SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended October 3, 1998
Commission File Number 23103
APPLIED FILMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
Colorado 84-1311581
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation ororganization)
9586 I-25 Frontage Rd., Longmont, Colorado 80504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 774-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No ____
3,477,263 shares of Common Stock were outstanding as of November 5, 1998.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements: 3
Consolidated Balance Sheets at October 3, 1998 and 3
June 27, 1998
Consolidated Statements of Operations for the Three 4
Months Ended October 3, 1998 and September 27, 1997
Consolidated Statements of Cash Flows for the Three Months 5
Ended October 3, 1998, and September 27, 1997
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 18
2
<PAGE>
<TABLE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
October 3, 1998 June 27, 1998
--------------- -------------
ASSETS (unaudited)
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 463 $ 81
Accounts Receivable, net
Coated glass and other 6,275 6,010
Income earned, not yet billed 424 1,436
Inventories, net 9,406 10,055
Prepaid expenses and other 1,076 948
Deferred tax asset, net 727 837
-------- --------
Total current assets 18,371 19,367
-------- --------
Property, Plant and Equipment:
Land 270 270
Building 240 240
Machinery and equipment 16,603 16,477
Office furniture and equipment 508 502
Leasehold improvements 1,033 1,022
Construction-in-progress 1,823 877
-------- --------
20,477 19,388
Accumulated depreciation (10,565) (10,129)
-------- --------
9,912 9,259
Investment in affiliate 577 71
-------- --------
577 71
Total Assets $ 28,860 $ 28,697
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 3,806 $ 5,241
Accrued expenses 2,607 2,955
Current portion of deferred gain -- 56
Income taxes payable -- 291
Current portion of long-term debt 71 77
-------- --------
Total current liabilities 6,484 8,620
-------- --------
Non-Current Liabilities:
Long-term debt, net of current portion 6,677 4,175
Deferred gain, net of current portion 742 756
Deferred tax liability, net of current portion 338 320
-------- --------
Total liabilities 14,241 13,871
-------- --------
Stockholders' Equity:
Common stock, no par value, 10,000,000
shares authorized, 3,474,465 shares
issued and outstanding 9,432 9,424
Deferred compensation (5) (7)
Retained earnings 5,192 5,409
-------- --------
Total stockholders' equity 14,619 14,826
-------- --------
Total liabilities & stockholders' equity $ 28,860 $ 28,697
======== ========
</TABLE>
3
<PAGE>
<TABLE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended
-----------------------------------
October 3,1998 September 27, 1997
<S> <C> <C>
Net Sales $ 9,351 $ 11,251
Cost of Goods Sold 8,158 8,801
-------- --------
Gross Profit 1,193 2,450
Selling, General and Administrative 1,304 986
Research and Development Expenses 260 330
-------- --------
(Loss) Income from Operations (371) 1,134
Other Income (Expense):
Gain on foreign currency exchange 124 12
Interest Expense (112) (171)
Other Income 12 12
-------- --------
(Loss) Income before income taxes (347) 987
Income Tax (Benefit) Provision (130) 328
-------- --------
Net (Loss) Income $ (217) $ 659
======== ========
Net (Loss) Income Per Share
Basic $(0.06) $ 0.24
Diluted $(0.06) $ 0.23
Weighted Average Common Shares
Outstanding
Basic 3,475 2,796
Diluted 3,504 2,925
</TABLE>
4
<PAGE>
<TABLE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
Three Months Ended Three Months Ended
October 3, 1998 September 27, 1997
--------------- ------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net (Loss) Income $ (217) $ 659
Depreciation and Amortization 454 422
Amortization of Deferred Gain (14) --
Compensation Cost - Option Plan 2 6
Loss (gain) on disposals of property,
plant and equipment 1 (4)
Undistributed earnings of affiliate -- (18)
Changes in --
Accounts receivable (net) 723 487
Inventories 648 78
Prepaid expenses and other (93) (8)
Accounts Payable (1,434) 1,446
Income received not yet earned -- 1,487
Accrued expenses (405) 98
Income taxes payable (292) 96
Deferred income taxes, net 128 (3)
Net cash flows from operating activities (499) 4,746
------- -------
Cash Flows From Investing Activities
Purchase of Machinery and Equipment (145) (76)
Purchase of Office Furniture & Equipment (6) --
Purchase of Leasehold Improvements (11) (1,300)
Costs incurred for Construction in Progress (946) (1,338)
Proceeds from Sale of Equipment -- 4
Investment in Affiliate (506) --
Change in notes receivable from employees (10) 1
Net cash flows from investing activities (1,624) (2,709)
------- -------
Cash Flows from Financing Activities
Proceeds from Long Term Debt 4,440 1,745
Repayment of Long Term Debt (1,943) (3,140)
Stock issuance on stock purchase plan 8 --
Net cash flows from financing activities 2,505 (1,395)
------- -------
Net Increase in Cash 382 642
Cash and Cash Equivalents, beginning of period 81 297
Cash and Cash Equivalents, end of period $ 463 $ 939
======= =======
Supplemental cash flow information
Cash paid for interest, net of amounts capitalized $ 183 $ 356
======= =======
Cash paid for income taxes net of
amounts refunded $ 34 $ 234
======= =======
</TABLE>
5
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Company Organization and Operations
Applied Films Corporation, (the "Company"), was originally incorporated in
1992 as a Michigan corporation. In June 1995, the Company reincorporated in
Colorado. The Company's principal line of business is the manufacture and sale
of thin film coated glass for use in flat panel and liquid crystal displays.
