or loss from operations of the Joint Venture
after elimination of the impact of interentity transactions. The functional
currency for the Joint Venture is the applicable local currency. The earnings
recorded by the Company from the Joint Venture are translated at average rates
prevailing during the period.
During the fourth quarter, the Company purchased coated glass totaling $847,000
from the Joint Venture, of which $398,000 remained in inventory at yearend. In
addition, the Company received royalties totaling $44,000 for the year ended
July 3, 1999.
(5) STOCKHOLDERS' EQUITY
Stock Options
In May 1993, the board of directors approved the Company's 1993 Stock Option
Plan (the "1993 Plan") covering 276,500 shares of common stock. The exercise
price of these options is determined by the board of directors. The options
granted in fiscal years 1994 and 1995 vested, one-quarter per year, 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 172,500 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.
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.
40
Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal 1999
and 1998 using the Black-Scholes pricing model and the following weighted
average assumptions:
1999 1998 1997
------- ------- -------
Risk-free interest rate 5.21% 5.66% 6.32%
Expected lives 7 years 5 years 5 years
Expected volatility 77% 64% 51%
Expected dividend yield 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 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 $51,000
and $147,000 for the years ended July 3, 1999 and June 27, 1998, respectively.
The amounts are amortized ratably over the vesting period of the options. Pro
forma stock-based compensation, net of the effect of forfeitures, was $88,000
and $82,000 for the fiscal years ended July 3, 1999 and June 27, 1998,
respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income would have been reported as
follows (in thousands, except share data):
1999 1998 1997
------ ------ ------
Net income (loss):
As reported $(224) $2,857 $1,621
==== ===== =====
Pro forma $(313) $2,768 $1,616
==== ===== =====
Basic earnings (loss) per share:
As reported $(0.06) $ 0.90 $0.58
===== ====== ====
Pro forma $(0.09) $ 0.87 $0.58
===== ====== ====
41
A summary of the 1993 and 1997 Plans is as follows:
For the Fiscal Years Ended
----------------------------------------------------------------------------
July 3, 1999 June 27, 1998 June 28, 1997
------------------------ ---------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- -------- ------- -------- ------- -------
Outstanding at beginning of year 379,645 $ 3.77 345,100 $3.43 260,183 $2.83
Granted 25,000 2.75 34,545 7.20 84,917 5.26
Forfeited (23,746) (6.61) - - - -
Exercised (3,806) (2.87)
------- ------ ------- ------ ------- ------
Outstanding at end of year 377,093 $ 3.53 379,645 $3.77 345,100 $3.43
======= ===== ======= ==== ======= ====
Exercisable at end of year 306,756 $ 3.29 255,695 $3.05 200,111 $2.78
======= ===== ======= ==== ======= ====
Weighted average fair value of
options granted $2.05 $4.26
==== ====
The following table summarizes information about employee stock options
outstanding and exercisable at July 3, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Number of Weighted
Options Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of July 3, Contractual Exercise July 3, Exercise
Exercise Prices 1999 Life in Years Price 1999 Price
-------------------------- -------------- ---------------- ----------- --------------- ------------
$2.32 121,107 3.90 $2.32 121,107 $2.32
$3.29 134,554 6.60 3.29 134,554 3.29
$5.26 79,160 8.90 5.26 42,459 5.26
$7.20 17,272 8.25 7.20 8,636 7.20
$2.75 25,000 9.90 2.75 - -
-------- ------ -------- -----
377,093 $3.53 306,756 $3.29
======= ===== ======= =====
Subsequent to yearend, an additional 17,273 options were granted to the new
Chief Financial Officer of the Company at an exercise price of $3.50 per share.
The options vest 25% per year beginning July 12, 2000 for the next four years.
Employee Stock Purchase Plan
On September 5, 1997, the board of directors of the Company adopted, and the
shareholders subsequently approved, the Applied Films Corporation Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan will permit eligible
employees of the Company to purchase shares of common stock through payroll
deductions. Shares
42
are purchased at 90% of the fair market value of the common stock on the last
trading day in each quarterly purchase period. Up to 30,000 shares of common
stock may be sold under the Purchase Plan. Shares sold under the Purchase Plan
may be newly issued shares or shares acquired by the Company in the open market.
Unless terminated earlier by the board of directors, the Purchase Plan will
terminate when all shares reserved for issuance have been sold thereunder. The
Purchase Plan is intended to qualify as an "employee stock purchase plan" under
Section 423 of the Internal Revenue Code of 1986, as amended, and will be
administered in accordance with the limitations set forth in Section 423 and the
rules and regulations thereunder.
During 1999, the Company issued shares to employees under this plan at a grant
price ranging from $2.42 to $4.84 per share. A total of 10,564 shares have been
issued under the plan. Subsequent to yearend 1999 an additional 1,818 shares
were granted, at a price of $3.13 per share.
(6) 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 (liability) asset is comprised of the following:
July 3, June 27,
1999 1998
Inventories $ 54,000 $ 118,000
Accrued expenses 281,000 771,000
Equity earnings in affiliate (135,000) (24,000)
Foreign currency (31,000) (28,000)
---------- ----------
Total current deferred tax asset, net 169,000 837,000
---------- ----------
Property, plant and equipment (748,000) (670,000)
Deferred compensation 219,000 216,000
Deferred gain 261,000 303,000
Deferred revenue 86,000 -
Other - (169,000)
---------- ----------
Total non-current deferred tax liability, net (182,000) (320,000)
---------- ----------
Total deferred tax (liability) asset, net $(13,000) $ 517,000
========== ==========
43
Income tax (benefit) provision for the years ended July 3, 1999, June 27, 1998
and June 28, 1997 consist of the following:
Fiscal Years Ended
----------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
------------- ------------ -------------
Taxes currently payable/(receivable):
Federal $(718,000) $1,858,000 $ 695,000
State (70,000) 180,000 22,000
---------- ---------- ---------
Total current (benefit) provision (788,000) 2,038,000 717,000
Taxes deferred:
Federal 483,000 (509,000) (143,000)
State 47,000 (49,000) 31,000
---------- ---------- ---------
Total deferred provision (benefit) 530,000 (558,000) (112,000)
---------- ---------- ---------
Total tax (benefit) provision $(258,000) $1,480,000 $ 605,000
========== ========= ========
Reconciliations between the effective statutory federal income tax (benefit)
expense rate and the Company's effective income tax (benefit) provision rate as
a percentage of net (loss) income before taxes were as follows:
Fiscal Years Ended
July 3, June 27, June 28,
1999 1998 1997
Statutory federal income tax (benefit) expense rate (34.0)% 34.0% 34.0%
State income taxes (3.3)% 3.3% 3.3%
Decrease in valuation allowance - % (1.1)% (0.5)%
Effect of FSC (18.1)% (4.4)% (5.8)%
Other 2.0 % 2.3% (3.8)%
------ ------ ------
(53.4)% 34.1% 27.2%
====== ====== ======
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.
(7) PROFIT SHARING PLAN
In August 1992, the board of directors adopted a profit sharing plan for all
non-executive employees. The amount to be contributed to the profit sharing
pool, subject to the approval of the Company's board of directors, is generally
10% of pre-tax income before royalty income and profit sharing expense. Profit
sharing is paid to employees monthly based on their employee pay level and
length of service with the Company. The Company
44
expensed approximately $0, $482,000 and $247,000 in fiscal years 1999, 1998 and
1997, respectively, related to this plan.
(8) SIGNIFICANT CUSTOMERS
During fiscal years 1999, 1998 and 1997, approximately 85%, 78% and 83%,
respectively, of the Company's gross sales were to overseas customers. The
Company's ten largest customers accounted for in the aggregate, approximately
62%, 78% and 59% of the Company's gross sales in fiscal 1999, 1998 and 1997,
respectively. In addition, two individual customers represented 15% and 11% of
sales, respectively, in 1999, and 33% and 15% of sales, respectively, in 1998.
These customers were not individually significant in 1997. The loss of, or a
significant reduction or purchases by, one or more of these customers would have
a material adverse effect on the Company's operating results.
The breakdown of sales by geographic region is as follows:
Fiscal Years Ended
-------------------------------------------------
July 3, June 27, June 28,
1999 1998 1997
-------------- ------------ -------------
Asia (other than Japan) $18,900,000 $32,800,000 $19,534,000
Japan 7,645,000 7,824,000 6,611,000
United States 4,924,000 12,224,000 5,997,000
Europe and Other 1,263,000 2,304,000 2,941,000
-------------- -------------- --------------
Gross sales 32,732,000 55,152,000 35,083,000
Less: sales returns and
allowances (1,209,000) (2,111,000) (1,033,000)
-------------- -------------- --------------
Net sales $31,523,000 $53,041,000 $34,050,000
========== ========== ==========
The Company's sales are typically denominated in U.S. dollars. However, certain
customers of the Company currently pay in Japanese Yen. As a result, the Company
recognized approximately $24,000, $174,000 and $96,000 of foreign currency
exchange rate (loss) gain on foreign currency exchange rate fluctuations for the
fiscal years ended July 3, 1999, June 27, 1998 and June 28, 1997, respectively.
The Company currently has approximately $605,000 of its accounts receivable and
$1,007,000 of its accounts payable denominated in Japanese Yen as of July 3,
1999.
(9) COMMITMENTS
The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities. During June 1997, the Company
entered into a new lease for the Company's manufacturing and administrative
location in Longmont, Colorado, which will be 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.
Additionally, on June 12, 1998, the Company entered into two short-term leases
for the Boulder facilities, which terminated August 31, 1998, to facilitate
moving to the Company's new location.
45
The future minimum rental payments under the leases are as follows:
Fiscal year-
2000 $ 861,000
2001 873,000
2002 886,000
2003 899,000
2004 882,000
Thereafter 8,039,000
-------------
$12,440,000
=============
(10) SEGMENT INFORMATION
The Company manages its business and has segregated its activities into two
business segments, the sale of "Thin Film Coated Glass" for use primarily in
liquid crystal displays ("LCDs"), and the sales of "Thin Film Coating Equipment"
to Flat Panel Display ("FPD") manufacturers. The Company adopted SFAS No. 131 at
fiscal yearend 1999. Certain financial information for each segment is provided
below:
1999 1998 1997
---- ---- ----
Net sales:
Thin film coated glass $26,906 $39,133 $31,266
Thin film coating equipment 4,617 13,908 2,784
-------- -------- --------
Total net sales $31,523 $53,041 $34,050
Operating (loss) income:
Thin film coated glass $ (148) $ 3,657 $ 4,325
Thin film coating equipment (203) 924 (1,372)
-------- -------- --------
Total operating (loss) income $ (351) $ 4,581 $ 2,953
======== ======= =======
Identifiable assets:
Thin film coated glass $ 6,634 $ 7,927 $ 5,777
Thin film coating equipment 38 28 432
-------- -------- --------
Total identifiable assets $ 6,672 $ 7,955 $ 6,209
======== ======== ========
(11) 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.
46
(12) YEAR 2000 (Unaudited)
The Year 2000 issue is the result of computer systems that use two digits rather
than four to define the applicable year, which may prevent such systems from
accurately processing dates ending in the year 2000 and after. This could result
in system failures or in miscalculations causing disruption of operations,
including, but not limited to, an inability to process transactions to send and
receive electronic data, or to engage in routine business activities and
operations.
The Company has completed a full assessment of all currently used computer
systems as well as production and coating equipment systems and has corrected
those areas that will be affected by the year 2000 issue. The Company did
utilize outside vendors to assist in the upgrade of certain systems and
estimates that the Company is approximately 95% complete with respect to its
systems. The Company's goal is to have tested each of these systems for year
2000 compliance by the end of the first quarter of fiscal 2000.
In addition to reviewing its internal systems, the Company has begun formal
communications with its significant vendors concerning Year 2000 compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be sufficiently Year 2000 compliant so as to avoid an adverse
impact on the Company's operations, financial condition and results of
operations. The Company does not believe that its products and services involve
any material Year 2000 risks.
The Company does not presently anticipate that the costs to address the Year
2000 issue will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Although the Company expects its internal systems to be Year 2000 compliant as
described above, the Company intends to prepare a contingency plan during the
fourth quarter of calendar year 1999 addressing supply chain and the Joint
Venture in China that will specify what it plans to do if it or important
external companies are not Year 2000 compliant in a timely manner.
47
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
The information set forth on page 4, under the caption "Nominees for
Election as Directors" of the Registrant's definitive Proxy Statement dated
September 24, 1999, is hereby incorporated by reference.
ITEM 11: Executive Compensation
Information relating to compensation of the Registrant's executive officers
and directors is contained on page 7, under the captions "Compensation of
Directors" and "Compensation of Executive Officers," in the Registrant's
definitive Proxy Statement dated September 24, 1999 , and is incorporated herein
by reference.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners and
management is contained on page 9, under the caption "Compensation of Executive
Officers -- Executive Compensation -- Security Ownership of Management" in the
Registrant's definitive Proxy Statement dated September 24, 1999 , and is
incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
There were no related transactions to report in fiscal 1999.
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
3, 1999 , 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 July 3, 1999.
48
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedules
The response to this section of Item 14 is submitted as a separate section
of this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED FILMS CORPORATION
By: /s/ Thomas T. Edman
Thomas T. Edman, President
September 24, 1999
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
September 24, 1999 The persons named below each hereby appoint Thomas T. Edman
and Lawrence D. Firestone, and each of them severally, as his attorney in fact,
to sign in his name and on his behalf, as a director or officer of the
Registrant, and to file with the Commission any and all amendments to this
report on Form 10-K.
Signatures Title
President, Chief Executive Officer and Director
/s/ Thomas T. Edman (principal executive officer)
Thomas T. Edman
Chief Financial Officer and Treasurer (principal
/s/ Lawrence D. Firestone accounting and financial officer)
Lawrence D. Firestone
/s/ John S. Chapin Director
John S. Chapin
/s/ Cecil Van Alsburg Director
Cecil Van Alsburg
/s/ Chad D. Quist Director
Chad D. Quist
/s/ James A. Knister Director
James A. Knister
/s/ Richard P. Beck Director
Richard P. Beck
49
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 Registration Statement on Form S-1, as amended (Reg.
No. 333-35331).
3.2 Amended and Restated Bylaws of Applied Films Corporation are
incorporated by reference to Exhibit 3.2 of Registrant's
Registration Statement on Form S-1, as amended (Reg. No.
333-35331).
4.1 Specimen common stock certificate is incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.1 1993 Stock Option Plan is incorporated by reference to Exhibit 4
of Registrant's Registration Statement on Form S-8 (Reg. No.
333-51175).
10.2 1997 Stock Option Plan is incorporated by reference to Exhibit
10.2 of Registrant's Registration Statement on Form S-1, as
amended (Reg. No. 333-35331).
10.3 Employee Stock Purchase Plan is incorporated by reference to
Exhibit 10.3 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.4 Form of Indemnity Agreement between Registrant and each of its
Directors and Executive Officers is incorporated by reference to
Exhibit 10.4 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.5 Lease Agreement dated January 30, 1998, between 9586 East
Frontage Road, Longmont, CO 80504 LLC and Registrant is
incorporated by reference to Exhibit 10.9 of Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 27, 1997.
