<PAGE> 1
As filed with the Securities and Exchange Commission on October 24, 1997
Registration No. 333-35331
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
APPLIED FILMS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
COLORADO 3674 84-1311581
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) NO.)
</TABLE>
6797 WINCHESTER CIRCLE
BOULDER, COLORADO 80301
(303) 530-1411
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CECIL VAN ALSBURG
6797 WINCHESTER CIRCLE
BOULDER, COLORADO 80301
(303) 530-1411
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
WILLIAM J. LAWRENCE III JAMES C. T. LINFIELD
VARNUM, RIDDERING, SCHMIDT & HOWLETT LLP COOLEY GODWARD LLP
333 BRIDGE ST., N.W. 2595 CANYON BLVD., SUITE 250
GRAND RAPIDS, MI 49504 BOULDER, CO 80302
(616) 336-6000 (303) 546-4000
</TABLE>
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION DATED OCTOBER 24, 1997
PROSPECTUS
1,900,000 Shares
APPLIED FILMS CORPORATION LOGO
Common Stock
------------------------
Of the 1,900,000 shares of Common Stock offered hereby, 500,000 are being
sold by Applied Films Corporation ("Applied Films" or the "Company") and
1,400,000 are being sold by Donnelly Corporation ("Donnelly"). See "Principal
and Selling Shareholders." The Company will not receive any of the proceeds from
the sale of shares by Donnelly. Prior to this offering, there has been no public
market for the Common Stock of the Company. It is currently anticipated that the
initial public offering price will be between $9.50 and $11.50 per share. See
"Underwriting" for information relating to the determination of the initial
public offering price. The Common Stock has been approved for quotation on the
Nasdaq National Market under the symbol "AFCO."
------------------------
THESE SECURITIES INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 5 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS(1) COMPANY SHAREHOLDERS(2)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
- -------------------------------------------------------------------------------------------------------------------------
Total(3)..................... $ $ $ $
=========================================================================================================================
</TABLE>
(1) The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses of the offering payable by Donnelly estimated at
$450,000.
(3) The Company and certain shareholders (together with Donnelly, the "Selling
Shareholders") have granted the Underwriters a 30-day option to purchase up
to an additional 285,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If all such shares are
purchased, the total Price to Public, Underwriting Discounts and
Commissions, Proceeds to Company and Proceeds to Selling Shareholders will
be $ , $ , $ , and $ respectively.
------------------------
The shares of Common Stock offered by this Prospectus are offered by the
several Underwriters, subject to prior sale, when, as and if delivered to and
accepted by them, subject to the right of the Underwriters to reject any order
in whole or in part. It is expected that delivery of the shares of Common Stock
will be made at the offices of Needham & Company, Inc., New York, New York, on
or about , 1997.
------------------------
NEEDHAM & COMPANY, INC. D.A. DAVIDSON & CO.
The date of this Prospectus is , 1997
<PAGE> 3
[Photos of sputtering line production control room and end products of
customers]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK OF THE
COMPANY, INCLUDING ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and financial statements, including notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Applied Films is a leader in thin film technology for the flat panel
display ("FPD") industry. The Company supplies thin film coated glass for use in
lower information content displays, primarily liquid crystal displays ("LCDs"),
and more recently began selling thin film coating equipment to manufacturers of
both lower and higher information content displays. 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 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. Stanford
Resources estimates that the worldwide market for FPDs will grow from
approximately $12.0 billion in 1996 to $26.9 billion in 2002.
Most FPDs require optically transparent, electrically conductive thin films
coated on 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. Applied Films
believes it possesses proprietary technology and process know-how to effectively
address these demands, both in its thin film coated glass business and its
coating equipment business.
The Company believes it is the leading worldwide supplier of thin film
coated glass for TN LCDs, and it has smaller but increasing sales of thin film
coated glass for STN LCDs. TN LCDs are most commonly used for simple displays
such as those found on watches and calculators. STN LCDs are typically larger
displays with higher information content and are used for applications such as
displays for cellular telephones and certain portable computers. 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. See "Business -- Strategy."
The coating of thin films onto glass for higher information content FPDs
involves a number of intermediate process steps, and is therefore more suitably
performed in-house by display manufacturers. To address this opportunity, the
Company has recently begun offering its thin film coating equipment to
manufacturers of higher-end FPDs such as plasma display panels ("PDPs"), as well
as manufacturers of LCDs. The Company believes 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 systems to others. Since entering the coating equipment
business in fiscal 1997, the Company has sold four systems with an aggregate
purchase price of approximately $17.6 million. As of September 27, 1997, the
Company's backlog from such system sales was approximately $12.7 million.
The Company believes that its technology and process know-how position it
to supply the emerging PDP market. The market for PDPs is expected to grow
rapidly. Stanford Resources' tabulation of announced investments indicates that
$4.0 billion to $8.0 billion will be invested in PDP manufacturing facilities
during the next five years. Applied Films has recently 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.
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. Donnelly has made a
strategic decision to focus on its core automotive business and as a result has
decided to divest its ownership position in the Company.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company.................. 500,000
Common Stock Offered by Donnelly..................... 1,400,000
Common Stock Outstanding after the Offering.......... 3,299,998(1)
Use of Proceeds to the Company....................... To repay indebtedness incurred for investment
in new production capacity and working capital
Nasdaq National Market Symbol........................ AFCO
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
----------------------------------------------------- -----------------------------
JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net sales............... $42,650 $29,765 $30,990 $21,738 $34,050 $6,279 $11,251
Gross profit............ 7,651 4,484 6,702 2,720 6,698 1,044 2,450
Operating income
(loss)............... 1,370 (79) 2,190 (478) 2,953 308 1,134
Net income (loss)....... 1,134 (201) 1,102 (1,078) 1,621 47 659
Primary and fully
diluted net income
(loss) per common
share................ $ 0.40 $ (0.07) $ 0.39 $ (0.38) $ 0.56 $ 0.02 $ 0.22
Weighted average common
shares outstanding... 2,853 2,853 2,853 2,849 2,917 2,853 2,978
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
------------------------
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
BALANCE SHEET DATA
Working capital........................................... $ 2,554 $ 4,437
Total assets.............................................. 23,924 25,807
Long term debt, net of current portion.................... 5,128 2,128
Total shareholders' equity................................ 7,405 12,288
</TABLE>
- -------------------------
(1) Based on the number of shares outstanding as of September 27, 1997. Excludes
379,645 shares of Common Stock issuable upon exercise of stock options at a
weighted average exercise price of $3.77 per share outstanding as of
September 27, 1997. See "Management -- Stock Option and Purchase Plans."
(2) Adjusted to give effect to the sale of 500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$10.50 per share and the application of the net proceeds therefrom.
---------------------
Except as otherwise specified, all information in this Prospectus (i)
assumes no exercise of outstanding options to purchase Common Stock; and (ii)
assumes no exercise of the Underwriters' over-allotment option. See
"Underwriting."
The Company's principal facilities and executive offices are located at
6797 Winchester Circle, Boulder, Colorado 80301, and its telephone number is
303-530-1411. All trademarks or other service marks appearing in this Prospectus
are trademarks or registered trademarks of the respective companies that utilize
them.
4
<PAGE> 6
RISK FACTORS
An investment in the shares of Common Stock being offered hereby involves a
high degree of risk. In addition to the other information in this Prospectus,
potential purchasers should consider carefully the following risk factors in
evaluating the Company, its business, and the shares of Common Stock offered
hereby. This Prospectus contains certain forward-looking statements concerning
certain aspects of the business of the Company. When used in this Prospectus,
words such as "believe," "anticipate," "intend," "goal," "expect" and similar
expressions may identify forward-looking statements. Forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those contemplated in such forward-looking statements,
including, without limitation, those set forth in the following risk factors and
elsewhere in this Prospectus. Prospective investors are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date of this Prospectus. The Company undertakes no obligation to release
publicly any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of 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
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;
(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 "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. For example, prices for much of the Company's
TN thin film coated glass supplied to the LCD market declined by approximately
15% between January 1996 and June 1997. The Company is aware of plans by several
competitors to increase production capacity in 1997 and 1998. 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
5
<PAGE> 7
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. One such equipment
manufacturer, Balzers Process Systems/Leybold AG, is an investor in a Chinese
joint venture which produces 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 "Business --
Competition."
UNCERTAINTIES RELATED TO COATING EQUIPMENT BUSINESS
Until recently, the Company's business has been 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 systems. Sales of the Company's thin film systems
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 systems 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 is currently building systems for two such customers. Systems sales also
may be affected by changes in the market for different types of displays and
customers' decisions to begin internal production of glass coatings rather than
rely on an outside supplier such as the Company. The sales cycle of the
Company's thin film coating systems 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 systems. With respect to the development of
its systems 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 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 systems 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 "Business --
Competition."
INTERNATIONAL MARKETS
Sales to international customers represented approximately 84%, 82% and 83%
of the Company's gross sales in fiscal 1995, 1996 and 1997, respectively. The
Company's principal international markets are China (including Hong Kong),
Korea, Japan, Taiwan and the Netherlands. The Company believes that
international sales will continue to represent a significant portion of its
gross sales, and that 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
6
<PAGE> 8
potentially adverse tax consequences. 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 "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 "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 1997, approximately 13% and 87% 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. 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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview."
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.
Further, the Company operates on a "just-in-time" inventory basis in ordering
its glass and other materials and therefore maintains only limited inventories,
increasing the operating risks associated with supply interruptions. 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
"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 1998 which could
adversely affect fiscal 1998 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
7
<PAGE> 9
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 "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 "Business -- Products and Manufacturing." During fiscal
1997 less than 10% of the Company's coated glass revenues were derived from the
sale of coated glass used in higher information content FPDs. Due in part to
strong customer demand for thin film coated glass for lower information content
displays, the Company has to date directed most of its production capacity to
the TN coated glass which is presently used in such displays. While the Company
has recently made and is making investments in additional production capacity
for STN 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
"Business -- Strategy" and "-- 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 current rates or 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.
DEPENDENCE ON KEY CUSTOMERS; LIMITED NUMBER OF CUSTOMERS
The Company's ten largest customers accounted for, in the aggregate,
approximately 63%, 56% and 59% of the Company's gross sales in fiscal years
1995, 1996 and 1997, respectively. 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 systems 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 "Business -- Sales, Marketing, and Customers."
MANAGEMENT OF GROWTH
In order to support potential future growth, the Company will need to
expand its facilities, improve its productivity, add additional production
lines, enhance its management information systems and add additional
8
<PAGE> 10
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 "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 "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, Cecil Van Alsburg; Chief Operating Officer and
Executive Vice President, Thomas Edman; Vice President -- Research, John S.
Chapin; Vice President -- Engineering, C. Richard Condon; Vice President --
Operations -- Thin Film Coatings, Mark Auble; Vice President -- Sales and
Marketing, Graeme Hennessey; Chief Financial Officer, Thomas D. Schmidt;
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. Cecil Van Alsburg, the Company's President and Chief
Executive Officer, presently intends to transition day-to-day management
responsibility for the Company to Thomas Edman, the Company's current Chief
Operating Officer and Executive Vice President, over the next 18 months. 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 "Business -- Employees" and
"Management."
NEW FACILITY EXPANSION
The establishment of the Company's new manufacturing facility and the
development and implementation of additional production lines will entail risks
related to new production facilities and will require an investment of the
Company's capital. As part of its manufacturing expansion, the Company will need
to hire and train a substantial number of new manufacturing workers. The
availability of skilled and unskilled workers in the Denver metropolitan area,
the site of the Company's new manufacturing facility, is limited due to a
relatively low unemployment rate. There can be no assurance that the Company
will successfully develop improved processes, implement additional production
lines or successfully operate its new facility. There can be no assurance that
the Company will be able to successfully complete construction of its new
manufacturing facility on a timely basis or at all, or that such new facility
will result in greater manufacturing capacity or
9
<PAGE> 11
lower manufacturing costs than those currently experienced by the Company. The
Company will incur duplicate facilities and operating costs during its
transition from its existing manufacturing facility to its new manufacturing
facility. In addition, the Company will incur certain start-up expenses at the
new facility and may experience interruptions in production during such
transition. These factors will adversely affect the Company's fiscal 1998
operating results, and may adversely affect fiscal 1999 operating results.
Failure to open its new manufacturing facility and increase capacity on a timely
basis could damage customer relationships, cause lost opportunities and have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Use of Proceeds" and "Business -- Facilities."
SUBSTANTIAL CONTROL BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS
Upon completion of this offering, the Company's officers, directors and
their affiliates will retain voting control of approximately 42% of the
Company's Common Stock (38% if the underwriters' over-allotment option is
exercised in full). As a result, these shareholders, acting together, would be
able to influence the outcome of actions requiring shareholder approval, such as
the election of directors, amendments to the Company's articles of
incorporation, mergers and other actions by shareholders with respect to the
business and affairs of the Company. In addition, the voting power of these
shareholders under certain circumstances could have the effect of delaying or
preventing a change in control of the Company. See "Management," "Principal and
Selling Shareholders" and "Description of Capital Stock."
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 "Business -- Proprietary Rights."
ENVIRONMENTAL REGULATIONS
The Company uses hazardous chemicals in producing its products. As a
result, the Company is subject to a variety of local, state and federal
governmental regulations relating to the storage, discharge, handling, emission,
generation, manufacture and disposal of toxic or other hazardous substances used
to manufacture the Company's products. The failure to comply with current or
future regulations could result in the imposition of substantial fines on the
Company, suspension of production, alteration of its manufacturing processes or
cessation of operations.
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 "Business -- Products and
Manufacturing."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock and there can be no assurance that following this offering an
active trading market will develop or be maintained. The initial
10
<PAGE> 12
public offering price will be determined by negotiations among the Company, the
Selling Shareholders and the representatives of the underwriters and may not be
indicative of prices that will prevail in the trading market following this
offering. For a description of the factors considered in determining the initial
public offering price, see "Underwriting." In addition, the stock market has
historically experienced volatility which has particularly affected the market
prices of securities of many technology-based companies and which sometimes has
been unrelated to the operating performances of such companies. Factors such as
announcements of technological developments for products by the Company or its
competitors, fluctuations in foreign exchange rates, variations in the Company's
quarterly operating results, or general, economic or stock market conditions may
significantly impact the market price of the Common Stock after this offering.
Furthermore, any adverse changes in the market price of common stock of other
similar companies may adversely affect the market price of the Company's Common
Stock, irrespective of whether there has been any deterioration in the Company's
business, operating results, financial condition or prospects.
ANTITAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
The Company's Articles of Incorporation and Bylaws contain provisions which
may have the effect of delaying, deferring or preventing a change in control of
the Company, may discourage bids for the Common Stock at a premium over the
market price of the Common Stock and may adversely affect the market price of
the Common Stock and the voting and other rights of the holders of the Common
Stock. These provisions include, but are not limited to, a classified Board of
Directors, fair price provisions and the authority of the Board to issue up to
1,000,000 shares of preferred stock and to fix the price, rights, preferences,
privileges and restrictions, including voting rights, of those shares without
further vote or action by the Company's shareholders. The rights of the holders
of Common Stock will be subject to, and may be adversely affected by, the rights
of the holders of any preferred stock that may be issued in the future. The
Company has no present plans to issue shares of preferred stock. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the 1,900,000 shares of Common stock
offered hereby (2,185,000 shares of Common Stock if the underwriters'
over-allotment is exercised in full), will be freely tradable by persons other
than "affiliates" of the Company without restriction. The remaining 1,399,998
shares of Common Stock held by officers, directors and existing shareholders of
the Company (1,351,437 shares if the underwriters' over-allotment is exercised
in full) are subject to "lockup" agreements under which the holders of such
shares have agreed not to sell or otherwise dispose of any shares of Common
Stock without the prior written consent of Needham & Company, Inc., for a period
of 180 days after the date of this prospectus. Such shares of Common Stock will
be eligible for resale after the expiration of the lockup period, subject to the
provisions of Rule 144 under the Securities Act of 1933, as amended (the "Act").
In addition, the Company intends to file registration statements under the Act
covering the sale of 479,000 shares of Common Stock reserved for issuance under
the Company's 1993 Stock Option Plan, 1997 Stock Option Plan and the 1997
Employee Stock Purchase Plan. Shares acquired through the exercise of options by
parties to lockup agreements will be subject to such lockup agreements. Sales of
substantial amounts of the Common Stock in the public market, whether by
purchasers in the offering or other shareholders of the Company, or the
perception that such sales could occur, may adversely affect the market price of
the Common Stock and may also adversely affect the Company's ability to raise
capital in the future. See "Shares Eligible for Future Sale" and "Underwriting."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is expected to be substantially higher
than the net tangible book value per share of the Common Stock. Investors
purchasing shares of Common Stock in this offering will, therefore, incur
immediate and substantial dilution of $6.82 net tangible book value per share,
assuming an initial public offering price of $10.50 per share. To the extent
that stock options (currently outstanding or subsequently granted) to purchase
Common Stock are exercised, there will be further dilution. See "Dilution."
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 500,000 shares of
Common Stock offered hereby are estimated to be approximately $4.9 million ($7.2
million if the Underwriters' over-allotment option is exercised in full) at an
assumed initial public offering price of $10.50 per share and after deducting
underwriting discounts and commissions. The net proceeds to the Company will be
used to repay indebtedness incurred for investment in new production capacity
and working capital. As of September 27, 1997, the Company had $5.8 million
outstanding under its credit facility, which includes $3.0 million outstanding
under its revolving credit facility and $2.8 million outstanding under an
amortizing term loan. This credit facility matures on June 30, 2000 and bears
interest at variable rates indexed to the prime rate or federal funds rate,
whichever is greater, as announced by the Company's lender from time to time.
The prime rate is the rate announced by the lender as its prime rate. The
federal funds rate is generally the rate paid by the lender for overnight
borrowings from other banks. The rate actually paid by the Company under such
circumstances is based upon such rates but includes a factor which varies based
on the Company's earnings before interest, taxes, depreciation and amortization.
The Company can also elect to borrow at a rate indexed to the London or Nassau
Interbank deposit interest rates, although this option, as currently structured,
will not be available following completion of this offering. Repayment of
amounts outstanding under the line of credit will not reduce the total amount
available for borrowing under the line of credit. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition -- Liquidity and
Capital Resources" and Note 3 of the Notes to Consolidated Financial Statements.
The Company is currently evaluating the possibility of establishing a
manufacturing facility in Asia, potentially through a joint venture, and a
portion of the proceeds could be used for that purpose.
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Shareholders. See "Principal and Selling Shareholders."
Donnelly Corporation has agreed to pay the expenses of the offering estimated at
$450,000.
DIVIDEND POLICY
The Company currently intends to retain all future earnings for use in the
operation of its business and, therefore, it does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. In the future,
determinations to pay cash dividends will be at the discretion of the Company's
Board of Directors and will be dependent upon the Company's results of
operations and financial condition, credit, and loan agreements in effect at
that time, and other factors deemed relevant by the Board of Directors.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the actual total long-term debt and
capitalization of the Company as of September 27, 1997, and as adjusted to
reflect the sale by the Company of 500,000 shares of Common Stock at an assumed
initial public offering price of $10.50 per share and the application of net
proceeds therefrom:
<TABLE>
<CAPTION>
SEPTEMBER 27, 1997
-------------------------
ACTUAL AS ADJUSTED
------ -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, net of current portion(1)................... $ 5,128 $ 2,128
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 authorized; no
shares outstanding actual or as adjusted............... -- --
Common Stock, no par value, 10,000,000 shares authorized,
2,799,998 shares outstanding actual; 3,299,998 shares
outstanding as adjusted(2)............................. 4,245 9,128
Less common shares held by affiliate........................ (26) (26)
Deferred compensation(3).................................... (25) (25)
Retained earnings........................................... 3,211 3,211
------- -------
Total shareholders' equity................................ 7,405 12,288
------- -------
Total long-term debt and shareholders' equity............. $12,533 $14,416
======= =======
</TABLE>
- -------------------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Based on the number of shares outstanding as of September 27, 1997. Excludes
379,645 shares of Common Stock issuable upon exercise of stock options at a
weighted average exercise price of $3.77 per share outstanding as of
September 27, 1997. See "Management -- Stock Option and Purchase Plans" and
Note 5 of Notes to Consolidated Financial Statements.
(3) See Note 5 of Notes to Consolidated Financial Statements.
13
<PAGE> 15
DILUTION
The net tangible book value of the Company as of September 27, 1997, was
$7.3 million, or $2.59 per share. Net tangible book value per share is
determined by dividing the net tangible book value of the Company by the number
of shares of Common Stock outstanding. After giving effect to the sale by the
Company of 500,000 shares of Common Stock hereby at an assumed initial public
offering price of $10.50 per share and the application of the estimated net
proceeds therefrom, the net tangible book value of the Company as of September
27, 1997 would have been $12.1 million, or $3.68 per share. This represents an
immediate increase in net tangible book value of $1.09 per share to existing
shareholders and an immediate dilution of $6.82 per share to new investors. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $10.50
Net tangible book value per share before the offering..... $2.59
Increase attributable to new investors.................... 1.09
-----
Net tangible book value per share after the offering........ 3.68
------
Dilution per share to new investors(1)...................... $ 6.82
======
</TABLE>
The following table summarizes as of September 27, 1997, the difference
between the existing shareholders and new investors with respect to the number
of shares purchased from the Company, the total consideration paid and the
average price paid per share. This table assumes no exercise of outstanding
stock options. As of September 27, 1997, there were outstanding stock options to
purchase an aggregate of 379,645 shares of Common Stock at a weighted average
exercise price of $3.77 per share. See "Management -- Stock Option and Purchase
Plans."
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(2)................... 2,799,998 85% $3,658,000 41% $ 1.31
New investors(2)........................... 500,000 15 5,250,000 59 10.50
--------- --- ---------- ---
Total.................................... 3,299,998 100% $8,908,000 100%
========= === ========== ===
</TABLE>
- -------------------------
(1) Assumes no exercise of outstanding stock options. As of September 27, 1997,
there were outstanding stock options to purchase an aggregate of 379,645
shares of Common Stock of which options to purchase 200,111 shares of Common
Stock were currently exercisable at a weighted average exercise price of
$2.78 per share. If the options to purchase 200,111 shares of Common Stock
are considered, using the treasury stock method, investors would incur
additional dilution of $0.16 per share. See "Management -- Stock Option and
Purchase Plans."
(2) Does not reflect the sale of Common Stock by the Selling Shareholders. Sales
by the Selling Shareholders in this offering will reduce the number of
shares held by existing shareholders to 1,399,998 shares, or 42% (1,351,437
or 38% if the Underwriters' over-allotment option is exercised in full) of
the total number of shares of Common Stock outstanding after the offering,
and will increase the number of shares held by new investors to 1,900,000
shares, or 58% (2,185,000 or 62% if the Underwriters' over-allotment option
is exercised in full) of the total number of shares of Common Stock
outstanding after the offering. See "Principal and Selling Shareholders."
14
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
The following selected consolidated financial data with respect to the
Company's balance sheet data as of June 29, 1996, and June 28, 1997, and, with
respect to the Company's consolidated statement of operations data, for each of
the three years in the period ended June 28, 1997, have been derived from the
Company's consolidated financial statements, which have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in its report
included elsewhere herein. The consolidated balance sheet data as of July 3,
1993, July 2, 1994 and July 1, 1995 and the consolidated statement of operations
data for the years ended July 3, 1993, and July 2, 1994 have been derived from
audited consolidated financial statements not included herein. The consolidated
balance sheet data at September 27, 1997 and the consolidated statement of
operations data for the three months ended September 28, 1996 and September 27,
1997 are derived from unaudited financial statements which have been prepared on
the same basis as the audited financial statements, and, in the opinion of
management, contain all adjustments, consisting only of normal recurring
adjustments necessary for a fair presentation of the consolidated financial
position at such dates and the operating results for such periods. Operating
results for the three months ended September 27, 1997 are not necessarily
indicative of the results that may be expected for the year ending June 27,
1998. The selected financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
-------------------------------------------------------------- -----------------------------
JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1993 1994 1995 1996 1997 1996 1997
------- ------- ------- -------- -------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA
Net sales.................. $ 42,650 $ 29,765 $ 30,990 $ 21,738 $ 34,050 $6,279 $11,251
Cost of goods sold......... 34,999 25,281 24,288 19,018 27,352 5,235 8,801
---------- ---------- ---------- ---------- ---------- ------ -------
Gross profit............... 7,651 4,484 6,702 2,720 6,698 1,044 2,450
Operating expenses:
Selling, general and
administrative......... 5,381 3,487 3,502 2,233 2,996 544 986
Research and
development............ 900 1,076 1,010 965 749 192 330
---------- ---------- ---------- ---------- ---------- ------ -------
Operating income (loss).... 1,370 (79) 2,190 (478) 2,953 308 1,134
Interest income
(expense)................ (333) (599) (816) (780) (822) (251) (171)
Other income (expense)..... 530 370 224 (244) 95 7 24
---------- ---------- ---------- ---------- ---------- ------ -------
Income (loss) before income
taxes.................... 1,567 (308) 1,598 (1,502) 2,226 64 987
Income tax benefit
(provision).............. (433) 107 (496) 424 (605) (17) (328)
---------- ---------- ---------- ---------- ---------- ------ -------
Net income (loss).......... $ 1,134 $ (201) $ 1,102 $ (1,078) $ 1,621 $ 47 $ 659
========== ========== ========== ========== ========== ====== =======
Primary and fully diluted
net income (loss)
per share(1)............. $ 0.40 $ (0.07) $ 0.39 $ (0.38) $ 0.56 $ 0.02 $ 0.22
========== ========== ========== ========== ========== ====== =======
Weighted average number of
common and equivalent
shares outstanding(1).... 2,853 2,853 2,853 2,849 2,917 2,853 2,978
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SEPTEMBER 27, 1997
----------------------------------------------------- ----------------------
JULY 3, JULY 2, JULY 1, JUNE 29, JUNE 28, AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(2)
------- ------- ------- -------- -------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Working capital..................... $ 5,905 $ 7,077 $ 5,312 $ 6,232 $ 5,534 $ 2,554 $ 4,437
Total assets........................ 20,872 21,891 20,128 18,198 21,541 23,924 25,807
Long-term debt, net of current
portion........................... 9,797 9,992 7,464 8,501 6,448 5,128 2,128
Total shareholders' equity.......... 4,766 4,565 6,020 5,058 6,740 7,405 12,288
</TABLE>
- -------------------------
(1) See Note 2 of Notes to Consolidated Financial Statements.
(2) Adjusted to reflect the sale of 500,000 shares of Common Stock offered by
the Company hereby at an assumed initial public offering price of $10.50 per
share and the application of the net proceeds therefrom.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
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 Prospectus.
This Prospectus, 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
"Risk Factors" section of this Prospectus, which prospective purchasers of the
Common Stock offered hereby should consider carefully.
OVERVIEW
The Company was founded in Colorado as Applied Films Lab, 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 that time, the Company has maintained all of its manufacturing operations
in Boulder, Colorado. The significant decrease in net sales from fiscal 1993 to
fiscal 1994 was due primarily to the reduction in production capacity which
occurred with discontinuance of operations at the Michigan facility. In
addition, the Company's fiscal 1994 results were adversely affected by higher
administrative expenses charged by Donnelly.
The Company's sales historically have been derived primarily from the sale
of thin film coated glass to manufacturers of LCDs. Sales and related costs of
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. See "Risk Factors -- Fluctuations in Demand and Annual
and Quarterly Operating Results." 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 coated glass. The Company's ten largest customers for
coated glass accounted for, in the aggregate, approximately 63%, 56% and 59% of
gross sales in fiscal 1995, 1996 and 1997, respectively. Prices for much of the
Company's TN thin film coated glass supplied to the LCD market declined by
approximately 15% from January 1996 to June 1997. The Company expects continued
downward pressure on its selling prices, which will require continuing
improvements in manufacturing efficiencies and cost reductions. The Company
intends to continue its efforts to improve utilization of thin film coating
target materials, to achieve glass purchasing economies and to endeavor to
increase sales at a faster rate than manufacturing and selling, general and
administrative overhead.
The principal demand for thin film coated glass is by LCD manufacturers,
most of which are located in Asia. Sales to international customers represented
approximately 84%, 82% and 83% of the Company's gross sales in fiscal 1995, 1996
and 1997, 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 $3.8 million, $2.8 million and $4.4 million in fiscal 1995, 1996
and 1997, 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 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 $511,000, $1.6 million and
$4.6 million in fiscal 1995, 1996 and 1997, respectively. In
16
<PAGE> 18
addition, in the latter half of fiscal 1996 the Company instituted a policy
whereby it shortened payment terms on sales denominated in Japanese yen, thereby
reducing currency risk. At September 27, 1997, accounts receivable denominated
in yen were approximately $943,000 or approximately 16% of total accounts
receivable. The Company is generally paid by its customers for its yen
denominated sales within approximately 15 to 30 days of the date of sale. See
"Risk Factors -- International Markets."