During fiscal 1997, the Company began selling its thin film coating equipment to
flat panel display and other 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"). On November 26,
1997, Donnelly sold all its shares of Applied Films stock during the Company's
initial public offering.
(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 October 3, 1998 and
for the quarter ended 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
October 3, 1998 are not necessarily indicative of the results to be expected for
the entire year.
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 1998
and 1999 include 52 and 53 weeks respectively.
6
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventory items are evaluated periodically for obsolescence and reserved
or written off as appropriate. The Company's provision for slow-moving and
unidentified losses in inventory was $113,000 at the end of the first quarter of
fiscal year 1999 ended October 3, 1998 and $95,000 at fiscal year end June 27,
1998. Inventories at October 3, 1998 and June 27, 1998 consist of the following:
<TABLE>
October 3, 1998 June 27, 1998
--------------- -------------
<S> <C> <C>
Raw materials, net............................... $5,616,000 $6,555,000
Work-in-process.................................. 3,000 11,000
Materials for manufacturing systems.............. 182,000 302,000
Finished Goods................................... 3,605,000 3,187,000
---------- -----------
$9,406,000 $10,055,000
========== ===========
</TABLE>
Revenue Recognition
Coated glass revenues are recognized upon shipment to the customer. A
provision for estimated sales returns and allowances is recognized in the period
of the sale.
Equipment Sales
Revenues relating to the sales of thin film coating equipment are
recognized on the percentage-of completion method, measured by the percentage of
the total costs incurred and applied to date in relation to the estimated total
costs to be incurred for each contract. Management considers costs incurred and
applied to be the best available measure of progress on these contracts.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance. General 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 earned, but not yet billed, which totaled $424,000 and $1,436,000 at
October 3, 1998 and June 27, 1998, respectively, represents revenues earned
prior to billing. The Company offers warranty coverage for equipment sales for a
period of 12 months after final acceptance. The Company estimates the
anticipated costs to be incurred during the warranty period and accrues a
reserve as a percentage of revenue as revenue is recognized. These reserves are
evaluated periodically based on actual experience and anticipated activity.
Provisions for anticipated losses on contracts, if any, will be made in the
period they become evident.
Research and Development Costs
Research and development costs are expensed as incurred and consist
primarily of salaries and supplies. The Company incurred approximately $260,000
and $330,000 of research and development costs for the first quarter of fiscal
year 1999 and the first quarter of fiscal year 1998, respectively.
7
<PAGE>
Foreign Currency Transactions
The Company generated approximately 87% and 78% of its revenues in the
first quarter of fiscal 1999 and fiscal year 1998, respectively, from sales to
foreign corporations. In addition, many of its raw materials are purchased from
foreign corporations. The majority of the Company's sales and purchases are
denominated in U.S. dollars, with the remainder denominated in Japanese yen. For
those transactions denominated in Japanese yen, the Company records the sale or
purchase at the spot exchange rate in effect on the date of sale. Receivables
from such sales or payables for such purchases are translated to U.S. dollars
using the end of 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.