10.6 Agreement, dated as of November 18, 1997, between Nippon Sheet
Glass Co., Ltd., NSG Fine Glass Co., Ltd. and Registrant is
incorporated by reference to Exhibit 10.8 of Registrant's Annual
Report on Form 10-K for the fiscal year ended June 27, 1998.
10.7 Amended and Restated Credit Agreement, dated as of September 17,
1999, between Registrant and Bank One, Michigan.
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).
11.1 Statement re: computation of per share earnings.
21.1 Subsidiary of Applied Films Corporation is incorporated by
reference to Exhibit 21 of Registrant's Registration Statement on
Form S-1, as amended (Reg. No. 333-35331).
23.1 Consent of Arthur Andersen LLP.
24.1 Power of Attorney (included on page 48).
27.1 Financial Data Schedule (EDGAR filing only).
EXHIBIT 10.7
APPLIED FILMS CORPORATION
------------------------------------------
$11,500,000
AMENDED AND RESTATED
CREDIT AGREEMENT
dated as of September 17, 1999
------------------------------------------
BANK ONE, MICHIGAN
TABLE OF CONTENTS
Page
----
ARTICLE 1
DEFINITIONS...........................................................1
Certain Definitions...................................................1
Other Definitions; Rules of Construction.............................11
ARTICLE 2
THE COMMITMENT.......................................................12
Commitment of the Bank...............................................12
Termination and Reduction of Commitment..............................12
Fees.................................................................13
Disbursement of Loans................................................13
Conditions for First Disbursement....................................14
Further Conditions for Disbursement..................................15
Subsequent Elections as to Loans.....................................16
Limitation of Requests and Elections.................................16
Minimum Amounts......................................................17
Security and Collateral..............................................17
ARTICLE 3
PAYMENTS AND PREPAYMENTS OF LOANS....................................17
Principal Payments...................................................17
Interest Payments....................................................17
Payment Method.......................................................18
No Setoff or Deduction...............................................18
Payment on Non-Business Day; Payment Computations....................18
Additional Costs.....................................................19
Illegality and Impossibility.........................................20
Indemnification......................................................20
Letter of Credit Reimbursement Payments..............................20
ARTICLE 4
REPRESENTATIONS AND WARRANTIES.......................................22
Corporate Existence and Power........................................22
Corporate Authority..................................................22
Binding Effect.......................................................22
Subsidiaries.........................................................22
Litigation...........................................................23
Financial Condition..................................................23
Use of Loans.........................................................23
Consents, Etc........................................................23
ii
Taxes ............................................................24
Title to Properties..................................................24
ERISA ............................................................24
Disclosure...........................................................24
ARTICLE 5
COVENANTS............................................................25
Affirmative Covenants................................................25
Negative Covenants...................................................27
ARTICLE 6
DEFAULT..............................................................30
Events of Default....................................................30
Remedies ............................................................33
ARTICLE 7
MISCELLANEOUS........................................................34
Amendments, Etc......................................................34
Notices ............................................................34
No Waiver By Conduct; Remedies Cumulative............................34
Reliance on and Survival of Various Provisions.......................35
Expenses; Indemnification............................................35
Successors and Assigns...............................................36
Counterparts.........................................................36
Governing Law........................................................36
Table of Contents and Headings.......................................36
Construction of Certain Provisions...................................36
Integration and Severability.........................................37
Interest Rate Limitation.............................................37
Waiver of Jury Trial.................................................37
EXHIBIT A Revolving Credit Note......................................A-1
EXHIBIT B Request for Advance........................................B-1
EXHIBIT C Request for Continuation or Conversion of Loan.............C-1
EXHIBIT D Borrowing Base Certificate.................................D-1
EXHIBIT E Confirmation of Security Agreement.........................E-1
iii
THIS AMENDED AND RESTATED CREDIT AGREEMENT, dated as of September 17, 1999
(this "Agreement"), is between Applied Films Corporation, a Colorado corporation
(the "Company"), and Bank One, Michigan, a Michigan banking corporation,
formerly NBD Bank (the "Bank").
INTRODUCTION
The Company, successor by merger to Donnelly Applied Films Corporation, and
the Bank have previously entered into an Amended and Restated Revolving Credit
and Term Loan Agreement dated June 30, 1994 (the "1994 Credit Agreement"), and
an Amended and Restated Revolving Credit and Term Loan Agreement dated June 30,
1997, as amended by the First Amendment to Amended and Restated Credit Agreement
dated as of March 27, 1998 (collectively, the "1997 Credit Agreement"). The
Company desires to obtain a revolving credit facility in the aggregate principal
amount of $11,500,000, including S/L/Cs not to exceed $1,000,000 and C/L/Cs not
to exceed $2,000,000, in substitution for the facility provided under the 1997
Credit Agreement, as amended, and in order to provide funds for its general
corporate purposes, and to provide and confirm certain security for the Bank's
benefit, and the Bank is willing to establish such a credit facility in favor of
the Company on the terms herein set forth.
ARTICLE 1
DEFINITIONS
1.1 Certain Definitions. As used herein the following terms shall have the
following respective meanings:
"Advance" means any Revolving Credit Loan and any Letter of Credit
Advance.
"Agreed Currency" means so long as such currencies remain Eligible
Currencies, (i) Japanese Yen and (ii) any other Eligible Currency which the
Company requests the Bank to include as an Agreed Currency hereunder and
which is acceptable to the Bank.
"Applicable Lending Installation" shall mean, with respect to the
Bank, any office(s), agency(is), branch(es), Subsdiary(ies) or Affiliate(s)
of the Bank selected by the Bank and notice of which is given to the
Company from time to time.
"Automatic Termination Date" means the date which is three years after
the Effective Date.
"Borrowing Base" means, as of any date, the sum of (a) an amount equal
to 85% of the value of Eligible Accounts Receivable, plus (b) an amount
equal to the lesser of (i) 40% of the value of Eligible Inventory and (ii)
$4,000,000, plus (c) an amount equal to 60% of the value of Eligible Fixed
Assets.
1
"Borrowing Base Certificate" for any date means an appropriately
completed report as of such date in substantially the form of Exhibit D,
certified as true and correct as of such date by the chief financial
officer of the Company.
"Business Day" means a day other than a Saturday, Sunday, or other day
on which (a) the Bank is not open to the public for carrying on
substantially all of its banking functions or (b) if such reference relates
to the date for payment or purchase of any amount denominated in any
currency other than Dollars, banks are not generally open to the public for
carrying on substantially all of their banking functions in the principal
financial center of the country issuing such currency.
"C/L/C" shall have the meaning ascribed to it in the definition of
"Letter of Credit".
"Capital Lease" of any person means any lease which, in accordance
with generally accepted accounting principles, is or should be capitalized
on the books of such person.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time, and the regulations thereunder.
"Consolidated" or "consolidated" means, when used with reference to
any financial term in this Agreement, the aggregate for two or more persons
of the amounts signified by such term for all such persons determined on a
consolidated basis in accordance with generally accepted accounting
principles.
"Commitment" means the Bank's commitment to make Loans and Letter of
Credit Advances pursuant to Section 2.1 in amounts not exceeding an
aggregate principal amount outstanding at any time of $11,500,000 as such
amount may be reduced from time to time pursuant to Section 2.2, provided,
that the aggregate principal amount of all outstanding S/L/Cs shall not
exceed $1,000,000 and the aggregate principal amount of all C/L/Cs shall
not exceed $2,000,000.
"Cumulative Net Income" of any person means, as of any date, the net
income (after deduction for income and other taxes of such person
determined by reference to income or profits of such person) for the period
commencing on the specified date through the end of the most recently
completed fiscal year of such person (but without reduction for any net
loss incurred for any fiscal year during such period), taken as one
accounting period, all as determined in accordance with generally accepted
accounting principles.
"Default" means any of the events or conditions described in Section
6.1 which might become an Event of Default with notice or lapse of time or
both.
"Dollars" and "$" means the lawful money of the United States of
America.
2
"EBITDA" means, for any period, the sum of (i) net income determined
in accordance with generally accepted accounting principles (without taking
into account any extraordinary gains or non-cash extraordinary losses),
(ii) interest expense determined in accordance with generally accepted
accounting principles, (iii) depreciation and amortization, (iv) federal,
state and local income taxes, in each case determined in accordance with
generally accepted accounting principles.
"Effective Date" means the date specified in the final paragraph of
this Agreement.
"Eligible Accounts Receivable" means, as of any date, those trade
accounts receivable owned by the Company which are payable in Dollars and
in which the Company has granted to the Bank a first-priority perfected
security interest pursuant to the Security Agreement, valued at the face
amount thereof but shall not include any such account receivable (a) that
is more than 90 days past due or that remains outstanding more than 90 days
after the earlier of the date of the invoice or the shipment of the related
inventory, goods or other property or the furnishing of the related
services or other consideration, (b) that is subject to any dispute,
contra-account, defense, offset or counterclaim or any Lien, or the
inventory, goods, property, services or other consideration of which such
account receivable constitutes proceeds is subject to any such Lien (except
those in favor of the Bank under the Security Documents or other Permitted
Liens), (c) in respect of which the inventory, goods, property, services or
other consideration have been rejected or the amount is in dispute, (d)
that has been classified by the Company as doubtful or has otherwise failed
to meet established or customary credit standards of the Company, (e) that
is payable by any person located outside the United States (which shall not
be deemed to include any territories of the United States) except such
trade accounts receivable which are supported by trade letters of credit
issued for the Company's benefit, (f) that is payable by the United States
or any of its departments, agencies or instrumentalities or by any state or
other governmental entity, or (g) that for any other reason is at any time
reasonably deemed by the Bank to be ineligible; provided, however, that any
trade accounts receivable which are insured in a manner satisfactory to the
Bank will be considered as eligible.
"Eligible Currency" means any currency other than Dollars (i) that is
readily available, (ii) that is freely traded, (iii) in which deposits are
customarily offered to banks in the London interbank market, (iv) which is
convertible into Dollars in the international interbank market, (v) as to
which an Equivalent Amount may be readily calculated, and (vi) that is
agreed to by the Bank in its discretion. If, after the designation by the
Bank of any currency as an Agreed Currency, (x) currency control or other
exchange regulations are imposed in the country in which such currency is
issued with the result that different types of such currency are
introduced, (y) such currency is, in the determination of the Bank, no
longer readily available or freely traded or (z) in the determination of
the Bank, an Equivalent Amount of such currency is not readily calculable,
the Bank shall promptly notify the Company, and such currency shall no
longer be an Agreed Currency until such time as the Bank agrees to
reinstate such currency as an Agreed Currency, and promptly, but in any
event within five Business Days of receipt of such notice from the bank,
the Company shall
3
repay all Loans in such affected currency or convert such Loans into Loans
in Dollars or another Eligible Currency, subject to the other terms set
forth in Article 2.
"Eligible Fixed Assets" means, as of any date, those tangible fixed
assets owned by the Company in which the Company has granted to the Bank a
first-priority perfected security interest pursuant to the Security
Agreement and which are either (i) listed and valued in an appraisal dated
December 21, 1998, performed by Norman Levy and Associates, which has been
furnished to the Bank, valued at the fair market value established in the
appraisal, as up-dated at the Bank's request from time to time, or (ii)
acquired by the Company after the appraisal identified above, valued at the
acquired cost until such time as the Bank requests an appraisal, after
which they shall be valued at the fair market value established in the
appraisal, but not including any such fixed asset (a) that is not usable in
the business of the Company, (b) that is located outside the United States
(which shall not be deemed to include any territories of the United
States), (c) that is subject to, or any accounts or other proceeds
resulting from the sale or other disposition thereof could be subject to,
any Lien (except those in favor of the Bank under the Security Documents),
(d) that is not in the possession of the Company, (e) that is held for sale
or lease or is the subject of any lease, (f) that is subject to any
trademark, trade name or licensing arrangement, or any law, rule or
regulation, that could limit or impair the ability of the Bank to promptly
exercise all rights of the Bank under the Security Documents, (g) if such
fixed asset is located on premises not owned by the Company unless the
landlord or other owner of the premises has waived its distraint, lien, and
similar rights with respect to the fixed asset and has agreed to permit the
Bank to enter the premises after an Event of Default has occurred pursuant
to a waiver and agreement of the owner in favor of and satisfactory to the
Bank, (h) with respect to which any insurance proceeds are not payable to
the Bank as a loss payee or are payable to any loss payee other than the
Bank or the Company, or (i) that for any other reason is at any time
reasonably deemed by the Bank to be ineligible.
"Eligible Inventory" means, as of any date, that raw material and
finished goods inventory owned by the Company in which the Company has
granted to the Bank a first- priority perfected security interest pursuant
to the Security Agreement, valued at the lower of cost or market, but shall
not include any such inventory (a) that is work-in-process or otherwise not
readily salable or usable in the business of the Company, (b) that is
located outside the United States (which shall not be deemed to include any
territories of the United States), (c) that is subject to, or any accounts
or other proceeds resulting from the sale or other disposition thereof
could be subject to, any Lien (except those in favor of the Bank under the
Security Documents or other Permitted Liens), including any sale on
approval or sale or return transaction or any consignment, (d) that is not
in the possession of the Company, and (e) that for any other reason is at
any time reasonably deemed by the Bank to be ineligible.
"Environmental Laws" means all provisions of law, statute, ordinances,
rules, regulations, judgments, writs, injunctions, decrees, orders, awards
and standards promulgated by the government of the United States of America
or any foreign government or by any
4
state, province, municipality or other political subdivision thereof or
therein or by any court, agency, or instrumentality, regulatory authority,
or commission of any of the foregoing concerning the protection of, or
regulating the discharge of substances into, the environment.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, and the regulations thereunder.
"ERISA Affiliate" means, with respect to any person, any trade or
business (whether or not incorporated) which, together with such person or
any Subsidiary of such person, would be treated as a single employer under
Section 414 of the Code.
"Equivalent Amount" of any currency with respect to any amount of
Dollars at any date shall mean the equivalent in such currency of such
amount of Dollars, calculated on the basis of the arithmetical mean of the
buy and sell spot rates of exchange of the Bank for such other currency at
11:00 a.m., London time, on the date on or as of which such amount is to be
determined.
"Eurodollar Business Day" means, with respect to any Eurodollar Rate
Loan, a day which is both a Business Day and a day on which dealings in
Dollar deposits are carried out in the interbank market selected by the
Bank with respect to such Eurodollar Rate Loan.
"Eurodollar Interest Period" means, with respect to any Eurodollar
Rate Loan, the period commencing on the day such Eurodollar Rate Loan is
made or converted to a Eurodollar Rate Loan and ending on the date one,
two, three, or six months thereafter, as the Company may elect under
Section 2.4 or 2.7, and each subsequent period commencing on the last day
of the immediately preceding Eurodollar Interest Period and ending on the
date one, two, three or six months thereafter, as the Company may elect
under Section 2.4 or 2.7, provided, however, that (a) any Eurodollar
Interest Period which commences on the last Eurodollar Business Day of a
calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end
on the last Eurodollar Business Day of the appropriate subsequent calendar
month, (b) each Eurodollar Interest Period which would otherwise end on a
day which is not a Eurodollar Business Day shall end on the next succeeding
Eurodollar Business Day or, if such next succeeding Eurodollar Business Day
falls in the next succeeding calendar month, on the next preceding
Eurodollar Business Day, and (c) no Eurodollar Interest Period which would
end after the Termination Date shall be permitted.