During fiscal 1997, the Company began selling thin film coating equipment
to FPD manufacturers, which sales totaled $2.8 million. Net sales of thin film
coating systems 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. The lead time for
the sale of thin film coating equipment is generally six to twelve months. As of
September 27, 1997, the Company's backlog from systems sales was approximately
$12.7 million. The Company believes that sales of thin film coating equipment
will increase in the foreseeable future. The Company expects to achieve higher
gross profit margins for coating equipment sales compared to the sale of thin
film coated glass. To date, the Company has priced its coating equipment in U.S.
dollars. See "Risk Factors -- Uncertainties Related to Coating Equipment
Business."
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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------- ------------------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997 1996 1997
------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.......................... 78.4 87.5 80.3 83.4 78.2
----- ----- ----- ----- -----
Gross profit................................ 21.6 12.5 19.7 16.6 21.8
Operating expenses:
Selling, general & administrative......... 11.3 10.3 8.8 8.7 8.8
Research and development.................. 3.3 4.4 2.2 3.0 2.9
----- ----- ----- ----- -----
Operating income (loss)..................... 7.1 (2.2) 8.7 4.9 10.1
Interest income (expense)................... (2.6) (3.6) (2.4) (4.0) (1.3)
Other income (expense)...................... 0.7 (1.1) 0.3 0.1 0.2
----- ----- ----- ----- -----
Income (loss) before income taxes........... 5.2 (6.9) 6.5 1.0 8.8
Income tax benefit (provision).............. (1.6) 2.0 (1.8) (0.3) (2.9)
----- ----- ----- ----- -----
Net income (loss)........................... 3.6% (5.0)% 4.8% 0.7% 5.9%
===== ===== ===== ===== =====
</TABLE>
THREE MONTHS ENDED SEPTEMBER 27, 1997 COMPARED WITH THREE MONTHS ENDED SEPTEMBER
28, 1996
Net Sales. Net sales increased 79.2% to $11.3 million in the first three
months of fiscal 1998 from $6.3 million in the first three months of fiscal
1997. The increase was primarily due to additional sales of thin film coated
glass as well as increased sales of thin film coating equipment. Thin film
coated glass net sales increased to $9.2 million in the first three months of
fiscal 1998 from $6.2 million in the first three months of fiscal 1997. Thin
film equipment net sales increased to $2.1 million in the first three months of
fiscal 1998 from $109,000 in the first three months of fiscal 1997. The Company
believes that sales of thin film coating equipment will increase in the
foreseeable future.
Gross Profit. Gross profit increased to $2.5 million in the first three
months of fiscal 1998 from $1.0 million in the first three months of fiscal
1997. As a percentage of net sales, gross profit increased to 21.8% in the first
three months of fiscal 1998 from 16.6% in the first three months of fiscal 1997.
This improvement in the first three months of fiscal 1997 was due to operating
efficiencies that resulted from higher sales volume of thin film coated glass as
well as increased gross profit margins from the sale of thin film coating
equipment.
17
<PAGE> 19
Selling, General and Administrative. Selling, general and administrative
expenses increased 81.3% to $986,000 in the first three months of fiscal 1998
from $544,000 in the first three months of fiscal 1997. As a percentage of net
sales, selling, general and administrative expenses increased slightly to 8.8%
in the first three months of fiscal 1998 from 8.7% in the first three months of
fiscal 1997 due to additional salaries, recruiting and selling expenses.
Research and Development. Research and development expenses increased 71.9%
to $330,000 in the first three months of fiscal 1998 from $192,000 in the first
three months of fiscal 1997. The increase was primarily attributable to
increased staffing and other expenses relating to MgO and cathode development
projects. As a percentage of net sales, research and development expenses
decreased slightly to 2.9% in the first three months of fiscal 1998 versus 3.0%
in the first three months of fiscal 1997. The Company expects research and
development expenditures to increase in fiscal 1998 by approximately 50% to 75%
over fiscal 1997 levels, which increase will be funded primarily from
operations.
Interest Income (Expense). Interest expense decreased 31.9% to $171,000 in
the first three months of fiscal 1998 from $251,000 in the first three months of
fiscal 1997 due primarily to decreased long-term debt levels.
Other Income (Expense). Other income increased slightly to $24,000 in the
first three months of fiscal 1998 from $7,000 for the first three months of
fiscal 1997.
Income Tax Benefit (Provision). The Company's income tax provision was
$328,000 in the first three months of fiscal 1998 compared to $17,000 in the
first three months of fiscal 1997. The effective tax rate for the first three
months of fiscal 1998 was approximately 33% versus 27% during fiscal 1997. The
Company's effective tax rate for the first three months of fiscal 1997
benefitted from the use of net operating loss carryforwards. As of the end of
fiscal 1997, the Company had no remaining net operating loss carryforwards.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased 56.6% to $34.0 million in fiscal 1997 from
$21.7 million in fiscal 1996. This increase was primarily due to worldwide
recovery in demand for thin film coated glass in fiscal 1997 versus fiscal 1996.
The Company believes that the decline in volume in 1996 was due largely to an
excessive inventory buildup by LCD manufacturers as well as an overall decline
in demand for thin film coated glass. Net unit sales of the Company's thin film
coated glass increased significantly, offset partially by price decreases for
LCD coated glass. In addition, the Company's net sales in fiscal 1997 included
sales of thin film coating systems of $2.8 million; no such sales occurred in
fiscal 1996.
Gross Profit. Gross profit increased to $6.7 million in fiscal 1997 from
$2.7 million in fiscal 1996. As a percentage of net sales, gross profit
increased to 19.7% in fiscal 1997 from 12.5% in fiscal 1996. This improvement in
fiscal 1997 was due primarily to increased operating efficiencies that resulted
from higher sales volume of thin film coated glass offset by sales price
declines, which adversely affected net sales and gross profit by an estimated
$1.3 million. The improvement in gross margin was also attributable to the sale
of thin film coating systems in fiscal 1997, which generally carry a higher
gross profit margin than thin film coated glass.
Selling, General and Administrative. Selling, general and administrative
expenses increased 34.2% to $3.0 million in fiscal 1997 from $2.2 million in
fiscal 1996, primarily due to higher overall selling costs including higher
commissions on systems sales and increased recruiting costs. As a percentage of
net sales, selling, general and administrative expenses decreased to 8.8% in
fiscal 1997 from 10.3% in fiscal 1996 due to the substantial increase in net
sales in fiscal 1997 compared with fiscal 1996.
Research and Development. Research and development expenses decreased 22.4%
to $749,000 in fiscal 1997 from $965,000 in fiscal 1996. Research and
development expenditures consisted primarily of salaries, outside contractor
expenses and other expenses related to the Company's ongoing product development
efforts. As a percentage of net sales, research and development expenses
decreased to 2.2% in fiscal 1997 from 4.4% in fiscal 1996. The decrease was due
to a temporary reduction of research and development salaries and related
expenses, net of reimbursements for research contracts.
18
<PAGE> 20
Interest Income (Expense). Interest expense increased 5.4% to $822,000 in
fiscal 1997 from $780,000 in fiscal 1996. The increase was primarily
attributable to a $250,000 charge by Donnelly Corporation to guarantee $5.0
million of the Company's credit facility during fiscal 1997, offset partially by
lower debt levels; no similar charge was incurred in fiscal 1996.
Other Income (Expense). Other income (expense) increased to $95,000 in
fiscal 1997 from ($244,000) in fiscal 1996. This increase in other income
(expense) was due primarily to foreign exchange gains of approximately $96,000
in fiscal 1997 versus foreign exchange losses of ($286,000) in fiscal 1996. The
foreign exchange losses in fiscal 1996 were primarily due to differences in the
dollar/yen exchange rate between the dates of sale and the dates of related
payment.
Income Tax Benefit (Provision). The Company's effective federal income tax
rate for fiscal 1997 was 27.2% compared to a tax benefit of 28.2% in fiscal
1996. The Company's effective tax rate for fiscal 1997 differed from the federal
statutory rate primarily as a result of the use of a Foreign Sales Corporation
(see Note 6 of Notes to Consolidated Financial Statements) in 1997 and net
operating loss carryforwards. As of the end of fiscal 1997, the Company had no
remaining net operating loss carryforwards.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales decreased 30.0% to $21.7 million in fiscal 1996 from
$31.0 million in fiscal 1995. The Company believes that the decrease in fiscal
1996 versus fiscal 1995 was due largely to an excessive inventory buildup by LCD
manufacturers as well as an overall decline in demand for thin film coated
glass. To a lesser extent, net sales also were adversely affected by price
decreases.
Gross Profit. Gross profit decreased to $2.7 million in fiscal 1996 from
$6.7 million in fiscal 1995. As a percentage of net sales, gross profit
decreased to 12.5% in fiscal 1996 from 21.6% in fiscal 1995. The decrease was
attributable to decreased thin film coated glass sales and the inability to
reduce fixed manufacturing costs at the same rate as the sales decline.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 36.2% to $2.2 million in fiscal 1996 from $3.5 million in
fiscal 1995. As a percentage of net sales, selling, general and administrative
expenses decreased to 10.3% in fiscal 1996 from 11.3% in 1995. These decreases
were due primarily to the expiration of noncompete compensation expenses
($436,000 in fiscal 1995), and reductions in sales and commission expenses,
profit sharing and amortization of deferred compensation expenses during fiscal
1996 compared with fiscal 1995.
Research and Development. Research and development expenses decreased 4.5%
to $965,000 in fiscal 1996 from $1.0 million in fiscal 1995 due primarily to
salary and related cost reductions. As a percentage of net sales, research and
development expenses increased to 4.4% in fiscal 1996 from 3.3% in fiscal 1995
due primarily to the overall reduction in net sales.
Interest Income (Expense). Interest expense decreased 4.4% to $780,000 in
fiscal 1996 from $816,000 in fiscal 1995 due primarily to decreased interest
rates offset partially by increased long-term debt levels.
Other Income (Expense). Other income (expense) decreased to ($244,000) in
fiscal 1996 from $224,000 in fiscal 1995. The most significant change resulted
from a foreign exchange loss of ($286,000) in fiscal 1996 due to differences in
dollar/yen exchange rates.
Income Tax Benefit (Provision). The Company's effective tax rate in fiscal
1996 was a 28.2% benefit, compared to 31.0% in fiscal 1995. The Company's
effective income tax rate in fiscal 1996 differed from the federal statutory
rate primarily as a result of the Company's net operating losses. The 1995
effective tax rate differed from the federal statutory rates due primarily to
the benefit of a Foreign Sales Corporation. See Note 6 of Notes to Consolidated
Financial Statements.
19
<PAGE> 21
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth summary unaudited quarterly financial
information for the last nine 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 Prospectus 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 "Risk Factors -- Fluctuations in Demand
and Annual and Quarterly Operating Results."
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997 FISCAL 1998
--------------------------------- ---------------------------------- -----------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE SEPT.
1995 1995 1996 1996 1996 1996 1997 1997 1997
----- ---- ----- ---- ----- ---- ----- ---- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....................... $7,139 $4,656 $4,709 $5,234 $6,279 $7,806 $9,935 $10,030 $11,251
Cost of goods sold.............. 5,966 4,173 4,334 4,545 5,235 6,593 7,768 7,756 8,801
------ ------ ------ ------ ------ ------ ------ ------- -------
Gross profit.................... 1,173 483 375 689 1,044 1,213 2,167 2,274 2,450
Operating expenses:
Selling, general and
administrative.............. 695 582 552 404 544 642 923 887 986
Research and development...... 288 276 231 170 192 115 181 261 330
------ ------ ------ ------ ------ ------ ------ ------- -------
Operating income (loss)......... 190 (375) (408) 115 308 456 1,063 1,126 1,134
Interest income
(expense)..................... (177) (184) (235) (184) (251) (200) (191) (180) (171)
Other income (expense).......... (142) 14 (113) (3) 7 34 10 44 24
------ ------ ------ ------ ------ ------ ------ ------- -------
Income (loss) before income
taxes......................... (129) (545) (756) (72) 64 290 882 990 987
Income tax benefit
(provision)................... 37 154 214 19 (17) (79) (240) (269) (328)
------ ------ ------ ------ ------ ------ ------ ------- -------
Net income (loss)............... $ (92) $ (391) $ (542) $ (53) $ 47 $ 211 $ 642 $ 721 $ 659
====== ====== ====== ====== ====== ====== ====== ======= =======
</TABLE>
The following table sets forth the above unaudited information as a
percentage of net sales.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
FISCAL 1996 FISCAL 1997 FISCAL 1998
-------------------------------- -------------------------------- -----------
SEPT. DEC. MARCH JUNE SEPT. DEC. MARCH JUNE SEPT.
1995 1995 1996 1996 1996 1996 1997 1997 1997
----- ---- ----- ---- ----- ---- ----- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales......................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold................ 83.6 89.6 92.0 86.8 83.4 84.4 78.2 77.3 78.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit...................... 16.4 10.4 8.0 13.2 16.6 15.6 21.8 22.7 21.8
Operating expenses:
Selling, general and
administrative................ 9.7 12.5 11.7 7.7 8.7 8.2 9.3 8.8 8.8
Research and development........ 4.0 5.9 4.9 3.2 3.1 1.5 1.8 2.6 2.9
----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss)........... 2.7 (8.1) (8.7) 2.2 4.9 5.8 10.7 11.2 10.1
Interest income (expense)......... (2.5) (4.0) (5.0) (3.5) (4.0) (2.6) (1.9) (1.8) (1.5)
Other income (expense)............ (2.0) 0.3 (2.4) (0.0) 0.1 0.4 0.1 0.4 0.2
----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes........................... (1.8) (11.7) (16.1) (1.4) 1.0 3.7 8.9 9.9 8.8
Income tax benefit (provision).... 0.5 3.3 4.5 0.4 (0.3) (1.0) (2.4) (2.7) (2.9)
----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)............... (1.3)% (8.4)% (11.5)% (1.0)% 0.7% 2.7% 6.5% 7.2% 5.9%
===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The variation in quarterly sales during fiscal 1996 and fiscal 1997 was due
primarily to the reduction in worldwide demand for thin film coated glass which
began in the second quarter of fiscal 1996. Unit demand began to improve in the
fourth quarter of fiscal 1996 and has continued to improve through the first
quarter of fiscal 1998. In addition, during the first quarter of fiscal 1997,
the Company began recognizing revenue from
20
<PAGE> 22
its initial sales of thin film coating equipment. Sales from coating equipment
contributed $109,000 in the quarter ended September 1996, $564,000 in the
quarter ended December 1996, $1.6 million in the quarter ended March 1997,
$554,000 in the quarter ended June 1997, and $2.1 million in the quarter ended
September 1997.
The Company began to experience significant gross profit erosion during the
second quarter of fiscal 1996 due to the decrease in thin film coated glass
sales and the Company's inability to reduce fixed manufacturing costs at the
same rate as the sales decline. In particular, the Company's gross profit margin
in the third quarter of fiscal 1996 was adversely affected by higher production
costs. Gross profit margin improved during fiscal 1997 due to increased
efficiencies that resulted from higher sales volume of thin film coated glass
and process improvements. In addition, gross profit margin improved as a result
of the initial recognition of equipment sales which generally carry higher gross
profit margins than thin film coated glass. Gross profit margins declined in the
first quarter of fiscal 1998 compared to the last quarter of fiscal 1997 due to
lower gross profit margins on thin film coated glass which was caused primarily
by higher production costs, and offset partially by higher gross profit margins
for equipment sales.
Sales, general and administrative expenses decreased in absolute dollars
during the industry downturn in fiscal 1996 as the Company adjusted its expenses
to minimize its net loss during these quarters. As sales improved during fiscal
1997, these expenses increased accordingly. During the third quarter of fiscal
1997, these expenses were particularly high in part due to the commissions
related to the $1.6 million in systems sales recognized during the period.
Research and development expenses decreased during the downturn in fiscal 1996
as the Company reduced salary and related costs. These reductions continued
until after the Company returned to profitability in fiscal 1997. Other income
(expense) included significant foreign exchange losses in the first and third
quarters of fiscal 1996 due to differences in the dollar/yen exchange rate
between the dates of sales and related payments.
Because a significant portion of the Company's overhead is fixed, at least
in the short term, the Company's quarterly results of operations may be
materially adversely affected if sales decline for any reason.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its operations to date primarily through cash
generated from operations and borrowings. Net cash flows from operating
activities were $3.9 million, ($793,000) and $4.0 million in fiscal 1995, 1996
and 1997, respectively. The Company used cash of $1.7 million, $899,000 and $1.3
million for purchases of machinery and equipment (including construction in
progress) in fiscal 1995, 1996 and 1997, respectively. The Company used cash of
$2.5 million and $2.3 million in fiscal 1995 and 1997 to decrease its long-term
debt, while borrowing an additional $759,000 in fiscal 1996.
As of September 27, 1997, the Company had cash and cash equivalents of
approximately $939,000 and working capital of $2.6 million. As of September 27,
1997 accounts receivable were approximately $6.0 million. The Company's accounts
receivable have increased from $2.8 million as of June 29, 1996 primarily as a
result of increased sales. The Company has a $11.5 million credit facility with
a commercial bank which expires June 30, 2000. This facility includes a $3.0
million term note and an $8.5 million line of credit. Borrowings under this
facility accrue interest at variable rates indexed to the prime rate or federal
funds rate, whichever is greater, as announced by the Company's lender from time
to time. The prime rate is the rate announced by the lender as its prime rate.
The federal funds rate is generally the rate paid by the lender for overnight
borrowings from other banks. The rate actually paid by the Company under such
circumstances is based upon such rates but includes a factor which varies based
on the Company's earnings before interest, taxes, depreciation and amortization.
The Company can also elect to borrow at a rate indexed to the London or Nassau
Interbank deposit interest rates, although this option, as currently structured,
will not be available following completion of this offering. Of the Company's
credit facility, $5.0 million is guaranteed by Donnelly Corporation
("Donnelly"), for which the Company accrued an annual fee to Donnelly of
$250,000 in fiscal 1997. As of September 27, 1997, the Company had approximately
$5.8 million outstanding on its credit facility. The credit facility restricts
capital expenditures during any fiscal year to $4,500,000 and the
21
<PAGE> 23
Company's ability to incur additional indebtedness for borrowed money, with
certain limited exceptions. The Company's ability to pledge its assets is also
generally restricted. The credit facility also requires the Company to maintain
certain financial ratios to remain in compliance with the credit agreement,
including a ratio of debt to earnings before interest, taxes, depreciation and
amortization of not greater than 4 to 1 on a rolling four quarter basis and a
ratio of total liabilities to tangible net worth of no greater than 3.5 to 1,
and maintain a tangible net worth of at least $5.2 million plus 75% of net
annual income. Following completion of the offering, the Donnelly guaranty will
be released and the borrowing terms will be renegotiated. However, the Company
anticipates no material change in its borrowing capacity as a result of the
release of the guaranty, although the interest rates charged by the lender may
increase somewhat. Any increase in the interest rate will be partially or fully
offset by not having to pay the amount which Donnelly has charged the Company
for its guaranty. In addition, as of September 27, 1997, the Company had a
$357,000 secured note outstanding relating to its new Weld County, Colorado
facility. The Company expects to reduce a substantial portion of its debt
obligations with proceeds from this offering. The Company's principal capital
expenditures in recent years have consisted of improvements to its equipment and
facilities. These expenditures have been funded principally from operations and
through the credit facility. The Company expects its capital expenditures for
fiscal 1998 to include construction of a new thin film production system as well
as capital expenditures related to its new production facility in Weld County,
Colorado. Capital expenditures for fiscal 1998 are budgeted at $4.2 million.
The Company believes that the net proceeds from this offering, together
with funds generated from operations and borrowings available under its line of
credit and term loan will be sufficient to fund its operations and capital
expenditures for at least twelve months following completion of the offering.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENTS
The Company adopted Statement of Financial Accounting Standards No. 121,
Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed Of ("SFAS 121") effective June 30, 1996. SFAS 121 establishes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles and goodwill. Implementation of SFAS 121 had no
material effect on the Company's financial position or results of operation. The
Company adopted Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("SFAS 123") effective June 30, 1996. SFAS 123
defines a fair value based method of accounting for employee stock compensation,
including stock options. However, companies may continue to account for stock
compensation using the intrinsic-value-based method as prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
provide pro forma disclosures of net income and earnings per share assuming the
fair-value-based method had been applied. The Company elected to account for
stock compensation using the intrinsic-value-based method, and thus, SFAS 123
will not have any impact on reported operating results.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards 128 ("SFAS 128"), "Earnings Per Share." SFAS 128
is effective for fiscal years ending after December 15, 1997; early adoption is
not permitted. SFAS 128 replaces primary and fully diluted EPS with basic and
diluted earnings per share, respectively. Under SFAS 128, net income (loss) per
share for the periods presented would be as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
----------------------------- -----------------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997 1996 1997
------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Basic....................................... $0.39 $(0.38) $0.57 $0.02 $0.23
Diluted..................................... 0.39 (0.38) 0.56 0.02 0.22
</TABLE>
22
<PAGE> 24
BUSINESS
Applied Films is a leader in thin film technology for the flat panel
display ("FPD") industry. The Company supplies thin film coated glass for use in
lower information content displays, primarily liquid crystal displays ("LCDs")
and more recently began selling thin film coating equipment to manufacturers of
both lower and higher information content displays. 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 coating equipment business.
INDUSTRY BACKGROUND
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. Stanford
Resources estimates that the worldwide market for FPDs will grow from
approximately $12.0 billion in 1996 to $26.9 billion in 2002.
The FPD industry is driven by a number of technological and market forces,
including consumer demand for high performance, portable and power efficient
computers, the increasing volume of text, graphics and video information being
generated and displayed, and the growing amount of multimedia applications. In
response, FPDs are being made larger, thinner, and with greater display quality
and sophistication. In addition, FPD development cycles are becoming shorter and
competitive pressures to reduce costs are continuous.
Most FPDs require optically transparent, electrically conductive thin films
coated on substrates. These thin films transmit electrical power to picture
elements of the displays and allow light to pass to the viewer. The FPD trends
described above are placing increasing performance and other demands on the thin
film coated glass used in FPDs, particularly with regard to imperfections, which
must be fewer and smaller. As FPDs become larger and more information intensive,
it becomes more crucial to maintain the lack of pinholes in the film, the
absence of contamination on or under the film and the physical, chemical and
electrical uniformity, as well as the micro flatness of the substrate. In
addition, the substrate cleaning process becomes more critical, and handling of
the glass through the system must be more carefully controlled for quality.
APPLIED FILMS SOLUTION
Applied Films believes its thin film technological and process expertise
positions it to respond to the evolving demands of the FPD industry. The Company
supplies both thin film coated glass for use in lower information content
displays, as well as thin film coating equipment for manufacturers of both lower
and higher information content displays. Applied Films believes that through the
combination of its coated glass business and its coating equipment business, it
is able to address a broad array of the FPD market.
Thin Film Coated Glass. The Company believes it is the leading worldwide
supplier of thin film coated glass for TN LCDs, and it has smaller but
increasing sales of thin film coated glass for STN LCDs. TN LCDs are most
commonly used for simple displays such as those found in watches and
calculators. STN LCDs are typically larger displays with higher information
content and are used for applications such as displays for cellular phones and
certain portable computers. STN coated glass technology is more complex and
expensive than TN primarily because of more stringent coating thickness, surface
quality, and glass flatness specifications.
The Company's design, construction and operation of its own thin film
systems give it a significant cost advantage over its competitors, most of which
must purchase equipment from third parties. In addition, the Company's hands-on
operating experience enables it to make continuous process and system
improvements resulting in higher throughput, better yields, greater equipment up
time and more efficient target utilization. Further, Applied Films' expertise in
substrates, coating materials and glass preparation under cleanroom conditions,
as well as its development of reliable, cost effective conveyance systems
enabling movement of the glass at varied speeds in a controlled fashion, are
significant competitive factors for the Company. The Company has achieved
considerable improvements in manufacturing productivity over the last several
years
23
<PAGE> 25
and its new facility in Weld County, Colorado will enable it to add new coating
systems to meet growing demand.
Thin Film Coating Equipment. The coating of thin films onto glass for
higher information content FPDs involves a number of intermediate process steps,
and is therefore more suitably performed in-house by display manufacturers. To
address this opportunity, the Company has recently begun offering its thin film
coating systems to manufacturers of higher-end FPDs such as plasma display
panels ("PDPs") as well as manufacturers of LCDs. Since entering the coating
equipment business in fiscal 1997, the Company has sold four systems with an
aggregate purchase price of approximately $17.6 million. As of September 27,
1997, the Company's backlog from such system sales was approximately $12.7
million.
The Company's technological expertise and experience in designing and
manufacturing several generations of coating systems for its own use is
particularly relevant to its systems business. The Company believes it possesses
proprietary technology and know-how which enable it to effectively address the
advanced technical requirements of certain FPDs. In particular, Applied Films
has recently developed (and applied for patent protection for) a process which
materially increases the reactive sputtering speed of magnesium oxide ("MgO").
The Company believes this process may represent a significant competitive
advantage in the emerging market for thin film coating equipment for PDPs. In
addition, the Company has designed its system platforms to offer technical,
processing, and operational advantages to system users. See "-- Products and
Manufacturing--Thin Film Coating Equipment." The Company believes its
technological expertise will be of increasing importance to its systems business
as the technical requirements of FPDs continue to evolve.
In addition to its technological leadership, Applied Films' extensive
experience in operating its own thin film systems provides it with particular
advantages in selling coating systems to others. By continually refining its own
systems in a real operating environment, the Company has achieved significant
processing efficiencies and quality improvements. Moreover, the Company's
operational experience enables it to better understand and respond to customer
specific needs in the design and construction of the customer's system. The
Company is also able to provide customers useful production, training and
performance data from the Company's own production systems.
STRATEGY
The Company's objective is to be a leading provider of thin film solutions
to the FPD industry. 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 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
significant 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 four systems (at an average purchase price of $4.4 million
per system) for applications which include PDPs, electrochromic automotive
mirrors and STN 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.
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 coated glass business by (i) seeking
to be the low cost producer, by building its own coating systems and achieving
technology-based manufacturing efficiencies, (ii) leveraging the Company's
long-standing relationships with many of the world's key FPD
24
<PAGE> 26
customers, and (iii) pursuing strategic business relationships to expand the
Company's customer base and manufacturing capacity. For instance, the Company is
entering into a relationship with Nippon Sheet Glass Co., Ltd. ("NSG"), a major
Japanese glass manufacturer to supply much of the TN and low to medium density
STN coated glass needs of NSG's customers. The Company anticipates that an
agreement will be signed by NSG within thirty days. However, there can be no
assurance that NSG will sign the agreement and even if signed, the agreement
will not obligate NSG to purchase any minimum amount of coated glass from the
Company. This agreement will provide a framework for the sale by the Company of
its coated glass through NSG to NSG's customers. The Company believes that
pursuant to this agreement, it will provide a significant portion of NSG's
customers' coated glass needs. In addition, the Company is considering the
possibility of entering into an alliance to establish manufacturing capacity in
southeast Asia to better serve the needs of existing and prospective Asian
customers.
Supply Emerging Plasma Display Market. Applied Films intends to become a
leading supplier of thin film coating equipment to the emerging PDP market. Many
industry analysts anticipate that PDPs will be the predominant display for high
definition TV. Stanford Resources' tabulation of announced investments indicates
that, as a result, approximately $4.0 to $8.0 billion is scheduled for
investment in PDP manufacturing facilities during the next five years. 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")). Currently the only 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, and has filed a patent application on, a process which materially
increases the reactive sputtering speed of MgO, which the Company believes may
allow glass coatings to be applied at lower cost and with greater uniformity
than evaporation. The Company has delivered one pilot system to a Korean PDP
manufacturer for use in applying CrCuCr and is presently engaged in active
discussions with other prospective PDP customers.
TECHNOLOGY
The Company believes it is a leader in thin film technology. The Company's
thin film coating equipment enables the manufacturer of thin film coated glass,
whether the Company or an equipment customer, to apply very thin, transparent
layers of solid, inorganic thin film coatings to extremely clean glass in vacuum
chambers loaded in clean room conditions. The coatings applied by the Company
are deposited in microscopic thicknesses by physically bombarding (sputtering, a
form of physical vapor deposition) a cathode source coating material (a chemical
compound or element) with argon ions. Individual atoms and molecules of the
source material are separated from the source by bombardment to form a vapor
that condenses as a film onto the glass. The Company's technology of applying a
thin film coating to glass or other substrate enables the display to function as
a complex switch which controls light emission or transmission from each of the
thousands of segments or pixels that comprise an FPD. The Company's primary thin
film coated glass product is made by applying a thin layer of silicon dioxide
("SiO(2)") to prevent sodium in glass from negatively affecting the operation of
the display. After this coating is applied, ITO is applied to provide conductive
properties, permitting the glass to be used for various FPD applications.