8
<PAGE>
Adoption of New Accounting Standards
The Financial Accounting Standards Board ("FASB") recently issued Statement
of Financial Accounting Standards ("SFAS") No. 128 entitled, "Earnings per
Share." SFAS No. 128 replaces primary and fully diluted earnings per share with
basic and diluted earnings per share, respectively. Under SFAS No. 128, basic
shares are calculated as shares outstanding in the market, less any treasury
shares, and diluted shares are calculated using basic shares and including
dilutive common equivalent shares such as stock options. The Company has applied
this accounting principle retroactively. The effect of this accounting change on
previously reported earnings per share was as follows:
<TABLE>
1st Quarter 1999 1st Quarter 1998
Fully Fully
Primary Diluted Primary Diluted
<S> <C> <C> <C> <C>
Primary (loss) earnings per share (as
reported under the prior method) $(0.06) $0.22
Effect of removal of options issued
within 12 months of IPO in connection
with adoption of SFAS No. 128 -- 0.02
--------- ------
Basic (loss) earnings per share (0.06) 0.24
Fully diluted (loss) earnings per share
(as reported under the prior method)
$(0.06) $0.22
Effect of stock options -- (0.01)
Effect of use of average market price for
options as opposed to end of year price
used under previous method -- -- 0.01
----------- ----------- -------- ------
Diluted earnings per share $(0.06) $(0.06) $0.23 $0.23
======= ======= ===== =====
</TABLE>
9
<PAGE>
A reconciliation between the number of shares used to calculate basic and
diluted earnings per share is as follows (in thousands of shares):
<TABLE>
1st Quarter 1998
<S> <C>
Weighted average number of common
shares outstanding (shares used in
basic earnings per share computation) 2,796
Effect of stock options (treasury stock
method) 129
-----
Shares used in diluted earnings per share
computation 2,925
=====
</TABLE>
The impact to the first quarter of fiscal 1999 is not shown as the effect is
anti-dilutive.
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in fiscal
year 1998. Under SFAS No. 130, the Company reports comprehensive income, which
in addition to net income, includes all changes in equity during a period except
those resulting from investments by and distributions to owners. In the first
quarter of fiscal year 1999 and fiscal year 1998 there were no differences
between net income and comprehensive income.
(3) Sales by Geographic Region
The breakdown of total sales by geographic region is as follows:
<TABLE>
Three Months Ended Fiscal Year Ended
October 3, 1998 June 27, 1998
---------------- --------------
(unaudited)
<S> <C> <C>
Asia (other than Japan).................... $ 5,930,000 $ 32,800,000
Japan...................................... 2,229,000 7,824,000
United States.............................. 1,270,000 12,224,000
Europe and Other........................... 324,000 2,304,000
------------- ------------
Gross sales................................ 9,753,000 55,152,000
Less: sales returns and allowances......... (402,000) (2,111,000)
------------- -------------
Net sales.................................. $ 9,351,000 $ 53,041,000
============ ============
</TABLE>
10
<PAGE>
(4) 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 and/or lump sum payments. 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.
The Company granted 2,798 and 1,777 shares to employees under this plan at grant
prices of $3.32 and $4.84 per share on October 3, 1998 and June 27, 1998,
respectively.
11
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
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 report.
This report contains certain forward-looking statements (within the meaning of
the Private Securities Litigation Reform Act of 1995) that involve substantial
risks and uncertainties, including those described below, the effect of changing
worldwide economic conditions, such as those in Asia, the effect of overall
market conditions, product demand and market acceptance risk, risks associated
with dependencies on suppliers, the impact of competitive products and pricing,
technological and product development risks, and other risk factors. For a
discussion of these and other risks and uncertainties, see the Company's Annual
Report on Form 10-K for the fiscal year ended June 27, 1998, Part I, "Certain
Factors." 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.
OVERVIEW
The Company's sales historically have been derived primarily from the sale
of thin film coated glass to manufacturers of liquid crystal displays (LCDs).
Most of the Company's LCD manufacturing customers are located in Asia. Sales to
international customers represented approximately 87% of the Company's total
gross sales and 88% of thin film coated glass sales in the first quarter of
fiscal 1999. The Company expects international sales will continue to represent
a significant portion of its net sales. During fiscal 1997, the Company began
selling thin film coating equipment to flat panel display ("FPD") and other
manufacturers, which sales totaled $2.8 million for fiscal year ended 1997.
Sales of thin film coating equipment totaled $13.9 million for fiscal 1998 and
$1.2 million for the first quarter of fiscal 1999.
Sales and related costs of coated glass sales are recognized when products
are shipped to the customer. Historically, sales have varied substantially from
quarter to quarter, and the Company expects such variations to continue. Because
a significant portion of the Company's overhead is fixed in the short term, the
Company's gross profit and results of operations may be adversely affected by
unexpected fluctuations in sales and prices. 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. Historically, the Company has experienced significant price pressure from
time to time in its thin film coated glass business. During the first quarter of
fiscal 1999, the Company has experienced a decline in selling prices and demand
for coated glass. The Company believes the decrease in selling prices has
resulted from a decrease in demand together with additional production capacity
which has been added by coated glass suppliers. The Company expects continued
downward pressure on its selling prices in the future. The Company expects
continued downward pressure on its selling prices in the future.