"Eurodollar Rate" means, with respect to any Eurodollar Rate Loan and
the related Eurodollar Interest Period, the per annum rate that is equal to
the sum of:
(a) the per annum margin amount determined by reference to the
chart set forth below, determined quarterly by the Bank from the
financial statements submitted by the Company under Section 5.1(d)(ii)
for the months of March, June, September and December, plus
5
(b) the rate per annum obtained by dividing (i) the per annum
rate of interest at which deposits in Dollars for such Eurodollar
Interest Period and in an aggregate amount comparable to the amount of
such Eurodollar Rate Loan are offered to the Bank by other prime banks
in the London or Nassau interbank market, selected in the Bank's
discretion, at approximately 11:00 a.m. London or Nassau time, as the
case may be, on the second Eurodollar Business Day prior to the first
day of such Eurodollar Interest Period by (ii) an amount equal to one
minus the stated maximum rate (expressed as a decimal) of all reserve
requirements (including, without limitation, any marginal, emergency,
supplemental, special or other reserves) that is specified on the
first day of such Eurodollar Interest Period by the Board of Governors
of the Federal Reserve System (or any successor agency thereto) for
determining the maximum reserve requirement with respect to
eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) maintained by a member
bank of such System, all as conclusively determined by the Bank, such
sum to be rounded up, if necessary, to the nearest whole multiple of
one-hundredth of one percent (1/100 of 1%).
Ratio calculated
under Section 5.2(a) Margin
-------------------- ------
(i) Less than or equal to 1.5 to 1.0 1.75%
(ii) Greater than 1.5 to 1.0 but 2.00%
less than or equal to 2.0 to 1.0
(iii) Greater than 2.0 to 1.0 but less 2.25%
than or equal to 2.5 to 1.0
(iv) Greater than 2.5 to 1.0 but 2.50%
less than or equal to 3.0 to 1.0
(v) Greater than 3.0 to 1.0 2.75%
all as conclusively determined by the Bank, such sum to be rounded up,
if necessary, to the nearest whole multiple of one-hundredth of one
percent (1/100 of 1%).
"Eurodollar Rate Loan" means any Loan which bears interest at the
Eurodollar Rate.
"Event of Default" means any of the events or conditions described in
Section 6.1.
"Federal Funds Rate" means the per annum rate that is equal to the per
annum rate established and announced by the Bank from time to time as the
opening federal funds rate paid by the Bank in its regional federal funds
market for overnight borrowings from other banks, all as conclusively
determined by the Bank, such sum to be rounded up, if necessary, to the
nearest whole multiple of one-hundredth of one percent (1/100 of 1%), which
Federal Funds Rate shall change simultaneously with any change in such
announced rates.
6
"Fixed Charge Ratio" means the ratio of EBITDA less capital
expenditures, plus operating lease rentals, to total interest expense, plus
operating lease rentals plus all scheduled principal reductions, plus cash
taxes, in each case determined in accordance with generally accepted
accounting principles.
"Fixed Rate Loan" means a Eurodollar Rate Loan or a Negotiated Rate
Loan.
"Floating Rate" means the per annum rate equal to the sum of (a) the
per annum margin amount determined by reference to the chart set forth
below, determined quarterly by the Bank from the financial statements
submitted by the Company under Section 5.1(d)(ii) for the months of March,
June, September, and December, plus (b) the greater of (i) the Prime Rate
in effect from time to time, and (ii) the sum of one-half of one percent
(1/2%) per annum plus the Federal Funds Rate in effect from time to time.
The Floating Rate shall change simultaneously with any change in the Prime
Rate or Federal Funds Rate, as the case may be, and shall change as of the
earlier of (x) the date when the Company's financial statements are due
under Section 5.1(d)(ii) for such months, and (y) the date the financial
statements are delivered to the Bank.
Ratio calculated
under Section 5.2(a) Margin
-------------------- ------
(i) Less than or equal to
1.5 to 1.0 -.50%
(ii) Greater than 1.5 to 1.0 but
less than or equal to 2.0 to 1.0 -.25%
(iii) Greater than 2.0 to 1.0 but
less than or equal to 2.5 to 1.0 0.0%
(iv) Greater than 2.5 to 1.0 but
less than or equal to 3.0 to 1.0 +.25%
(v) Greater than 3.0 to 1.0 +.50%
"Floating Rate Loan" means any Loan which bears interest at the
Floating Rate.
"generally accepted accounting principles" means generally accepted
accounting principles applied on a basis consistent with that reflected in
the financial statements referred to in Section 4.6.
"Hazardous Materials" means any flammable explosives, radioactive
materials, hazardous materials, hazardous wastes, hazardous or toxic
substances or related materials defined in the comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended (42 U.S.C.
Sections 9601, et seq.), the Hazardous Materials Transportation Act, as
amended (49 U.S.C. Sections 1801, et seq.), the Resource Conservation and
Recovery Act, as amended (42 U.S.C. Sections 6901, et seq.), and in the
regulations adopted
7
and publications promulgated pursuant thereto, or any other federal, state,
or local government law, ordinance, rule, or regulation.
"Indebtedness" of any person means, as of any date, (a) all
obligations of such person for borrowed money, (b) all obligations of such
person as lessee under any Capital Lease, and (c) all obligations of others
similar in character to those described in clauses (a) and (b) of this
definition for which such person is contingently liable, as obligor,
guarantor, surety or in any other capacity, or in respect of which
obligations such person assures a creditor against loss or agrees to take
any action to prevent any such loss (other than endorsements of negotiable
instruments for collection in the ordinary course of business), including
without limitation all reimbursement obligations of such person in respect
of letters of credit, surety bonds or similar obligations and all
obligations of such person to advance funds to, or to purchase assets,
property or services from, any other person in order to maintain the
financial condition of such other person.
"Interest Payment Date" means (a) with respect to any Loan bearing
interest at the Eurodollar Rate, the last day of each Eurodollar Interest
Period with respect to such Loan and, in the case of any Eurodollar
Interest Period exceeding three months, those days that occur during such
Eurodollar Interest Period at intervals of three months after the first day
of such Eurodollar Interest Period, and (b) in all other cases, the last
Business Day of each March, June, September, and December occurring after
the date hereof, commencing with the first such date hereafter.
"Letter of Credit" means any standby letter of credit ("S/L/C") or
commercial letter of credit ("C/L/C") having a stated expiry date not
earlier than ninety days after the date of issuance and not later than the
earlier of one year after the date of issuance or the Termination Date, and
which may be issued by the Bank for the account of the Company pursuant to
Section 2.1 under an application and related documentation acceptable to
the Bank requiring, among other things, immediate reimbursement by the
Company to the Bank in respect of all drafts or other demand for payment
honored thereunder and all expenses paid or incurred by the Bank relative
thereto.
"Letter of Credit Advance" means any issuance of a Letter of Credit
under Section 2.4 made pursuant to Section 2.1.
"Letter of Credit Documents" shall have the meaning ascribed thereto
in Section 3.9.
"Lien" means any pledge, assignment, hypothecation, mortgage, security
interest, deposit arrangement, option, conditional sale or title retaining
contract, sale and leaseback transaction, financing statement filing,
lessor's or lessee's interest under any lease, subordination of any claim
or right, or any other type of lien, charge, encumbrance, preferential
arrangement, or other claim or right.
8
"Loan" means the Revolving Credit Loan. Any Loan or portion thereof
may also be denominated as a Floating Rate Loan, a Eurodollar Rate Loan or
a Negotiated Rate Loan and such Floating Rate Loans, Eurodollar Rate Loans,
and Negotiated Rate Loans are referred to herein as "types" of Loans.
"Multiemployer Plan" means any "multiemployer plan" as defined in
Section 4001(a)(3) of ERISA or Section 414(f) of the Code.
"Negotiated Interest Period" means, with respect to any Negotiated
Rate Loan, the period commencing on the day such Negotiated Rate Loan is
made or converted to a Negotiated Rate Loan and ending on the date agreed
upon by the Company and the Bank, provided, however, that (a) any
Negotiated Interest Period which commences on the last Business Day of a
calendar month (or on any day for which there is no numerically
corresponding day in the appropriate subsequent calendar month) shall end
on the last Business Day of the appropriate subsequent calendar month, (b)
each Negotiated Interest Period which would otherwise end on a day which is
not a Business Day shall end on the next succeeding Business Day or, if
such next succeeding Business Day falls in the next succeeding calendar
month, on the next preceding Business Day, and (c) no Negotiated Interest
Period which would end after the Termination Date shall be permitted.
"Negotiated Rate" means the rate which is determined by the Bank, in
its discretion, which is adjusted for reserves and costs and expenses
associated with the currency.
"Negotiated Rate Loan" means any Loan which bears interest at the
Negotiated Rate.
"Note" means the Revolving Credit Note.
"Overdue Rate" means (a) in respect of principal of Floating Rate
Loans, a rate per annum that is equal to the sum of three percent (3%) per
annum plus the Floating Rate, (b) in respect of principal of Eurodollar
Rate Loans, a rate per annum that is equal to the sum of three percent (3%)
per annum plus the per annum rate in effect thereon until the end of the
then current Eurodollar Interest Period for such Loan and, thereafter, a
rate per annum that is equal to the sum of three percent (3%) per annum
plus the Floating Rate, (c) in respect of Negotiated Rate Loans, a rate per
annum that is equal to the sum of three percent (3%) per annum plus the per
annum rate in effect thereon until the end of the then current Negotiated
Interest Period for such Loan, and, thereafter, at a rate per annum that is
equal to the sum of three percent (3%) per annum plus the Floating Rate,
and (c) in respect of other amounts payable by the Company hereunder (other
than interest), a per annum rate that is equal to the sum of three percent
(3%) per annum plus the Floating Rate.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
"Permitted Liens" means Liens permitted by Section 5.2(f) hereof.
9
"Person" or "person" shall include an individual, a corporation, an
association, a partnership, a trust or estate, a joint stock company, an
unincorporated organization, a joint venture, a trade or business (whether
or not incorporated), a government (foreign or domestic) and any agency or
political subdivision thereof, or any other entity.
"Plan" means, with respect to any person, any pension plan (other than
a Multiemployer Plan) subject to Title IV of ERISA or to the minimum
funding standards of Section 412 of the Code which has been established or
maintained by such person, any Subsidiary of such person or any ERISA
Affiliate, or by any other person if such person, any Subsidiary of such
person or any ERISA Affiliate could have liability with respect to such
pension plan.
"Prime Rate" means the per annum rate announced by the Bank from time
to time as its "prime rate" (it being acknowledged that such announced rate
may not necessarily be the lowest rate charged by the Bank to any of its
customers), which Prime Rate shall change simultaneously with any change in
such announced rate.
"Prohibited Transaction" means any transaction involving any Plan
which is proscribed by Section 406 of ERISA or Section 4975 of the Code.
"Reportable Event" means a reportable event as described in Section
4043(b) of ERISA including those events as to which the thirty (30) day
notice period is waived under Part 2615 of the regulations promulgated by
the PBGC under ERISA.
"Revolving Credit Loans" means the borrowings under Section 2.4
evidenced by the Revolving Credit Note and made pursuant to Section 2.1 and
"Revolving Credit Loan" means any of the Revolving Credit Loans.
"Revolving Credit Note" means any promissory note of the Company
evidencing the Revolving Credit Loans, in substantially the form of Exhibit
A, as amended or modified from time to time and together with any
promissory note or notes issued in exchange or replacement therefor.
"S/L/C" shall have the meaning ascribed to it in the definition of
"Letter of Credit".
"Security Agreement" means the Security Agreement dated June 30, 1994,
entered into by the Company for the benefit of the Bank pursuant to the
1994 Credit Agreement, as confirmed by a Confirmation of Security Agreement
entered into by the Company in substantially the form of Exhibit E, and as
amended, modified, and confirmed from time to time.
"Security Documents" means, collectively, the Security Agreement, and
all other related agreements and documents, including financing statements
and similar documents,
10
delivered pursuant to this Agreement or otherwise entered into by any
person to secure the Loans.
"Subsidiary" of any person means any other person (whether now
existing or hereafter organized or acquired) in which (other than directors
qualifying shares required by law) at least a majority of the securities or
other ownership interests of each class having ordinary voting power or
analogous right (other than securities or other ownership interests which
have such power or right only by reason of the happening of a contingency),
at the time as of which any determination is being made, are owned,
beneficially and of record, by such person or by one or more of the other
Subsidiaries of such person or by any combination thereof. Unless otherwise
specified, reference to "Subsidiary" means a Subsidiary of the Company.
"Tangible Net Worth" of any person means, as of any date, (a) the
amount of any capital stock, paid-in capital and similar equity accounts
plus (or minus in the case of a deficit) the capital surplus and retained
earnings of such person and the amount of any foreign currency translation
adjustment account shown as a capital account of such person, less (b) the
net book value of all items of the following character which are included
in the assets of such person: (i) goodwill, including without limitation,
the excess of cost over book value of any asset, (ii) organization or
experimental expenses, (iii) unamortized debt discount and expense, (iv)
patents, trademarks, trade names and copyrights, (v) treasury stock, (vi)
deferred taxes (but only to the extent that the deferred taxes shown as an
asset on the Company's balance sheet exceeds the deferred taxes shown as a
liability on the Company's balance sheet) and deferred charges, (vii)
franchises, licenses and permits, and (viii) other assets which are deemed
intangible assets under generally accepted accounting principles.
"Termination Date" means the earlier to occur of (a) the Automatic
Termination Date, and (b) the date on which the Commitment shall be
terminated pursuant to Section 2.2 or 6.2.
"Total Liabilities" of any person means, as of any date, all
obligations which, in accordance with generally accepted accounting
principles, are or should be classified as liabilities on a balance sheet
of such person.
"Unfunded Benefit Liabilities" means, with respect to any Plan as of
any date, the amount of the unfunded benefit liabilities determined in
accordance with Section 4001(a)(18) or ERISA.
1.2 Other Definitions; Rules of Construction. As used herein, the terms
"Bank", "Company", "1994 Credit Agreement", "1997 Credit Agreement", and "this
Agreement" shall have the respective meanings ascribed thereto in the
introductory paragraph of this Agreement. Such terms, together with the other
terms defined in Section 1.1, shall include both the singular and the plural
forms thereof and shall be construed accordingly. All computations required
hereunder and all financial terms used herein shall be made or construed in
accordance with generally accepted
11
accounting principles unless such principles are inconsistent with the express
requirements of this Agreement. Use of the terms "herein", "hereof", and
"hereunder" shall be deemed references to this Agreement in its entirety and not
to the Section or clause in which such term appears. References to "Sections",
"subsections" and "Exhibits" shall be to Sections, subsections and Exhibits,
respectively, of this Agreement unless otherwise specifically provided.