Particularly in FPDs, optically transparent, electrically conductive films, such
as those applied by the Company, find common application in transferring
electrical power to the picture elements of the displays and allowing light to
pass to the viewer. Sputtering provides many advantages including material
flexibility, thickness consistency, adaptability to large substrates and high
volume production, defect and contamination control, adhesion, and thin film
density.
John S. Chapin, Vice President--Research and a founder of the Company,
invented the planar magnetron, which first enabled manufacturers of thin film
coated glass (as well as of semiconductor chips) to economically deposit
sputtered thin film coatings. Another founder, Vice President--Engineering
Richard Condon, was a pioneer in the development of the in-line coating process
which is currently used by much of the industry. The Company believes it
maintains a competitive advantage because it designs, builds and operates its
own thin film coating equipment for thin film coated glass. Further, because its
primary business is producing thin film coated glass, the Company is able to
effectively incorporate its production know-how into
25
<PAGE> 27
new generation coating equipment and improvements in existing coating equipment.
The Company believes this provides it with a capital cost advantage over most of
its competitors. This also enables the Company to compete effectively in the
market for thin film coated glass manufacturing.
The quality of the coatings, the cycle time of the process, the utilization
of materials, and other factors are controlled by proprietary information and
technology of the Company. For example, the Company is currently engaged in a
development program to improve utilization of the cathode source material. The
Company has also developed a method of reducing cathode voltage and is
developing the application of this method to ITO coatings. The Company believes
this will improve the conductivity of the ITO coating. The Company's glass
coating process has gone from approximately 11 hours in-process-time and nine
separate manual handling steps in 1985, to approximately 30 minutes and four
manual handling steps currently. All of the coating and heat treating steps now
occur within the equipment. The glass must be moved in a very controlled fashion
at high temperatures over a wide range of speeds through a vacuum system. The
Company has developed a simple, cost effective and reliable means of moving
glass with high yields. The Company is continually enhancing its technology to
improve the performance of its equipment, both in terms of the characteristics
of the coating obtained and the efficiency of the equipment. The Company
continues to work on the conductivity of its ITO coatings. The Company is also
continuing to work on improving its systems not only to obtain better quality
coatings, but also to obtain better utilization of coating materials.
The Company is continually seeking advances to thin film technology which
have commercial promise. The Company recently developed a process called
geometrically enhanced metal oxide sputtering ("GEMS"), which increases the
speed of reactive sputtering of certain materials such as MgO. The Company has
recently applied its knowledge of reactive sputtering to the problem of the low
sputtering rate of materials such as MgO needed in the growing PDP market. While
significant challenges lie ahead in successfully commercializing this
technology, the Company believes that in-line sputtered MgO has the potential
advantage of being more uniform than evaporated MgO, the current method of
applying MgO coating, especially as the size of plasma panels increases. The
Company believes sputtered MgO may also offer PDP manufacturers improved
production throughput and improved quality in certain other respects. See
"Business -- Strategy." The Company has filed a patent application relating to
this technology. See "Risk Factors -- Rapid Technological Change."
26
<PAGE> 28
The following diagram illustrates a common construction of a plasma display
panel, including the three thin film layers: ITO, MgO and CrCuCr.
[PLASMA DISPLAY PANEL]
PRODUCTS AND MANUFACTURING
The Company's principal products include various types of thin film coated
glass, which are a necessary component of LCDs and other FPDs. LCDs are used in
a wide variety of consumer and industrial products, including watches, cellular
telephones, calculators, scientific instruments, pagers, handheld video games,
laptop and notebook computers, point-of-sale terminals, wireless terminals, and
other electronic devices requiring displays. The Company also designs and
manufactures thin film coating equipment for its own use and that of customers
in the FPD and other industries.
The following table sets forth the Company's gross sales by its major
product categories (excluding returns and allowances) for its last three fiscal
years:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------
JULY 1, 1995 JUNE 29, 1996 JUNE 28, 1997
------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
TN Glass................................................. $28,346 $18,972 $24,366
STN Glass................................................ 543 1,499 3,676
Other Coated Glass....................................... 3,283 2,141 4,257
Thin Film Coating Equipment.............................. -- -- 2,784
</TABLE>
27
<PAGE> 29
Thin Film Coated Glass used for TN LCDs. Thin film coated glass
manufactured for TN LCDs is manufactured by depositing SiO(2) and ITO onto glass
purchased primarily in three thicknesses, 1.1 millimeters, 0.7 millimeters, and
0.55 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 STN LCDs. This product is more complex and
expensive to manufacture than thin film coated glass for TN LCDs. STN LCD
product in most instances, requires that the Company purchase higher quality,
flatter glass. In addition, glass for many STN LCDs requires thicker ITO coats
to improve conductivity, commonly requiring a longer cycle time. Production of
large quantities and higher quality thin film coated glass for STN LCDs requires
augmented optical inspection equipment and an automated inspection process. The
Company has converted one of its TN LCD coating systems to meet these needs and
will bring a new coating system capable of manufacturing thin film coated glass
for STN LCDs on line in late 1997. There is a wide range of information density
on STN LCDs ranging from low information displays such as personal information
managers to high information density displays such as laptop computer screens.
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.
Thin Film Coating Equipment. The Company has designed and built several
generations of high volume thin film production systems 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 or is currently
manufacturing thin film coating equipment for use in producing in TN LCDs, STN
LCDs, PDPs and automatically dimming (electrochromic) automotive mirrors. The
Company's present coating equipment product line includes two basic platforms:
(i) the Venture Series in-line vertical system which provides improved particle
defect levels and high throughput for use in FPD and other high volume
applications; and (ii) the Pilot Series, a line of sputtering systems for
research and development, and limited production. The Company has not yet sold a
Pilot Series system but is in active discussions with customers regarding this
product. The Pilot system can be upgraded to a Venture system as customer
requirements increase. The Company also is developing other systems to meet the
expanding needs of its customers. 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 systems provide for all coating
and heat treating within the equipment using processes pioneered and developed
by the Company. The Company's thin film coating systems range in cost from
approximately $1.5 million for a simply configured system to approximately $8.0
million for the largest system. See "Risk Factors -- Uncertainties Related to
Coating Equipment Business."
28
<PAGE> 30
Process Flow. The basic process flow for the Company's manufacture of thin
film coated glass is shown in the following diagram.
THIN FILM GLASS COATING
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
is stored in a HEPA filtered clean room until loaded onto 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 Boulder and one based in
China. Sales in Taiwan and Korea are handled through outside sales
representatives who are supported by the Company's internal personnel. Sales
agents in Shenzhen, China and Japan also support the Company's thin film coated
glass sales effort. Other Company personnel, including its Chief Executive
Officer, Chief Operating Officer and Quality Assurance Manager, 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 systems involve a broad based effort by various
levels within the Company. Much of the sales effort in the systems area is
undertaken by the Company's technical group. The Company has recently added one
individual to focus on systems sales. The sales process for coating equipment is
long-term, involving multiple visits to and by the customer and nine to twelve
months of technical sales effort. Systems sales are handled through independent
sales and service representatives in each region who have been selected with an
emphasis on their ability to provide after sales service and support. The
Company generally sells its thin film coating systems with progress payments.
Approximately 83% of the Company's fiscal 1997 gross sales were derived
from exports. In the same period, the Company served 155 customers in 19
countries. In fiscal 1997, the Company's ten largest customers accounted for
approximately 59% of the Company's gross sales. The principal demand for thin
film coated glass is in Asia. The Company's customers for thin film coating
equipment have been in Korea, Taiwan
29
<PAGE> 31
and the United States and the Company believes its potential geographic market
for systems includes all the major geographic regions in which FPD manufacturing
takes place. See "Risk Factors -- International Markets."
The Company's gross sales (excluding 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.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED THREE MONTHS ENDED
------------------------------- ------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 27,
1995 1996 1997 1997
------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Asia (other than Japan)......................... $20,642 $12,776 $17,059 $5,057
Japan........................................... 5,467 4,288 6,611 686
United States................................... 5,091 4,049 5,688 2,142
Europe and Other................................ 972 1,499 2,941 1,750
</TABLE>
The Company believes the Japanese market represents a substantial national
market for coated glass. The Company expects to enter into an agreement with NSG
to supply thin film coated glass for TN and STN thin film LCDs which will assist
the Company's effort to further penetrate the Japanese market. However, there
can be no assurance that NSG will sign the agreement and even if signed, the
agreement will not obligate NSG to purchase any minimum amount of coated glass
from the Company.
The Company believes a key aspect to serving the needs of its customers is
just-in-time delivery of its products. The Company's warehouse operations in
Japan and Hong Kong assist the Company in meeting this need and the Company is
also currently evaluating the possibility of locating a manufacturing facility
in Asia, potentially through a joint venture.
Further, the Company has established direct links between the Company's
quality control management and customers to help assure quality product
performance. The Company also has a product support laboratory in Boulder
available for its customers. Using this program, customers can directly contact
Company staff to help analyze product problems or questions they may have in
their own manufacturing process. With its analytical capability, the Company's
technical sophistication can be brought to bear directly on the customers'
applications.
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. See "Risk Factors -- International Markets."
SUPPLIERS
Thin Film Coated Glass. The thin glass used by the Company in its
manufacturing represents its most significant material cost. The required
quality, in terms of 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 thin 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 SiO(2) and ITO. The
Company currently purchases SiO(2) from one supplier, although it believes
alternative sources of supply could be developed if necessary. Other coating
materials, currently used to a lesser extent by the Company, include materials
which are available from few suppliers.
30
<PAGE> 32
Thin Film Coating Equipment. In its thin film systems business, the Company
uses various suppliers of machined components, pump systems, logic controllers
and other components and features. It has no single source for any principal
components in this aspect of its business.
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. See "Risk Factors -- Limited Sources of Supply."
COMPETITION
Competition in the market for thin film coated glass for FPDs is intense.
Competition is based primarily on price 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 unmet customer needs for thin film coated
glass features are important competitive factors. Although certain of the
Company's potential competitors have considerably greater financial, 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 one is a user 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.
Both Company suppliers and customers could, conceivably, vertically
integrate to manufacture the products produced by the Company. See "Risk Factors
- -- Highly Competitive Market Environment."
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/Leybold AG (formerly
Leybold AG) 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 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 historical success has depended in large part on successful,
focused research and development in thin film technology, processes and
equipment. The Company believes that its continued success depends on the
development of new or improved technology, processes, products, and equipment.
In fiscal 1995, 1996 and 1997, research and development expenditures were
respectively 3.3%, 4.4%, and 2.2% of the Company's net sales for those years.
The Company intends to increase its level of research and development
expenditures in fiscal 1998.
PROPRIETARY RIGHTS
The Company's proprietary technology is principally related to 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, the Company has
recently applied for a patent with respect to certain developments in thin film
process and device technology. Trade secret protection can be preferable over
patent protection in part due to the expense and difficulty of obtaining and
enforcing foreign patent
31
<PAGE> 33
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,
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. See
"Risk Factors -- Limited Protection of Proprietary Rights."
FACILITIES
The Company's general offices, research and development facilities, and
production lines are currently housed in three buildings totaling approximately
98,000 square feet located in Boulder, Colorado. One building is owned by the
Company, and the other two are leased, one from a partnership consisting of the
Company and three of the Company's officers (the "Partnership"). See "Certain
Transactions." In addition, the Company has leased warehouse space in Japan and
Hong Kong from which it supplies customers on a just-in-time basis. The Company
also has a sales office in Shenzhen, China. In June 1997, the Company signed a
Lease for approximately 127,000 square feet of production space in Weld County,
Colorado. The Company believes this location will enable it to draw from a
larger employee base. The Company recently commenced the construction of
leasehold improvements and anticipates the beginning of production at the Weld
County facility during calendar 1998. It is anticipated that all systems
manufacturing will eventually occur in the newly leased space. After the Company
completes its move from Boulder to Weld County, it will remain liable on the
lease to the Partnership until the lease expires on April 30, 2000. The Company
intends to relet its vacated facility to a third party. See "Risk Factors -- New
Facility Expansion" and "Certain Transactions." The Company currently operates
four thin film coated glass production lines and one smaller system used for a
variety of other thin films. In addition, the Company expects to commence
production on a sixth thin film coating system in the Weld County facility in
fiscal 1998.
EMPLOYEES
As of September 27, 1997, the Company employed 280 people, including 230 in
thin film coated glass production, 20 in thin film coating systems, 6 in
marketing and sales, 8 in research and development and 16 in accounting, human
resources, and other administrative personnel. None of the employees is
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 multiskilled 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 permanent 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.
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.
32
<PAGE> 34
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company as of
September 27, 1997 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Cecil Van Alsburg............................. 60 Director, President, Chief Executive Officer
John S. Chapin................................ 56 Director, Vice President -- Research, Secretary
C. Richard Condon............................. 51 Director, Vice President -- Engineering
Mark Auble.................................... 50 Vice President -- Operations -- Thin Film
Coatings
Thomas Edman.................................. 35 Chief Operating Officer and Executive Vice
President
Graeme Hennessey.............................. 59 Vice President -- Sales and Marketing
Thomas D. Schmidt............................. 42 Chief Financial Officer
Roger Smith................................... 56 Treasurer
James A. Knister.............................. 59 Director, Chairman of the Board
J. Dwane Baumgardner.......................... 57 Director
Chad D. Quist................................. 35 Director
Russell W. Black.............................. 37 Director of Operations -- Thin Film Systems
John J. Kester................................ 48 Advanced Development Manager
Jeffrey K. Fergason........................... 37 Director -- Nominee
</TABLE>
Cecil Van Alsburg co-founded Applied Films Lab, Inc. in 1976 and served as
its President and has continuously served as President, Chief Executive Officer
and a director of Applied Films Corporation since its inception. Prior to 1976,
Mr. Van Alsburg was employed in various capacities by Donnelly Corporation for
which he worked since 1957. Mr. Van Alsburg majored in civil engineering and
architecture at the University of Michigan.
John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and served as its
Vice President -- Research and has continuously served as Vice President --
Research 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 served as
its Vice President -- Engineering and has continuously served as Vice President
- -- Engineering and a director of Applied Films Corporation since its inception.
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.
Mark Auble has been employed by the Company since July 1993 and has served
as Vice President -- Operations since May 1994. From 1990 until joining the
Company, Mr. Auble served in various operations, management and organization
development capacities at Donnelly Corporation. Mr. Auble obtained a bachelors
of science degree in psychology and statistics from California State University.
Thomas Edman has been employed by the Company since June 1996 and is
currently Chief Operating Officer and Executive Vice President. From 1993 until
joining the Company, he served as General Manager of the Electric Materials
Division at Marubeni Specialty Chemicals, Inc., 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 in
multinational management and marketing from The Wharton School at the University
of Pennsylvania.
33
<PAGE> 35
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.
Thomas D. Schmidt has been employed by the Company since March 1997 as its
Chief Financial Officer. From October 1995 until he joined the Company, Mr.
Schmidt served as a consultant to other companies. From 1992 to 1995, Mr.
Schmidt served as Chief Financial Officer of Concord Resources Group, Inc., an
environmental services company, and from 1977 to 1992, in various financial
positions with Conrail, Inc. Mr. Schmidt obtained a bachelors of science degree
in business/accounting from West Chester University and a masters degree in
business from Villanova University. He is a certified public accountant.
Roger Smith has been employed by the Company since May 1993 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.
James A. Knister has been a director of the Company since 1992 and has
served as Chairman since 1996. Mr. Knister has been the Group Managing Director
of Ventures at Donnelly Corporation since January 1997. From 1981 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, Inc. Mr. Knister
obtained a bachelors of science degree in industrial engineering and a masters
degree in business administration from the University of Michigan.
J. Dwane Baumgardner has been a director of the Company since 1992. Dr.
Baumgardner has been the Chief Executive Officer of Donnelly Corporation since
1983. Dr. Baumgardner also serves on the Board of Directors of Donnelly
Corporation and SL Industries, Inc. Dr. Baumgardner obtained a bachelors of
science degree in physics from the Missouri School of Mines and Metallurgy and a
doctorate in engineering optics from the University of Rochester.
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 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.
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 Manager at Applied Komatsu Technology, a capital
equipment supplier to the FPD industry, and from 1990 to 1993, as an Engineering
Manager at Varian Associates, Inc., a capital equipment supplier to the
semiconductor industry. Mr. Black obtained a bachelors of science degree in
engineering technology from California State Polytechnic University. In 1995,
Mr. Black pleaded guilty to one count of wire fraud in United States District
Court. Mr. Black was sentenced to 18 months probation and 50 hours of community
service and was ordered to pay approximately $7,500 in fines and restitution.
Mr. Black's probation was terminated by the court after 10 months.
John J. Kester has been employed by the Company since June 1997 as its
Advanced Development Manager. From 1995 until he joined the Company, Dr. Kester
served as Research and Development Manager at Golden Photon, a subsidiary of
Golden Technologies, a manufacturer of photovoltaic modules, and from 1989 to
1995, as a Division Chief in the research division of the United States Air
Force where he managed the Basic Research Division at the USAF Academy. Dr.
Kester obtained a bachelors degree from Colorado College and a masters degree
and doctorate in physics from Washington University, St. Louis.
The Company's Board of Directors is currently composed of six directors
divided into three classes. Messrs. Van Alsburg and Chapin serve in the class
whose term expires in 1998; Messrs. Baumgardner and Quist serve in the class
whose term expires in 1999 and Messrs. Condon and Knister serve in the class
whose term expires in 2000. Upon the expiration of the term of each class of
directors, directors comprising that class
34
<PAGE> 36
will be elected for a three-year term at the next succeeding annual meeting of
shareholders. Each director holds office until that director's successor has
been duly elected and qualified. Selection of the nominees for the Board of
Directors is made by the entire Board of Directors.
Mr. Baumgardner has expressed his intention to resign as a member of the
Board of Directors as of the closing of this offering. The Board of Directors
intends to appoint Jeffrey K. Fergason to serve as a director of the Company to
fill the vacancy which will occur upon this anticipated resignation.
Jeffrey K. Fergason has served as President of i-o Display Systems LLC, an
electronics company since August 1997. Mr. Fergason also has served as President
of Ilixco, Inc., a company which integrates liquid crystal displays, electronics
and advanced optical systems, since October 1996. From 1990 to 1996, Mr.
Fergason served as President of OSD Envizion, Inc., an electronic welding safety
products company. Mr. Fergason obtained a bachelors of business administration
degree from Kent State University and a masters degree in business
administration from Pace University.
Mr. Quist has agreed to continue to serve as a director for up to 180 days
after this offering.
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.
COMPENSATION OF DIRECTORS
Directors who are not officers or employees of, or consultants to the
Company will be paid an annual fee of $10,000 and $800 per Board meeting or
committee meeting attended. Such directors shall be reimbursed for their
expenses for each meeting attended.
COMMITTEES OF THE BOARD OF DIRECTORS
The Company's Board of Directors has recently established an Audit
Committee and a Compensation Committee.
The Audit Committee is responsible for recommending to the Board of
Directors the appointment of the Company's independent accountants, approving
the scope of the audit, reviewing the results of the audit with the independent
accountants and approving the audit fee payable to the Company's independent
accountants. The Audit Committee will be comprised of Mr. Knister, Mr. Quist and
Mr. Fergason.
The Compensation Committee is responsible for the compensation of executive
officers and key employees of the Company, including salaries and bonuses. The
Compensation Committee also administers the option plans and the Purchase Plan
discussed below. The Compensation Committee will be comprised of Mr. Knister,
Mr. Quist and Mr. Fergason.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, all executive officer compensation decisions were
made by the entire Board of Directors of the Company, including Messrs. Van
Alsburg, Chapin, and Condon. After completion of the offering, all executive
compensation decisions will be made by the Board of Directors based upon
recommendations by the Compensation Committee.
35
<PAGE> 37
EXECUTIVE COMPENSATION
The following table sets forth the compensation awarded or paid to or
earned by, the Company's Chief Executive Officer and its four other most highly
compensated executive officers (the "Named Executive Officers") for fiscal years
1997, 1996 and 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------
---------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY($) COMPENSATION($) OPTIONS(#)
--------------------------- ----------- --------- --------------- ----------
<S> <C> <C> <C> <C>
Cecil Van Alsburg............................ 1997 $174,658 -- --
President, Chief Executive Officer 1996 $166,310 -- --
1995 $124,482 $148,250(1) 17,955
C. Richard Condon............................ 1997 $109,157 -- --
Vice President -- Engineering 1996 $108,050 -- --
1995 $107,306 $148,250(1) 17,955
Mark Auble................................... 1997 $114,635 -- --
Vice President -- Operations -- Thin Film
Coatings 1996 $113,075 -- --
1995 $108,973 -- 24,591
Thomas Edman................................. 1997 $120,197 -- 34,545
Chief Operating Officer 1996(2) $ 9,242 -- --
and Executive Vice President 1995 -- -- --
Graeme Hennessey............................. 1997 $126,384 -- --
Vice President -- Sales and Marketing 1996 $125,589 -- --
1995 $126,150 -- 11,319
</TABLE>
- -------------------------
(1) Payments made pursuant to a non-competition agreement which expired in
fiscal 1995.
(2) Mr. Edman joined the Company in June 1996.
STOCK OPTION AND PURCHASE PLANS
1993 Stock Option Plan. In May 1993, the Company's Board of Directors
approved and its shareholders subsequently approved the Donnelly Applied Films
Corporation Stock Option Plan (the "1993 Plan"). A total of 276,500 shares of
Common Stock are reserved for issuance upon exercise of options to be granted
under the 1993 Plan. The 1993 Plan is administered by the Board of Directors of
the Company. The 1993 Plan provides for the grant of non-statutory stock
options. The 1993 Plan will terminate on May 12, 2003 unless sooner terminated
by the Board of Directors. Subject to the provisions of the 1993 Plan, the
administrator of the 1993 Plan has the discretion to determine the optionees and
the terms of the option grants. The exercise price of an option granted under
the 1993 Plan may not be less than the fair market value per share of the Common
Stock on the date of grant. Shares obtained upon the exercise of options granted
pursuant to the 1993 Plan may not be sold until the expiration of a one year
period commencing on the exercise date of such options. The options terminate
not more than 10 years from the date of grant, subject to earlier termination on
the optionee's death, disability or termination of employment with the Company.
Options are not assignable or otherwise transferable except by will or the laws
of descent and distribution. The options granted pursuant to the 1993 Plan vest
equally over a four-year period and, under the 1993 Plan's original terms, were
not exercisable until after an initial public offering of Common Stock by the
Company. On May 12, 1993, options were granted pursuant to the 1993 Plan
covering 155,946 shares at an exercise price equal to $2.32 per share. On
January 20, 1995, options were granted pursuant to the 1993 Plan covering
143,745 shares at an exercise price equal to $3.29 per share. On June 27, 1997,
options were granted pursuant to the 1993 Plan covering 15,827 shares at an
exercise price equal to $5.26 per share. Options for 39,508 shares have been
forfeited pursuant to
36
<PAGE> 38
the terms of those option agreements since granting. On June 30, 1995, the
Company's Board of Directors declared that the options then outstanding were
exercisable. The Company has recorded approximately $597,000 of deferred
compensation related to all vested options, of which $25,000 has not been
amortized as of September 27, 1997. The remaining $25,000 will be expensed in
fiscal 1998 and fiscal 1999. Options for the purchase of 490 shares remain to be
granted under the 1993 Plan.
1997 Stock Option Plan. On April 29, 1997, the Board of Directors of the
Company adopted, and the shareholders approved, the 1997 Stock Option Plan, as
amended September 5, 1997 (the "1997 Plan"). The 1997 Plan has 172,500 shares of
Common Stock reserved for issuance upon the exercise of options granted under
the 1997 Plan. Options may be granted under the 1997 Plan to officers and other
employees of the Company.
The purpose of the 1997 Plan is to encourage stock ownership by certain
officers and employees of the Company instrumental to the success of the Company
and to give them a greater personal interest in the success of the Company. The
1997 Plan will be administered by the Board of Directors or the Compensation
Committee thereof. The Board, or the Compensation Committee, within the
limitations of the 1997 Plan, determines the persons to whom options will be
granted; the number of shares to be covered by each option; the option purchase
price per share; the manner of exercise; the time, manner and form of payment
upon exercise of an option; and restrictions such as repurchase rights or
obligations of the Company. Options granted under the 1997 Plan may not be
granted at a price less than fair market value of the Common Stock on the date
of grant. Options granted under the 1997 Plan will expire not more than 10 years
from the date of grant. Options granted under the 1997 Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. On April 29, 1997, options were
granted pursuant to the 1997 Plan covering 69,090 shares at an exercise price
equal to $5.26 per share. On September 5, 1997, options were granted pursuant to
the 1997 Plan covering 34,545 shares at an exercise price equal to $7.20 per
share.
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 will be 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.
37
<PAGE> 39
STOCK OPTION GRANTS
The following table sets forth information concerning individual grants of
stock options made to Named Executive Officers during the Company's fiscal year
ended June 28, 1997:
OPTION GRANTS IN FISCAL 1997
<TABLE>
<CAPTION>
POTENTIAL VALUE AT
ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTION/ EXERCISE APPRECIATION FOR
UNDERLYING GRANTED TO OR BASE OPTION TERM
OPTIONS EMPLOYEES PRICE PER EXPIRATION ---------------------
NAME GRANTED(#) IN FISCAL YEAR SHARE DATE 5% 10%
---- ---------- -------------- --------- ---------- -- ---
<S> <C> <C> <C> <C> <C> <C>
Thomas Edman................. 34,545 40.7% $5.26 June 1, 2007 $114,274 $289,593
Chief Operating Officer &
Executive Vice President
</TABLE>
OPTION EXERCISES AND HOLDINGS
The following table sets forth information covering the exercise of stock
options by Named Executive Officers during the Company's fiscal year ended June
28, 1997:
AGGREGATED OPTION EXERCISES IN FISCAL 1997
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES VALUE OPTIONS/SARS AT FISCAL OPTIONS/SARS AT FISCAL
ACQUIRED ON REALIZED YEAR-END (#) YEAR-END($)
NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Thomas Edman.................... -- -- 8,636/25,908 --/--
Chief Operating Officer &
Executive Vice President
</TABLE>
OTHER PLANS
In August 1992, the Company's Board of Directors adopted a profit sharing
plan for all full-time, non-executive employees. Historically, the amount
contributed to the profit sharing pool, subject to the approval of the Company's
Board of Directors, has been approximately 10% of the pretax income before
royalty and profit sharing expense. Profit sharing has been paid to employees
monthly based on their employee pay level and length of service with the
Company. The Company expended approximately $204,000, $7,000, $217,000, $29,000,
and $247,000 in fiscal years 1993, 1994, 1995, 1996, and 1997, respectively,
related to this plan.
CERTAIN TRANSACTIONS
During fiscal 1993, the Company acquired a 25% general partner interest in
a partnership (the "Partnership") from an unrelated party; the remaining 75%
general partner interest in the Partnership is owned equally by Messrs. Van
Alsburg, Condon and Chapin. The Partnership owns and leases certain Boulder,
Colorado office and manufacturing facilities (the "Boulder Facility") to the
Company under a non-cancellable lease which will expire on April 30, 2000 (the
"Expiration Date"). The Company currently pays the Partnership $20,100 as
monthly rent and pays all property taxes and insurance costs. The Company paid
rent of approximately $241,000 under this agreement during each of fiscal years
1993, 1994, and 1995. The Company believes that the occupancy costs payable to
the Partnership by the Company under such lease are no higher than those which
would be charged by an unrelated third party under similar circumstances. After
the Company moves its operations to the Weld County facility, it will remain
liable to the Partnership for all amounts owing under the lease until the
Expiration Date. The Company intends to relet the Boulder Facility to a third
party after vacating the facility. See "Business -- Facilities" and Note 4 of
Notes to Consolidated Financial Statements.
38
<PAGE> 40
In connection with its purchase of the Boulder Facility, the Partnership
borrowed $1,320,000 pursuant to the terms of a partnership borrowing agreement
(the "Partnership Borrowing Agreement"). The Partnership Borrowing Agreement, as
amended, will mature on May 1, 1999. The Company is jointly and severally liable
to the lender as a general partner of the Partnership for all amounts owing
under such agreement. As of September 27, 1997, the remaining principal balance
on this loan was $1,208,000.