12
<PAGE>
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 $6.0 million, for fiscal 1998 and $2.2
million for the first quarter of fiscal 1999. 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 $8.9
million in fiscal 1998 and $1.6 million in the first quarter of fiscal 1999. At
October 3, 1998, accounts receivable denominated in yen were approximately
$957,000 or approximately 14% of total accounts receivable. At October 3, 1998,
accounts payable denominated in yen were approximately $1.6 million, or 41% of
total accounts payable. The Company is generally paid by its customers for its
yen denominated sales within approximately 15 to 30 days of the date of sale.
Net sales of thin film coating equipment are recognized on the
percentage-of-completion method, measured by the percentage of the total costs
incurred and applied to date in relation to the estimated total costs to be
incurred for each contract. The lead time for the sale of thin film coating
equipment is generally six to twelve months. To date, the Company has priced its
coating equipment in U.S. dollars.
In June 1998, the Company announced that its financial results were being
impacted by the economic conditions in Asia. These conditions continued to
impact the financial results of the Company during the first quarter of fiscal
1999. In August 1998, the Company announced a restructuring plan that included a
reduction in capacity (shutdown of a production coating system) and a reduction
in work force. During the quarter, the Company has experienced reduced demand
and declining sales prices for its thin film coated glass. Sales of thin film
coated glass to two recent purchasers of the Company's thin film coating
equipment are down significantly in part because these customers now coat glass
formerly supplied to them by the Company. The Company believes these customers
would have purchased thin film coating equipment from a competitor had they not
purchased it from the Company and that sales of thin film coated glass to these
customers would have declined whether or not the equipment was supplied by the
Company. In addition, delays in capital spending by Asian-based flat panel
display manufacturers have adversely impacted sales of thin film coating
equipment by the Company. During fiscal 1998, certain plasma display
manufacturers announced plans to delay commercialization of plasma display
panels which negatively impact their capital equipment purchases and sale of
equipment by the Company. Purchases of equipment by other FPD manufacturers have
also been negatively affected by the Asian economic conditions. The Company
expects the above conditions to continue to negatively impact both its coated
glass and coating equipment businesses. Coating equipment backlog at the end of
the first quarter of fiscal 1999 was $449,000 versus $950,000 at fiscal year end
1998 and $12.7 million as of the end of the first quarter of fiscal 1998.
During fiscal 1998, the Company began the relocation of its production
facilities from Boulder, Colorado to its new headquarters and production
facility in Longmont, Colorado. The relocation of its production facilities
adversely impacted results of operations during fiscal 1998 as well as during
the first quarter of fiscal 1999. The Company has completed the relocation of
its facilities as of October 3, 1998.
13
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended October 3, 1998 Compared with Three Months Ended September
27, 1997
Net Sales. Net sales decreased 17% to $9.4 million in the first quarter of
fiscal 1999 from $11.3 million in the first quarter of fiscal 1998. The decrease
reflected a weakening demand and declining selling prices for thin film coated
glass and a decline in equipment sales. Thin film coated glass sales decreased
12% from the first quarter of fiscal 1998 to the first quarter of fiscal 1999.
Equipment sales decreased 45% from the first quarter of fiscal 1998 to the first
quarter of fiscal 1999. Near term, the Company expects to experience reduced
sales of both thin film coated glass and coating equipment.
Gross Profit. Gross profit decreased to $1.2 million in the first quarter
of fiscal 1999 from $2.5 million in the first quarter of fiscal 1998. As a
percentage of net sales, gross profit margins decreased to 13% in the first
quarter of fiscal 1999 from 22% in the first quarter of fiscal 1998. Gross
profit margins for thin film coated glass for the first quarter of fiscal 1999
were negatively affected by declining sales prices, reduced sales volumes and
the shut-down of a production coater in August 1998. Gross profit margins for
coating equipment for the first quarter of fiscal 1999 were favorably affected
by warranty reserves which were reduced by $157,000 as actual claims have been
less than expected.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $1.3 million in the first quarter of fiscal 1999 from
$986,000 in the first quarter of fiscal 1998 due primarily to one-time
restructuring charges of $168,000 associated with the August 1998 reduction in
work force as well as moving expenses of $186,000 incurred to complete the
relocation of production equipment to the Company's new facility in Longmont,
Colorado. As a percentage of net sales, selling, general and administrative
costs were 14% for the first quarter of fiscal 1999 compared to 9% for the first
quarter of fiscal 1998.