ARTICLE 2
THE COMMITMENT
2.1 Commitment of the Bank. The Bank agrees, subject to the terms of this
Agreement, to make Revolving Credit Loans denominated in Dollars or any Agreed
Currency to the Company pursuant to Section 2.4 and Section 3.9, and to make
Letter of Credit Advances denominated in Dollars only to the Company pursuant to
Section 2.4, from time to time from and including the Effective Date to but
excluding the Termination Date, not to exceed in aggregate principal amount at
any time outstanding the lesser of (i) the amount of the Borrowing Base as of
the close of business on the last day of the month next preceding the date any
such Advance is made and (ii) the amount of the Commitment as of the date any
such Advance is made, provided, that the aggregate principal amount of S/L/C
Advances outstanding at any time shall not exceed $1,000,000, the aggregate
amount of C/L/C Advances shall not exceed $2,000,000, and the aggregate
principal amount of Loans made in Agreed Currency outstanding at any time shall
not exceed the Equivalent Amount of $5,000,000.
2.2 Termination and Reduction of Commitment. (a) The Company shall have the
right to terminate or reduce the Commitment at any time and from time to time,
provided that (i) the Company shall give notice of such termination or reduction
to the Bank specifying the amount and effective date thereof, (ii) each partial
reduction of the Commitment shall be in a minimum amount of $500,000 and in an
integral multiple of $500,000, (iii) no such termination or reduction shall be
permitted with respect to any portion of the Commitment as to which a request
for a Loan or a Letter of Credit Advance pursuant to Section 2.4 is then
pending, and (iv) the Commitment may not be terminated if any Loans or Letters
of Credit are then outstanding and may not be reduced below the principal amount
of Loans and Letters of Credit then outstanding. The Commitment or any portion
thereof terminated or reduced pursuant to this Section 2.2, whether optional or
mandatory, may not be reinstated.
(b) For purposes of this Agreement, a Letter of Credit (i) shall be
deemed outstanding in an amount equal to the sum of the maximum amount
available to be drawn under the related Letter of Credit on or after the
date of determination and on or before the stated expiry date thereof,
which shall not exceed twelve (12) months from the date of issuance, plus
the amount of any draws under such Letter of Credit that have not been
reimbursed as provided in Section 3.9, and (ii) shall be deemed outstanding
at all times on and before such stated expiry date or such earlier date on
which all amounts available to be drawn under such Letter of Credit have
been fully drawn, and thereafter until all related reimbursement
obligations have been paid pursuant to Section 3.9.
12
2.3 Fees.
(a) The Company agrees to pay to the Bank a commitment fee on the
daily average unused amount of the Commitment, for the period from the
Effective Date to but excluding the Termination Date, at a rate equal to
one-quarter of one percent (1/4 of 1%) per annum. Accrued commitment fees
shall be payable quarterly in arrears on each Interest Payment Date,
commencing on the first such day occurring after the date of this
Agreement, and on the Termination Date. For purposes of calculating the
commitment fee, S/L/Cs shall be considered usage, but C/L/Cs shall not be
considered usage.
(b) In addition to the commitment fees payable pursuant to Section
2.3(a), the Company agrees to pay to the Bank an arrangement fee in the
amount of $25,000, payable on or prior to the Effective Date.
(c) On or before the date of issuance of any Letter of Credit, the
Company agrees to pay to the Bank (i) a fee computed at the rate per annum
set forth in the chart below of the maximum amount available to be drawn
from time to time under any S/L/C for the period from and including its
issuance date to and including its stated expiry date, (ii) a fee computed
at the rate to be agreed upon by the Company and the Bank from time to time
under any C/L/C, and (iii) such other customary administrative fees,
charges and expenses of the Bank in respect of the issuance, negotiation,
acceptance, amendment, transfer and payment of any Letter of Credit or
otherwise payable pursuant to the application and related documentation
under which any Letter of Credit is issued. Such fees are nonrefundable and
the Company shall not be entitled to any rebate of any portion thereof if
such Letter of Credit does not remain outstanding through its stated expiry
date or for any other reason.
Ratio calculated
under Section 5.2(a) Rate
-------------------- ----
(i) Less than or equal to
1.5 to 1.0 1.75%
(ii) Greater than 1.5 to 1.0 but
less than or equal to 2.0 to 1.0 2.0 %
(iii) Greater than 2.0 to 1.0 but
less than or equal to 2.5 to 1.0 2.25%
(iv) Greater than 2.5 to 1.0 but
less than or equal to 3.0 to 1.0 2.50%
(v) Greater than 3.0 to 1.0 2.75%
2.4 Disbursement of Loans.
(a) The Company shall give the Bank notice of its request for each
Revolving Credit Loan or Letter of Credit Advance in substantially the form
of Exhibit B not later than 10:00 a.m. Detroit time or 10:00 a.m. local
time of the Applicable Lending Installation if
13
such request is for a Negotiated Rate Loan (i) three Eurodollar Business
Days prior to the date a Revolving Credit Loan is requested to be made if a
Revolving Credit Loan is to be made as a Eurodollar Rate Loan, (ii) on the
date such Loan is requested to be made if such Loan to be made is a
Floating Rate Loan, (iii) three Business Days prior to the date a
Negotiated Rate Loan is requested to be made if a Revolving Credit Loan is
to be made as a Negotiated Rate Loan, and (iv) five Business Days prior to
the date any Letter of Credit Advance is requested to be made, which notice
shall specify whether a Eurodollar Rate Loan, Floating Rate Loan, a
Negotiated Rate Loan or a Letter of Credit Advance is requested and, in the
case of each requested Eurodollar Rate Loan, the Eurodollar Interest Period
to be initially applicable to such Loan. Subject to the terms of this
Agreement, the proceeds of each such requested Loan shall be made available
to the Company by depositing the proceeds thereof, in immediately available
funds, in an account maintained and designated by the Company at the Bank.
(b) Subject to the terms of this Agreement, the Company may borrow
Revolving Credit Loans under this Section 2.4, prepay Revolving Credit
Loans under Section 3.1, and reborrow Revolving Credit Loans under this
Section 2.4.
2.5 Conditions for First Disbursement. The obligation of the Bank to make
the first Loan hereunder is subject to receipt by the Bank of the following
documents and completion of the following matters, in form and substance
satisfactory to the Bank:
(a) Charter Documents. Certificates of recent date of the appropriate
authority or official of the Company's state of incorporation certifying as
to the Company's good standing and corporate existence, together with
copies of the Company's Articles of Incorporation, certified as of a recent
date by such authority or official and certified as true and correct as of
the Effective Date by a duly authorized officer of the Company;
(b) By-Laws and Corporate Authorizations. Copies of the by-laws of the
Company, together with all authorizing resolutions and evidence of other
corporate action taken by the Company to authorize the execution, delivery,
and performance by the Company of this Agreement, the Notes, and the
Security Documents to which it is a party and the consummation by the
Company of the transactions contemplated hereby, certified as true and
correct as of the Effective Date by a duly authorized officer of the
Company;
(c) Incumbency Certificate. Certificates of incumbency of the Company
containing, and attesting to the genuineness of, the signatures of those
officers authorized to act on behalf of the Company in connection with this
Agreement, the Notes, and the Security Documents to which it is a party and
the consummation by the Company of the transactions contemplated hereby,
certified as true and correct as of the Effective Date by a duly authorized
officer of the Company;
(d) Note. The Revolving Credit Note duly executed on behalf of the
Company;
14
(e) Security Documents. A confirmation of the Security Agreement duly
executed on behalf of the Company substantially in the form of Exhibit E
granting or confirming to the Bank the collateral and security intended to
be provided pursuant to Section 2.10, together with:
(i) Recording, Filing, Etc. Evidence of the recordation, filing
and other action (including payment of any applicable taxes or fees)
in such jurisdictions as the Bank may deem necessary or appropriate
with respect to the Security Documents, including the filing of
financing statements and similar documents which the Bank may deem
necessary or appropriate to create, preserve, or perfect the liens,
security interests, and other rights intended to be granted to the
Bank thereunder, together with Uniform Commercial Code record searches
in such offices as the Bank may request; and
(ii) Casualty and Other Insurance. Evidence that the casualty and
other insurance required pursuant to Section 5.1(c), and paragraph
1(e) of the Security Agreement, is in full force and effect.
(f) Legal Opinions. The favorable written opinion of counsel for the
Company with respect to each of the matters set forth in Article IV (other
than Section 4.6) and as to such other matters as the Bank may reasonably
request; and
(g) Fees. The arrangement fee described in Section 2.3(b).
2.6 Further Conditions for Disbursement. The obligation of the Bank to make
any Advance (including the first Advance) or any continuation or conversion
under Section 2.7, is further subject to the satisfaction of the following
conditions precedent:
(a) The representations and warranties contained in Article IV hereof
and in the Security Documents shall be true and correct on and as of the
date such Advance is made (both before and after such Advance is made) as
if such representations and warranties were made on and as of such date;
(b) No Event of Default, and no event or condition which might become
an Event of Default with notice or lapse of time, or both, shall exist or
shall have occurred and be continuing on the date such Advance is made
(whether before or after such Advance is made); and
(c) The Bank shall have received the Borrowing Base Certificate
required pursuant to Section 5.1(d)(v) as of the close of business on the
last day of the month next preceding the date such Advance is made.
(d) In the case of any Letter of Credit Advance, the Company shall
have delivered to the Bank an application for the related Letter of Credit
and other related documentation
15
requested by and acceptable to the Bank, appropriately completed and duly
executed on behalf of the Company.
The Company shall be deemed to have made a representation and warranty to the
Bank at the time of the making of each Advance, and the continuation or
conversion of each Loan, to the effect set forth in clauses (a) and (b) of this
Section 3.3.
2.7 Subsequent Elections as to Loans. The Company may elect (a) to continue
a Eurodollar Rate Loan, or a portion thereof, as a Eurodollar Rate Loan or (b)
may elect to convert a Eurodollar Rate Loan, or a portion thereof, to a Floating
Rate Loan or (c) elect to convert a Floating Rate Loan, or a portion thereof, to
a Eurodollar Rate Loan, in each case by giving notice thereof to the Bank in
substantially the form of Exhibit C not later than 10:00 a.m. Detroit time (i)
three Eurodollar Business Days prior to the date any such continuation of or
conversion to a Eurodollar Rate Loan is to be effective, and (ii) on the date
such continuation or conversion is to be effective in all other cases, provided
that an outstanding Eurodollar Rate Loan may only be converted on the last day
of the then-current Eurodollar Interest Period with respect to such Loan, and
provided, further, if a continuation of a Loan as, or a conversion of a Loan to,
a Eurodollar Rate Loan is requested, such notice shall also specify the
Eurodollar Interest Period to be applicable thereto upon such continuation or
conversion, and, provided, further, that a Eurodollar Rate Loan may be requested
only if the aggregate outstanding principal amount of the Eurodollar Rate Loans
(including the requested Loan) plus the Letter of Credit Advances would not
exceed the Guaranty Amount. If the Company shall not timely deliver such a
notice with respect to any outstanding Eurodollar Rate Loan, the Company shall
be deemed to have elected to convert such Eurodollar Rate Loan to a Floating
Rate Loan on the last day of the then-current Eurodollar Interest Period with
respect to such Loan.
2.8 Limitation of Requests and Elections. Notwithstanding any other
provision of this Agreement to the contrary, if, upon receiving a request for a
Eurodollar Rate Loan pursuant to Section 2.4, or a request for a continuation of
a Eurodollar Rate Loan as a Eurodollar Rate Loan of the then-existing type, or a
request for a conversion of a Floating Rate Loan to a Eurodollar Rate Loan
pursuant to Section 2.7, (a) in the case of any Eurodollar Rate Loan, deposits
in Dollars for periods comparable to the Eurodollar Interest Period elected by
the Company are not available to the Bank in the relevant interbank or secondary
market, or (b) the Eurodollar Rate will not adequately and fairly reflect the
cost to the Bank of making, funding or maintaining the related Eurodollar Rate
Loan, or (c) by reason of national or international financial, political, or
economic conditions or by reason of any applicable law, treaty, rule, or
regulation (whether domestic or foreign) now or hereafter in effect, or the
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by the Bank
with any guideline, request, or directive of such authority (whether or not
having the force of law), including without limitation exchange controls, it is
impracticable, unlawful or impossible for the Bank (i) to make or fund the
relevant Eurodollar Rate Loan, or (ii) to continue such Eurodollar Rate Loan as
a Eurodollar Rate Loan, or (iii) to convert a Loan to a Eurodollar Rate Loan,
then the Company shall not be entitled, so long as such circumstances continue,
to request a Eurodollar Rate Loan pursuant to Section 2.4 or a continuation of
or conversion to a Eurodollar Rate
16
Loan pursuant to Section 2.7. In the event that such circumstances no longer
exist, the Bank shall again consider requests for Eurodollar Rate Loans pursuant
to Section 2.4, and requests for continuations of and conversions to Eurodollar
Rate Loans of the affected type pursuant to Section 2.7.
2.9 Minimum Amounts. Except for (a) Loans and conversions thereof which
exhaust the entire remaining amount of the Commitment, and (b) conversions or
payments required pursuant to Section 3.1(c) or Section 3.7, each Loan and each
continuation or conversion pursuant to Section 2.7 and each prepayment thereof
shall be in a minimum amount of $100,000 with respect to Floating Rate Loans,
with respect to Eurodollar Rate Loans, a minimum amount of $500,000, and with
respect to Negotiated Rate Loans, such minimum amount as agreed upon by the
Bank.
2.10 Security and Collateral. To secure the payment when due of the
Revolving Credit Note, and all other obligations of the Company under this
Agreement to the Bank, the Company shall execute and deliver, to the Bank the
Security Documents granting or confirming security interests in all present and
future accounts, chattel paper, inventory, equipment, and fixtures of the
Company provided, however, that the Company need not grant to the Bank a
security interest in fixed assets which are not Eligible Fixed Assets.
ARTICLE 3
PAYMENTS AND PREPAYMENTS OF LOANS
3.1 Principal Payments.
(a) Revolving Credit Loans. Unless earlier payment is required under
this Agreement, the Company shall pay to the Bank on the Termination Date
the entire outstanding principal amount of the Revolving Credit Loans.
(b) Prepayment of Loans. The Company may at any time and from time to
time prepay all or a portion of the Loans, without premium or penalty,
provided that (i) the Company may not prepay any portion of any Loan as to
which an election for a continuation of or a conversion to a Fixed Rate
Loan is pending pursuant to Section 2.7, and (ii) unless earlier payment is
required under this Agreement, any Fixed Rate Loan may only be prepaid on
the last day of the then-current Eurodollar Interest Period or Negotiated
Interest Period, as the case may be, with respect to such Loan.