In fiscal 1995, the Partnership acquired 14,993 shares of the Company's
Common Stock for an aggregate purchase price of $104,526. Accordingly, the
Company has reduced its investment by approximately $26,000 in the Partnership.
See Note 4 of Notes to Consolidated Financial Statements.
The Company had employment agreements with Messrs. Van Alsburg, Condon and
Chapin which expired in fiscal 1995. These agreements contained provisions
designed to protect the technology, customer base and business operations of the
Company. In addition to their other compensation, Messrs. Van Alsburg, Condon
and Chapin were each paid a total of $533,000, which was paid between fiscal
1992 and fiscal 1995. At the time these agreements were entered, Messrs. Van
Alsburg, Condon and Chapin owned approximately 20%, 5% and 20%, respectively, of
the Company's outstanding shares. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Fiscal 1996 Compared with
Fiscal 1995" and Note 4 of Notes to Consolidated Financial Statements.
In fiscal 1997, the Company accrued a charge of $250,000, which was
ultimately paid to Donnelly, a significant shareholder of the Company, to
guarantee $5.0 million of the Company's line of credit. Following completion of
the offering, the Donnelly guaranty will be released and the borrowing terms
will be renegotiated. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and Note
4 of Notes to Consolidated Financial Statements.
39
<PAGE> 41
PRINCIPAL AND SELLING SHAREHOLDERS
The following table and notes set forth, as of September 27, 1997, and as
adjusted to reflect the sale of the shares offered hereby (assuming no exercise
of the Underwriters' over-allotment option), certain information regarding
beneficial ownership of the Company's stock by: (i) each person (or group of
affiliated persons) known by the Company to own beneficially more than 5% of the
Common Stock, (ii) each director of the Company, (iii) each of the Named
Executive Officers, (iv) all directors and executive officers of the Company as
a group, and (v) each Selling Shareholder. Except as otherwise noted, the
persons or parties in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES
OWNED PRIOR TO THE SHARES BEING BENEFICIALLY OWNED
OFFERING(2) OFFERED AFTER OFFERING(2)(3)
-------------------- ------------ --------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT NUMBER PERCENT
--------------------------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Donnelly Corporation...................... 1,400,000 50.0% 1,400,000 -- --
Cecil Van Alsburg(4)...................... 596,231 21.1% -- 596,231 17.9%
John S. Chapin(5)......................... 596,098 21.1% -- 596,098 17.9%
C. Richard Condon(6)...................... 187,997 6.7% -- 187,997 5.7%
Graeme Hennessey(7)....................... 28,886 1.0% -- 28,886 *
Mark Auble(8)............................. 22,250 * -- 22,250 *
Thomas Edman(9)........................... 12,136 * -- 12,136 *
J. Dwane Baumgardner(10).................. -- -- -- -- --
James A. Knister.......................... -- -- -- -- --
Chad D. Quist............................. -- -- -- -- --
Jeffrey K. Fergason....................... -- -- -- -- --
Executive Officers and Directors as a
group (11 persons)(11).................. 1,439,180 49.6% -- 1,439,180 42.3%
</TABLE>
- -------------------------
* Less than one percent.
(1) All addresses are c/o Applied Films Corporation, 6797 Winchester Circle,
Boulder, Colorado 80301 except for Donnelly Corporation whose address is
414 East Fortieth Street, Holland, Michigan 49423.
(2) Percentage of beneficial ownership is based on 2,799,998 shares of Common
Stock outstanding as of September 27, 1997 and 3,299,998 shares of Common
Stock outstanding after this offering. Beneficial ownership is determined
in accordance with the rules of the Securities and Exchange Commission and
generally includes voting or investment power with respect to securities.
Shares of Common Stock subject to options or warrants currently exercisable
or exercisable within 60 days of September 27, 1997, are deemed outstanding
for computing the percentage of the person or entity holding such
securities, but are not outstanding for computing the percentage of any
other person or entity. Except as indicated by footnote, and subject to
community property laws where applicable, the person named in the table
above has sole voting and investment power with respect to all shares of
Common Stock shown as beneficially owned by him.
(3) Amounts indicated reflect the actual number of shares offered and assumes
no exercise of the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, the following additional shares
will be sold by the following shareholders: 21,000 shares by the Louise
Chapin Trust, of which John S. Chapin is the Trustee (as a result Mr.
Chapin will beneficially own 575,098 shares or 16.1% of the Common Stock
outstanding after this offering); and 27,561 shares by Paul Walsh, a non-
employee shareholder.
40
<PAGE> 42
(4) Consists of (i) 555,670 shares held by Mr. Van Alsburg, (ii) options to
purchase 25,568 shares of Common Stock exercisable within 60 days of
September 27, 1997, and (iii) 14,993 shares of Common Stock held by
Winchester 44 Associates. Mr. Van Alsburg is a general partner of
Winchester 44 Associates. Mr. Van Alsburg disclaims beneficial ownership of
the shares held by Winchester 44 Associates except to the extent of his
pecuniary interest therein arising from his general partnership interest
therein.
(5) Includes (i) 363,823 shares held by Mr. Chapin, (ii) 21,000 shares held by
the Louise Chapin Trust, of which Mr. Chapin is the Trustee, (iii) 170,714
shares held by the John Chapin Family Trust, of which Mr. Chapin is the
Trustee, (iv) options to purchase 25,568 shares of Common Stock exercisable
within 60 days of September 27, 1997, and (v) 14,993 shares of Common Stock
held by Winchester 44 Associates. Mr. Chapin is a general partner of
Winchester 44 Associates. Mr. Chapin disclaims beneficial ownership of the
shares held by Winchester 44 Associates except to the extent of his
pecuniary interest therein arising from his general partnership interest
therein.
(6) Includes (i) 147,436 shares held by Mr. Condon, (ii) options to purchase
25,568 shares of Common Stock exercisable within 60 days of September 27,
1997, and (iii) 14,993 shares of Common Stock held by Winchester 44
Associates. Mr. Condon is a general partner of Winchester 44 Associates.
Mr. Condon disclaims beneficial ownership of the shares held by Winchester
44 Associates except to the extent of his pecuniary interest therein
arising from his general partnership interest therein.
(7) Consists of options to purchase Common Stock exercisable within 60 days of
September 27, 1997 by Mr. Hennessey.
(8) Consists of options to purchase Common Stock exercisable within 60 days of
September 27, 1997 by Mr. Auble.
(9) Consists of 3,500 shares held by Mr. Edman and options to purchase 8,636
shares of Common Stock exercisable within 60 days of September 27, 1997.
(10) Mr. Baumgardner is the Chairman of the Board of Directors of Donnelly
Corporation. Although by reason of his membership on the Board of Directors
of Donnelly, Mr. Baumgardner may share investment and voting power with the
respect to the shares of the Company beneficially owned by Donnelly
Corporation, Mr. Baumgardner disclaims beneficial ownership of these
shares.
(11) Includes shares included pursuant to Notes (4), (5), (6), (7), (8) and (9)
and includes options to purchase 25,568 shares exercisable within 60 days
of September 27, 1997.
DESCRIPTION OF CAPITAL STOCK
The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Articles of Incorporation (the
"Articles") and Bylaws is a summary and is qualified in its entirety by the
provisions of the Articles and Bylaws, which have been filed as exhibits to the
Company's Registration Statement, of which this Prospectus is a part.
GENERAL
The Company's Articles provide that the Company is authorized to issue
10,000,000 shares of Common Stock, no par value per share. As of September 27,
1997, 2,799,998 shares of Common Stock were outstanding and held of record by 14
shareholders. Upon completion of this offering, there will be 3,299,998 shares
of Common Stock outstanding. The Company also is authorized to issue 1,000,000
shares of preferred stock, no par value per share. No shares of preferred stock
are currently issued and outstanding. In addition, an aggregate of 479,000
shares of Common Stock are reserved for issuance under the Company's 1993 Plan,
1997 Plan and the Purchase Plan.
41
<PAGE> 43
COMMON STOCK
The holders of Common Stock are entitled to one vote per share on all
matters submitted to a vote of the shareholders. The holders of Common Stock are
not entitled to cumulative voting rights with respect to election of directors,
and as a consequence, minority shareholders will not be able to elect directors
on the basis of their shares alone. Holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared by the Board of
Directors of legally available funds, subject to any preferences that may be
applicable to any shares of preferred stock issued in the future. In the event
of a liquidation, dissolution and winding up of the Company, holders of Common
Stock are entitled to share ratably in all assets remaining after payment of
liabilities and the liquidation preference of any outstanding preferred stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. All outstanding shares of Common Stock are, and all shares of
Common Stock to be outstanding upon completion of this offering will be fully
paid and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue up to 1,000,000 shares of
preferred stock in one or more series and to fix the relative rights and
preferences thereof, including dividend rights, conversion rights, voting
rights, redemption rights, liquidation preferences and numbers of shares
constituting any series, without any further vote or action by the Company's
shareholders. The issuance of preferred stock with voting and conversion rights
may adversely affect the rights of holders of Common Stock. Issuances of
preferred stock in certain circumstances may have the effect of delaying,
deferring or preventing a change of control of the Company, may discourage bids
for the Company's stock at a premium over the market price, and may adversely
affect the market price, and the voting and other rights of the holders, of the
Common Stock. The Company has no current plans to issue any shares of preferred
stock. See "Risk Factors -- Antitakeover Provisions; Possible Issuance of
Preferred Stock."
CERTAIN ARTICLE AND BYLAW PROVISIONS AND PROVISIONS OF COLORADO LAW
The Company's Articles contain provisions that may have the effect of
delaying, deferring or preventing a hostile takeover or change of control of the
Company.
The Articles provide for the division of the Board of Directors into three
classes with staggered three year terms. See "Management -- Executive Officers
and Directors." The Articles also prohibit cumulative voting in the election of
directors.
The Articles prohibit, subject to certain exceptions, certain transactions
involving an "Interested Shareholder" (defined as a person who owns beneficially
10% or more of the Company's voting securities) including, but not limited to, a
merger or consolidation, the sale, lease, exchange, pledge or other transfer of
the Company's assets or the dissolution and liquidation of the Company unless
the transaction is determined to be at a "fair price" or otherwise approved by a
majority of the Company's disinterested directors or is approved by holders of
80% of the Company's outstanding voting securities, including 50% of all
outstanding voting securities not owned by an Interested Shareholder. The
Articles provide in general terms, that a transaction is priced fairly if the
consideration paid is equal to the higher of (a) the highest per share price
paid by the Interested Shareholder (i) over the two-year period prior to the
first public announcement of the takeover transaction or (ii) in the transaction
in which it became an Interested Shareholder, whichever is greater (with certain
adjustments as provided in the Articles); or (b) the Fair Market Value of the
Common Stock on the date the takeover transaction is announced. "Fair Market
Value" is defined in the Articles, in general terms, as the highest closing
price for such security within the 30-day period preceding the announcement of
the transaction. The Articles also require, in such circumstances, that the form
of consideration (cash versus other forms) be either in cash or the form used to
acquire the largest number of shares of such securities previously acquired by
it.
The Articles empower the Board of Directors, when considering a tender
offer or a merger acquisition proposal, to take into account factors in addition
to potential financial benefits to shareholders. Such factors
42
<PAGE> 44
may include (i) the adequacy and fairness of the consideration to be received by
the Company and/or its shareholders under the offer considering historical
trading prices of the Company's stock, the price that might be achieved in a
negotiated sale of the Company as a whole, premiums over trading prices which
have been proposed or offered with respect to the securities of other companies
in the past in connection with similar offers and the future prospects for the
Company and its business; (ii) the potential social and economic impact of the
offer and its consummation on the Company, its employees and vendors; and (iii)
the potential social and economic impact of the offer and its consummation on
the communities in which the Company and any of its subsidiaries operate or are
located.
The Articles prohibit a merger or consolidation of the Company with another
corporation, other than a wholly owned subsidiary, or the sale, lease, exchange,
pledge or other disposal of all or substantially all of the assets of the
Company, other than in the usual and regular course of business, or the
voluntary dissolution and liquidation of the Company's its assets without the
affirmative vote of not less than two-thirds of the voting power of the then
issued and outstanding shares of the class or classes of stock entitled to vote
thereon.
The Colorado Business Corporation Act provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's articles or bylaws, unless a corporation's
articles or bylaws, as the case may be, require a greater percentage. The
Articles of the Company require the affirmative vote of holders of at least
two-thirds of the outstanding voting stock of the Company to amend or repeal any
of the foregoing provisions of the Articles. Such shareholder vote would be in
addition to any separate class vote that might in the future be required
pursuant to the terms of any preferred stock that might be outstanding at the
time any such amendments are submitted to the shareholders.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
control of the Company.
INDEMNIFICATION; LIMITATION OF LIABILITY
Pursuant to provisions of the Colorado Business Corporation Act, the
Company has adopted provisions in its Articles and has entered into Director and
Officer Indemnity Agreements ("Indemnity Agreements") which permit the Company
to indemnify its directors to the fullest extent permitted by Colorado law,
except that the Company shall not indemnify any such director (i) in connection
with a proceeding by or in the right of the corporation in which the director
was adjudged liable to the corporation; or (ii) in connection with any other
proceedings charging that the director derived an improper personal benefit,
whether or not involving action in an official capacity, in which proceeding the
director was judged liable on the basis that he/she derived an improper personal
benefit. The Company also has entered into Indemnity Agreements with certain of
its officers providing for similar indemnification. In addition, the Articles
eliminate the personal liability of the Company's directors to the Company or
its shareholders for the monetary damages for breach of their duty of due care,
except that there shall be no elimination or limitation of liability for any
breach of a director's duty of loyalty to the Company or to its shareholders,
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, acts providing for an unlawful distribution of the
Company's assets, or any transaction from which the director directly or
indirectly derived an improper personal benefit. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors and officers of the Company, the Company has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable.
43
<PAGE> 45
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have 3,299,998 shares of
Common Stock outstanding (3,536,437 if the Underwriters' over-allotment option
is exercised in full). Of these shares, the 1,900,000 shares sold in this
offering (2,185,000 if the underwriters' over-allotment option is exercised in
full) will be freely tradable without restriction or further registration under
the Act, except that any shares purchased by "Affiliates" of the Company, as
that term is defined by Rule 144 ("Rule 144") under the Act (the "Affiliates"),
may generally only be sold in compliance with the limitations of Rule 144
described below.
The remaining 1,399,998 shares of Common Stock outstanding (1,351,437
shares if the underwriters' over-allotment option is exercised in full) are
deemed "Restricted Shares" under Rule 144 because they were originally issued
and sold by the Company in private transactions in reliance upon exemptions from
the Act. These remaining Restricted Shares will not be eligible for resale under
Rule 144 until after the expiration of a one year holding period beginning on
the date such Restricted Shares were acquired from the Company or from an
Affiliate and may be resold in the public market prior to such date only in
compliance with the registration requirements of the Act or pursuant to a valid
exemption therefrom. In addition, all of the Company's shareholders have entered
into lockup agreements providing that such holders will not, without the prior
written consent of Needham & Company, Inc., offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock beneficially owned by them for a
period of 180 days after the date of this prospectus, except pursuant to bona
fide gifts to persons who agree in writing to be bound by provisions in the
lockup agreements.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
restricted shares for at least one year is entitled to sell within any three
month period, a number of such shares that does not exceed the greater of (i)
one percent of the then outstanding shares of Common Stock (approximately 33,000
shares immediately after this Offering (35,364 if the underwriter's
over-allotment option is exercised in full)) or (ii) the average weekly trading
volume in the Common Stock in the over-the-counter market during the four
calendar weeks preceding the date on which notice of such sale is filed. In
addition, under Rule 144(k), a person who is not an Affiliate and who has not
been an Affiliate for at least three months prior to the sale and who has
beneficially owned Restricted Shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one
and two year holding periods described above, a holder of Restricted Shares can
include the holding periods of a prior owner who is not an Affiliate. The
holding period will include the period during which the person held convertible
securities of the Company or stock of the Company.
The Company intends to file registration statements under the Securities
Act to register shares of Common Stock reserved for issuance under certain stock
plans of the Company, thus permitting the resale of such shares by nonaffiliates
upon issuance in the public market without restriction under the Securities
Acts. Such registration statements will automatically become effective
immediately upon filing. As of September 27, 1997, there were a total of 379,645
shares of Common Stock subject to outstanding stock options, 200,111 of which
were vested and exercisable. Such vested shares could be resold; however, all
shares issuable upon the exercise of such options also are subject to Lockup
Agreements. "Management -- Stock Option and Purchase Plans."
Prior to this offering, there has been no public market for the Common
Stock, and no predictions can be made as to the effect, if any, that sale of
shares of Common Stock under Rule 144 will have on the market price of the
Common Stock. Sales of substantial amounts of such shares in the public market
could adversely affect the market price of the Common Stock or the ability of
the Company to raise capital through a public offering of its equity securities.
44
<PAGE> 46
UNDERWRITING
Under the terms and subject to the conditions of the Underwriting
Agreement, the Underwriters named below, for whom Needham & Company, Inc. and
D.A. Davidson & Co. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and Donnelly, and the Company and
Donnelly have agreed to sell to each Underwriter, the aggregate number of shares
of Common Stock set forth opposite their respective names in the table below.
The Underwriting Agreement provides that the obligations of the Underwriters to
pay for and accept delivery of the shares of Common Stock are subject to certain
conditions precedent, and that the Underwriters are committed to purchase and
pay for all shares if any shares are purchased.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Needham & Company, Inc. ....................................
D.A. Davidson & Co. ........................................
---------
Total.................................................. 1,900,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the shares of Common Stock directly to the public at the offering price
set forth on the cover page of this prospectus and to certain dealers (who may
include the Underwriters) at such price less a commission not in excess of
$ per share, of which $ may be reallowed to other dealers. After the
offering to the public, the offering price and other selling terms may be
changed by the Representatives. No such reduction shall change the amount of
proceeds to be received by the Company and the Selling Shareholders as set forth
on the cover page of this prospectus. The Common Stock will be offered on the
NASDAQ National Market.
The Company and certain shareholders have granted an option to the
Underwriters, exercisable during the 30-day period after the date of this
prospectus, to purchase up to 285,000 shares of Common Stock at the same price
per share as the Company and Donnelly receive for the 1,900,000 shares that the
Underwriters have agreed to purchase from them. To the extent the Underwriters
exercise such option, each of the Underwriters will be committed, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number of shares of Common Stock to be purchased by
such Underwriter as shown in the above table bears to the total shown. If
purchased, such additional shares will be sold by the Underwriters on the same
terms as those on which the 1,900,000 shares are being sold.
The Underwriting Agreement contains covenants of indemnity and contribution
between the Company and the Underwriters and the Selling Shareholders against
certain civil liabilities that may be incurred in connection with this offering,
including liabilities under the Securities Act. Insofar as indemnification for
liabilities arising under the Securities Act of 1933 may be permitted to
directors, officers or persons controlling the Registrant pursuant to the
foregoing provisions, the Registrant has been informed that in the opinion of
the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is therefore unenforceable.
Pursuant to the terms of lock up agreements, all of the Company's
shareholders holding an aggregate of 1,399,998 shares of the Company's Common
Stock have agreed with the Representatives not to sell, otherwise dispose of,
contract to sell, grant any option to sell, transfer or otherwise dispose of,
directly or indirectly, shares of Common Stock for a period of 180 days after
the date of this prospectus, without the prior written consent of Needham &
Company, Inc. The Company has agreed not to sell, contract to sell, grant any
option to sell, transfer or otherwise dispose of, directly or indirectly, shares
of Common Stock, other than the Company's sales of shares in this offering, the
issuance of shares of Common Stock upon the exercise of outstanding options, the
grant of options to purchase shares or the issuance of shares of Common Stock
under
45
<PAGE> 47
the Company's 1993 Plan, 1997 Plan and Purchase Plan, for a period of 180 days
after the date of this prospectus, without the prior written consent of Needham
& Company, Inc.
The Underwriters will not make sales to accounts over which they exercise
discretionary authority in excess of 5% of the number of shares of Common Stock
offered hereby, and unless they obtain specific written consent of the customer.
In connection with the offering, the Underwriters and other persons
participating in the offering may engage in transactions that stabilize,
maintain or otherwise affect the price of the Common Stock. Specifically, the
Underwriters may over-allot in connection with the offering, creating a short
position in the Common Stock for their own account. To cover over-allotments or
to stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, Common Stock in the open market. The Underwriters may also impose a
penalty bid whereby they may reclaim selling concessions allowed to an
underwriter or a dealer for distributing Common Stock in the offering if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of the Common Stock above market levels that might otherwise prevail. The
Underwriters are not required to engage in these activities and may end these
activities at any time.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price will be
determined through negotiations among the Company, the Selling Shareholders and
the Representatives. Among the factors to be considered in such negotiations
will be prevailing market conditions; the net sales and results of operations of
the Company in recent periods, market valuations of publicly traded companies
that the Company, the Selling Shareholders and the Representatives believe to be
comparable to the Company; estimates of the business potential of the Company;
the present state of the Company's development; the current state of the
industry and the economy as a whole; and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the Company and the Selling Shareholders by Varnum, Riddering, Schmidt
& Howlett LLP, Grand Rapids, Michigan. Cooley Godward LLP, Boulder, Colorado, is
acting as counsel for the Underwriters in connection with certain legal matters
relating to the Common Stock offered hereby.
EXPERTS
The consolidated financial statements of the Company included in this
Prospectus and elsewhere in the Registration Statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto and are included in reliance upon the authority of
said firm, as experts in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission
("Commission") a Registration Statement on Form S-1 (herein, together with all
amendments and exhibits thereto, referred to as the "Registration Statement")
under the Securities Act of 1933, as amended. This Prospectus does not contain
all of the information set forth in the Registration Statement, certain parts of
which are omitted in accordance with the rules and regulations of the
Commission. The statements contained in this Prospectus concerning the contents
of any contract or other document referred to are not necessarily complete.
Where such contract or other document is an exhibit to the Registration
Statement, each statement is qualified in all respects by the provisions of such
exhibit, to which reference is hereby made for a full statement of the
provisions thereof. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to
46
<PAGE> 48
the Registration Statement. A copy of the Registration Statement can be
inspected by anyone without charge at the Public Reference Section of the
Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at 7 World Trade Center, Suite 1300,
New York, New York 10048, and 500 West Madison Street, Chicago, Illinois 60601.
Copies of such materials can be obtained by mail from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. The Commission maintains a Web site (which can be found at
http://www.sec.gov) that contains information regarding registrants that file
electronically with the Commission.
47
<PAGE> 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of June 29, 1996, June 28,
1997 and September 27, 1997 (unaudited)................... F-3
Consolidated Statements of Operations for the years ended
July 1, 1995, June 29, 1996 and June 28, 1997, and for the
periods ended September 28, 1996 and September 27, 1997
(unaudited)............................................... F-5
Consolidated Statements of Stockholders' Equity for the
years ended July 1, 1995, June 29, 1996, and June 28,
1997, and the period ended September 27, 1997
(unaudited)............................................... F-6
Consolidated Statements of Cash Flows for the years ended
July 1, 1995, June 29, 1996, and June 28, 1997, and for
the periods ended September 28, 1996 and September 27,
1997 (unaudited).......................................... F-7
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 50
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 June 29, 1996
and June 28, 1997 and the related consolidated statements of operations,
stockholders' equity and cash flows for each of the fiscal periods ended July 1,
1995, June 29, 1996 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 June 29, 1996 and June 28, 1997,
and the consolidated results of their operations and their cash flows for each
of the fiscal periods ended July 1, 1995, June 29, 1996 and June 28, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 22, 1997
F-2
<PAGE> 51
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 29, JUNE 28, SEPTEMBER 27,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 260 $ 297 $ 939
Accounts and trade notes receivable, net
Coated glass and other................................. 2,805 6,316 5,336
Income earned, not yet billed (Note 2)................. -- 145 638
Inventories, net (Note 2)................................. 6,814 6,160 6,082
Income taxes receivable................................... 332 -- --
Prepaid expenses and other................................ 38 423 430
Notes receivable from officers (Note 4)................... 25 5 4
Deferred tax asset, net (Note 6).......................... 222 250 239
------- ------- -------
Total current assets................................. 10,496 13,596 13,668
------- ------- -------
PROPERTY, PLANT AND EQUIPMENT (NOTE 2):
Land...................................................... 464 733 733
Building.................................................. 2,477 2,747 2,747
Machinery and equipment................................... 11,526 11,587 11,652
Office furniture and equipment............................ 409 452 452
Leasehold improvements.................................... 421 425 1,725
Construction-in-progress.................................. 239 1,209 2,548
------- ------- -------
15,536 17,153 19,857
Accumulated depreciation.................................. (7,973) (9,330) (9,741)
------- ------- -------
7,563 7,823 10,116
------- ------- -------
Other assets................................................ 24 -- --
Investment in affiliate..................................... 115 122 140
------- ------- -------
$18,198 $21,541 $23,924
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 52
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 29, JUNE 28, SEPTEMBER 27,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable.................................... $ 2,401 $ 3,802 $ 5,248
Accrued expenses.......................................... 474 1,272 1,369
Income received but not yet earned........................ -- 1,500 2,987
Income taxes payable...................................... -- 352 448
Current portion of long-term debt (Note 6)................ 1,389 1,136 1,062
------- ------- -------
Total current liabilities............................ 4,264 8,062 11,114
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion (Note 3)........... 8,501 6,448 5,128
Deferred tax liability, net (Note 6)...................... 375 291 277
------- ------- -------
Total liabilities.................................... 13,140 14,801 16,519
------- ------- -------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 10,000,000 shares authorized,
2,799,998 shares issued and outstanding................ 4,245 4,245 4,245
Less common shares held by affiliate...................... (26) (26) (26)
Deferred compensation (Note 5)............................ (92) (31) (25)
Retained earnings......................................... 931 2,552 3,211
------- ------- -------
Total stockholders' equity........................... 5,058 6,740 7,405
------- ------- -------
$18,198 $21,541 $23,924
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 53
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE QUARTERS ENDED
------------------------------- ------------------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997 1996 1997
------- -------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales................................ $30,990 $21,738 $34,050 $6,279 $11,251
Cost of Goods Sold....................... 24,288 19,018 27,352 5,235 8,801
------- ------- ------- ------ -------
Gross Profit............................. 6,702 2,720 6,698 1,044 2,450
Selling, General and Administrative
Expenses............................... 3,502 2,233 2,996 544 986
Research and Development Expenses........ 1,010 965 749 192 330
------- ------- ------- ------ -------
Income (Loss) from Operations............ 2,190 (478) 2,953 308 1,134
------- ------- ------- ------ -------
Other (Expense) Income:
Gain (loss) on foreign currency
exchange (Note 2)................... 223 (286) 96 10 12
Other (loss) income, net............... (13) 30 (20) (6) 8
Interest income........................ 14 12 19 3 4
Interest expense....................... (816) (780) (822) (251) (171)
------- ------- ------- ------ -------
(592) (1,024) (727) (244) (147)
------- ------- ------- ------ -------
Income (loss) before income taxes........ 1,598 (1,502) 2,226 64 987
Income tax provision (benefit)........... 496 (424) 605 17 328
------- ------- ------- ------ -------
Net income (loss)........................ $ 1,102 $(1,078) $ 1,621 $ 47 $ 659
======= ======= ======= ====== =======
Primary and Fully Diluted Net Income
(Loss) Per Share....................... $0.39 $(0.38) $ 0.56 $ 0.02 $ 0.22
======= ======= ======= ====== =======
Weighted Average Common Shares
Outstanding............................ 2,853 2,849 2,917 2,853 2,978
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 54
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE PERIODS ENDED JULY 1, 1995, JUNE 29, 1996, JUNE 28, 1997 AND SEPTEMBER
27, 1997 (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK HELD BY AFFILIATE TOTAL
------------------ ----------------- DEFERRED RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION EARNINGS EQUITY
------ ------ ------ ------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 2, 1994... 2,799,998 $3,658 -- $ -- $ -- $ 907 $ 4,565
Net income............. -- -- -- -- -- 1,102 1,102
Deferred compensation
related to
options............. -- 597 -- -- (597) -- --
Amortization of
deferred
compensation........ -- -- -- -- 353 -- 353
--------- ------ ------ ---- ----- ------- -------
BALANCES, JULY 1, 1995... 2,799,998 4,255 -- -- (244) 2,009 6,020
Net loss............... -- -- -- -- -- (1,078) (1,078)
Forfeiture of
options............. -- (10) -- -- 10 -- --
Amortization of
deferred
compensation........ -- -- -- -- 142 -- 142
Acquisition of shares
by affiliate........ -- -- (3,748) (26) -- -- (26)
--------- ------ ------ ---- ----- ------- -------
BALANCES, JUNE 29,
1996................... 2,799,998 4,245 (3,748) (26) (92) 931 5,058
Net income............. -- -- -- -- -- 1,621 1,621
Amortization of
deferred
compensation........ -- -- -- -- 61 -- 61
--------- ------ ------ ---- ----- ------- -------
BALANCES, JUNE 28,
1997................... 2,799,998 $4,245 (3,748) $(26) $ (31) $ 2,552 $ 6,740
========= ====== ====== ==== ===== ======= =======
Net income
(unaudited)......... -- -- -- -- -- 659 659
Amortization of
deferred
compensation
(unaudited)......... -- -- -- -- 6 -- 6
--------- ------ ------ ---- ----- ------- -------
BALANCES, SEPTEMBER 27,
1997 (unaudited)....... 2,799,998 $4,245 (3,748) $(26) $ (25) $ 3,211 $ 7,405
========= ====== ====== ==== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 55
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE QUARTERS ENDED
----------------------------- -----------------------------
JULY 1, JUNE 29, JUNE 28, SEPTEMBER 28, SEPTEMBER 27,
1995 1996 1997 1996 1997
------- -------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $ 1,102 $ (1,078) $ 1,621 $ 47 $ 659
Adjustments to reconcile net income (loss)
to net cash flows from operating
activities --
Depreciation and amortization............. 1,391 1,405 1,473 372 377
Amortization of deferred compensation..... 353 142 61 15 6
Loss (gain) on disposals of property,
plant and equipment..................... 17 2 6 -- (4)
Undistributed earnings of affiliate....... (17) (12) (7) -- (18)
Changes in --
Accounts and trade notes receivable..... (441) 2,361 (3,656) (704) 487
Inventories............................. 1,975 (1,960) 654 (271) 78
Income taxes receivable................. 90 (332) 332 332 --
Prepaid expenses and other.............. (114) 461 (385) (373) (7)
Accounts payable-trade.................. (511) (1,037) 1,401 652 1,417
Due to Donnelly Corporation............. (337) -- -- -- --
Income received not yet earned.......... -- -- 1,500 409 1,487
Accrued expenses........................ 211 (445) 798 176 126
Income taxes payable.................... 130 (130) 352 21 96
Deferred income taxes, net.............. 38 (170) (112) (3) (3)
------- -------- -------- ------- -------
Net cash flows from operating
activities........................... 3,887 (793) 4,038 673 4,701
------- -------- -------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of land............................ $ -- $ -- $ (269) $ -- $ --
Purchase of building........................ -- -- (270) -- --
Purchases of machinery and equipment........ (1,688) (899) (1,320) (11) (1,370)
Reimbursement of equipment costs............ 351 387 161 -- --
Purchases of office furniture and
equipment................................. (23) (34) (73) (6) --
Proceeds from sale of equipment............. -- 85 60 -- 4
Purchases of leasehold improvements......... (32) -- (4) -- (1,300)
Cash paid for note receivable from
officer................................... -- (15) -- -- --
Cash received from note receivable from
officer................................... 50 3 20 1 1
------- -------- -------- ------- -------
Net cash flows from investing
activities........................... (1,342) (473) (1,695) (16) (2,665)
------- -------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt................ 3,995 12,444 8,128 1,161 1,745
Repayment of long-term debt................. (6,524) (11,685) (10,434) (1,752) (3,139)
------- -------- -------- ------- -------
Net cash flows from financing
activities........................... (2,529) 759 (2,306) (591) (1,394)
------- -------- -------- ------- -------
Net Increase (Decrease) in Cash............... 16 (507) 37 66 642
Cash and Cash Equivalents, beginning of
period...................................... 751 767 260 260 297
------- -------- -------- ------- -------
Cash and Cash Equivalents, end of period...... $ 767 $ 260 $ 297 $ 326 $ 939
======= ======== ======== ======= =======
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of amounts
capitalized............................... $ 873 $ 783 $ 593 $ 168 $ 356
======= ======== ======== ======= =======
Cash paid (received) for income taxes, net
of amounts refunded....................... $ 237 $ 208 $ 123 $ (26) $ 234
======= ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 56
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING NOTES TO APPLICABLE UNAUDITED PERIODS)
(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. Recently,
the Company has begun selling its proprietary thin film coated glass
manufacturing systems 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 owns 50% of the outstanding common stock of the Company,
with the remaining 50% owned by the former shareholders of AFI.