(c) Exceeding Borrowing Base. If at any time the aggregate outstanding
principal amount of the Revolving Credit Loans plus the Letter of Credit
Advances shall exceed the then-existing Borrowing Base, the Company shall
forthwith pay to the Bank an amount not less than the amount of such excess
for application to the outstanding principal amount of the Revolving Credit
Loans.
3.2 Interest Payments. The Company shall pay interest to the Bank on the
unpaid principal amount of each Loan, for the period commencing on the date such
Loan is made until such
17
Loan is paid in full, on each Interest Payment Date and at maturity (whether at
stated maturity, by acceleration or otherwise), and thereafter on demand, at the
following rates per annum:
(a) With respect to Loans denominated in Dollars:
(i) During such periods that such Loan is a Floating Rate Loan,
the Floating Rate; and
(ii) During such periods that such Loan is a Eurodollar Rate
Loan, the Eurodollar Rate applicable to such Loan for each related
Eurodollar Interest Period.
(b) With respect to Loans denominated in any Agreed Currency, the
Negotiated Rate.
Notwithstanding the foregoing paragraphs (a) and (b), the Company shall pay
interest on demand at the Overdue Rate on the outstanding principal amount of
any Loan and any other amount payable by the Company hereunder (other than
interest) which is not paid in full when due (whether at stated maturity, by
acceleration, or otherwise) for the period commencing on the due date thereof
until the same is paid in full.
3.3 Payment Method. All payments to be made by the Company hereunder will
be made in Dollars and in immediately available funds to the Bank at its address
set forth in Section 7.2 not later than 1:00 p.m. Detroit time on the date on
which such payment shall become due. Payments received after 1:00 p.m. Detroit
time shall be deemed to be payments made prior to 1:00 p.m. Detroit time on the
next succeeding Business Day.
3.4 No Setoff or Deduction. All payments of principal and interest on the
Loans and other amounts payable by the Company hereunder shall be made by the
Company without setoff or counterclaim, and free and clear of, and without
deduction or withholding for, or on account of, any present or future taxes,
levies, imposts, duties, fees, assessments, or other charges of whatever nature,
imposed by any governmental authority, or by any department, agency, or other
political subdivision or taxing authority.
3.5 Payment on Non-Business Day; Payment Computations. Except as otherwise
provided in this Agreement to the contrary, whenever any installment of
principal of, or interest on, any Loan or any other amount due hereunder becomes
due and payable on a day which is not a Business Day, the maturity thereof shall
be extended to the next succeeding Business Day and, in the case of any
installment of principal, interest shall be payable thereon at the rate per
annum determined in accordance with this Agreement during such extension.
Computations of interest and other amounts due under this Agreement shall be
made on the basis of a year of 360 days for the actual number of days elapsed,
including the first day but excluding the last day of the relevant period.
18
3.6 Additional Costs.
(a) In the event that any applicable law, treaty, rule, or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline,
request or directive of any such authority (whether or not having the force
of law), shall (i) affect the basis of taxation of payments to the Bank of
any amounts payable by the Company under this Agreement (other than taxes
imposed on the overall net income of the Bank, by the jurisdiction, or by
any political subdivision or taxing authority of any such jurisdiction, in
which the Bank has its principal office), or (ii) shall impose, modify or
deem applicable any reserve, special deposit or similar requirement against
assets of, deposits with or for the account of, or credit extended by the
Bank, or (iii) shall impose any other condition with respect to this
Agreement, the Commitment, the Notes, or the Loans, and the result of any
of the foregoing is to increase the cost to the Bank of making, funding, or
maintaining any Fixed Rate Loan or to reduce the amount of any sum
receivable by the Bank thereon, then the Company shall pay to the Bank,
from time to time, upon request by the Bank, additional amounts sufficient
to compensate the Bank for such increased cost or reduced sum receivable to
the extent, in the case of any Fixed Rate Loan, the Bank is not compensated
therefor in the computation of the interest rate applicable to such Fixed
Rate Loan. A statement as to the amount of such increased cost or reduced
sum receivable, prepared in good faith and in reasonable detail by the Bank
and submitted by the Bank to the Company, shall be conclusive and binding
for all purposes absent manifest error in computation.
(b) In the event that any applicable law, treaty, rule, or regulation
(whether domestic or foreign) now or hereafter in effect and whether or not
presently applicable to the Bank, or any interpretation or administration
thereof by any governmental authority charged with the interpretation or
administration thereof, or compliance by the Bank with any guideline,
request, or directive of any such authority (whether or not having the
force of law), including any risk-based capital guidelines, affects or
would affect the amount of capital required or expected to be maintained by
the Bank (or any corporation controlling the Bank) and the Bank determines
that the amount of such capital is increased by or based upon the existence
of the Bank's obligations hereunder and such increase has the effect of
reducing the rate of return on the Bank's (or such controlling
corporation's) capital as a consequence of such obligations hereunder to a
level below that which the Bank (or such controlling corporation) could
have achieved but for such circumstances (taking into consideration its
policies with respect to capital adequacy) by an amount deemed by the Bank
to be material, then the Company shall pay to the Bank, from time to time,
upon request by the Bank, additional amounts sufficient to compensate the
Bank (or such controlling corporation) for any increase in the amount of
capital and reduced rate of return which the Bank reasonably determines to
be allocable to the existence of the Bank's obligations hereunder. A
statement as to the amount of such compensation, prepared in good faith and
in reasonable detail by the Bank and submitted by the Bank to the Company,
shall be conclusive and binding for all purposes absent manifest error in
computation.
19
3.7 Illegality and Impossibility. In the event that any applicable law,
treaty, rule, or regulation (whether domestic or foreign) now or hereafter in
effect and whether or not presently applicable to the Bank, or any
interpretation or administration thereof by any governmental authority charged
with the interpretation or administration thereof, or compliance by the Bank
with any guideline, request, or directive of such authority (whether or not
having the force of law), including without limitation exchange controls, shall
make it unlawful or impossible for the Bank to maintain any Fixed Rate Loan
under this Agreement, the Company shall upon receipt of notice thereof from the
Bank, repay in full the then-outstanding principal amount of each Fixed Rate
Loan so affected, together with all accrued interest thereon to the date of
payment and all amounts owing to the Bank under Section 3.8, (a) on the last day
of the then-current Eurodollar Interest Period or Negotiated Interest Period, as
the case may be, applicable to such Loan if the Bank may lawfully continue to
maintain such Loan to such day, or (b) immediately if the Bank may not continue
to maintain such Loan to such day.
3.8 Indemnification. If the Company makes any payment of principal with
respect to any Fixed Rate Loan on any other date than the last day of a
Eurodollar Interest Period or Negotiated Interest Period, as the case may be,
applicable thereto (whether pursuant to Section 3.1(c), Section 3.7, Section
6.2, or otherwise), or if the Company fails to borrow any Fixed Rate Loan after
notice has been given to the Bank in accordance with Section 2.4, or if the
Company fails to make any payment of principal or interest in respect of a Fixed
Rate Loan when due, the Company shall reimburse the Bank on demand for any
resulting loss or expense incurred by the Bank, including without limitation any
loss incurred in obtaining, liquidating, or employing deposits from third
parties, whether or not the Bank shall have funded or committed to fund such
Loan. A statement as to the amount of such loss or expense, prepared in good
faith and in reasonable detail by the Bank and submitted by the Bank to the
Company, shall be conclusive and binding for all purposes absent manifest error
in computation. Calculation of all amounts payable to the Bank under this
Section 3.8 shall be made as though the Bank shall have actually funded or
committed to fund the relevant Fixed Rate Loan through the purchase of an
underlying deposit in an amount equal to the amount of such Loan and having a
maturity comparable to the related Eurodollar Interest Period or Negotiated
Interest Period, as the case may be; provided, however, that the Bank may fund
any Fixed Rate Loan in any manner it sees fit and the foregoing assumption shall
be utilized only for the purpose of calculating amounts payable under this
Section 3.8.
3.9 Letter of Credit Reimbursement Payments.
(a) The Company agrees to pay to the Bank, on the day on which the
Bank shall honor a draft or other demand for payment presented or made
under any Letter of Credit, an amount equal to the amount paid by the Bank
in respect of such draft or other demand under such Letter of Credit and
all expenses paid or incurred by the Bank relative thereto. Unless the
Company shall have made such payment to the Bank on such day, upon each
such payment by the Bank, the Bank shall be deemed to have disbursed to the
Company, and the Company shall be deemed to have elected to satisfy its
reimbursement obligation by, a Revolving Credit Loan bearing interest at
the Floating Rate in an amount equal to the amount so paid by the Bank in
respect of such draft or other demand under such Letter of Credit.
20
Such Revolving Credit Loan shall be disbursed notwithstanding any failure
to satisfy any conditions for disbursement of any Loan set forth in Article
II and, to the extent of the Revolving Credit Loan so disbursed, the
reimbursement obligation of the Company under this Section 3.9 shall be
deemed satisfied.
(b) The reimbursement obligation of the Company under this Section 3.9
shall be absolute, unconditional, and irrevocable and shall remain in full
force and effect until all obligations of the Company to the Bank hereunder
shall have been satisfied, and such obligations of the Company shall not be
affected, modified, or impaired upon the happening of any event, including
without limitation any of the following, whether or not with notice to, or
the consent of, the Company:
(i) Any lack of validity or enforceability of any Letter of
Credit or any documentation relating to any Letter of Credit or to any
transaction related in any way to such Letter of Credit (the "Letter
of Credit Documents");
(ii) Any amendment, modification, waiver, consent, or any
substitution, exchange or release of or failure to perfect any
interest in collateral or security, with respect to any of the Letter
of Credit Documents;
(iii) The existence of any claim, setoff, defense or other right
which the Company may have at any time against any beneficiary or any
transferee of any Letter of Credit (or any persons or entities for
whom any such beneficiary or any such transferee may be acting), the
Bank or any other person or entity, whether in connection with any of
the Letter of Credit Documents, the transactions contemplated herein
or therein or any unrelated transactions.
(iv) Any draft or other statement or document presented under any
Letter of Credit proving to be forged, fraudulent, invalid, or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(v) Payment by the Bank to the beneficiary under any Letter of
Credit against presentation of documents which do not comply with the
terms of the Letter of Credit, including failure of any documents to
bear any reference or adequate reference to such Letter of Credit;
(vi) Any failure, omission, delay, or lack on the part of the
Bank or any party to any of the Letter of Credit Documents to enforce,
assert, or exercise any right, power, or remedy conferred upon the
Bank or any such party under this Agreement or any of the Letter of
Credit Documents, or any other acts or omissions on the part of the
Bank or any such party;
(vii) Any other event or circumstance that would, in the absence
of this clause, result in the release or discharge by operation of law
or otherwise of the
21
Company from the performance or observance of any obligation, covenant
or agreement contained in this Section 3.9.
No setoff, counterclaim, reduction, or diminution of any obligation or any
defense of any kind or nature which the Company has or may have against the
beneficiary of any Letter of Credit shall be available hereunder to the Company
against the Bank. Nothing in this Section 3.9 shall impair the rights of the
Company set forth in Section 7.5(b).
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
The Company represents and warrants that:
4.1 Corporate Existence and Power. Each of the Company and the Guarantor is
a corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation, and is duly qualified to do business, and is
in good standing, in all additional jurisdictions where such qualification is
necessary under applicable law. Each of the Company and the Guarantor has all
requisite corporate power to own or lease the properties used in its business
and to carry on its business as now being conducted and as proposed to be
conducted, and to execute and deliver this Agreement, the Notes, and the
Security Documents to which it is a party and to engage in the transactions
contemplated by this Agreement.
4.2 Corporate Authority. The execution, delivery, and performance by the
Company and the Guarantor of this Agreement, the Notes, and the Security
Documents to which it is a party have been duly authorized by all necessary
corporate action and are not in contravention of any law, rule, or regulation,
or any judgment, decree, writ, injunction, order or award of any arbitrator,
court, or governmental authority, or of the terms of the Company's or the
Guarantor's respective articles of incorporation or by-laws, or of any contract
or undertaking to which the Company or the Guarantor is a party or by which the
Company or the Guarantor or their respective property may be bound or affected,
or result in the imposition of any Lien on the Company or its property except
for Permitted Liens.
4.3 Binding Effect. This Agreement is, and the Notes and the Security
Documents to which the Company or the Guarantor is a party when delivered
hereunder will be, legal, valid, and binding obligations of the Company and the
Guarantor, respectively, enforceable against the Company and the Guarantor,
respectively, in accordance with their respective terms.
4.4 Subsidiaries. The Company has no Subsidiaries as of the date hereof
except for DAF Export Corporation, a Barbados corporation. Each such Subsidiary
and each corporation becoming a Subsidiary of the Company after the date hereof
is and will be a corporation duly organized, validly existing, and in good
standing under the laws of its jurisdiction of incorporation and is and will be
duly qualified to do business in each additional jurisdiction where such
qualification is or may be necessary under applicable law. Each Subsidiary of
the Company has and will have all requisite corporate power to own or lease the
properties used in its business and to carry on its
22
business as now being conducted and as proposed to be conducted. All outstanding
shares of capital stock of each class of each Subsidiary of the Company have
been and will be validly issued and are and will be fully paid and nonassessable
and are and will be owned, beneficially and of record, by the Company or another
Subsidiary of the Company, free and clear of any Liens.
4.5 Litigation. There is no action, suit, or proceeding pending or, to the
best of the Company's knowledge, threatened against or affecting the Company
before or by any court, governmental authority, or arbitrator, which if
adversely decided might result, either individually or collectively, in any
material adverse change in the business, properties, operations, or condition,
financial or otherwise, of the Company or in any material adverse effect on the
legality, validity, or enforceability of this Agreement, any Note, or any
Security Document and, to the best of the Company's knowledge, there is no basis
for any such action, suit, or proceeding.
4.6 Financial Condition. The consolidated balance sheet of the Company and
its Subsidiaries and the related consolidated statements of income, retained
earnings and changes in financial position of the Company and its Subsidiaries
for the fiscal year ended July 3, 1999, and reported on by Arthur Andersen &
Co., independent certified public accountants, and the interim consolidated
balance sheet and related interim consolidated statements of income, retained
earnings and changes in financial position of the Company and its Subsidiaries,
as of or for the 1-month period ended on July 31, 1999, copies of which have
been furnished to the Bank, fairly present, and the financial statements of the
Company delivered pursuant to Section 5.1(d) will fairly present, the
consolidated financial position of the Company and its Subsidiaries as at the
respective dates thereof, and the results of operations of the Company and its
Subsidiaries for the respective periods indicated, all in accordance with
generally accepted accounting principles consistently applied (subject, in the
case of said interim statements, to year-end audit adjustments). There has been
no material adverse change in the business, properties, operations or condition,
financial or otherwise, of the Company and its Subsidiaries since July 3, 1999.
There is no material Contingent Liability of the Company that is not reflected
in such financial statements or in the notes thereto.
4.7 Use of Loans. The Company will use the Loans for its general corporate
purposes. Neither the Company nor any Subsidiary extends or maintains, in the
ordinary course of business, credit for the purpose, whether immediate,
incidental, or ultimate, of buying or carrying margin stock (within the meaning
of Regulation U of the Board of Governors of the Federal Reserve System), and no
part of the proceeds of any Loan will be used for the purpose, whether
immediate, incidental, or ultimate, of buying or carrying any such margin stock
or maintaining or extending credit to others for such purpose. After applying
the proceeds of each Loan, such margin stock will not constitute more than 25%
of the value of the assets (either of the Company alone or of the Company and
its Subsidiaries on a consolidated basis) that are subject to any provisions of
this Agreement or any Security Document that may cause the Loans to be deemed
secured, directly or indirectly, by margin stock.
4.8 Consents, Etc. No consent, approval or authorization of or declaration,
registration or filing with any governmental authority or any nongovernmental
person or entity, including without limitation any creditor, lessor, or
stockholder of the Company, is required on the part of the
23
Company in connection with the execution, delivery and performance of this
Agreement, the Notes, the Security Documents, or the transactions contemplated
hereby or as a condition to the legality, validity or enforceability of this
Agreement, the Notes, or any of the Security Documents.
4.9 Taxes. The Company and its Subsidiaries have filed all tax returns
(federal, state and local) required to be filed and have paid all taxes shown
thereon to be due, including interest and penalties, or have established
adequate financial reserves on their respective books and records for payment
thereof. Neither the Company nor any Subsidiary knows of any actual or proposed
tax assessment or any basis therefor, and no extension of time for the
assessment of deficiencies in any federal or state tax has been granted by the
Company or any Subsidiary.
4.10 Title to Properties. Except as otherwise disclosed in the latest
balance sheet delivered pursuant to Section 4.6 or 5.1(d) of this Agreement, the
Company or one of its Subsidiaries has good and marketable fee simple title to
all of the real property, and a valid and indefeasible ownership interest in all
of the other properties and assets (including without limitation the collateral
subject to the Security Agreement) reflected in said balance sheet or
subsequently acquired by the Company or any Subsidiary. All of such properties
and assets are free and clear of any Lien, except for Permitted Liens.
4.11 ERISA. The Company, its Subsidiaries, their ERISA Affiliates, and
their respective Plans are in compliance in all material respects with those
provisions of ERISA and of the Code which are applicable with respect to any
Plan. No Prohibited Transaction and no Reportable Event has occurred with
respect to any such Plan. None of the Company, any of its Subsidiaries, or any
of their ERISA Affiliates is an employer with respect to any Multiemployer Plan.
The Company, its Subsidiaries, and their ERISA Affiliates have met the minimum
funding requirements under ERISA and the Code with respect to each of their
respective Plans, if any, and have not incurred any liability to the PBGC or any
Plan. The execution, delivery and performance of this Agreement, the Notes, and
the Security Documents does not constitute a Prohibited Transaction. There is no
material unfunded benefit liability, determined in accordance with Section
4001(a)(18) of ERISA, with respect to any Plan of the Company, its Subsidiaries,
or their ERISA Affiliates.
4.12 Disclosure. No report or other information furnished in writing or on
behalf of the Company or the Guarantor to the Bank in connection with the
negotiation or administration of this Agreement contains any material
misstatement of fact or omits to state any material fact or any fact necessary
to make the statements contained therein not misleading. Neither this Agreement,
the Notes, the Security Documents, nor any other document, certificate, or
report or statement or other information furnished to the Bank by or on behalf
of the Company in connection with the transactions contemplated hereby contains
any untrue statement of a material fact or omits to state a material fact in
order to make the statements contained herein and therein not misleading.
24
ARTICLE 5
COVENANTS
5.1 Affirmative Covenants. The Company covenants and agrees that, until the
Termination Date and thereafter until payment in full of the principal of and
accrued interest on the Notes and the performance of all other obligations of
the Company under this Agreement, unless the Bank shall otherwise consent in
writing, it shall, and shall cause each of its Subsidiaries to:
(a) Preservation of Corporate Existence, Etc. Do or cause to be done
all things necessary to preserve, renew and keep in full force and effect
its legal existence, and its qualification as a foreign corporation in good
standing in each jurisdiction in which such qualification is necessary
under applicable law, and the rights, licenses, permits, franchises,
patents, copyrights, trademarks, and trade names material to the conduct of
its businesses; and defend all of the foregoing against all claims,
actions, demands, suits, or proceedings at law or in equity or by or before
any governmental instrumentality or other agency or regulatory authority.
(b) Compliance with Laws, Etc. Comply in all material respects with
all applicable laws, rules, regulations, and orders of any governmental
authority, whether federal, state, local or foreign, in effect from time to
time; and pay and discharge promptly when due all taxes, assessments, and
governmental charges or levies imposed upon it or upon its income,
revenues, or property, before the same shall become delinquent or in
default, except to the extent that payment of any of the foregoing is then
being contested in good faith by appropriate legal proceedings and with
respect to which adequate financial reserves have been established on the
books and records of the Company or the appropriate Subsidiary.
(c) Maintenance of Properties; Insurance. Maintain, preserve, and
protect all property that is material to the conduct of the business of the
Company or any of its Subsidiaries and keep such property in good repair,
working order and condition; and, in addition to that insurance required
under the Security Documents, maintain in full force and effect insurance
with responsible and reputable insurance companies or associations in such
amounts, on such terms, and covering such risks, including fire and other
risks insured against by extended coverage and public liability insurance,
as is usually carried by companies engaged in similar businesses and owning
similar properties similarly situated.
(d) Reporting Requirements. Furnish to the Bank the following:
(i) Promptly and in any event within three calendar days after
becoming aware of the occurrence of any Event of Default or any event
or condition which, with notice or lapse of time, or both, would
constitute an Event of Default, together with a statement of the chief
financial officer of the Company setting forth details of such Event
of Default or such event or condition and the action which the Company
25
or the appropriate Subsidiary, as the case may be, has taken and
proposes to take with respect thereto;
(ii) As soon as available and in any event within 20 days after
the end of each month, the consolidated balance sheet of the Company
and its Subsidiaries as of the end of such month, and the related
consolidated statements of income, retained earnings and cash flow for
the period commencing at the end of the previous fiscal year and
ending with the end of such month, setting forth in each case in
comparative form the corresponding figures for the corresponding date
or period of the preceding fiscal year, all in reasonable detail and
duly certified (subject to year-end audit adjustments) by the chief
financial officer of the Company as having been prepared in accordance
with generally accepted accounting principles, together with a
certificate of the chief financial officer of the Company stating (A)
that no Event of Default or event or condition which, with notice or
lapse of time, or both, would constitute an Event of Default, has
occurred and is continuing or, if an Event of Default or such an event
or condition has occurred and is continuing, a statement setting forth
the details thereof and the action which the Company has taken and
proposes to take with respect thereto, and (B) that a computation
(which computation shall accompany such certificate and shall be in
reasonable detail) showing compliance with Sections 5.2(a), (b), (c),
and (d) hereof is in conformity with the terms of this Agreement;
(iii) As soon as available and in any event within 90 days after
the end of each fiscal year of the Company, a copy of the consolidated
balance sheet of the Company and its Subsidiaries as of the end of
such fiscal year and the related consolidated statements of income,
retained earnings and changes in financial position of the Company and
its Subsidiaries for such fiscal year, with a customary audit report
of Arthur Andersen & Co., or other independent certified public
accountants selected by the Company and acceptable to the Bank,
without qualifications unacceptable to the Bank, together with a
certificate of such accountants stating (A) that they have reviewed
this Agreement and stating further whether, in the course of their
review of such financial statements, they have become aware of any
Event of Default or any event or condition which, with notice or lapse
of time, or both, would constitute an Event of Default, and, if such
an Event of Default or such an event or condition then exists and is
continuing, a statement setting forth the nature and status thereof,
and (B) that a computation by the Company (which computation shall
accompany such certificate and shall be in reasonable detail) showing
compliance with Sections 5.2 (a), (b), (c), and (d) hereof is in
conformity with the terms of this Agreement;
(iv) As soon as available and in any event within 20 days after
the end of each month, a list of all accounts receivable of the
Company, aged from the date of invoice, and a list of inventory then
held by the Company, categorized as raw materials, work-in-process,
and finished goods, and valued at the lower of cost or
26
market, each certified as true and correct by the chief financial
officer of the Company;
(v) As soon as available and in any event no later than 20 days
after the last day of each month, a Borrowing Base Certificate
prepared as of the close of business on the last day of such month,
together with supporting schedules, in form and detail satisfactory to
the Bank, setting forth such information as the Bank may request with
respect to the aging, value, location and other information relating
to the computation of the Borrowing Base and the eligibility of any
property or assets included in such computation, certified as true and
correct by the chief financial officer of the Company;
(vi) Promptly, such other information respecting the business,
properties, operations or condition, financial or otherwise, of the
Company or any of it Subsidiaries as the Bank may from time to time
reasonably request.
(e) Accounting; Access to Records, Books, Etc. Maintain a system of
accounting established and administered in accordance with sound business
practices to permit preparation of financial statements in accordance with
generally accepted accounting principles and to comply with the
requirements of this Agreement and, at any reasonable time and from time to
time; and
(f) Further Assurances. Execute and deliver, and will cause the
Guarantor to, execute and deliver within 30 days after request therefor by
the Bank, all further instruments and documents and take all further action
that may be necessary or desirable, or that the Bank may request, in order
to give effect to, and to aid in the exercise and enforcement of the rights
and remedies of the Bank under, this Agreement, the Notes, and the Security
Documents.
5.2 Negative Covenants. Until the Termination Date and thereafter until
payment in full of the principal of and accrued interest on the Notes and the
performance of all other obligations of the Company under this Agreement, the
Company agrees that, unless the Bank shall otherwise consent in writing, it
shall not, and shall not permit any of its Subsidiaries to:
(a) Debt to EBITDA Ratio. Permit or suffer the ratio of (i)
consolidated Indebtedness of the Company and its Subsidiaries as of the end
of each fiscal quarter to (ii) consolidated EBITDA of the Company and its
Subsidiaries for the preceding four fiscal quarters then ended to be
greater than 4.0 to 1.0 at any time from and including the Effective Date
until June 30, 2000, after which time, it shall not be greater than 3.5 to
1.0.
(b) Tangible Net Worth. Permit or suffer the consolidated Tangible Net
Worth of the Company and its Subsidiaries to be less than the sum of (i)
$13,000,000 plus (ii) 75% of consolidated Cumulative Net Income of the
Company and its Subsidiaries for each fiscal year of the Company ending
after the Effective Date.
27
(c) Fixed Charge Ratio. Permit or suffer the Fixed Charge Ratio to be
greater than 1.5 to 1.0 at any time from and including the Effective Date.
(d) Capital Expenditures. Make any capital expenditures during any
fiscal year of the Company, the aggregate amount of which exceeds
$2,000,000.
(e) Indebtedness. Create, incur, assume, or in any manner become
liable in respect of, or suffer to exist, any Indebtedness other than:
(i) The Loans;
(ii) Indebtedness to shareholders of the Company, which
Indebtedness shall be subordinated to the Indebtedness of the Bank and
shall be unsecured;
(iii) A lease of the Company's headquarters facility on
Winchester Circle in Boulder, Colorado, under terms disclosed to the
Bank, or other Indebtedness directly relating to the Company
purchasing such facility under terms disclosed to the Bank;
(iv) A lease of the Company's additional facility on Frontage
Road in Weld County, Colorado, under terms disclosed to the Bank, or
other Indebtedness directly relating to the Company purchasing such
facility under terms disclosed to the Bank;
(v) Indebtedness directly related to the Company purchasing a
former residence located adjacent to the Company's additional facility
on Frontage Road in Weld County, Colorado, under terms disclosed to
the Bank;
(vi) Indebtedness in the form of guaranties to third parties not
to exceed the maximum amount of $3,000,000 outstanding at any one
time; and
(vii) Indebtedness secured by fixed assets other than Eligible
Fixed Assets, not to exceed $50,000.
(f) Liens. Create, incur or suffer to exist any Lien on any of the
assets, rights, revenues or property, real, personal or mixed, tangible or
intangible, whether now owned or hereafter acquired, of the Company or any
of its Subsidiaries, other than:
(i) Liens for taxes not delinquent or for taxes being contested
in good faith by appropriate proceedings and as to which adequate
financial reserves have been established on its books and records;
(ii) Liens (other than any Lien imposed by ERISA) created and
maintained in the ordinary course of business which would not have a
material
28
adverse effect on the business or operations of the Company or any of
its Subsidiaries and which constitute (A) pledges or deposits under
worker's compensation laws, unemployment insurance laws or similar
legislation, (B) good faith deposits in connection with bids, tenders,
contracts or leases to which the Company or any of its Subsidiaries is
a party for a purpose other than borrowing money or obtaining credit,
including rent security deposits, (C) liens imposed by law, such as
those of carriers, warehousemen and mechanics, if payment of the
obligation secured thereby is not yet due, and (D) Liens securing
taxes, assessments, or other governmental charges or levies not yet
subject to penalties for nonpayment;
(iii) Liens created pursuant to the Security Documents and Liens
expressly permitted by the Security Documents;
(iv) Each Lien disclosed to the Bank in writing prior to the date
hereof may be suffered to exist upon the same terms as those existing
on the date hereof, but no extension or renewal thereof shall be
permitted;
(v) Any Lien created to secure payment of a portion of the
purchase price of, or existing at the time of acquisition of, the
Company's headquarters facility on I-25 Frontage Road in Longmont,
Colorado, may be created or suffered to exist on such fixed asset,
provided, that such Lien does not encumber any other asset at any time
owned by the Company, and provided, further, that not more than one
Lien shall encumber such facility at any one time;
(vi) Any Lien created to secure payment of a portion of the
purchase price of the Company's additional facility on Frontage Road
in Weld County, Colorado, may be created or suffered to exist on such
fixed asset, provided, that such Lien does not encumber any other
asset at any time owned by the Company, and provided, further, that
not more than one Lien shall encumber such facility at any one time;
(vii) Any Lien created to secure payment of a portion of the
purchase price of a former residence adjacent to the Company's
additional facility on Frontage Road in Weld County, Colorado, may be
created or suffered to exist on such fixed asset, provided, that such
Lien does not encumber any other asset at any time owned by the
Company, and provided, further, that not more than one Lien shall
encumber such facility at any one time;
(viii) Any Lien on tangible fixed assets other than Eligible
Fixed Assets securing Indebtedness permitted by Section 5.2(e)(vi);
and
(ix) Any Lien created to secure payment of a portion of the
purchase price of, or existing at the time of acquisition of, any
other tangible fixed asset acquired by the Company (other than
inventory and supplies) may be created or suffered to exist upon such
fixed asset if the aggregate principal amount of all Indebtedness
secured
29
by such Liens does not exceed $50,000, provided, that such Lien does
not encumber any other asset at any time owned by the Company, and
provided, further, that not more than one Lien shall encumber such
fixed asset at any one time.