STOCK SPLIT
Effective September 30, 1997, the Company issued a stock dividend to all
shareholders of 6 shares for every one held. All share and per share amounts
have been retroactively restated to reflect this event.
(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.
UNAUDITED FINANCIAL INFORMATION
The accompanying interim financial information as of September 27, 1997 and
for the quarters ended September 28, 1996 and September 27, 1997 is unaudited.
In the opinion of management, all adjustments (consisting of normal recurring
adjustments) have been included that are necessary to a fair statement of the
results of those interim periods presented. The results of operations for the
quarter ended September 27, 1997 are not necessarily indicative of the results
to be expected for the entire year.
BASIS OF PRESENTATION
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.
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,
1995, 1996 and 1997 include 52 weeks.
F-8
<PAGE> 57
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
CASH AND CASH EQUIVALENTS
The Company generally considers all highly liquid debt 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. 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. Although the Company is directly impacted by economic conditions in
the electronics industry, management does not believe significant credit risk
exists at June 28, 1997.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at June 29, 1996, and June 28, 1997 consist of the
following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28, SEPTEMBER 27,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials, net............................... $2,935,000 $3,840,000 $3,850,000
Work-in-process.................................. 10,000 9,000 6,000
Materials for manufacturing systems.............. -- 158,000 336,000
Finished goods................................... 3,869,000 2,153,000 1,890,000
---------- ---------- ----------
$6,814,000 $6,160,000 $6,082,000
========== ========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Building.................................................... 30 years
Machinery and equipment..................................... 3-10 years
Office furniture and equipment.............................. 3-5 years
Leasehold improvements...................................... 5-10 years
</TABLE>
REVENUE RECOGNITION
Coated glass revenues are recognized upon shipment.
SYSTEM SALES
Revenues relating to the sales of thin film coating systems 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
F-9
<PAGE> 58
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
be the best available measure of progress on these contracts. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance. General and administrative costs are charged to expense as
incurred. Changes in performance, contract conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. Income received
but not yet earned, which totaled $1,500,000 and 2,987,000 at June 28, 1997 and
September 27, 1997, respectively, 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 $145,000 and $638,000 at June 28, 1997 and September 27, 1997,
respectively, represents revenues earned prior to billing.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and consist
primarily of salaries and supplies. The Company incurred approximately
$1,010,000, $965,000 and $749,000 of research and development costs for the
years ended July 1, 1995, June 29, 1996 and June 28, 1997, respectively, net of
reimbursements received from a contracting research organization.
FOREIGN CURRENCY TRANSACTIONS
The Company generated 82 percent of its revenues in fiscal year 1997 from
sales to foreign corporations. In addition, many of their 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 payments 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.
NET INCOME (LOSS) PER SHARE
Net income (loss) per share is computed using the weighted average number
of common and common equivalent shares outstanding for each period. Common
equivalent shares include stock options to purchase the Company's common stock.
Pursuant to Securities and Exchange Commission Accounting Staff Bulletin No. 83,
common and common equivalent shares issued during the twelve months immediately
preceding the Company's initial public offering filing date have been included
in the calculation of common and common equivalent shares using the treasury
stock method and the anticipated public offering price as if they were
outstanding for all periods. Common stock equivalents, excluding those issued
within twelve months immediately preceding the Company's initial public offering
filing date, are excluded for loss periods because their inclusion would be
anti-dilutive.
F-10
<PAGE> 59
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(2) SIGNIFICANT ACCOUNTING POLICIES -- CONTINUED
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards 128 ("SFAS 128") entitled, "Earnings per Share."
SFAS 128 is effective for fiscal years ending after December 15, 1997; early
adoption is not permitted. SFAS 128 replaces primary and fully diluted earnings
per share with basic and diluted earnings per share, respectively. Under SFAS
128, net income (loss) per share for the periods reported would be as follows:
<TABLE>
<CAPTION>
YEARS ENDED
------------------------------ QUARTER ENDED QUARTER ENDED
1995 1996 1997 SEPTEMBER 28, 1996 SEPTEMBER 27, 1997
---- ---- ---- ------------------ ------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Basic................ $0.39 $(0.38) $0.57 $0.02 $0.23
Diluted.............. $0.39 $(0.38) $0.55 $0.02 $0.22
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-lived
Assets and for Long-lived Assets to be Disposed Of" ("SFAS 121"), which
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles and goodwill. The Company adopted SFAS 121
effective June 30, 1996. Implementation of SFAS 121 had no material effect on
the Company's financial position or results of operations.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
F-11
<PAGE> 60
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 29, JUNE 28, SEPTEMBER 27,
1996 1997 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to a bank (amended June 30, 1997)
payable in 36 monthly installments of
principal of $83,333 (final payment due June
30, 2000); interest accruing at the prime or
federal funds rate, whichever is greater, plus
a factor varying on earnings as defined in the
Agreement, cross collateralized with the
revolving credit facility..................... -- -- $ 2,833,000
Revolving credit facility, due June 30, 2000,
secured by eligible accounts receivable,
inventory, equipment and fixtures, as defined
in the Agreement; interest accruing at the
same rate as the note payable to a bank
(amended June 30, 1997)....................... -- -- 3,000,000
Line of credit with a bank, due June 30, 1997,
(see amended terms discussed below); cross
collateralized with the note payable to a
bank.......................................... $ 8,426,000 $ 7,138,000 --
Note payable to a bank.......................... 1,389,000 -- --
Note payable secured by a deed of trust on land,
due January 12, 1998; payments of interest
only due monthly; interest accruing at 9.0% at
June 28, 1997................................. 75,000 75,000 --
Note payable secured by a deed of trust on land
and buildings, payable in 60 monthly
installments of principal and interest of
$7,692 (final payment due June 27, 2002); with
interest accruing at 8.790%................... -- 371,000 357,000
----------- ----------- -----------
9,890,000 7,584,000 6,190,000
Less -- Current portion, amended........... (1,389,000) (1,136,000) (1,062,000)
----------- ----------- -----------
Total long-term debt....................... $ 8,501,000 $ 6,448,000 $ 5,128,000
=========== =========== ===========
</TABLE>
On June 30, 1997, the Company entered into an Amended and Restated Credit
Agreement (the "Agreement"), which includes a term note in the amount of
$3,000,000, payable in 36 monthly installments of $83,333, commencing on July
31, 1997, as well as a revolving credit facility with maximum availability of
$8,500,000, due on June 30, 2000. Both facilities are secured by eligible
accounts receivable, inventory, equipment and fixtures, as defined in the
Agreement. In addition, Donnelly has guaranteed $5,000,000 of the term note and
the revolving credit facility, so long as such amounts are outstanding. Interest
is payable quarterly on the aggregate balance, based on the prime or federal
funds rate, whichever is greater, plus a factor varying based on earnings before
interest, taxes, depreciation and amortization, as defined by the Agreement. 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; a ratio of total liabilities to tangible net
worth and maintain a certain amount of tangible net worth, all as defined in the
Agreement.
F-12
<PAGE> 61
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(3) LONG-TERM DEBT -- CONTINUED
Maturities of debt at June 28, 1997, giving effect to the subsequent event
discussed above, are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998...................................................... $1,136,000
1999...................................................... 1,067,000
2000...................................................... 5,212,000
2001...................................................... 81,000
2002...................................................... 88,000
Thereafter................................................ --
----------
Total.................................................. $7,584,000
==========
</TABLE>
(4) RELATED PARTY TRANSACTIONS
In fiscal 1993, the Company acquired a 25% general partner interest in a
partnership (the "Partnership") from an unrelated party; the remaining 75%
general partner interest in the Partnership is owned by stockholders of the
Company. The Company accounts for this investment under the equity method of
accounting, and the undistributed earnings are included in other income in the
accompanying consolidated statements of operations. The Partnership owns and
leases certain Boulder office and manufacturing facilities to the Company under
a noncancelable lease (see Note 9). The Company currently pays the Partnership
monthly rent and pays all property taxes and insurance costs. The Company paid
rent of approximately $241,000 under this agreement during each of the years
ended July 1, 1995, June 29, 1996 and June 28, 1997, respectively. In November
1995, the partnership acquired approximately 15,000 shares of the Company's
common stock. Accordingly, the Company has reduced its investment in the
affiliate for its 25% share of the partnership's investment in the Company.
In connection with its purchase of the office and manufacturing facilities,
the Partnership borrowed $1,320,000 pursuant to the terms of a partnership
borrowing agreement (the "Partnership Borrowing Agreement"). The Partnership
Borrowing Agreement, as amended, will mature on May 1, 1999. The Company is
jointly and severally liable to the lender as a general partner of the
Partnership for all amounts owing under such agreement. The balance outstanding
on this loan as of June 28, 1997 was $1,227,000.
The Company had employment agreements with three of its officers and
stockholders which contained certain clauses designed to protect the technology,
customer base and business operations of the Company. The agreements expired
April 30, 1995. In addition to salary compensation, each of the three employees
was paid $533,000 in thirty-six monthly installments beginning May 31, 1992, and
ending April 30, 1995. The Company expensed $436,000 in payments to the
stockholders related to these agreements during the year ended July 1, 1995.
As of June 28, 1997, the Company had a note receivable of approximately
$5,000 due from an officer for advances made by the Company. The note is secured
by the officer's residence, and is payable in $100 weekly installments and
accrues interest at prime plus .5%.
During 1996, the Company executed a note receivable to an officer of the
Company in connection with his relocation to Boulder in the amount of $15,000.
Interest accrued at a fixed rate of 8.75%. The note is secured by the
executive's residence in New York and is payable in full upon the sale of this
home. During 1997, this balance was repaid in full.
In fiscal 1997, the Company accrued $250,000 as interest expense as
consideration for Donnelly's guarantee of $5 million of the Company's debt. This
amount was paid in July 1997. On July 22, 1997,
F-13
<PAGE> 62
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(4) RELATED PARTY TRANSACTIONS -- CONTINUED
Donnelly extended this guarantee for the duration of the Agreement with the same
maximum amount guaranteed of $5 million.
(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. Through June 28, 1997,
the Company has expensed $556,000, and the balance of such deferred compensation
is being expensed over the remaining estimated service period, which is
consistent with the vesting period.
In April 1997, the Company adopted the 1997 Stock Option Plan ("the 1997
Plan") covering 122,500 shares of common stock. The exercise price of options
granted under the 1997 Plan is determined by the board of directors based upon
estimated fair market value. The options granted are to vest ratably over four
years. In April 1997, the Company granted options to purchase 69,090 shares of
common stock with an exercise price of $5.26 per share. In June 1997, the
Company issued an additional 15,827 options out of the 1993 Plan, with an
exercise price of $5.26 per share. The remaining shares must be granted with an
exercise price equal to estimated fair market value.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 ("SFAS 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 123 allows the continued measurement of compensation
cost in the financial statements for such plans using the intrinsic value based
method prescribed by APB 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 123 had been
applied. The Company has elected to account for its stock-based compensation
plans for employees and directors under APB 25. As the Company did not grant
options to purchase common stock during the year ended June 29, 1996, no pro
forma compensation expense was required for fiscal 1996 under the provisions of
SFAS 123.
For 1997, the Company has elected to account for its stock-based
compensation plans under APB 25; accordingly, for purposes of the pro forma
disclosures presented below, the Company has computed the fair values of all
options granted during fiscal 1997 using the Black-Scholes pricing model and the
following weighted average assumptions:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Risk-free interest rate..................................... 6.32%
Expected lives.............................................. 5.0 years
Expected volatility......................................... 51%
Expected dividend yield..................................... 0%
</TABLE>
F-14
<PAGE> 63
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) STOCKHOLDERS' EQUITY -- CONTINUED
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. 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. Because the Company's common stock is not yet 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 during fiscal 1997 was computed to
be approximately $230,000 for the year ended June 28, 1997. The amount is
amortized ratably over the vesting period of the options. Pro forma stock-based
compensation, net of the effect of forfeitures, was $5,000 for 1997.
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):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Net income:
As reported............................................... $1,621
======
Pro forma (unaudited)..................................... $1,616
======
Net income per share:
As reported............................................... $ 0.56
======
Pro forma (unaudited)..................................... $ 0.55
======
</TABLE>
A summary of the 1993 and 1997 Plans is as follows:
<TABLE>
<CAPTION>
FOR THE
FOR THE YEARS ENDED PERIOD ENDED
------------------------------------------------------------ ------------------
JULY 1, 1995 JUNE 29, 1996 JUNE 28, 1997 SEPTEMBER 27, 1997
------------------ ------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
------- -------- ------- -------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year............... 132,720 $2.32 273,602 $2.82 260,183 $2.83 345,100 $3.43
Granted............ 143,745 $3.29 -- -- 84,917 $5.26 34,545 $7.20
Canceled........... (2,863) $3.29 (13,419) $2.57 -- -- -- --
------- ------- ------- ----- ------- -----
Outstanding at end of
year............... 273,602 $2.82 260,183 $2.83 345,100 $3.43 379,645 $3.77
======= ===== ======= ===== ======= ===== ======= =====
Exercisable at end of
year............... 66,360 $2.32 126,427 $2.58 200,111 $2.78 200,111 $2.78
======= ===== ======= ===== ======= ===== ======= =====
Weighted average fair
value of options
granted............ $2.71
=====
</TABLE>
F-15
<PAGE> 64
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(5) STOCKHOLDERS' EQUITY -- CONTINUED
The following table summarizes information about employee stock options
outstanding and exercisable at June 28, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------- OPTIONS EXERCISABLE
NUMBER OF WEIGHTED -------------------------
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF JUNE 28, CONTRACTUAL EXERCISE JUNE 28, EXERCISE
EXERCISE PRICES 1997 LIFE IN YEARS PRICE 1997 PRICE
- --------------- -------------- ------------- -------- -------------- --------
<C> <C> <C> <C> <C> <C>
$2.32 122,766 5.9 $2.32 122,766 $2.32
$3.29 137,417 8.6 $3.29 68,709 $3.29
$5.26 84,917 9.3 $5.26 8,636 $5.26
------- ----- ------- -----
345,100 $3.43 200,111 $2.78
======= ===== ======= =====
</TABLE>
(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 is comprised of the following:
<TABLE>
<CAPTION>
JUNE 29, JUNE 28,
1996 1997
-------- --------
<S> <C> <C>
Alternative minimum tax credit.............................. $ 217,000 $ --
Net operating loss carryforward, state...................... 61,000 --
Inventories................................................. (26,000) 85,000
Accrued expenses............................................ 55,000 215,000
Foreign currency gain....................................... (24,000) --
Valuation allowance......................................... (61,000) (50,000)
--------- ---------
Total current deferred tax asset, net................ 222,000 250,000
--------- ---------
Property, plant and equipment............................... (453,000) (442,000)
Deferred compensation....................................... 185,000 208,000
Other....................................................... (107,000) (57,000)
--------- ---------
Total non-current deferred tax liability, net.......... (375,000) (291,000)
--------- ---------
Total deferred tax liability, net...................... $(153,000) $ (41,000)
========= =========
</TABLE>
Income tax (benefit) provision for the years ended July 1, 1995, June 29,
1996 and June 28, 1997 consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED
----------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Current federal and state income taxes.............. $458,000 $(254,000) $ 717,000
Deferred federal and state income taxes............. 38,000 (170,000) (112,000)
-------- --------- ---------
Total income tax (benefit) provision........... $496,000 $(424,000) $ 605,000
======== ========= =========
</TABLE>
F-16
<PAGE> 65
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(6) INCOME TAXES -- CONTINUED
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:
<TABLE>
<CAPTION>
YEARS ENDED
-------------------------------
JULY 1, JUNE 29, JUNE 28,
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax expense (benefit) rate......... 34.0% (34.0)% 34.0%
State income taxes.......................................... 3.3% (3.3)% 3.3%
Increase (decrease) in valuation allowance.................. -- 4.1% (0.5)%
Effect of FSC............................................... (6.8)% -- (5.8)%
Other....................................................... .5% 5.0% (3.8)%
---- ----- ----
Effective income tax expense (benefit) rate................. 31.0% (28.2)% 27.2%
==== ===== ====
</TABLE>
The Company's effective tax rate for the period ended September 27, 1997
was 33.2%.
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 expensed approximately $217,000,
$29,000 and $247,000 in fiscal years 1995, 1996 and 1997, respectively, related
to this plan.
(8) SIGNIFICANT CUSTOMERS
During fiscal years 1995, 1996 and 1997, approximately 84%, 82% and 83%,
respectively, of the Company's gross sales were to overseas customers. A single
customer accounted for approximately 12% of the Company's sales in fiscal year
1995. The Company's ten largest customers accounted for, in the aggregate,
approximately 63%, 56% and 59% of the Company's gross sales in fiscal 1995, 1996
and 1997, respectively. 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.
F-17
<PAGE> 66
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
(8) SIGNIFICANT CUSTOMERS -- CONTINUED
The breakdown of sales by geographic region is as follows:
<TABLE>
<CAPTION>
YEARS ENDED FOR THE
----------------------------------------------- QUARTER ENDED
1995 1996 1997 SEPTEMBER 27, 1997
---- ---- ---- ------------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Asia (other than
Japan)............... $20,642,000 $12,776,000 $19,534,000 $ 5,172,000
Japan.................. 5,467,000 4,288,000 6,611,000 2,142,000
United States.......... 5,091,000 4,049,000 5,997,000 3,716,000
Europe and Other....... 972,000 1,499,000 2,941,000 698,000
----------- ----------- ----------- -----------
Gross sales............ 32,172,000 22,612,000 35,083,000 11,728,000
Less: sales returns and
allowances........... (1,182,000) (874,000) (1,033,000) (477,000)
----------- ----------- ----------- -----------
Net sales.............. $30,990,000 $21,738,000 $34,050,000 $11,251,000
=========== =========== =========== ===========
</TABLE>
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 $223,000, $(286,000), and $96,000 of foreign
currency exchange rate gain (loss) on foreign currency exchange rate
fluctuations for the years ended July 1, 1995, June 29, 1996 and June 28, 1997,
respectively. The Company currently has approximately $896,000 of its accounts
receivable and $1,322,000 of its accounts payable denominated in Japanese Yen as
of June 28, 1997.
(9) COMMITMENTS
The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities. In addition, during 1997, the
Company entered into an agreement to lease land and a building which will be
used as the Company's primary manufacturing location and administrative
facility, which will be accounted for as an operating lease. Lease payments
commence January 1, 1998, and are fixed until the third anniversary of this
payment, at which time payments increase annually based on the Consumer Price
Index. The initial lease term is 15 years, with two additional 5 year options to
extend. Commencement of payments is contingent upon certain construction
completion deadlines by the lessor, as defined in the agreement.
The future minimum rental payments under the leases are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1998...................................................... $ 789,000
1999...................................................... 1,061,000
2000...................................................... 1,024,000
2001...................................................... 816,000
2002...................................................... 841,000
Thereafter................................................ 10,499,000
-----------
$15,030,000
===========
</TABLE>
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts 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 instruments are based on
borrowing rates that would approximate existing rates; therefore, there is no
material difference in their fair market value and the carrying value.
F-18
<PAGE> 67
======================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFERING
MADE BY THIS PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY AND SELLING
SHAREHOLDER OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SHARES
OF COMMON STOCK TO WHICH THIS PROSPECTUS RELATES, OR AN OFFER IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 3
Risk Factors............................. 5
Use of Proceeds.......................... 12
Dividend Policy.......................... 12
Capitalization........................... 13
Dilution................................. 14
Selected Financial and Operating Data.... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operation.............................. 16
Business................................. 23
Management............................... 33
Certain Transactions..................... 38
Principal and Selling Shareholders....... 40
Description of Capital Stock............. 41
Shares Eligible for Future Sale.......... 44
Underwriting............................. 45
Legal Matters............................ 46
Experts.................................. 46
Additional Information................... 46
Index to Consolidated Financial
Statements............................. F-1
</TABLE>
------------------------
UNTIL , (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO
THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS
AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
======================================================
======================================================
1,900,000 Shares
APPLIED FILMS CORPORATION LOGO
Common Stock
------------------------
PROSPECTUS
------------------------
Needham & Company, Inc.
D.A. Davidson & Co.
------------------------
, 1997
======================================================
<PAGE> 68
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the Common Stock being registered, other than
underwriting discounts and commission. All amounts shown are estimates, except
the SEC registration fee and the NASD filing fee, and assume sale of 1,900,000
shares in the offering. All expenses shown will be paid by Donnelly Corporation,
a Selling Shareholder.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 7,414
NASD filing fee............................................. 3,013
Printing and mailing expenses............................... 150,000
Fees and expenses of counsel................................ 150,000
Accounting and related expenses............................. 75,000
Blue Sky fees and expenses.................................. 10,000
Registrar and Transfer Agent fees........................... 2,500
Miscellaneous............................................... 52,073
--------
Total.................................................. $450,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 7-109-102 through 7-109-110 of the Colorado Business Corporation
Act (the "Act") grant the Registrant broad powers to indemnify any person in
connection with legal proceedings brought against him by reason of his present
or past status as an officer or director of the Registrant, provided with
respect to conduct in an official capacity with the Registrant, the person acted
in good faith and in a manner he reasonably believed to be in the best interests
of the Registrant, with respect to all other conduct, the person believed the
conduct to be in or not opposed to the best interests of the Registrant, and
with respect to any criminal action or proceeding, the person had no reasonable
cause to believe his conduct was unlawful. Indemnification is limited to
reasonable expenses incurred in connection with the proceeding. No
indemnification may be made (i) in connection with a proceeding by or in the
right of the Registrant in which the person was adjudged liable to the
Registrant; or (ii) in connection with any other proceedings charging that the
person derived an improper personal benefit, whether or not involving action in
an official capacity, in which proceeding the person was judged liable on the
basis that he derived an improper personal benefit, unless and only to the
extent the court in which such action was brought or another court of competent
jurisdiction determines upon application that, despite such adjudication, but in
view of all relevant circumstances, the person is fairly and reasonably entitled
to indemnity for reasonable expenses as the court deems proper. In addition, to
the extent that any such person is successful in the defense of any such legal
proceeding, the Registrant is required by the Act to indemnify him against
reasonable expenses.
The Registrant's Amended and Restated Articles of Incorporation contain
provisions which permit the Registrant to indemnify its officers and directors
to the fullest extent permitted by the Colorado Business Corporation Act. The
Registrant has entered into indemnification agreements with each of its
directors and certain of its officers providing for similar indemnification. See
Exhibit 10.4 to this Registration Statement. In addition to the available
indemnification, the Registrant's Amended and Restated Articles of Incorporation
limit the personal liability of the members of its Board of Directors, subject
to certain exceptions, for monetary damages with respect to claims by the
Registrant or its shareholders.
The Registrant's Amended and Restated Bylaws provide that the Registrant
may purchase and maintain insurance on behalf of its directors, officers,
employees, fiduciaries and agents against liability asserted against or incurred
by such persons in any such capacity.
II-1
<PAGE> 69
The Registrant has agreed to indemnify the Underwriters, and the
Underwriters have agreed to indemnify the Registrant against certain civil
liabilities, including liabilities under the Securities Act, as amended.
Reference is made to the Underwriting Agreement filed as Exhibit 1.1 herewith.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
On January 20, 1995, the Registrant granted options on 143,745 shares of
its Common Stock at an exercise price of $3.29 per share pursuant to the
Donnelly Applied Films Corporation Stock Option Plan (the "1993 Plan"). The
options were granted to directors, officers and employees of the Registrant.
On April 29, 1997, the Registrant granted options on 69,090 shares of its
Common Stock at an exercise price of $5.26 per share pursuant to the 1997 Stock
Option Plan (the "1997 Plan"). The options were granted to directors, officers
and employees of the Registrant.
On June 27, 1997, the Registrant granted options on 15,827 shares of its
Common Stock at an exercise price of $5.26 per share pursuant to the 1993 Plan.
The options were granted to directors, officers and employees of the Registrant.
On September 5, 1997, the Registrant granted options on 34,545 shares of
its Common Stock at an exercise price of $7.20 per share pursuant to the 1997
Plan. The options were granted to directors, officers and employees of the
Registrant.