(g) Merger; Purchase of Assets; Acquisitions; Etc. Purchase or
otherwise acquire, whether in one or a series of transactions, all or a
substantial portion of the business assets, rights, revenues, or property,
real, personal, or mixed, tangible or intangible, of any person, or all or
a substantial portion of the capital stock of or other ownership interest
in any other person; nor merge or consolidate or amalgamate with any other
person or take any other action having a similar effect, provided, however,
that this Section shall not prohibit any merger or acquisition if the
Company shall be the surviving or continuing corporation thereof and,
immediately after such merger or acquisition, no Event of Default shall
exist or shall have occurred and be continuing.
(h) Disposition of Assets; Etc. Sell, lease, license, transfer,
assign, or otherwise dispose of all or a substantial portion of its
business, assets, rights, revenues, or property, real, personal, or mixed,
tangible or intangible, whether in one or a series of transactions, other
than inventory sold in the ordinary course of business upon customary
credit terms, sales of scrap or obsolete material or equipment, and other
sales of assets in the ordinary course of business not to exceed $100,000
during any calendar year.
(i) Investments. Make, permit, or suffer to exist any investment in
the stock or securities of, make loans or advances to, or make, permit, or
suffer to exist a liability to exist as guarantor, surety, or indemnitor
with respect to any indebtedness or other obligation of, any entity which
is not consolidated with the Company for financial reporting purposes
except for (i) loans to employees of the Company, provided that the
aggregate amount of such employee loans shall not exceed $75,000, and (ii)
investments in the stock or securities of any entity which is not
consolidated with the Company for financial reporting purposes which
investments are made solely with intangible assets of the Company.
ARTICLE 6
DEFAULT
6.1 Events of Default. The occurrence of any one of the following events or
conditions shall be deemed an "Event of Default" hereunder unless waived by the
Bank pursuant to Section 7.1:
(a) Nonpayment. The Company fails to pay when due any principal of any
of the Notes or fails to pay within five (5) days of when due any interest
due on any of the Notes or any fees or any other amount payable hereunder;
or
(b) Misrepresentation. Any representation or warranty made by the
Company in Article 4 or by the Company in any Security Document or any
other certificate, report, financial statement, or other document furnished
by or on behalf of the Company in
30
connection with this Agreement shall have been incorrect in any material
respect when made or deemed made; or
(c) Certain Covenants. The Company shall fail to perform or observe
any term, covenant or agreement contained in Article 5; or
(d) Other Defaults. The Company shall fail to perform or observe any
other term, covenant or agreement contained in this Agreement, and any such
failure shall remain unremedied for 20 calendar days after notice thereof
shall have been given to the Company by the Bank; or
(e) Cross Default. The Company or any of its Subsidiaries shall fail
to pay any part of the principal of, the premium, if any, or the interest
on, or any other payment of money due under, any of its Indebtedness (other
than Indebtedness hereunder), beyond any period of grace provided with
respect thereto, or if the Company or any of its Subsidiaries fails to
perform or observe any other term, covenant, or agreement contained in any
agreement, document, or instrument evidencing or securing any such
Indebtedness, or under which any such Indebtedness was issued or created,
beyond any period of grace provided with respect thereto if the effect of
such failure is to cause, or permit the holders of such Indebtedness (or a
trustee on behalf of such holders) to cause, any payment in respect of such
Indebtedness to become due prior to its due date; or
(f) Judgments. One or more judgments or orders for the payment of
money shall be rendered against the Company or any of its Subsidiaries, or
any other judgment or order (whether or not for the payment of money) shall
be rendered against or shall affect the Company which causes or could cause
a material adverse change in the business, properties, operations or
condition, financial or otherwise, of the Company or any of its
Subsidiaries or which does or could have a material adverse effect on the
legality, validity, or enforceability of this Agreement, the Notes, or any
Security Document, and either (i) such judgment or order shall have
remained unsatisfied and the Company or the Subsidiary shall not have taken
action necessary to stay enforcement thereof by reason of pending appeal or
otherwise, prior to the expiration of the applicable period of limitations
for taking such action or, if such action shall have been taken, a final
order denying such stay shall have been rendered, or (ii) enforcement
proceedings shall have been commenced by any creditor upon any such
judgment or order; or
(g) ERISA. The occurrence of a Reportable Event that results in or
could result in liability of the Company, any of its Subsidiaries or their
ERISA Affiliates to the PBGC or to any Plan and such Reportable Event is
not corrected within thirty (30) days after the occurrence thereof; or the
occurrence of any Reportable Event which could constitute grounds for
termination of any Plan of the Company, any of its Subsidiaries, or their
ERISA Affiliates by the PBGC or for the appointment by the appropriate
United States District Court of a trustee to administer any such Plan and
such Reportable Event is not corrected within thirty (30) days after the
occurrence thereof; or the filing by the Company, any of its
31
Subsidiaries, or any of their ERISA Affiliates of a notice of intent to
terminate a Plan or the institution of other proceedings to terminate a
Plan; or the Company, any of its Subsidiaries, or any of their ERISA
Affiliates shall fail to pay when due any liability to the PBGC or to a
Plan; or the PBGC shall have instituted proceedings to terminate, or to
cause a trustee to be appointed to administer, any Plan of the Company, any
of its Subsidiaries, or their ERISA Affiliates; or any person engages in a
Prohibited Transaction with respect to any Plan which results in or could
result in liability of the Company, any of its Subsidiaries, any of their
ERISA Affiliates, any Plan of the Company, any of its Subsidiaries, or
their ERISA Affiliates or fiduciary of any such Plan; or failure by the
Company, any of its Subsidiaries, or any of their ERISA Affiliates to make
a required installment or other payment to any Plan within the meaning of
Section 302(f) of ERISA or Section 412(n) of the Code that results in or
could result in liability of the Company, any of its Subsidiaries, or any
of their ERISA Affiliates to the PBGC or any Plan; or the withdrawal of the
Company, any of its Subsidiaries, or any of their ERISA Affiliates from a
Plan during a plan year in which it was a "substantial employer" as defined
in Section 4001(9a)(2) of ERISA; or the Company, any of its Subsidiaries,
or any of their ERISA Affiliates becomes an employer with respect to any
Multiemployer Plan without the Bank's prior written consent.
(h) Insolvency, Etc. The Company or any of its Subsidiaries shall be
dissolved or liquidated (or any judgment, order or decree therefor shall be
entered), or shall generally not pay its debts as they become due, or shall
admit in writing its inability to pay its debts generally, or shall make a
general assignment for the benefit of creditors, or shall institute, or
there shall be instituted against the Company or any of its Subsidiaries
any proceeding or case seeking to adjudicate it a bankrupt or insolvent or
seeking liquidation, winding up, reorganization, arrangement, adjustment,
protection, relief, or composition of it or its debts under any law
relating to bankruptcy, insolvency, or reorganization or relief or
protection of debtors, or seeking the entry of an order for relief, or the
appointment of a receiver, trustee, custodian, or other similar official
for it or for any substantial part of its assets, rights, revenues, or
property, and, if such proceeding is instituted against the Company or any
Subsidiary and is being contested by the Company or the Subsidiary in good
faith by appropriate proceedings, such proceeding shall remain undismissed
or unstayed for a period of 60 days; or the Company or any Subsidiary shall
take any action (corporate or other) to authorize or further any of the
actions described above in this subsection; or
(i) Security Documents. A default described in any Security Document
shall have occurred and be continuing beyond the period of grace, if any,
therein provided with respect thereto, or any material provision of any
Security Document shall at any time for any reason cease to be valid,
binding, and enforceable against any obligor thereunder, or the validity,
binding effect, or enforceability thereof shall be contested by any person,
or any obligor shall deny that it has any or further liability or
obligation thereunder; or
(j) Change of Control. There occurs any significant change in the
ownership of the Company.
32
6.2 Remedies.
(a) Upon the occurrence and during the continuance of any Event of
Default, the Bank may by notice to the Company (i) terminate the
Commitment, (ii) declare the outstanding principal of, and accrued interest
on, the Notes and all other amounts owing under this Agreement to be
immediately due and payable, whereupon the Commitment shall terminate
forthwith and all such amounts shall become immediately due and payable,
and (iii) demand immediate delivery of cash collateral, and the Company
agrees to deliver such cash collateral upon demand, in an amount equal to
the maximum amount that may be available to be drawn at any time prior to
the stated expiry of all outstanding Letters of Credit, provided that in
the case of any event or condition described in Section 6.1(h) with respect
to the Company, the Commitment shall automatically terminate forthwith and
all such amounts shall automatically become immediately due and payable
without notice; in all cases without demand, presentment, protest,
diligence, notice of dishonor, or other formality, all of which are
expressly waived.
(b) The Bank may, in addition to the remedies provided in Section
6.2(a), exercise and enforce any and all other rights and remedies
available to it, whether arising under this Agreement, the Notes, or any
Security Document or under applicable law, in any manner deemed appropriate
by the Bank, including suit in equity, action at law, or other appropriate
proceedings, whether for the specific performance (to the extent permitted
by law) of any covenant or agreement contained in this Agreement or in the
Notes, or any Security Document or in aid of exercising any power granted
in this Agreement, the Notes, or any Security Document.
(c) Upon the occurrence and during the continuance of any Event of
Default, the Bank may at any time and from time to time, without notice to
the Company (any requirement for such notice being expressly waived by the
Company) set off and apply against any and all of the obligations of the
Company now or hereafter existing under this Agreement any and all deposits
(general or special, time or demand, provisional or final) at any time held
and other indebtedness at any time owing by the Bank to or for the credit
or the account of the Company and any property of the Company from time to
time in possession of the Bank, irrespective of whether or not the Bank
shall have made any demand hereunder and although such obligations may be
contingent and unmatured. The Company grants to the Bank a lien on and
security interest in all such deposits, indebtedness, and property as
collateral security for the payment and performance of the Company's
obligations under this Agreement. The Bank's rights under this Section
6.2(c) are in addition to other rights and remedies (including without
limitation other rights of setoff) which the Bank may have.
33
ARTICLE 7
MISCELLANEOUS
7.1 Amendments, Etc. No amendment, modification, termination, or waiver of
any provision of this Agreement nor any consent to any departure therefrom shall
be effective unless the same shall be in writing and signed by the Bank. Any
such amendment, waiver, or consent shall be effective only in the specific
instance and for the specific purpose for which given.
7.2 Notices.
(a) Except as otherwise provided in Section 7.2(c), all notices and
other communications hereunder shall be in writing and shall be delivered
or sent to the Company at 9586 I-25 Frontage Rd., Longmont, Colorado 80504,
Attention: Treasurer, and to the Bank at 611 Woodward Avenue, Detroit,
Michigan 48226, Attention: Manager, Commercial Loans, or to any other
address as may be designated by the Company or the Bank by notice to the
other party. All notices and other communications shall be deemed to have
been given at the time of actual delivery thereof to such address, or if
sent by certified or registered mail, postage prepaid, to such address, on
the third day after the date of mailing, or, if sent by Federal Express or
other recognized overnight delivery service, prepaid, to such address, on
the Business Day following the date of deposit with such delivery service
prior to such service's next-day delivery deadline, provided, however, that
notices to the Bank shall not be effective until received.
(b) Notices by the Company to the Bank with respect to terminations or
reductions of the Commitment pursuant to Section 2.2, requests for Loans
and Letter of Credit Advances pursuant to Section 2.4, and requests for
continuations or conversions of Loans pursuant to Section 2.7 shall be
irrevocable and binding on the Company.
(c) Any notice to be given by the Company to the Bank pursuant to
Sections 2.4 or 2.7, and any notice to be given by the Bank hereunder, may
be given by telephone, and all such notices given by the Company must be
immediately confirmed in writing in the manner provided in Section 7.2(a).
Any such notice given by telephone shall be deemed effective upon its
receipt by the party to whom such notice is to be given.
7.3 No Waiver By Conduct; Remedies Cumulative. No course of dealing on the
part of the Bank, nor any delay or failure on the part of the Bank in exercising
any right, power, or privilege hereunder shall operate as a waiver of such
right, power, or privilege or otherwise prejudice the Bank's rights and remedies
hereunder; nor shall any single or partial exercise thereof preclude any further
exercise thereof or the exercise of any other right, power, or privilege. No
right or remedy conferred upon or reserved to the Bank under this Agreement, the
Notes, or any Security Document is intended to be exclusive of any other right
or remedy, and every right and remedy shall be cumulative and in addition to
every other right or remedy granted thereunder or now or hereafter existing
under any applicable law. Every right and remedy granted by this Agreement, the
Notes, or any Security Document or by applicable law to the Bank may be
exercised from time to time and
34
as often as may be deemed expedient by the Bank and, unless contrary to the
express provisions of this Agreement, the Notes, or any Security Document,
irrespective of the occurrence or continuance of any Default or Event of
Default.
7.4 Reliance on and Survival of Various Provisions. All terms, covenants,
agreements, representations, and warranties of the Company made herein or in any
Security Document or in any certificate, report, financial statement, or other
document furnished by or on behalf of the Company in connection with this
Agreement shall be deemed to be material and to have been relied upon by the
Bank, notwithstanding any investigation heretofore or hereafter made by the Bank
or on the Bank's behalf, and those covenants and agreements of the Company set
forth in Sections 3.6, 3.8, and 7.5 shall survive the repayment in full of the
Loans and the termination of the Commitment.
7.5 Expenses; Indemnification.
(a) The Company agrees to pay, or reimburse the Bank for the payment
of, on demand, the reasonable fees and expenses of counsel to the Bank,
including without limitation the fees and expenses of Messrs. Dickinson
Wright PLLC in connection with preparing, executing, delivering, and
administrating this Agreement, the Note, and the Security Documents and the
consummation of the transactions contemplated hereby, in connection with
advising the Bank as to its rights and responsibilities with respect
thereto, and in connection with any Default or Event of Default or any
amendments, waivers, or consents in connection therewith, and all
reasonable costs and expenses of the Bank (including reasonable fees and
expenses of counsel) in connection with any action or proceeding relating
to a court order, injunction, or other process or decree restraining or
seeking to restrain the Bank from paying any amount under, or otherwise
relating in any way to, any Letter of Credit, and any and all costs and
expenses which any of them may incur relative to any payment under any
Letter of Credit.
(b) The Company indemnifies and agrees to hold the Bank and its
respective officers, directors, employees, and agents, harmless from and
against any and all claims, damages, losses, liabilities, costs, or
expenses of any kind whatsoever which the Bank or any such person may incur
or which may be claimed against any of them by reason of or in connection
with any Letter of Credit, and neither the Bank or any of its respective
officers, directors, employees, or agents shall be liable or responsible
for: (i) the use which may be made of any Letter of Credit or for any acts
or omissions of any beneficiary in connection therewith; (ii) the validity,
sufficiency, or genuineness of documents or of any endorsement thereon,
even if such documents should in fact prove to be in any or all respects
invalid, insufficient, fraudulent, or forged; (iii) payment by the Bank to
the beneficiary under any Letter of Credit against presentation of
documents which do not comply with the terms of any Letter of Credit,
including failure of any documents to bear any reference or adequate
reference to such Letter of Credit; (iv) any error, omission, interruption,
or delay in transmission, dispatch, or delivery of any message or advice,
however transmitted, in connection with any Letter of Credit; or (v) any
other event or circumstance whatsoever arising in connection with any
Letter of Credit; provided, however, that the Company shall
35
not be required to indemnify the Bank and such other persons, and the Bank
shall be liable to the Company to the extent, but only to the extent, of
any direct, as opposed to consequential or incidental, damages suffered by
the Company which were caused by (A) the Bank's wrongful dishonor of any
Letter of Credit after the presentation to it by the beneficiary thereunder
of a draft or other demand for payment and other documentation strictly
complying with the terms of such Letter of Credit, or (B) the Bank's
payment to the beneficiary under any Letter of Credit against presentation
of documents which do not comply with the terms of the Letter of Credit to
the extent, but only to the extent, that such payment constitutes gross
negligence or willful misconduct of the Bank. It is understood that, in
making any payment under a Letter of Credit, the Bank will rely on
documents presented to it under such Letter of Credit as to any and all
matters set forth therein without further investigation and regardless of
any notice or information to the contrary, and such reliance and payment
against documents presented under a Letter of Credit substantially
complying with the terms thereof shall not be deemed gross negligence or
willful misconduct of the Bank in connection with such payment. It is
further acknowledged and agreed that the Company may have rights against
the beneficiary or others in connection with any Letter of Credit with
respect to which the Bank is alleged to be liable and it shall be a
precondition of asserting any liability of the Bank under this Section that
the Company shall first have exhausted all remedies in respect of the
alleged loss against such beneficiary and any other parties obligated or
liable in connection with such Letter of Credit and any related
transactions.
7.6 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, provided that the Company may not, without the prior consent of the
Bank, assign its rights or obligations hereunder or under any Note or any
Security Document and the Bank shall not be obligated to make any Loan hereunder
to any entity other than the Company.
7.7 Counterparts. This Agreement may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Agreement by signing
any such counterpart.
7.8 Governing Law. This Agreement is a contract made under, and shall be
governed by and construed in accordance with, the law of the State of Michigan
applicable to contracts made and to be performed entirely within such State and
without giving effect to choice of law principles of such State.
7.9 Table of Contents and Headings. The table of contents and the headings
of the various subdivisions hereof are for the convenience of reference only and
shall in no way modify any of the terms or provisions hereof.
7.10 Construction of Certain Provisions. If any provision of this Agreement
refers to any action to be taken by any person, or which such person is
prohibited from taking, such provision
36
shall be applicable whether such action is taken directly or indirectly by such
person, whether or not expressly specified in such provision.
7.11 Integration and Severability. This Agreement embodies the entire
agreement and understanding between the Company and the Bank, and supersedes all
prior agreements and understandings, relating to the subject matter hereof. In
case any one or more of the obligations of the Company under this Agreement, any
Note, or any Security Document shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
obligations of the Company shall not in any way be affected or impaired thereby,
and such invalidity, illegality, or unenforceability in one jurisdiction shall
not affect the validity, legality, or enforceability of the Company's
obligations under this Agreement, the Notes, or any Security Document in any
other jurisdiction.
7.12 Interest Rate Limitation. Notwithstanding any provisions of this
Agreement, any Note, or any Security Document, in no event shall the amount of
interest paid or agreed to be paid by the Company exceed an amount computed at
the highest rate of interest permissible under applicable law. If, from any
circumstances whatsoever, fulfillment of any provision of this Agreement, any
Note, or any Security Document at the time performance of such provision shall
be due, shall involve exceeding the interest rate limitation validly prescribed
by law which a court of competent jurisdiction may deem applicable hereto, then,
ipso facto, the obligations to be fulfilled shall be reduced to an amount
computed at the highest rate of interest permissible under applicable law. If
for any reason whatsoever the Bank shall ever receive as interest an amount
which would be deemed unlawful under applicable law, such interest shall be
automatically applied to the payment of principal of the Loans outstanding
hereunder (whether or not then due and payable) and not to the payment of
interest, or shall be refunded to the Company if such principal and all other
obligations of the Company to the Bank have been paid in full.
7.13 Waiver of Jury Trial. The Bank and the Company, after consulting or
having had the opportunity to consult with counsel, knowingly, voluntarily, and
intentionally waive any right either of them may have to a trial by jury in any
litigation based upon or arising out of this Agreement or any related instrument
or agreement or any of the transactions contemplated by this Agreement or any
course of conduct, dealing, statements (whether oral or written), or actions of
either of them. Neither the Bank nor the Company shall seek to consolidate, by
counterclaim or otherwise, any such action in which a jury trial has been waived
with any other action in which a jury trial cannot be or has not been waived.
These provisions shall not be deemed to have been modified in any respect or
relinquished by either the Bank or the Company except by a written instrument
executed by both of them.
37
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written (the "Effective Date").
APPLIED FILMS CORPORATION
By: /s/ Larry D. Firestone
Its: Treasurer
BANK ONE, MICHIGAN
By: /s/ William C. Goodhue
William C. Goodhue
Its: Vice President
::ODMA\PCDOCS\GRR\345476\1
38
EXHIBIT A
REVOLVING CREDIT NOTE
$11,500,000 September ___, 1999
Detroit, Michigan
FOR VALUE RECEIVED, the undersigned, APPLIED FILMS CORPORATION, a Colorado
corporation (the "Company"), promises to pay to the order of BANK ONE, MICHIGAN,
a Michigan banking corporation, of Detroit, Michigan (the "Bank"), at the
principal banking office of the Bank in lawful money of the United States of
America and in immediately available funds, the principal sum of Eleven Million
Five Hundred Thousand Dollars ($11,500,000), or such lesser amount as is noted
in the books and records of the Bank, on the Termination Date; and to pay
interest on the unpaid principal balance hereof from time to time outstanding,
in like money and funds, for the period from the date hereof until the Revolving
Credit Loans shall be paid in full, at the rates per annum and on dates provided
in the Credit Agreement referred to below.
This Note evidences one or more Revolving Credit Loans made under an
Amended and Restated Credit Agreement dated as of even date herewith (as amended
or modified from time to time, the "Credit Agreement"), between the Company and
the Bank, to which reference is made for a statement of the circumstances under
which this Note is subject to prepayment and under which its due date may be
accelerated. Capitalized terms used but not defined in this Note shall have the
respective meanings assigned to them in the Credit Agreement.
The Bank is authorized by the Company to note in its records the date,
amount and type of each Loan, the interest rate and duration of the related
Eurodollar Interest Period or Negotiated Interest Period (if applicable), the
amount of each payment or prepayment of principal thereon, and the other
information provided for in such records, which records shall constitute prima
facie evidence of the information so noted, provided that the Bank's failure to
make any such notation shall not relieve the Company of its obligation to repay
the outstanding principal amount of this Note, all accrued interest hereon, and
any amount payable with respect thereto in accordance with this Note and the
Credit Agreement.
This Note is issued in substitution for the Revolving Credit Note dated
March 27, 1998, in the principal amount of $11,500,000, previously issued by the
Company to the Bank pursuant to the Agreement (the "Prior Note"). This Note
shall evidence, and the Company promises to pay, in addition to the principal
amount outstanding hereunder and all interest thereon accrued, all accrued and
unpaid interest on the Prior Note.
The Company and each endorser or guarantor hereof waives demand,
presentment, protest, diligence, notice of dishonor and any other formality in
connection with this Note. Should the indebtedness evidenced by this Note or any
part thereof be collected in any proceeding or be placed
A-1
in the hands of attorneys for collection, the Company agrees to pay, in addition
to the principal and interest payable hereon, all costs of collecting this Note,
including attorneys' fees and expenses.
APPLIED FILMS CORPORATION
By: ________________________
Its: ___________________
A-2
EXHIBIT B
REQUEST FOR ADVANCE
(date)
Bank One, Michigan
611 Woodward Avenue
Detroit, Michigan 48226
Attention: William C. Goodhue
Applied Films Corporation, a Colorado corporation (the "Company"), requests
a [Letter of Credit Advance] [Revolving Credit Loan] pursuant to Section 2.4 of
the Amended and Restated Credit Agreement, dated as of September __, 1999 (as
amended, the "Credit Agreement"), between the Company and the Bank, in the
amount of [$__________/______ Agreed Currency], to be issued on _____________,
and to be evidenced by the Company's Revolving Credit Note. Capitalized terms
used but not defined herein shall have the respective meanings assigned to them
in the Credit Agreement.
Such Revolving Credit Loan shall be made as a [insert either Eurodollar
Rate Loan, a Floating Rate Loan, or a Negotiated Rate Loan] [and the initial
Interest Period, if the requested Advance is a [Eurodollar Rate Loan /
Negotiated Rate Loan], shall be [insert permitted Eurodollar Interest Period /
Negotiated Interest Period]].
Such Letter of Credit Advance shall be made by the Bank issuing its Letter
of Credit for the account of the Company in the maximum amount of
$_______________ to and for the benefit of ___________________ with a stated
expiry date of _________________, and containing the further terms and
conditions set forth in the attached letter of credit application to the Bank.
In support of this request, the Company represents and warrants to the Bank
that:
A. The representations and warranties contained in Article IV of the Credit
Agreement are true and correct on and as of the date hereof, and will be true
and correct on the date such Advance is made (both before and after such Advance
is made), as if such representations and warranties were made on and as of such
dates.
B. No Event of Default, and no event or condition which might become such
an Event of Default with notice or with lapse of time, or both, has occurred and
is continuing or will exist on the date of such Advance is made (whether before
or after such Advance is made).
B-1
Accepting the proceeds of the Advance by the Company shall constitute a
further representation and warranty that the representations and warranties made
herein are true and correct at the time the proceeds are disbursed.
APPLIED FILMS CORPORATION
By: ______________________________
Its: ___________________________
B-2
EXHIBIT C
REQUEST FOR CONTINUATION OR CONVERSION OF LOAN
(date)
Bank One, Michigan
611 Woodward Avenue
Detroit, Michigan 48226
Attention: _________________
The undersigned (the "Company") requests that [$_______/_______ Agreed
Currency] of the principal amount of the Revolving Credit Loan originally made
on _______________, which Loan is currently a [Floating Rate Loan / Eurodollar
Rate Loan / Negotiated Rate Loan], be continued as or converted to, as the case
may be, a [insert type of Loan requested based on type of interest rate desired]
on ______________. [If such Loan is requested to be converted to a Eurodollar
Rate Loan, the Company elects a Eurodollar Interest Period for such Loan of
[insert permitted Eurodollar Interest Period].] Capitalized terms used but not
defined herein shall have the respective meanings assigned to them in the
Amended and Restated Credit Agreement dated as of September ___, 1999 (as
amended, the "Credit Agreement"), between the Company and Bank One, Michigan.
In support of this request, the Company certifies that:
A. The representations and warranties contained in Article IV of the Credit
Agreement are true and correct on and as of the date hereof, and will be true
and correct on the date of the continuation or conversion of such Loan, as if
such representations and warranties were made on and as of such dates.
B. No Event of Default has occurred and is continuing or will exist on the
date of the continuation or conversion of such Loan.
C. Acceptance of the continuation or conversion of such Loan by the Company
shall be deemed to be a further representation that the representations made
herein are true and correct at the time such proceeds are disbursed.
APPLIED FILMS CORPORATION
By: _______________________________
Its: _________________________
C-1
EXHIBIT D
BORROWING BASE CERTIFICATE
(date)
Bank One, Michigan
611 Woodward Avenue
Detroit, Michigan 48226
Attention: William C. Goodhue
Reference is made to the Amended and Restated Credit Agreement, dated as of
September ___, 1999 (as amended, the "Credit Agreement"), between Applied Films
Corporation, a Colorado corporation (the "Company"), and Bank One, Michigan, a
Michigan banking corporation (the "Bank"). Capitalized terms used but not
defined herein shall have the respective meanings assigned to them in the Credit
Agreement.
The Company represents and warrants to the Bank that the following
computations of the Borrowing Base, and the related supporting schedules
attached hereto, are true and correct as of the close of business on
_____________, 19___, and conform with the terms of the Credit Agreement:
Borrowing Base
1. (1) Eligible Accounts Receivable.........................$________
(b) 85% of Eligible Accounts Receivable..................$________
2. (a) Value of Eligible Inventory..........................$________
(b) 40% of Value of Eligible Inventory...................$________
(c) Maximum Eligible Inventory Value....................$4,000,000
3. (a) Fair Market Value of Eligible Fixed Assets...........$________
(b) 60% of Eligible Fixed Assets.........................$________
D-1
4. Borrowing Base - (1(b), plus the lesser of 2(b) and 2(c),
plus 3(b))....................................................$________
5. Aggregate outstanding principal amount of Revolving Credit
Loans plus Letter of Credit Advances..........................$________
6. 4 minus 5 - if negative, remit difference to the Bank
under Section 3.1(c) of the Credit Agreement..................$________
The Company further represents and warrants to the Bank that as of the
close of business on _________________:
1. The representations and warranties contained in Article IV of the
Credit Agreement and in the Security Agreement are true and correct on and
as of such date, as if such representations and warranties were made on and
as of such date. For purposes of this certificate, the representations and
warranties contained in Section 4.6 of the Credit Agreement shall be deemed
made with respect to both the financial statements referred to therein and
the most recent financial statements delivered pursuant to Section 5.1(d)
of the Credit Agreement.
2. No Event of Default or event or condition which might become an
Event of Default with notice or lapse of time, or both, has occurred and is
continuing.
APPLIED FILMS CORPORATION
By: ____________________________
Its: ________________________
D-2
EXHIBIT E
CONFIRMATION OF SECURITY AGREEMENT
In connection with the Amended and Restated Credit Agreement dated as of
September __, 1999 (as it may be amended or modified from time to time, the
"Credit Agreement"), between Applied Films Corporation, a Colorado corporation
(the "Company"), and Bank One, Michigan, a Michigan banking corporation (the
"Bank"), the Company confirms to the Bank the continuing effect of the Security
Agreement, dated June 30, 1994, as security for the payment of all debt now or
hereafter owing by the Company to the Bank, including without limitation the
debt arising under the Credit Agreement.
IN WITNESS WHEREOF, the undersigned has duly executed this Confirmation on
___________________, 1999.
APPLIED FILMS CORPORATION
By: ___________________________
Its: _______________________
E-1
Exhibit 11.1
APPLIED FILMS CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
July 3, 1999
BASIC EARNINGS PER SHARE
Net income (loss) $(224)
Weighted average number of common shares outstanding 3,478
Basic earnings per share $(0.06)
DILUTED EARNINGS PER SHARE
Net income (loss) $(224)
Shares Outstanding:
Weighted average number of common shares outstanding 3,478
Assuming exercise of stock options 441
Assuming repurchase of treasury stock (441)
Net incremental shares 0
Weighted average number of common shares outstanding, as adjusted 3,478
Diluted earnings per share $(0.06)
::ODMA\PCDOCS\GRR\346310\1
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Form 10-K
and to the incorporation of our report into the Company's previously filed
Registration Statement File Numbers 333-47951, 333-47967 and 333-51175.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Denver, Colorado
September 24, 1999
::ODMA\PCDOCS\GRR\346312\1