No underwriter was engaged in connection with the foregoing sales of
securities. The grants of options were made in reliance upon Section 4(2) of the
Securities Act of 1933 as transactions not involving any public offering. The
Registrant has reason to believe that all of the foregoing purchasers were
familiar with or had access to information concerning the operations and
financial condition of the Registrant, and all of those individuals acquired the
options and related shares for investment and not with a view to the
distribution thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Reference is made to the Exhibit Index which appears at page II-4 of the
Registration Statement.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes as follows:
The Registrant will provide to the underwriter at the closing specified in
the underwriting agreement certificates in such denominations and registered in
such names as required by the underwriter to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission such indemnification is against the public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration Statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act
shall be deemed to be part of this Registration Statement as of the time it was
declared effective; and (2) For the purpose of determining any liability under
the Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 70
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement No. 333-35331 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Boulder, State of Colorado, on October , 1997.
APPLIED FILMS CORPORATION
By: /s/ CECIL VAN ALSBURG
------------------------------------
Cecil Van Alsburg, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to Registration Statement No. 333-35331 has been signed by the following
persons in the capacities indicated on October , 1997.
<TABLE>
<CAPTION>
SIGNATURES TITLE
---------- -----
<C> <S>
/s/ Cecil Van Alsburg President, Chief Executive Officer and Director
- --------------------------------------------------- (principal executive officer)
Cecil Van Alsburg
/s/ Thomas D. Schmidt Chief Financial Officer (principal financial
- --------------------------------------------------- officer)
Thomas D. Schmidt
/s/ Roger Smith Treasurer (principal accounting officer)
- ---------------------------------------------------
Roger Smith
/s/ John S. Chapin* Vice President -- Research, Secretary and
- --------------------------------------------------- Director
John S. Chapin
/s/ C. Richard Condon* Vice President -- Engineering and Director
- ---------------------------------------------------
C. Richard Condon
/s/ J. Dwane Baumgardner* Director
- ---------------------------------------------------
J. Dwane Baumgardner
/s/ James A. Knister* Director
- ---------------------------------------------------
James A. Knister
/s/ Chad D. Quist* Director
- ---------------------------------------------------
Chad D. Quist
*By /s/ Cecil Van Alsburg
----------------------------------------------
Cecil Van Alsburg, Attorney in Fact
</TABLE>
II-3
<PAGE> 71
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
1.1 Form of Underwriting Agreement
3.1 * Amended and Restated Articles of Incorporation of Applied
Films Corporation
3.2 * Amended and Restated Bylaws of Applied Films Corporation
4.1 Specimen common stock certificate
5.1 Opinion of Varnum, Riddering, Schmidt & Howlett LLP
10.1 * 1993 Stock Option Plan
10.2 * 1997 Stock Option Plan
10.3 * Employee Stock Purchase Plan
10.4 * Form of Indemnity Agreement between Registrant and each of
its Directors and Executive Officers
10.5 * Amended and Restated Credit Agreement, dated as of June 30,
1997, together with Security Agreement, dated June 30, 1994,
each between Registrant and NBD Bank
10.6 * Partnership Agreement, dated January 1, 1981, by and among
James R. Loftus, Cecil W. Van Alsburg, Charles Richard
Condon and John S. Chapin, as amended by the Amendment to
Partnership Agreement of Winchester 44 Associates, dated as
of April 14, 1993, by and among James R. Loftus, Cecil W.
Van Alsburg, Charles Richard Condon, John S. Chapin and
Registrant
10.7 * Agreement of Lease, dated July 1, 1993, between Randal
Bjerke and Registrant
10.8 * Lease Agreement, dated April 27, 1995, between Winchester 44
Associates and Registrant
10.9 * Lease, dated June 26, 1997, between Registrant and CFA LLC
11.1 Statement re: computation of per share earnings
21 * Subsidiary of Applied Films Corporation
23.1 Consent of Varnum, Riddering, Schmidt & Howlett LLP
(included in opinion filed as Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24 * Power of Attorney (included on page II-3)
27 Financial Data Schedule (EDGAR filing only)
</TABLE>
- -------------------------
* Previously filed.
II-4
<PAGE> 1
EXHIBIT 1.1
1,900,000 SHARES*
APPLIED FILMS CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
November __, 1997
NEEDHAM & COMPANY, INC.
D.A. DAVIDSON & CO.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
Applied Films Corporation, a Colorado corporation (the "Company"),
proposes to issue and sell 500,000 shares (the "Company Firm Shares") of the
Company's Common Stock, no par value per share (the "Common Stock"), and the
stockholders of the Company named in Schedule II hereto (the "Selling
Stockholders") propose to sell the number of shares set forth opposite their
name in Schedule II hereto for an aggregate of 1,400,000 shares (the "Selling
Stockholder Firm Shares") of Common Stock, in each case to you and to the
several other Underwriters named in Schedule I hereto (collectively, the
"Underwriters"), for whom you are acting as representatives (the
"Representatives"). The Company and certain of the Selling Stockholders have
also agreed to grant to you and the other Underwriters an option (the "Option")
to purchase up to an additional 285,000 shares of Common Stock, on the terms
and for the purposes set forth in Section 1(b) (the "Option Shares"). The
Company Firm Shares and the Selling Stockholder Firm Shares are referred to
collectively herein as the "Firm Shares," and the Firm Shares and the Option
Shares are referred to collectively herein as the "Shares."
The Company and each of the Selling Stockholders confirm as follows
their respective agreements with the Representatives and the several other
Underwriters.
- -------------------
* Plus an option to purchase up to an additional 285,000 shares to cover
over-allotments.
<PAGE> 2
1. AGREEMENT TO SELL AND PURCHASE.
(A) On the basis of the representations, warranties and
agreements of the Company and the Selling Stockholders herein contained
and subject to all the terms and conditions of this Agreement, (i) the Company
agrees to issue and sell the Company Firm Shares to the several Underwriters,
(ii) each Selling Stockholder, severally and not jointly, agrees to sell to the
several Underwriters the respective number of Selling Stockholder Firm Shares
set forth opposite that Selling Stockholders' name on Schedule II hereto and
(iii) each of the Underwriters, severally and not jointly, agrees to purchase
from the Company and the Selling Stockholders the respective number of Firm
Shares set forth opposite that Underwriter's name in Schedule I hereto, at the
purchase price of $____ for each Firm Share. The number of Firm Shares to be
purchased by each Underwriter from the Company and each Selling Stockholder
shall be as nearly as practicable in the same proportion to the total number of
Firm Shares being sold by the Company and each Selling Stockholder as the
number of Firm Shares being purchased by each Underwriter bears to the total
number of Firm Shares to be sold hereunder.
(B) Subject to all the terms and conditions of this
Agreement, the Selling Stockholders grant the Option to the several
Underwriters to purchase, severally and not jointly, up to the maximum number
of Option Shares set forth in Schedule II hereto at the same price per share as
the Underwriters shall pay for the Firm Shares. The Option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 30th day after the date of this Agreement upon
written or telegraphic notice (the "Option Shares Notice") by the
Representatives to the Company and the Selling Stockholders no later than 12:00
noon, New York City time, at least two and no more than five business days
before the date specified for closing in the Option Shares Notice (the "Option
Closing Date"), setting forth the aggregate number of Option Shares to be
purchased and the time and date for such purchase. On the Option Closing Date,
the Company and certain of the Selling Stockholders will sell to the
Underwriters the number of Option Shares set forth in the Option Shares Notice,
and each Underwriter will purchase such percentage of the Option Shares as is
equal to the percentage of Firm Shares that such Underwriter is purchasing, as
adjusted by the Representatives in such manner as they deem advisable to avoid
fractional shares.
2. DELIVERY AND PAYMENT. Delivery of the Firm Shares shall be
made to the Representatives for the accounts of the Underwriters against
payment of the purchase price by certified or official bank checks or by wire
transfers payable in same-day funds to the order of the Company for the Company
Firm Shares to be sold by it and to __________, as custodian for the Selling
Stockholders (the "Custodian") for the Firm Shares to be sold by the Selling
Stockholders at the office of Needham & Company, Inc., 445 Park Avenue, New
York, New York 10022, at 10:00 a.m., New York City time, on the third (or, if
the purchase price set forth in Section 1(b) hereof is determined after 4:30
p.m., Washington D.C. time, the fourth) business day following the commencement
of the offering contemplated by this Agreement, or at such time on such other
date, not later than seven business days after the date of this Agreement, as
may be agreed upon by the Company and the Representatives (such date is
hereinafter referred to as the "Closing Date").
2
<PAGE> 3
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and
shall be registered in such names and in such denominations as the
Representatives shall request at least two business days prior to the Closing
Date or the Option Closing Date, as the case may be, by written notice to the
Company. For the purpose of expediting the checking and packaging of
certificates for the Shares, the Company agrees to make such certificates
available for inspection at least 24 hours prior to the Closing Date or the
Option Closing Date, as the case may be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to
the respective Underwriters shall be borne by the Company. The Company will
pay and save each Underwriter and any subsequent holder of the Shares harmless
from any and all liabilities with respect to or resulting from any failure or
delay in paying Federal and state stamp and other transfer taxes, if any, which
may be payable or determined to be payable in connection with the original
issuance or sale to such Underwriter of the Shares.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents, warrants and covenants to each Underwriter that:
(A) A registration statement (Registration No. 333-35331)
on Form S-1 relating to the Shares, including a preliminary prospectus and
such amendments to such registration statement as may have been required to the
date of this Agreement, has been prepared by the Company under the provisions
of the Securities Act of 1933, as amended (the "Act"), and the rules and
regulations (collectively referred to as the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission") thereunder, and has been
filed with the Commission. The term "preliminary prospectus" as used herein
means a preliminary prospectus as contemplated by Rule 430 or Rule 430A of the
Rules and Regulations included at any time as part of the registration
statement. Copies of such registration statement and amendments and of each
related preliminary prospectus have been delivered to the Representatives. If
such registration statement has not become effective, a further amendment to
such registration statement, including a form of final prospectus, necessary to
permit such registration statement to become effective will be filed promptly
by the Company with the Commission. If such registration statement has become
effective, a final prospectus containing information permitted to be omitted at
the time of effectiveness by Rule 430A of the Rules and Regulations will be
filed promptly by the Company with the Commission in accordance with Rule
424(b) of the Rules and Regulations. The term "Registration Statement" means
the registration statement as amended at the time it becomes or became
effective (the "Effective Date"), including financial statements and all
exhibits and any information deemed to be included by Rule 430A and includes
any registration statement relating to the offering contemplated by this
Agreement and filed pursuant to Rule 462(b) of the Rules and Regulations. The
term "Prospectus" means the prospectus as first filed with the Commission
pursuant to Rule
3
<PAGE> 4
424(b) of the Rules and Regulations or, if no such filing is required, the form
of final prospectus included in the Registration Statement at the Effective
Date.
(B) No order preventing or suspending the use of any
preliminary prospectus has been issued by the Commission. On the Effective
Date, the date the Prospectus is first filed with the Commission pursuant to
Rule 424(b) (if required), at all times subsequent to and including the Closing
Date and, if later, the Option Closing Date and when any post-effective
amendment to the Registration Statement becomes effective or any amendment or
supplement to the Prospectus is filed with the Commission, the Registration
Statement and the Prospectus (as amended or as supplemented if the Company
shall have filed with the Commission any amendment or supplement thereto),
including the financial statements included in the Prospectus, did and will
comply with all applicable provisions of the Act and the Rules and Regulations
and will contain all statements required to be stated therein in accordance
with the Act and the Rules and Regulations. On the Effective Date and when any
post-effective amendment to the Registration Statement becomes effective, no
part of the Registration Statement, the Prospectus or any such amendment or
supplement did or will contain an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading. At the Effective Date, the date
the Prospectus or any amendment or supplement to the Prospectus is filed with
the Commission and at the Closing Date and, if later, the Option Closing Date,
the Prospectus did not and will not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading.
The foregoing representations and warranties in this Section 3(b) do not apply
to any statements or omissions made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives specifically for inclusion in the Registration Statement or
Prospectus or any amendment or supplement thereto. The Company acknowledges
that the statements set forth under the heading "Underwriting" in the
Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives specifically for
inclusion in the Registration Statement.
(C) The Company does not own, and at the Closing Date and,
if later, the Option Closing Date, will not own, directly or indirectly, any
shares of stock or any other equity or long-term debt securities of any
corporation or have any equity interest in any corporation, firm, partnership,
joint venture, association or other entity, other than the subsidiaries listed
in Exhibit 21 to the Registration Statement (the "Subsidiaries"). The Company
and each of its Subsidiaries is, and at the Closing Date and, if later, the
Option Closing Date, will be, a corporation duly organized, validly existing
and in good standing under the laws of its jurisdiction of incorporation. The
Company and each of its Subsidiaries has, and at the Closing Date and, if
later, the Option Closing Date, will have, full power and authority to conduct
all the activities conducted by it, to own or lease all the assets owned or
leased by it and to conduct its business as described in the Registration
Statement and the Prospectus. The Company and each of its Subsidiaries is, and
at the Closing Date and, if later, the Option Closing Date, will be, duly
licensed or qualified to do business and in good standing as a foreign
corporation in all jurisdictions in which the nature of the activities
conducted by it or the character of the assets owned or leased by it makes such
license or qualification necessary, except to the extent that the
4
<PAGE> 5
failure to be so qualified or be in good standing would not materially and
adversely affect the Company or its business, properties, business prospects,
condition (financial or other) or results of operations. All of the
outstanding shares of capital stock of each Subsidiary have been duly
authorized and validly issued and are fully paid and nonassessable, and owned
by the Company free and clear of all claims, liens, charges and encumbrances;
there are no securities outstanding that are convertible into or exercisable or
exchangeable for capital stock of any Subsidiary. The Company is not, and at
the Closing Date and, if later, the Option Closing Date, will not be, engaged
in any discussions or a party to any agreement or understanding, written or
oral, regarding the acquisition of an interest in any corporation, firm,
partnership, joint venture, association or other entity where such discussions,
agreements or understandings would require amendment to the Registration
Statement pursuant to applicable securities laws. Complete and correct copies
of the certificate of incorporation and of the by-laws of the Company and each
of its Subsidiaries and all amendments thereto have been delivered to the
Representatives, and no changes therein will be made subsequent to the date
hereof and prior to the Closing Date or, if later, the Option Closing Date.
(D) All of the outstanding shares of capital stock of the
Company (including the Selling Stockholder Firm Shares to be sold by the Selling
Stockholders under this Agreement) have been duly authorized, validly issued
and are fully paid and nonassessable and were issued in compliance with all
applicable state and federal securities laws; the Company Firm Shares have been
duly authorized and when issued and paid for as contemplated herein will be
validly issued, fully paid and nonassessable; no preemptive or similar rights
exist with respect to any of the Shares or the issue and sale thereof. The
description of the capital stock of the Company in the Registration Statement
and the Prospectus is, and at the Closing Date and, if later, the Option
Closing Date, will be, complete and accurate in all respects. Except as set
forth in the Prospectus, the Company does not have outstanding, and at the
Closing Date and, if later, the Option Closing Date, will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, any shares of capital stock, or any such warrants, convertible
securities or obligations. No further approval or authority of stockholders or
the Board of Directors of the Company will be required for the transfer and
sale of the Selling Stockholder Firm Shares or the issuance and sale of the
Company Firm Shares as contemplated herein.
(E) The financial statements and schedules included in the
Registration Statement or the Prospectus present fairly the financial condition
of the Company and its consolidated Subsidiaries as of the respective dates
thereof and the results of operations and cash flows of the Company and its
consolidated Subsidiaries for the respective periods covered thereby, all in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the entire period involved, except as otherwise
disclosed in the Prospectus. No other financial statements or schedules of the
Company are required by the Act or the Rules and Regulations to be included in
the Registration Statement or the Prospectus. Arthur Andersen LLP (the
"Accountants"), who have reported on such financial statements and schedules,
are independent accountants with respect to the Company as required by the Act
and the Rules and Regulations. The summary consolidated financial and
statistical data included in the
5
<PAGE> 6
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein.
(F) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus and prior
to the Closing Date and, if later, the Option Closing Date, except as set forth
in or contemplated by the Registration Statement and the Prospectus, (i) there
has not been and will not have been any change in the capitalization of the
Company (other than in connection with the exercise of options to purchase the
Company's Common Stock granted pursuant to the Company's stock option plans
from the shares reserved therefor as described in the Registration Statement),
or any material adverse change in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company or
any of its Subsidiaries, arising for any reason whatsoever, (ii) neither the
Company nor any of its Subsidiaries has incurred nor will any of them incur,
except in the ordinary course of business as described in the Prospectus, any
material liabilities or obligations, direct or contingent, nor has the Company
or any of its Subsidiaries entered into nor will it enter into, except in the
ordinary course of business as described in the Prospectus, any material
transactions other than pursuant to this Agreement and the transactions
referred to herein and (iii) the Company has not and will not have paid or
declared any dividends or other distributions of any kind on any class of its
capital stock.
(G) The Company is not, will not become as a result of the
transactions contemplated hereby, and does not intend to conduct its business
in a manner that would cause it to become, an "investment company" or an
"affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(H) Except as set forth in the Registration Statement and
the Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or affecting the Company, and of
its Subsidiaries or any of its or their officers in their capacity as such, nor
any basis therefor, before or by any Federal or state court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, wherein an unfavorable ruling, decision or finding might materially
and adversely affect the Company, any of its Subsidiaries or the business,
properties, business prospects, condition (financial or otherwise) or results
of operations of the Company or any of its Subsidiaries.
(I) The Company and each Subsidiary has, and at the Closing
Date and, if later, the Option Closing Date, will have, performed all the
obligations required to be performed by it, and is not, and at the Closing
Date, and, if later, the Option Closing Date, will not be, in default, under
any contract or other instrument to which it is a party or by which its
property is bound or affected, which default might materially and adversely
affect the Company or the business, properties, business prospects, condition
(financial or other) or results of operations of the Company or any of its
Subsidiaries. To the best knowledge of the Company, no other party under any
contract or other instrument to which it or any of its Subsidiaries is a party
is in default in any respect thereunder, which default might materially and
adversely affect the Company, any of its Subsidiaries or the business,
properties, business prospects, condition (financial or other) or
6
<PAGE> 7
results of operations of the Company or any of its Subsidiaries. Neither the
Company nor any of its Subsidiaries is, and at the Closing Date and, if later,
the Option Closing Date, will be, in violation of any provision of its
certificate or articles of organization or by-laws or other organizational
documents.
(J) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is
required for the consummation by the Company of the transactions on its part
contemplated herein, except such as have been obtained under the Act or the
Rules and Regulations and such as may be required under state securities or
Blue Sky laws or the by-laws and rules of the National Association of
Securities Dealers, Inc. (the "NASD") in connection with the purchase and
distribution by the Underwriters of the Shares.
(K) The Company has full corporate power and authority to
enter into this Agreement. This Agreement has been duly authorized, executed
and delivered by the Company and constitutes a valid and binding agreement of
the Company, enforceable against the Company in accordance with the terms
hereof. The performance of this Agreement and the consummation of the
transactions contemplated hereby will not result in the creation or imposition
of any lien, charge or encumbrance upon any of the assets of the Company
pursuant to the terms or provisions of, or result in a breach or violation of
any of the terms or provisions of, or constitute a default under, or give any
party a right to terminate any of its obligations under, or result in the
acceleration of any obligation under, the certificate or articles of
incorporation or by-laws of the Company or any of its Subsidiaries, any
indenture, mortgage, deed of trust, voting trust agreement, loan agreement,
bond, debenture, note agreement or other evidence of indebtedness, lease,
contract or other agreement or instrument to which the Company or any of its
Subsidiaries is a party or by which the Company, any of its Subsidiaries or any
of its or their properties is bound or affected, or violate or conflict with
any judgment, ruling, decree, order, statute, rule or regulation of any court
or other governmental agency or body applicable to the business or properties
of the Company or any of its Subsidiaries.
(L) The Company or one of its Subsidiaries has good and
marketable title to all properties and assets described in the Prospectus as
owned by them, free and clear of all liens, charges, encumbrances or
restrictions, except such as are described in the Prospectus or are not
material to the business of the Company or its Subsidiaries. The Company or
its Subsidiaries has valid, existing and enforceable leases for the properties
described in the Prospectus as leased by them. The Company or one of its
Subsidiaries owns or leases all such properties as are necessary to its
operations as now conducted or as proposed to be conducted, except where the
failure to so own or lease would not materially and adversely affect the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company or its Subsidiaries.
(M) There is no document or contract of a character
required to be described in the Registration Statement or the Prospectus or to
be filed as an exhibit to the Registration Statement which is not described or
filed as required. All such contracts to which the Company or any of its
Subsidiaries is a party have been duly authorized, executed and delivered by the
7
<PAGE> 8
Company or such Subsidiary, constitute valid and binding agreements of the
Company or such Subsidiary and are enforceable against and by the Company or
such Subsidiary in accordance with the terms thereof.
(N) No statement, representation, warranty or covenant made
by the Company in this Agreement or made in any certificate or document
required by Section 6 of this Agreement to be delivered to the Representatives
was or will be, when made, inaccurate, untrue or incorrect.
(O) Neither the Company nor any of its directors, officers
or controlling persons has taken, directly or indirectly, any action designed,
or which might reasonably be expected, to cause or result, under the Act or
otherwise, in, or which has constituted, stabilization or manipulation of the
price of any security of the Company to facilitate the sale or resale of the
Shares.
(P) No holder of securities of the Company has rights to
the registration of any securities of the Company because of the filing of the
Registration Statement, which rights have not been waived by the holder thereof
as of the date hereof.
(Q) The Company has filed a registration statement pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), to register the Common Stock, has filed an application to list
the Shares to be sold by the Company hereunder on the Nasdaq National Market
("NNM"), and has received notification that the listing has been approved,
subject to notice of issuance of such Shares.
(R) Except as disclosed in or specifically contemplated by
the Prospectus (i) the Company and its Subsidiaries have, or can acquire on
reasonable terms, sufficient trademarks, trade names, patent rights,
copyrights, licenses, approvals and governmental authorizations to conduct
their businesses as now conducted, (ii) the Company has no knowledge of any
infringement by it or any of its Subsidiaries of trademarks, trade name rights,
patent rights, copyrights, licenses, trade secrets or other similar rights of
others, where such infringement could have a material and adverse effect on the
Company, any of its Subsidiaries or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company or any of its Subsidiaries, and (iii) to the best of the Company's
knowledge, there is no claim being made against the Company or any of its
Subsidiaries or any employee of the Company or any of its Subsidiaries,
regarding trademark, trade name, patent, copyright, license, trade secret or
other infringement which could have a material and adverse effect on the
Company, any of its Subsidiaries or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company or any of its Subsidiaries.
(S) The Company and each of its Subsidiaries has filed all
federal, state, local and foreign income tax returns which have been required
to be filed and has paid all taxes and assessments received by it to the extent
that such taxes or assessments have become due. Neither the Company nor any of
its Subsidiaries has any tax deficiency which has been or, to the best
knowledge of the Company, might be asserted or threatened against it which
could have a
8
<PAGE> 9
material and adverse effect on the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company or
its Subsidiaries.
(T) The pro forma financial information set forth in the
Registration Statement reflects, subject to the limitations set forth in the
Registration Statement as to such pro forma financial information, the results
of operations of the Company and its consolidated Subsidiaries purported to be
shown thereby for the periods indicated and conforms to the requirements of
Regulation S-X of the Rules and Regulations.
(U) The Company or its Subsidiaries owns or possesses all
authorizations, approvals, orders, licenses, registrations, other certificates
and permits of and from all governmental regulatory officials and bodies,
necessary to conduct their respective businesses as contemplated in the
Prospectus, except where the failure to own or possess all such authorizations,
approvals, orders, licenses, registrations, other certificates and permits
would not materially and adversely affect the Company and its Subsidiaries
taken as a whole or the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries taken as a whole. There is no proceeding pending or threatened (or
any basis therefor known to the Company) which may cause any such
authorization, approval, order, license, registration, certificate or permit to
be revoked, withdrawn, canceled, suspended or not renewed; and the Company and
each of its Subsidiaries is conducting its business in compliance with all
laws, rules and regulations applicable thereto (including, without limitation,
all applicable federal, state and local environmental laws and regulations)
except where such noncompliance would not materially and adversely affect the
Company, any of its Subsidiaries or the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company or any of its Subsidiaries.
(V) The Company and each of its Subsidiaries maintains
insurance of the types and in the amounts generally deemed adequate for
its business, including, but not limited to, insurance covering real and
personal property owned or leased by the Company and its Subsidiaries against
theft, damage, destruction, acts of vandalism and all other risks customarily
insured against, all of which insurance is in full force and effect.
(W) Neither the Company nor any of its Subsidiaries has
nor, to the best of the Company's knowledge, any of its or their respective
employees or agents at any time during the last five years (i) made any
unlawful contribution to any candidate for foreign office, or failed to
disclose fully any contribution in violation of law, or (ii) made any payment
to any federal or state governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments
required or permitted by the laws of the United States or any jurisdiction
thereof.
(X) The Company and each of its Subsidiaries is in
compliance in all respects with all applicable Environmental Laws except
to the extent that any noncompliance would not have a material adverse effect
on the Company as the business, properties, business prospects, condition
(financial or otherwise) or results of operations of the Company and its
Subsidiaries taken as a whole. Except as set forth in the Registration
Statement and Prospectus, neither the
9
<PAGE> 10
Company nor any of its Subsidiaries has received any notice or other
communication (in writing or otherwise) that alleges that the Company or any of
its Subsidiaries is not in compliance with any Environmental Law where such
noncompliance is required to be disclosed in the Registration Statement and the
Prospectus, and there are no circumstances that may prevent or interfere with
the Company's or any of its Subsidiaries' compliance with any Environmental Law
in the future. For purposes of this Section 3(x), "Environmental Law" means
any federal, state, local or foreign legal requirement relating to pollution or
protection of human health or the environment.
4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLING
STOCKHOLDERS. Each Selling Stockholder, severally and not jointly, represents,
warrants and covenants to each Underwriter that:
(A) All consents, approvals, authorizations and orders
necessary for the execution and delivery by such Selling Stockholder of
this Agreement and the Power-of-Attorney and Custody Agreement (hereinafter
referred to as a "Custody Agreement") hereinafter referred to, and for the sale
and delivery of the Selling Stockholder Firm Shares to be sold by such Selling
Stockholder hereunder, have been obtained; and such Selling Stockholder has
full right, power and authority to enter into this Agreement and the Custody
Agreement, to make the representations, warranties and agreements hereunder and
thereunder, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder hereunder.
(B) Certificates in negotiable form representing all of the
Selling Stockholder Firm Shares to be sold by such Selling Stockholder have
been placed in custody under the Custody Agreement, in the form heretofore
furnished to you, duly executed and delivered by such Selling Stockholder to
the Custodian, and such Selling Stockholder has duly executed and delivered a
power-of-attorney, in the form heretofore furnished to you and included in the
Custody Agreement (the "Power-of-Attorney"), appointing [CECIL VAN ALSBURG] and
[THOMAS SCHMIDT], and each of them, as such Selling Stockholder's
attorney-in-fact (the "Attorneys-in-Fact") with authority to execute and
deliver this Agreement on behalf of such Selling Stockholder, to determine
(subject to the provisions of the Custody Agreement) the purchase price to be
paid by the Underwriters to the Selling Stockholders as provided in Section 2
hereof, to authorize the delivery of the Selling Stockholder Firm Shares to be
sold by such Selling Stockholder hereunder and otherwise to act on behalf of
such Selling Stockholder in connection with the transactions contemplated by
this Agreement and the Custody Agreement.
(C) Such Selling Stockholder specifically agrees that the
Selling Stockholder Firm Shares represented by the certificates held in custody
for such Selling Stockholder under the Custody Agreement are for the benefit of
and coupled with and subject to the interests of the Underwriters, the
Custodian, the Attorneys-in-Fact, each other Selling Stockholder and the
Company, that the arrangements made by such Selling Stockholder for such
custody, and the appointment by such Selling Stockholder of the
Attorneys-in-Fact by the Power-of-Attorney, are to that extent irrevocable, and
that the obligations of such Selling Stockholder hereunder shall not be
terminated by operation of law, whether by the death, disability, incapacity,
liquidation or dissolution of any Selling Stockholder or by the occurrence of
any other event. If any individual
10
<PAGE> 11
Selling Stockholder or any executor or trustee for a Selling Stockholder should
die or become incapacitated, or if any Selling Stockholder that is an estate or
trust should be terminated, or if any Selling Stockholder that is a partnership
or corporation should be dissolved, or if any other such event should occur,
before the delivery of the Selling Stockholder Firm Shares hereunder,
certificates representing the Selling Stockholder Firm Shares shall be
delivered by or on behalf of the Selling Stockholders in accordance with the
terms and conditions of this Agreement and of the Custody Agreement, and
actions taken by the Attorneys-in-Fact pursuant to the Powers-of-Attorney shall
be as valid as if such death, incapacity, termination, dissolution or other
event had not occurred, regardless of whether or not the Custodian, the
Attorneys-in-Fact, or any of them, shall have received notice of such death,
incapacity, termination, dissolution or other event.
(D) This Agreement and the Custody Agreement have each been
duly authorized, executed and delivered by such Selling Stockholder and each
such document constitutes a valid and binding obligation of such Selling
Stockholder, enforceable in accordance with its terms.
(E) No consent, approval, authorization or order of, or any
filing or declaration with, any court or governmental agency or body is
required in connection with the sale of the Selling Stockholder Firm Shares by
such Selling Stockholder or the consummation by such Selling Stockholder of the
transactions on its part contemplated by this Agreement and the Custody
Agreement, except such as have been obtained under the Act or the Rules and
Regulations and such as may be required under state securities or Blue Sky laws
or the by-laws and rules of the NASD in connection with the purchase and
distribution by the Underwriters of the Shares to be sold by such Selling
Stockholder.
(F) The sale of the Selling Stockholder Firm Shares and the
Option Shares to be sold by such Selling Stockholder hereunder and the
performance by such Selling Stockholder of this Agreement and the Custody
Agreement and the consummation of the transactions contemplated hereby
and thereby will not result in the creation or imposition of any lien, charge
or encumbrance upon any of the Shares pursuant to the terms or provisions of,
or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, any voting trust agreement, contract or other
agreement or instrument, relating directly or indirectly to any of the Shares,
to which such Selling Stockholder is a party, or violate or conflict with any
judgment, ruling, decree, order, statute, rule or regulation of any court or
other governmental agency or body applicable to such Selling Stockholder or, if
such Selling Stockholder is a corporation, partnership or other entity, the
organizational documents of such Selling Stockholder.
(G) Such Selling Stockholder has, and at the Closing Date
and, if later, the Option Closing Date, will have, good and marketable title
to the Selling Stockholder Firm Shares to be sold by such Selling Stockholder
hereunder, free and clear of all liens, encumbrances, equities or claims
whatsoever; and, upon delivery of such Selling Stockholder Firm Shares and
payment therefor pursuant hereto, good and valid title to such Selling
Stockholder Firm Shares, free and clear of all liens, encumbrances, equities or
claims whatsoever, will be delivered to the Underwriters.
11
<PAGE> 12
(H) On the Closing Date or, if later, the Option Closing
Date, all stock transfer or other taxes (other than income taxes) that are
required to be paid in connection with the sale and transfer of the Shares to
be sold by such Selling Stockholder to the several Underwriters hereunder will
have been fully paid or provided for by such Selling Stockholder and all laws
imposing such taxes will have been fully complied with.
(I) Other than as permitted by the Act and the Rules and
Regulations, such Selling Stockholder has not distributed and will not
distribute any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering and sale of the Shares. Such Selling
Stockholder has not taken and will not at any time take, directly or
indirectly, any action designed, or which might reasonably be expected, to
cause or result in, or which will constitute, stabilization of the price of
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(J) All information with respect to such Selling
Stockholder contained in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendment or supplement thereto complied or
will comply in all material respects with all applicable requirements of the
Act and the Rules and Regulations and does not and will not contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
(K) Such Selling Stockholder has no knowledge of any
material fact or condition not set forth in the Registration Statement
or the Prospectus that has adversely affected, or may adversely affect, the
business, properties, business prospects, condition (financial or otherwise) or
results of operations of the Company and its Subsidiaries, and the sale of the
Shares proposed to be sold by such Selling Stockholder is not prompted by any
such knowledge, provided, however, that if such Selling Stockholder is named in
Schedule III hereto, such Selling Stockholder's representations in this section
4(k) shall be limited to the actual knowledge of such Selling Stockholder.
(L) Such Selling Stockholder has no reason to believe that
the representations and warranties of the Company contained in Section 3 hereof
are not true and correct.
(M) In order to document the Underwriters' compliance with
the reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 with respect to the transactions herein
contemplated, such Selling Stockholder agrees to deliver to you prior to or at
the Closing Date a properly completed and executed United States Treasury
Department Form W 9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
5. AGREEMENTS OF THE COMPANY AND THE SELLING STOCKHOLDERS. Each
of the Company and the Selling Stockholders respectively covenants and agrees
with the several Underwriters as follows:
(A) The Company will not, either prior to the Effective
Date or thereafter during such period as the Prospectus is required by law to
be delivered in connection with sales
12
<PAGE> 13
of the Shares by an Underwriter or dealer, file any amendment or supplement to
the Registration Statement or the Prospectus, unless a copy thereof shall first
have been submitted to the Representatives within a reasonable period of time
prior to the filing thereof and the Representatives shall not have objected
thereto in good faith.
(B) The Company will use its best efforts to cause the
Registration Statement to become effective, and will notify the Representatives
promptly, and will confirm such advice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment thereto
becomes effective, (ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus or for additional
information, (iii) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (iv) of the happening
of any event during the period mentioned in the second sentence of Section 5(e)
that in the judgment of the Company makes any statement made in the
Registration Statement or the Prospectus untrue or that requires the making
of any changes in the Registration Statement or the Prospectus in order to make
the statements therein, in the light of the circumstances in which they are
made, not misleading and (v) of receipt by the Company or any representative or
attorney of the Company of any other communication from the Commission relating
to the Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will comply with the provisions of and make all requisite filings with
the Commission pursuant to said Rule 430A and notify the Representatives
promptly of all such filings.
(C) The Company will furnish to each Representative,
without charge, one signed copy of each of the Registration Statement and
of any post-effective amendment thereto, including financial statements and
schedules, and all exhibits thereto and will furnish to the Representatives,
without charge, for transmittal to each of the other Underwriters, a copy of
the Registration Statement and any post-effective amendment thereto, including
financial statements and schedules but without exhibits.
(D) The Company will comply with all the provisions of any
undertakings contained in the Registration Statement.
(E) On the Effective Date, and thereafter from time to
time, the Company will deliver to each of the Underwriters, without
charge, as many copies of the Prospectus or any amendment or supplement thereto
as the Representatives may reasonably request. The Company consents to the use
of the Prospectus or any amendment or supplement thereto by the several
Underwriters and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur
which in the judgment of the Company or counsel to the Underwriters should be
set
13
<PAGE> 14
forth in the Prospectus in order to make any statement therein, in the light of
the circumstances under which it was made, not misleading, or if it is
necessary to supplement or amend the Prospectus to comply with law, the Company
will forthwith prepare and duly file with the Commission an appropriate
supplement or amendment thereto, and will deliver to each of the Underwriters,
without charge, such number of copies of such supplement or amendment to the
Prospectus as the Representatives may reasonably request.
(F) Prior to any public offering of the Shares, the Company
will cooperate with the Representatives and counsel to the Underwriters in
connection with the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as the
Representatives may request; provided, that in no event shall the Company be
obligated to qualify to do business in any jurisdiction where it is not now so
qualified or to take any action which would subject it to general service of
process in any jurisdiction where it is not now so subject.
(G) The Company will, so long as required under the Rules
and Regulations, furnish to its stockholders as soon as practicable
after the end of each fiscal year an annual report (including a balance sheet
and statements of income, stockholders' equity and cash flow of the Company and
its consolidated Subsidiaries, if any, certified by independent public
accountants) and, as soon as practicable after the end of each of the first
three quarters of each fiscal year (beginning with the fiscal quarter ending
after the effective date of the Registration Statement), consolidated summary
financial information of the Company and its Subsidiaries, if any, for such
quarter in reasonable detail.
(H) During the period of five years commencing on the
Effective Date, the Company will furnish to the Representatives and each
other Underwriter who may so request copies of such financial statements and
other periodic and special reports as the Company may from time to time
distribute generally to the holders of any class of its capital stock, and will
furnish to the Representatives and each other Underwriter who may so request a
copy of each annual or other report it shall be required to file with the
Commission.
(I) The Company will make generally available to holders of
its securities as soon as may be practicable but in no event later than the
last day of the fifteenth full calendar month following the calendar quarter in
which the Effective Date falls, an earnings statement (which need not be
audited but shall be in reasonable detail) for a period of 12 months ended
commencing after the Effective Date, and satisfying the provisions of Section
11(a) of the Act (including Rule 158 of the Rules and Regulations).
(J) Whether or not the transactions contemplated by this
Agreement are consummated or this Agreement is terminated, Donnelly
Corporation and, unless otherwise paid by Donnelly Corporation, the Company
will pay or reimburse if paid by the Representatives, in such proportions as
they may agree upon themselves, all costs and expenses incident to the
performance of the obligations of the Company and the Selling Stockholders
under this Agreement and in connection with the transactions contemplated
hereby, including but not limited to costs and expenses of or relating to (i)
the preparation, printing and filing of the
14
<PAGE> 15
Registration Statement and exhibits to it, each preliminary prospectus,
Prospectus and any amendment or supplement to the Registration Statement or
Prospectus, (ii) the preparation and delivery of certificates representing the
Shares, (iii) the printing of this Agreement, the Agreement Among Underwriters,
any Selected Dealer Agreements, any Underwriters' Questionnaires, the Custody
Agreements, any Underwriters' Powers of Attorney, and any invitation letters to
prospective Underwriters, (iv) furnishing (including costs of shipping and
mailing) such copies of the Registration Statement, the Prospectus and any
preliminary prospectus, and all amendments and supplements thereto, as may be
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold, (v) the listing of the
Shares on the NNM, (vi) any filings required to be made by the Underwriters
with the NASD, and the fees, disbursements and other charges of counsel for the
Underwriters in connection therewith, (vii) the registration or qualification
of the Shares for offer and sale under the securities or Blue Sky laws of such
jurisdictions designated pursuant to Section 5(f), including the fees,
disbursements and other charges of counsel to the Underwriters in connection
therewith, and the preparation and printing of preliminary, supplemental and
final Blue Sky memoranda, (viii) fees, disbursements and other charges of
counsel to the Company (but not those of counsel for the Underwriters, except
as otherwise provided herein) and (ix) the transfer agent for the Shares. The
Underwriters may deem the Company to be the primary obligor with respect to all
costs, fees and expenses to be paid by the Company and by the Selling
Stockholders. The Selling Stockholders will pay (directly or by reimbursement)
all fees and expenses incident to the performance of their obligations under
this Agreement that are not otherwise specifically provided for herein,
including but not limited to any fees and expenses of counsel for such Selling
Stockholders, any fees and expenses of the Attorneys-in-Fact and the Custodian,
and all expenses and taxes incident to the sale and delivery of the Shares to
be sold by such Selling Stockholders to the Underwriters hereunder.
(K) The Company will not at any time, directly or
indirectly, take any action designed or which might reasonably be expected to
cause or result in, or which will constitute, stabilization of the price of the
shares of Common Stock to facilitate the sale or resale of any of the Shares.
(L) The Company will apply the net proceeds from the
offering and sale of the Shares to be sold by the Company in the manner set
forth in the Prospectus under "Use of Proceeds" and shall file such reports
with the Commission with respect to the sale of the Shares and the application
of the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(M) During the period beginning from the date hereof and
continuing to and including the date 180 days after the date of the
Prospectus, without the prior written consent of Needham & Company, Inc., the
Company will not offer, sell, contract to sell, grant options to purchase or
otherwise dispose of any of the Company's equity securities of the Company or
any other securities convertible into or exchangeable with its Common Stock or
other equity security (other than pursuant to employee stock option plans or
the conversion of convertible securities or the exercise of warrants
outstanding on the date of this Agreement).
15
<PAGE> 16
(N) During the period of 180 days after the date of the
Prospectus, the Company will not, without the prior written consent of Needham
& Company, Inc., grant options to purchase shares of Common Stock at a price
less than the initial public offering price.
(O) The Selling Stockholders will, and the Company will
cause each of its officers, directors and certain stockholders designated by
the Representatives to, enter into lock up agreements with the Representatives
to the effect that they will not, without the prior written consent of Needham
& Company, Inc., sell, contract to sell or otherwise dispose of any shares of
Common Stock or rights to acquire such shares according to the form of Lock-up
Agreement set forth in Schedule IV hereto.
(P) The Company will not file with the Commission any
registration statement on Form S-8 relating to shares of its Common Stock prior
to 90 days after the effective date of the Registration Statement.
6. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of each Underwriter hereunder are subject to the following
conditions:
(A) Notification that the Registration Statement has become
effective shall be received by the Representatives not later than 5:00 p.m.,
New York City time, on the date of this Agreement or at such later date and
time as shall be consented to in writing by the Representatives and all filings
required by Rule 424 and Rule 430A of the Rules and Regulations shall have been
made.
(B) (i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or threatened by the Commission, (ii) no order
suspending the effectiveness of the Registration Statement or the qualification
or registration of the Shares under the securities or Blue Sky laws of any
jurisdiction shall be in effect and no proceeding for such purpose shall be
pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the
Commission or such authorities and (iv) after the date hereof no amendment or
supplement to the Registration Statement or the Prospectus shall have been
filed unless a copy thereof was first submitted to the Representatives and the
Representatives do not object thereto in good faith, and the Representatives
shall have received certificates, dated the Closing Date and, if later, the
Option Closing Date and signed by the Chief Executive Officer and the Chief
Financial Officer of the Company (who may, as to proceedings threatened, rely
upon the best of their information and belief), to the effect of clauses (i),
(ii) and (iii) of this paragraph.
(C) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (i) there shall not
have been a material adverse change in the general affairs, business, business
prospects, properties, management, condition (financial or otherwise) or
results of operations of the Company or any of its Subsidiaries, whether or not
arising from transactions in the ordinary course of business, in each case
other than as described in or contemplated by the Registration Statement and the
Prospectus, and (ii)
16
<PAGE> 17
the Company shall not have sustained any material loss or interference with its
business or properties from fire, explosion, flood or other casualty, whether
or not covered by insurance, or from any labor dispute or any court or
legislative or other governmental action, order or decree, which is not
described in the Registration Statement and the Prospectus, if in the judgment
of the Representatives any such development makes it impracticable or
inadvisable to consummate the sale and delivery of the Shares by the
Underwriters at the initial public offering price.
(D) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, there shall have
been no litigation or other proceeding instituted against the Company, any of
its Subsidiaries, or any of its or their officers or directors in their
capacities as such, before or by any Federal, state or local court, commission,
regulatory body, administrative agency or other governmental body, domestic or
foreign, in which litigation or proceeding an unfavorable ruling, decision or
finding would, in the judgment of the Representatives, materially and adversely
affect the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company or any of its Subsidiaries.
(E) Each of the representations and warranties of the
Company and the Selling Stockholders contained herein shall be true and correct
in all material respects at the Closing Date and, with respect to the Option
Shares, at the Option Closing Date, and all covenants and agreements contained
herein to be performed on the part of the Company or the Selling Stockholders
and all conditions contained herein to be fulfilled or complied with by the
Company or the Selling Stockholders at or prior to the Closing Date and, with
respect to the Option Shares, at or prior to the Option Closing Date, shall
have been duly performed, fulfilled or complied with.
(F) The Representatives shall have received an opinion,
dated the Closing Date and, with respect to the Option Shares, the Option
Closing Date, satisfactory in form and substance to the Representatives and
counsel for the Underwriters from Varnum, Riddering, Schmidt & Howlett LLP,
counsel to the Company and the Selling Stockholders, with respect to the
following matters:
(I) Each of The Company and its Subsidiaries is a
corporation duly organized, validly existing and in good standing under
the laws of its jurisdiction of incorporation; has full corporate power and
authority to conduct all the activities conducted by it, to own or lease all
the assets owed or leased by it and to conduct its business as described in the
Registration Statement and Prospectus; and is duly licensed or qualified to do
business and is in good standing as a foreign corporation in all jurisdictions
in which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such license or qualification necessary
except to the extent that the failure to be so licensed or qualified would not
have a material and adverse effect on the business or financial condition of
the Company.
(II) All of the outstanding shares of capital stock
of the Company (including the Selling Stockholder Shares) have been duly
authorized, validly issued and are fully paid and nonassessable, to such
counsel's knowledge, were issued pursuant to exemptions
17
<PAGE> 18
from the registration and qualification requirements of federal and applicable
state securities laws, and were not issued in violation of or subject to any
preemptive or similar rights under the Articles of Incorporation or By-Laws of
the Company or any statute or under any agreement known to such counsel;
(III) The specimen certificate evidencing the Common
Stock filed as an exhibit to the Registration Statement is in due and proper
form under Colorado law, the Shares to be sold by the Company hereunder have
been duly authorized and, when issued and paid for as contemplated by this
Agreement, will be validly issued, fully paid and nonassessable; and no
preemptive or similar rights exist with respect to any of the Shares or the
issue and sale thereof under the Articles of Incorporation or By-Laws of the
Company or any statute or under any agreement known to such counsel.
(IV) All of the outstanding shares of capital stock
of each Subsidiary have been duly authorized and validly issued and are
fully paid and nonassessable, and owned by the Company free and clear of all
claims, liens, charges and encumbrances; to such counsel's knowledge, there are
no securities outstanding that are convertible into or exercisable or
exchangeable for capital stock of any Subsidiary.
(V) The authorized and outstanding capital stock of
the Company is as set forth in the Registration Statement and the Prospectus
in the column entitled "Actual" under the caption "Capitalization" (except for
subsequent issuances, if any, pursuant to this Agreement or pursuant to
reservations, agreements, employee benefit plans or the exercise of convertible
securities, options or warrants referred to in the Prospectus). To such
counsel's knowledge, except as disclosed in or specifically contemplated by the
Prospectus, there are no outstanding options, warrants of other rights calling
for the issuance of, and no commitments, plans or arrangements to issue, any
shares of capital stock of the Company or any security convertible into or
exchangeable or exercisable for capital stock of the Company. The description
of the capital stock of the Company in the Registration Statement and the
Prospectus conforms in all material respects to the terms thereof.
(VI) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened to which the Company or any
of its Subsidiaries is a party or to which any of their respective properties is
subject that are required to be described in the Registration Statement or the
Prospectus but are not so described.
(VII) No consent, approval, authorization or order
of, or any filing or declaration with, any court or governmental agency or
body is required for the consummation by the Company of the transactions on its
part contemplated under this Agreement, except such as have been obtained or
made under the Act or the Rules and Regulations and such as may be required
under state securities or Blue Sky laws or the by-laws and rules of the NASD in
connection with the purchase and distribution by the Underwriters of the
Shares.
(VIII) The Company has full corporate power and
authority to enter into this Agreement. This Agreement has been duly
authorized, executed and delivered by the Company.
18
<PAGE> 19
(IX) The execution and delivery of this Agreement,
the compliance by the Company with all of the terms hereof and the
consummation of the transactions contemplated hereby does not contravene any
provision of applicable law or the Articles of Incorporation or By-Laws of the
Company or any of its Subsidiaries, and to the best of such counsel's knowledge
will not result in the creation or imposition of any lien, charge or
encumbrance upon any of the assets of the Company pursuant to the terms and
provisions of, result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or give any party a right to
terminate any of its obligations under, or result in the acceleration of any
obligation under, any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement or other evidence of
indebtedness, lease, contract or other agreement or instrument known to such
counsel to which the Company or any of its Subsidiaries is a party or by which
the Company, any of its Subsidiaries, or any of their respective properties is
bound or affected, or violate or conflict with (i) any judgment, ruling, decree
or order known to such counsel or (ii) any statute, rule or regulation of any
court or other governmental agency or body, applicable to the business or
properties of the Company or any of its Subsidiaries.
(X) To such counsel's knowledge, there is no
document or contract of a character required to be described in the
Registration Statement or the Prospectus or to be filed as an exhibit to the
Registration Statement which is not described or filed as required, and each
description of such contracts and documents that is contained in the
Registration Statement and Prospectus fairly presents in all material respects
the information required under the Act and the Rules and Regulations.
(XI) The statements under the captions "Risk
Factors -- Shares Eligible for Future Sale," "Risk Factors -- Anti-Takeover
Provisions, Possible Issuance of Preferred Stock," "Management -- Stock Option
and Purchase Plans," "Certain Transactions," "Description of Capital Stock,"
and "Shares Eligible for Future Sale" in the Prospectus, insofar as the
statements constitute a summary of documents referred to therein or matters of
law, are accurate summaries and fairly and correctly present, in all material
respects, the information called for with respect to such documents and matters
(provided, however, that such counsel may rely on representations of the
Company with respect to the factual matters contained in such statements, and
provided further that such counsel shall state that nothing has come to the
attention of such counsel which leads them to believe that such representations
are not true and correct in all material respects).
(XII) The Company is not an "investment company" or
an "affiliated person" of, or "promoter" or "principal underwriter" for, an
"investment company," as such terms are defined in the Investment Company Act
of 1940, as amended.
(XIII) The Selling Stockholder Shares are duly listed
on the NNM and the Company Shares have been duly authorized for listing on the
NNM, subject to notice of issuance.
(XIV) To such counsel's knowledge, no holder of
securities of the Company has rights, which have not been waived or satisfied,
to require the register with the
19
<PAGE> 20
Commission shares of Common Stock or other securities, as part of the offering
contemplated hereby.
(XV) The Registration Statement has become effective
under the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been instituted or is pending, threatened
or contemplated.
(XVI) The Registration Statement and the Prospectus
comply as to form in all material respects with the requirement of the Act
and the Rules and Regulations (other than the financial statements, schedules
and other financial data contained in the Registration Statement or the
Prospectus, as to which such counsel need express no opinion).
(XVII) This Agreement and the Custody Agreement have
each been duly executed and delivered by or on behalf of each Selling
Stockholder; the Custody Agreement constitutes a valid and binding agreement of
such Selling Stockholder in accordance with its terms, except as enforceability
may be limited by the application of bankruptcy, insolvency or other laws
affecting creditors' rights generally or by general principles of equity; the
Attorneys-in-Fact and the Custodian have been duly authorized by such Selling
Stockholder to deliver the Shares on behalf of such Selling Stockholder in
accordance with the terms of this Agreement; and the sale of the Shares to be
sold by such Selling Stockholder hereunder, the performance by such Selling
Stockholder of this Agreement and the Custody Agreement and the consummation of
the transactions contemplated hereby and thereby will not result in a breach or
violation of any of the terms or provisions of, or constitute a default under,
or give any party a right to terminate any of its obligations under, or result
in the acceleration of any obligation under any indenture, mortgage, deed of
trust, voting trust agreement, loan agreement, bond, debenture, note agreement
or other evidence of indebtedness, lease, contract or other agreement or
instrument known to such counsel to which such Selling Stockholder is a party
or by which such Selling Stockholder or any of its properties is bound or
affected, or violate or conflict with any judgment, ruling, decree, order,
statute, rule or regulation of any court or other governmental agency or body
applicable to such Selling Stockholder or, if such Selling Stockholder is a
corporation, partnership or other entity, the organizational documents of such
Selling Stockholder.
(XVIII) No consent, approval, authorization or order
of, or any filing or declaration with, any court or governmental agency or
body is required for the consummation by the Selling Stockholders of the
transactions on their part contemplated by this Agreement, except such as have
been obtained or made under the Act or the Rules and Regulations and such as
may be required under state securities or Blue Sky laws or the by-laws and
rules of the NASD in connection with the purchase and distribution by the
Underwriters of the Shares.
(XIX) Each Selling Stockholder has full legal right,
power and authority to enter into this Agreement and the Custody Agreement and
to sell, assign, transfer and deliver the Shares to be sold by such Selling
Stockholder hereunder and, upon payment for such Shares and assuming that the
Underwriters are purchasing such Shares in good faith and without notice of any
other adverse claim within the meaning of the Uniform Commercial Code, the
20
<PAGE> 21
Underwriters will have acquired all rights of such Selling Stockholder in such
Shares free of any adverse claim, any lien in favor of the Company and any
restrictions on transfer imposed by the Company.
In rendering the opinions in subparagraphs (xiii) - (xix), such counsel
may rely upon opinions of other counsel retained by the Selling Stockholders
reasonably acceptable to the Representatives and as to matters of fact on
certificates of the Selling Stockholders, officers of the Company and
governmental officials and the representations and warranties of the Company
and the Selling Stockholders contained in this Agreement and the Custody
Agreement, provided that the opinion of counsel to the Company and Selling
Stockholders shall state that they are doing so, that they have no reason to
believe that they and the Underwriters are not entitled to rely on such
opinions or certificates and that copies of such opinions or certificates are
to be attached to the opinion.
In rendering such opinion, such counsel may rely upon as to matters of
local law on opinions of counsel satisfactory in form and substance to the
Representatives and counsel for the Underwriters, provided that the opinion of
counsel to the Company and the Selling Stockholders shall state that they are
doing so, that they have no reason to believe that they and the Underwriters
are not entitled to rely on such opinions and that copies of such opinions are
to be attached to the opinion.
Such counsel shall also state that such counsel has participated in the
preparation of the Registration Statement and Prospectus and has no reason to
believe that, as of the Effective Date the Registration Statement, or any
amendment or supplement thereto, (other than the financial statements,
schedules and other financial data contained therein, as to which such counsel
need express no opinion) contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or that the Prospectus, or any
amendment or supplement thereto, as of its date and the Closing Date and, if
later, the Option Closing Date, contained or contains any untrue statement of a
material fact or omitted or omits to state a material fact necessary to make
the statements therein, in the light of the circumstances under which they were
made, not misleading (other than the financial statements, schedules and other
financial data contained therein, as to which such counsel need express no
opinion).
(G) The representatives shall have received an opinion,
dated the Closing Date and the Option Closing Date, from Cooley Godward
LLP, counsel to the Underwriters, with respect to the Registration Statement,
the Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives.
(H) Concurrently with the execution and delivery of this
Agreement, the Accountants shall have furnished to the Representatives a
letter, dated the date of its delivery, addressed to the Representatives and in
form and substance satisfactory to the Representatives, confirming that they
are independent accountants with respect to the Company and its Subsidiaries as
required by the Act and the Rules and Regulations and with respect to certain
financial and other statistical and numerical information contained in the
Registration Statement.
21
<PAGE> 22
At the Closing Date and, as to the Option Shares, the Option Closing Date, the
Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery, which shall confirm, on the basis of a review in
accordance with the procedures set forth in the letter from the Accountants,
that nothing has come to their attention during the period from the date of the
letter referred to in the prior sentence to a date (specified in the letter)
not more than five days prior to the Closing Date and the Option Closing Date,
as the case may be, which would require any change in their letter dated the
date hereof if it were required to be dated and delivered at the Closing Date
and the Option Closing Date.
(I) Concurrently with the execution and delivery of this
Agreement and at the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to the Representatives a
certificate, dated the date of its delivery, signed by each of the Chief
Executive Officer and the Chief Financial Officer of the Company, in form and
substance satisfactory to the Representatives, to the effect that:
(I) Each signer of such certificate has carefully
examined the Registration Statement and the Prospectus and (A) as of the
date of such certificate, such documents are true and correct in all material
respects and do not omit to state a material fact required to be stated therein
or necessary in order to make the statements therein not untrue or misleading
and (B) in the case of the certificate delivered at the Closing Date and the
Option Closing Date, since the Effective Date no event has occurred as a result
of which it is necessary to amend or supplement the Prospectus in order to make
the statements therein not untrue or misleading.
(II) Each of the representations and warranties of
the Company contained in this Agreement were, when originally made, and are, at
the time such certificate is delivered, true and correct.
(III) Each of the covenants required to be performed
by the Company herein on or prior to the date of such certificate has been
duly, timely and fully performed and each condition herein required to be
satisfied or fulfilled on or prior to the date of such certificate has been
duly, timely and fully satisfied or fulfilled.
(J) Concurrently with the execution and delivery of this
Agreement and at the Closing Date and, as to the Option Shares, the
Option Closing Date, there shall be furnished to the Representatives a
certificate, dated the date of its delivery, signed by the Selling Stockholders
(or the Attorneys-in-Fact on their behalf), in form and substance satisfactory
to the Representatives, to the effect that the representations and warranties
of the Selling Stockholders contained herein are true and correct in all
material respects on and as of the date of such certificate as if made on and
as of the date of such certificate, and each of the covenants and conditions
required herein to be performed or complied with by the Selling Stockholders on
or prior to the date of such certificate has been duly, timely and fully
performed or complied with.
(K) On or prior to the Closing Date, the Representatives
shall have received the executed agreements referred to in Section 5(n).
22
<PAGE> 23
(L) The Shares shall be qualified for sale in such
jurisdictions as the Representatives may reasonably request and each such
qualification shall be in effect and not subject to any stop order or other
proceeding on the Closing Date or the Option Closing Date.
(M) Prior to the Closing Date, the Shares shall have been
duly authorized for listing on the NNM upon official notice of issuance.
(N) The Company and the Selling Stockholders shall have
furnished to the Representatives such certificates, in addition to those
specifically mentioned herein, as the Representatives may have reasonably
requested as to the accuracy and completeness at the Closing Date and the
Option Closing Date of any statement in the Registration Statement or the
Prospectus, as to the accuracy at the Closing Date and the Option Closing Date
of the representations and warranties of the Company and the Selling
Stockholders herein, as to the performance by the Company and the Selling
Stockholders of its and their respective obligations hereunder, or as to the
fulfillment of the conditions concurrent and precedent to the obligations
hereunder of the Representatives.
7. INDEMNIFICATION.
(A) The Company will indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each
Underwriter and each person, if any, who controls each Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and
against any and all losses, claims, liabilities, expenses and damages
(including any and all investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted), to which they, or any of them, may
become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such
losses, claims, liabilities, expenses or damages arise out of or are based in
whole or in part on (i) any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus, the Registration
Statement or the Prospectus or any amendment or supplement to the Registration
Statement or the Prospectus, (ii) the omission or alleged omission to state in
such document a material fact required to be stated in it or necessary to make
the statements in it not misleading in the light of the circumstances in which
they were made, or (iii) any inaccuracy in the representations and warranties
of the Company contained herein or any failure of the Company to perform its
obligations hereunder or under law in connection with the transactions
contemplated hereby; provided, however, that (x) the Company will not be liable
to the extent that such loss, claim, liability, expense or damage arises from
the sale of the Shares in the public offering to any person by an Underwriter
and is based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives, on
behalf of any Underwriter, expressly for inclusion in the Registration
Statement, the preliminary prospectus or the Prospectus and (y) the Company
will not be liable to any Underwriter, the directors, officers, employees or
agents of such Underwriter or any person controlling such Underwriter with
respect to any loss, claim, liability, expense, or damage arising out of or
based on any untrue statement or omission or alleged untrue statement or
omission or alleged omission
23
<PAGE> 24
to state a material fact in the preliminary prospectus which is corrected in
the Prospectus if the person asserting any such loss, claim, liability, charge
or damage purchased Shares from such Underwriter but was not sent or given a
copy of the Prospectus at or prior to the written confirmation of the sale of
such Shares to such person. The Company acknowledges that the statements set
forth under the heading "Underwriting" in the preliminary prospectus and the
Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of the
Underwriters expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that the Company might otherwise have.
(B) Each of the Selling Stockholders, severally and not
jointly will indemnify and hold harmless each Underwriter, the directors,
officers, employees and agents of each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act, from and against any and all losses, claims,
liabilities, expenses and damages (including any and all investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based in whole or in part on (i) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus, (ii) the omission
or alleged omission to state in such document a material fact required to be
stated in it or necessary to make the statements in it not misleading in the
light of the circumstances in which they were made, or (iii) any inaccuracy in
the representations and warranties of the Selling Stockholders contained herein
or any failure of the Selling Stockholders to perform their obligations
hereunder or under law in connection with the transactions contemplated hereby;
provided, however, that (x) the Selling Stockholders will not be liable to the
extent that such loss, claim, liability, expense or damage arises from the sale
of the Shares in the public offering to any person by an Underwriter and is
based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished in writing to the Company by the Representatives, on
behalf of any Underwriter, expressly for inclusion in the Registration
Statement, the preliminary prospectus or the Prospectus; (y) the Selling
Stockholders will not be liable to any Underwriter, the directors, officers,
employees or agents of such Underwriter or any person controlling such
Underwriter with respect to any loss, claim, liability, expense, or damage
arising out of or based on any untrue statement or omission or alleged untrue
statement or omission or alleged omission to state a material fact in the
preliminary prospectus which is corrected in the Prospectus if the person
asserting any such loss, claim, liability, charge or damage purchased Shares
from such Underwriter but was not sent or given a copy of the Prospectus at or
prior to the written confirmation of the sale of such Shares to such person;
and (z) the liability of each Selling Stockholder under this Section 7(a) shall
not exceed the product of the purchase price for each share set forth in
Section 1(a) hereof multiplied by the number of Shares sold by such Selling
Stockholder hereunder (less (1) the amount of the underwriting commissions paid
thereon to the Underwriters by such Selling Stockholder and (2) any costs or
expenses paid by such Selling
24
<PAGE> 25
Stockholder incident to the performance of the obligations of the Company or
the Selling Stockholders under this Agreement and in connection with the
transactions contemplated hereby including, but not limited to, those costs and
expenses of the type described in Section 5(j)); and further provided, that in
the case of a Selling Stockholder named in Schedule III hereto, the indemnity
agreement provided in sub paragraphs (i) and (ii) of this Section 7(b) shall
apply only to the extent that any untrue statement or alleged untrue statement
or omission or alleged omission described in such subparagraphs was made in
reliance upon and in conformity with written information furnished to the
Company or such Underwriter by such Selling Stockholder, directly or through
such Selling Stockholder's representatives, specifically for use in the
preparation thereof. The Selling Stockholders acknowledge that the statements
set forth under the heading "Underwriting" in the preliminary prospectus and
the Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of the
Underwriters expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that the Selling Stockholders might otherwise have.
(C) Each Underwriter will indemnify and hold harmless the
Company, each director of the Company, each officer of the Company who signs
the Registration Statement, each person, if any, who controls the Company
within the meaning of Section 15 of the Act or Section 20 of the Exchange Act,
and each Selling Stockholder to the same extent as the foregoing indemnity from
the Company and each Selling Stockholder to each Underwriter, as set forth in
Section 7(a), but only insofar as losses, claims, liabilities, expenses or
damages arise out of or are based on any untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to any Underwriter furnished in writing to the Company by
the Representatives, on behalf of such Underwriter, expressly for use in the
Registration Statement, the preliminary prospectus or the Prospectus. The
Company and the Selling Stockholders acknowledge that the statements set forth
under the heading "Underwriting" in the preliminary prospectus and the
Prospectus constitute the only information relating to any Underwriter
furnished in writing to the Company by the Representatives on behalf of the
Underwriters expressly for inclusion in the Registration Statement, the
preliminary prospectus or the Prospectus. This indemnity will be in addition
to any liability that each Underwriter might otherwise have.
(D) Any party that proposes to assert the right to be
indemnified under this Section 7 shall, promptly after receipt of notice
of commencement of any action against such party in respect of which a claim is
to be made against an indemnifying party or parties under this Section 7,
notify each such indemnifying party in writing of the commencement of such
action, enclosing with such notice a copy of all papers served, but the
omission so to notify such indemnifying party will not relieve it from any
liability that it may have to any indemnified party under the foregoing
provisions of this Section 7 unless, and only to the extent that, such omission
results in the loss of substantive rights or defenses by the indemnifying
party. If any such action is brought against any indemnified party and it
notifies the indemnifying party of its commencement, the indemnifying party
will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying
25
<PAGE> 26
party similarly notified, to assume the defense of the action, with counsel
reasonably satisfactory to the indemnified party. After notice from the
indemnifying party to the indemnified party of its election to assume the
defense, the indemnifying party will not be liable to the indemnified party for
any legal or other expenses except as provided below and except for the
reasonable out of pocket costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (i) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (ii) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it or other indemnified parties that are different
from or in addition to those available to the indemnifying party, (iii) a
conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (iv) the indemnifying
party has not in fact employed counsel to assume the defense of such action
within a reasonable time after receiving notice of the commencement of the
action, in each of which cases the reasonable fees, disbursements and other
charges of counsel will be at the expense of the indemnifying party or parties.
It is understood that the indemnifying party or parties shall not, in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than
one separate firm admitted to practice in such jurisdiction at any one time for
all such indemnified party or parties. All such fees, disbursements and other
charges will be reimbursed by the indemnifying party promptly as they are
incurred. Any indemnifying party will not be liable for any settlement of any
action or claim effected without its written consent (which consent will not be
unreasonably withheld).
(E) If the indemnification provided for in this Section 7
is applicable in accordance with its terms but for any reason is held to
be unavailable to or insufficient to hold harmless an indemnified party under
paragraphs (a), (b) and (c) of this Section 7 in respect of any losses, claims,
liabilities, expenses and damages referred to therein, then each applicable
indemnifying party, in lieu of indemnifying such indemnified party, shall
contribute to the amount paid or payable (including any investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted, but
after deducting any contribution received by the Company or the Selling
Stockholders from persons other than the Underwriters, such as persons who
control the Company within the meaning of the Act, officers of the Company who
signed the Registration Statement and directors of the Company, who also may be
liable for contribution) by such indemnified party as a result of such losses,
claims, liabilities, expenses and damages in such proportion as shall be
appropriate to reflect the relative benefits received by the Company and the
Selling Stockholders, on the one hand, and the Underwriters, on the other hand.
The relative benefits received by the Company and the Selling Stockholders, on
the one hand, and the Underwriters, on the other hand, shall be deemed to be in
the same proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling Stockholders bear
to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. If, but
26
<PAGE> 27
only if, the allocation provided by the foregoing sentence is not permitted by
applicable law, the allocation of contribution shall be made in such proportion
as is appropriate to reflect not only the relative benefits referred to in the
foregoing sentence but also the relative fault of the Company and the Selling
Stockholders, on the one hand, and the Underwriters, on the other hand, with
respect to the statements or omissions which resulted in such loss, claim,
liability, expense or damage, or action in respect thereof, as well as any
other relevant equitable considerations with respect to such offering. Such
relative fault shall be determined by reference to whether the untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact relates to information supplied by the Company, the
Selling Stockholders or the Representatives on behalf of the Underwriters, the
intent of the parties and their relative knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company, the
Selling Stockholders and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this Section 7(d) were to be determined
by pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take into
account the equitable considerations referred to herein. The amount paid or
payable by an indemnified party as a result of the loss, claim, liability,
expense or damage, or action in respect thereof, referred to above in this
Section 7(d) shall be deemed to include, for purposes of this Section 7(d), any
legal or other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 7(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discounts
received by it and no person found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) will be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 7(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 7(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as
the Company, subject in each case to the provisions hereof. Any party entitled
to contribution, promptly after receipt of notice of commencement of any action
against any such party in respect of which a claim for contribution may be made
under this Section 7(d), will notify any such party or parties from whom
contribution may be sought, but the omission so to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 7(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(F) The indemnity and contribution agreements contained in
this Section 7 and the representations and warranties of the Company and the
Selling Stockholders contained in this Agreement shall remain operative and in
full force and effect regardless of (i) any investigation made by or on behalf
of the Underwriters, (ii) acceptance of any of the Shares and payment therefor
or (iii) any termination of this Agreement.
27
<PAGE> 28
8. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to its other
obligations under Section 7(a) of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other reasonable expenses incurred in connection with investigating or
defending any claim, action, investigation, inquiry or other proceeding arising
out of or based upon, in whole or in part, any statement or omission or alleged
statement or omission, or any inaccuracy in the representations and warranties
of the Company or the Selling Stockholder contained herein or failure of the
Company or the Selling Stockholders to perform its or their respective
obligations hereunder or under law, all as described in Section 7(a),
notwithstanding the absence of a judicial determination as to the propriety and
enforceability of the obligations under this Section 8 and the possibility that
such payment might later be held to be improper; provided, however, that, to
the extent any such payment is ultimately held to be improper, the persons
receiving such payments shall promptly refund them.
9. TERMINATION. The obligations of the several Underwriters under
this Agreement may be terminated at any time on or prior to the Closing Date
(or, with respect to the Option Shares, on or prior to the Option Closing
Date), by notice to the Company and the Selling Stockholders from the
Representatives, without liability on the part of any Underwriter to the
Company if, prior to delivery and payment for the Firm Shares or Option Shares,
as the case may be, in the sole judgment of the Representatives, (i) trading in
any of the equity securities of the Company shall have been suspended by the
Commission or by The Nasdaq Stock Market, (ii) trading in securities generally
on The Nasdaq Stock Market shall have been suspended or limited or minimum or
maximum prices shall have been generally established on such exchange, or
additional material governmental restrictions, not in force on the date of this
Agreement, shall have been imposed upon trading in securities generally by such
exchange, by order of the Commission or any court or other governmental
authority, or by The Nasdaq Stock Market, (iii) a general banking moratorium
shall have been declared by Federal or New York State authorities or (iv) any
material adverse change in the financial or securities markets in the United
States or in political, financial or economic conditions in the United States
or any outbreak or material escalation of hostilities or other calamity or
crisis shall have occurred, the effect of which is such as to make it, in the
sole judgment of the Representatives, impracticable or inadvisable to proceed
with completion of the public offering or the delivery of and payment for the
Shares.
If this Agreement is terminated pursuant to Section 9 hereof, neither
the Company nor any Selling Stockholder shall be under any liability to any
Underwriter except as provided in Sections 5(j), 7 and 8 hereof; but, if the
purchase of the Shares by the Underwriters is not consummated because of a
failure by the Company or the Selling Stockholders to comply with any of the
terms or to fulfill any of the obligations of this Agreement or if for any
reason the Company shall be unable to perform its obligations hereunder, the
Company and the Selling Stockholders will reimburse the several Underwriters
for all out-of-pocket expenses not to exceed $100,000 (including the fees,
disbursements and other charges of counsel to the Underwriters) incurred by
them in connection with the offering of the Shares.
10. SUBSTITUTION OF UNDERWRITERS. If any one or more of the
Underwriters shall fail or refuse to purchase any of the Firm Shares which it
or they have agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters
28
<PAGE> 29
agreed but failed or refused to purchase is not more than one-tenth of the
aggregate number of Firm Shares, the other Underwriters shall be obligated,
severally, to purchase the Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase, in the proportions which
the number of Firm Shares which they have respectively agreed to purchase
pursuant to Section 1 bears to the aggregate number of Firm Shares which all
such non-defaulting Underwriters have so agreed to purchase, or in such other
proportions as the Representatives may specify; provided that in no event shall
the maximum number of Firm Shares which any Underwriter has become obligated to
purchase pursuant to Section 1 be increased pursuant to this Section 10 by more
than one-ninth of such number of Firm Shares without the prior written consent
of such Underwriter. If any Underwriter or Underwriters shall fail or refuse
to purchase any Firm Shares and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Firm Shares are not made within 48 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter,
the Company or the Selling Stockholders for the purchase or sale of any Shares
under this Agreement. In any such case either the Representatives or the
Company shall have the right to postpone the Closing Date, but in no event for
longer than seven days, in order that the required changes, if any, in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Any action taken pursuant to this Section 10
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
11. MISCELLANEOUS. Notice given pursuant to any of the provisions
of this Agreement shall be in writing and, unless otherwise specified, shall be
mailed or delivered (a) if to the Company or the Selling Stockholders, at the
office of the Company, 6797 Winchester Circle, Boulder, Colorado 80301,
Attention: Cecil Van Alsburg, with a copy to William J. Lawrence III, Esq.,
Varnum, Riddering, Schmidt & Howlett LLP, 333 Bridge Street, N.W., Grand
Rapids, Michigan 49504, or (b) if to the Underwriters, to the Representatives
at the offices of Needham & Company, Inc., 445 Park Avenue, New York, New York
10022, Attention: Corporate Finance Department, with a copy to James C. T.
Linfield, Esq., Cooley Godward LLP, 2595 Canyon Boulevard, Suite 250, Boulder,
Colorado 80302. Any such notice shall be effective only upon receipt. Any
notice under such Section 9 or 10 may be made by telex or telephone, but if so
made shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, the Selling Stockholders and the controlling
persons, directors and officers referred to in Section 7, and their respective
successors and assigns, and no other person shall acquire or have any right
under or by virtue of this Agreement. The term "successors and assigns" as
used in this Agreement shall not include a purchaser, as such purchaser, of
Shares from any of the several Underwriters.
Any action required or permitted to be made by the Representatives
under this Agreement may be taken by them jointly or by Needham & Company, Inc.
29
<PAGE> 30
This Agreement shall be governed by and construed in accordance with
the laws of the State of New York applicable to contracts made and to be
performed entirely within such State.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby waive any right they may
have to a trial by jury in respect of any claim based upon or arising out of
this Agreement or the transactions contemplated hereby.
30
<PAGE> 31
Please confirm that the foregoing correctly sets forth the agreement
among the Company and the several Underwriters.
Very truly yours,
APPLIED FILMS CORPORATION
By: ___________________________________
Title:
SELLING STOCKHOLDERS
(named in Schedule II hereto)
By: ___________________________________
Attorney-in-Fact
Confirmed as of the date first
above mentioned:
NEEDHAM & COMPANY, INC.
D.A. DAVIDSON & CO.
Acting on behalf of themselves
and as the Representatives of
the other several Underwriters
named in Schedule I hereto.
By: NEEDHAM & COMPANY, INC.
By: _____________________________________
Title:
31
<PAGE> 32
SCHEDULE I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of
Firm
Shares
Underwriters to be Purchased
- ----------------------- ---------------
<S> <C>
Needham & Company, Inc. .....................
D. A. Davidson & Co. ........................
Total .......................................
---------
1,900,000
</TABLE>
<PAGE> 33
SCHEDULE II
<TABLE>
<CAPTION>
Total Number Total Number of
of Firm Shares Option Shares
to be Sold to be Sold
-------------- ---------------
<S> <C> <C>
Applied Films Corporation .............. 500,000 236,439
Selling Stockholders
- --------------------
Donnelly Corporation.................... 1,400,000 __
Louise Chapin Trust..................... __ 21,000
Paul Walsh.............................. __ 27,561
TOTALS.............................
--------- -------
1,900,000 285,000
</TABLE>
<PAGE> 34
SCHEDULE III
Louise Chapin Trust
Paul Walsh
<PAGE> 35
SCHEDULE IV
APPLIED FILMS CORPORATION
180-DAY LOCK-UP AGREEMENT
NEEDHAM & COMPANY, INC.
D.A. DAVIDSON & CO.
As Representatives of the several Underwriters
c/o Needham & Company, Inc.
445 Park Avenue
New York, New York 10022
Ladies and Gentlemen:
The undersigned is a holder of securities of Applied Films Corporation,
a Colorado corporation (the "Company"), and wishes to facilitate the public
offering of shares of the Common Stock (the "Common Stock") of the Company (the
"Offering"). The undersigned recognizes that such Offering and the public
market for shares of the Company's Common Stock created thereby will be of
benefit to the undersigned.
In consideration of the foregoing and in order to induce you to act as
underwriters in connection with the Offering, the undersigned hereby
irrevocably agrees that he, she or it will not, without the prior written
approval of Needham & Company, Inc., acting on its own behalf and/or on behalf
of other representatives of the underwriters, directly or indirectly, offer,
sell, contract to sell, make any short sale (including, but not limited to, a
"short against the box"), pledge, or otherwise dispose of, any shares of Common
Stock (exclusive of any shares of Common Stock purchased in connection with the
Offering), options to acquire shares of Common Stock or securities exchangeable
or exercisable for or convertible into shares of, or any other rights to
purchase or acquire, Common Stock of the Company (the "Securities") which he,
she or it may own directly or indirectly or beneficially (as defined by the
Securities Exchange Act of 1934 and the rules and regulations promulgated
thereunder), for a period commencing on the date on which the Form S-1
Registration Statement filed on behalf of the Company in connection with the
Offering (the "Registration Statement") shall become effective by order of the
Securities and Exchange Commission (the "Effective Date") and ending on the
date which is one hundred eighty (180) days (the "Lock-Up Period") following
the Effective Date. The foregoing restriction is expressly agreed to preclude
the holder of Securities from engaging in any hedging or other transaction that
is designed to or reasonably expected to lead to, or result in, a disposition
of Securities during the Lock-Up Period even if such Securities would be
disposed of by the undersigned subsequent to the Lock-Up Period or by someone
other than the undersigned.
Notwithstanding the foregoing, any transfer of Securities which either
(i) will not result in any change in beneficial ownership, including, but not
limited to, pro rata partnership distributions and transfers into trusts for
the benefit of the original holder, or (ii) constitute bona fide gifts of such
shares will not require your consent; provided that the transferee enters into
a
<PAGE> 36
lock-up agreement in substantially the form hereof covering the remainder of
the Lock-Up Period under this Agreement.
The undersigned confirms that he, she or it understands that the
underwriters and the Company will rely upon the representations set forth in
this Agreement in proceeding with the Offering. The undersigned further
confirms that this Agreement is irrevocable and shall be binding upon the
undersigned and his, her or its respective heirs, personal representatives,
successors and assigns. The undersigned agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of Securities held by the undersigned except in compliance with this
Agreement.
_______________________________________
(Securities Holder's Name)
_______________________________________
(Signature)
_______________________________________
(Name of Person Signing)
_______________________________________
(Title)
<PAGE> 1
EXHIBIT 4.1
<TABLE>
<S><C>
NUMBER SHARES
_____________ _____________
| | | |
| | | |
| | | |
|____________| |____________|
[LOGO]
APPLIED FILMS CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF COLORADO CUSIP 038197 10 9
SEE REVERSE
FOR CERTAIN DEFINITIONS
THIS CERTIFIES THAT
Is The Owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF NO PAR VALUE COMMON STOCK OF
APPLIED FILMS CORPORATION
transferable on the books of the Corporation in person or by duly authorized attorney upon surrender of this Certificate
properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the
Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers.
Dated:
[APPLIED FILMS CORPORATION CORPORATE SEAL COLORADO]
John S. Chapin, Secretary Cecil Van Alsburg, President
COUNTERSIGNED AND REGISTERED:
AMERICAN SECURITIES TRANSFER & TRUST, INC.
P.O. BOX 1596
DENVER, COLORADO 80201
By:____________________________________________
TRANSFER AGENT & REGISTRAR AUTHORIZED SIGNATURE
</TABLE>
<PAGE> 2
<TABLE>
<S><C>
APPLIED FILMS CORPORATION
THE CORPORATION WILL FURNISH WITHOUT CHARGE TO EACH SHAREHOLDER WHO SO REQUESTS, A FULL STATEMENT OF THE DESIGNATIONS,
RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF THE SHARES OF EACH CLASS AUTHORIZED TO BE ISSUED, THE DESIGNATIONS, RELATIVE
RIGHTS, PREFERENCES AND LIMITATIONS OF EACH SERIES OF SHARES SO FAR AS THE SAME HAVE BEEN PRESCRIBED AND THE AUTHORITY OF THE BOARD
TO DESIGNATE AND PRESCRIBE THE RELATIVE RIGHTS, PREFERENCES AND LIMITATIONS OF OTHER SERIES.
The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they
were written out in full according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT-................Custodian..............
TEN ENT -as tenants by the entireties (Cust) (Minor)
JT TEN -as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act..........................
in common (State)
Additional abbreviations may also be used though not in the above list.
____________________________________________________________________________________________________________________________________
For Value Received, _________________________________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________________
| |
|____________________________________________|
____________________________________________________________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
____________________________________________________________________________________________________________________________________
____________________________________________________________________________________________________________________________________
_______________________________________________________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint
___________________________________________________________________________________________________________ attorney-in-fact
to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises.
Dated ______________________
_____________________________________________________________________________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature(s) Guaranteed:
______________________________________________________
The signature(s) must be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and
Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15.
</TABLE>
<PAGE> 1
EXHIBIT 5.1
October 23, 1997
Board of Directors
Applied Films Corporation
6797 Winchester Circle
Boulder, Colorado 80301
Gentlemen:
We have acted as counsel to Applied Films Corporation, a Colorado
corporation (the "Company") in connection with the Registration Statement on
Form S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission (Registration No. 333-35331) for the purpose of registering under
the Securities Act of 1933, as amended, 2,185,000 shares of the Company's
Common Stock, no par value, for sale to the public. We are familiar with the
corporate action taken by the Board of Directors of the Company authorizing the
registration and offering of such shares, and we have examined such documents
and questions of law as we consider necessary or appropriate for the purpose of
furnishing this opinion. As to our opinion that the shares of Common Stock
that may be sold by the Selling Shareholders, as defined in the Registration
Statement, are fully paid, we are basing our opinion solely upon available
financial records of the Company, certificates by the Company's officers and
the representations in the Underwriting Agreement.
It is our opinion that the 2,185,000 shares of Common Stock being sold by
the Company and the Selling Shareholders, as described in the Registration
Statement, upon delivery thereof and payment therefor in accordance with the
terms stated in the Registration Statement, at the time it becomes effective,
will be legally and validly authorized, issued and outstanding and will be
fully paid and nonassessable.
We hereby consent to the reference to us under the caption "Legal Matters"
in the Prospectus forming a part of the Registration Statement and to the
filing of this opinion and consent as an exhibit to the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933, as amended, or under the rules and regulations of the Securities and
Exchange Commission relating thereto.
Very truly yours,
VARNUM, RIDDERING, SCHMIDT & HOWLETTLLP
/s/ William J. Lawrence III
William J. Lawrence III, Partner
WJL/PHB/mjb
<PAGE> 1
Exhibit 11.1
APPLIED FILMS CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
PERIOD ENDED Quarter Ended
---------------------------------------- -------------------------
July 1, June 29, June 28, September September
1995 1996 1997 28, 1996 27, 1997
------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
PRIMARY EARNINGS PER SHARE
Net income $1,102 $(1,078) $1,621 $ 47 $ 659
------ ------- ------ ------ ------
Shares outstanding
Weighted average number of common shares
outstanding 2,800 2,796 2,796 2,796 2,796
Assuming exercise of stock options 273 -- 345 260 380
Assuming repurchase of treasury stock (273) -- (277) (260) (251)
------ ------- ------ ------ ------
Net incremental shares 0 -- 68 0 129
Assuming exercise of stock options considered
cheap stock 53 53 53 53 53
------ ------- ------ ------ ------
Weighted average number of common shares
outstanding as adjusted 2,853 2,849 2,917 2,853 2,978
------ ------- ------ ------ ------
Primary earnings per common share $ 0.39 $ (0.38) $ 0.56 $ 0.02 $ 0.22
------ ------- ------ ------ ------
FULLY DILUTED EARNINGS PER SHARE(1)
Net income $1,102 $(1,078) $1,621 $ 47 $ 659
------ ------- ------ ------ ------
Shares outstanding
Weighted average number of common shares
outstanding 2,800 2,796 2,796 2,796 2,796
Assuming exercise of stock options 273 -- 345 260 380
Assuming repurchase of treasury stock (235) -- (225) (224) (199)
------ ------- ------ ------ ------
Net incremental shares(1) 38 -- 120 36 181
Assuming exercise of stock options considered
cheap stock 53 53 53 53 53
------ ------- ------ ------ ------
Weighted average number of common shares
outstanding as adjusted 2,891 2,849 2,969 2,885 3,030
------ ------- ------ ------ ------
Fully diluted earnings per common share $ 0.38 $ (0.38) $ 0.55 $ 0.02 $ 0.22
====== ======= ====== ====== ======
</TABLE>
- ----------------
(1) This calculation is submitted in accordance with Securities Exchange Act of
1994 Release No. 5083 although not required by footnote 2 to paragraph 14 of
APB No. 15 because it results in dilution of less than 3%.
<PAGE> 1
EXHIBIT 23.2
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
registration statement.
Denver, Colorado,
October 23, 1997.
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE JUNE
28, 1997 CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FORM S-1 REGISTRATION STATEMENT.
</LEGEND>
<CIK> 0001040660
<NAME> APPLIED FILM CORPORATION
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> JUN-28-1997 JUN-27-1998
<PERIOD-START> JUN-30-1996 JUN-29-1997
<PERIOD-END> JUN-28-1997 SEP-27-1997
<CASH> 297,000 939,000
<SECURITIES> 0 0
<RECEIVABLES> 6,461,000 5,974,000
<ALLOWANCES> 0 0
<INVENTORY> 6,160,000 6,082,000
<CURRENT-ASSETS> 13,596,000 13,668,000
<PP&E> 17,153,000 19,857,000
<DEPRECIATION> (9,330,000) (9,741,000)
<TOTAL-ASSETS> 21,541,000 23,924,000
<CURRENT-LIABILITIES> 8,062,000 11,114,000
<BONDS> 6,448,000 5,128,000
0 0
0 0
<COMMON> 4,245,000 4,245,000
<OTHER-SE> 2,495,000 3,160,000
<TOTAL-LIABILITY-AND-EQUITY> 21,541,000 23,924,000
<SALES> 34,050,000 11,251,000
<TOTAL-REVENUES> 34,050,000 11,251,000
<CGS> 27,352,000 8,801,000
<TOTAL-COSTS> 27,352,000 8,801,000
<OTHER-EXPENSES> 3,745,000 1,316,000
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 822,000 171,000
<INCOME-PRETAX> 2,226,000 987,000
<INCOME-TAX> 605,000 328,000
<INCOME-CONTINUING> 1,621,000 659,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,621,000 659,000
<EPS-PRIMARY> 0.56 0.22
<EPS-DILUTED> 0.56 0.22
</TABLE>