Research and Development. Research and development expenses declined to
$260,000 in the first quarter of fiscal 1999 from $330,000 in the first quarter
of fiscal 1998. The decrease was due primarily to reduced salary and material
expenses and a reduction in the number of research and development projects. As
a percentage of net sales, research and development expenses were 3% in both the
first quarter of fiscal 1999 and the first quarter of fiscal 1998.
Interest Expense. Interest expense decreased to $112,000 in the first
quarter of fiscal 1999 from $171,000 in the first quarter of fiscal 1998.
Although debt levels were slightly higher during the first quarter of fiscal
1999 compared to the first quarter of fiscal 1998, interest expense decreased
primarily due to a debt guarantee fee from Donnelly incurred in the first
quarter of fiscal 1998 which was not incurred in 1999. The debt guarantee fee
terminated when Donnelly divested their investment in the Company in November
1997.
Other Income (Expense). Other income increased by approximately $112,000 in
the first quarter of fiscal 1999 over the first quarter of fiscal 1998 due
primarily to gains on foreign currency exchange. Foreign currency gains and
losses may occur in the future due to the fluctuating yen rate.
Income Tax Provision (Benefit). The Company's income tax provision provided
a benefit of $(130,000) in the first quarter of fiscal 1999 compared to an
expense of $328,000 in the first quarter of 1998
14
<PAGE>
due to operating losses incurred during the first quarter of fiscal 1999. The
effective tax rate was approximately 37% during the first quarter of fiscal 1999
versus 33% during the first quarter of fiscal 1998. The increase in the
effective tax rate is due to tax benefits resulting from favorable treatment of
foreign transactions in the Company's FSC.
Liquidity and Capital Resources
The Company has primarily funded its operations with cash generated from
operations, proceeds from an initial public offering of the Company's stock and
with additional debt borrowings. Cash used by operating activities for the first
quarter of fiscal 1999 was ($499,000) compared to $4.7 million of cash provided
by operations for the corresponding period in fiscal 1998 due primarily to first
quarter fiscal 1999 net losses as well as reductions in accounts payable and
accrued expenses. As of October 3, 1998, the Company had cash and cash
equivalents of approximately $463,000 and working capital of $11.9 million. As
of October 3, 1998, accounts receivable were approximately $6.7 million.
The Company has an $11.5 million credit facility with a commercial bank
which expires June 30, 2000. As of October 3, 1998, the Company had
approximately $6.4 million outstanding on its credit facility. The remaining
amount of this facility was available to the Company on October 3, 1998.
Cash used by investing activities for the first quarter of fiscal 1999 was
$1.6 million compared to $2.7 million for the first quarter of fiscal 1998.
Capital expenditures for the fiscal quarter ended October 3, 1998 were $1.1
million, compared to $2.7 for the fiscal quarter ended September 27, 1997.
Capital expenditures for the current year are expected to be approximately $3.0
million. Approximately $506,000 of the cash used by investing activities in the
first quarter of fiscal 1999 related to the funding of the announced China joint
venture with NSG. The Company expects to fund, through additional debt
borrowings, approximately $2.9 million during the second quarter of fiscal 1999
for the joint venture. During the third and fourth quarters of fiscal 1999, the
Company expects to receive cash proceeds from the sale of thin film coating
equipment to the joint venture, which is expected to reduce borrowings.
The Company believes that its working capital and capital resource needs
will continue to be met by operations and by additional borrowings under its
credit facility.
Year 2000 Compliance
The Year 2000 issue is the result of computer systems that use two digits
rather than four to define the applicable year, which may prevent such systems
from accurately processing dates ending in the year 2000 and after. This could
result in system failures or in miscalculations causing disruption of
operations, including, but not limited to, an inability to process transactions,
to send and receive electronic data, or to engage in routine business activities
and operations.
The Company has completed its initial assessment of all currently used
computer systems as well as production and coating equipment systems and has
developed a plan to correct those areas that will be affected by the year 2000
issue. The Company has undertaken a corrective action plan including the
replacement or upgrade of certain software and hardware. The Company will
utilize outside vendors to assist in the upgrade of certain systems. The Company
estimates that the implementation phase is approximately
15
<PAGE>
60% complete with respect to its major systems. The Company's goal is to have
these systems substantially year 2000 compliant by the end of fiscal 1999.
The Company began in late fiscal 1998 evaluating personal computer hardware
and software outside of the Company's IT systems. With respect to personal
computers, the Company has completed the audit phase, and the assessment and
scope phases are approximately 85% complete. The Company is presently in the
process of testing and implementation, and is upgrading its personal computer
hardware and software to become Year 2000 compliant. The Company's goal is to
complete the remediation of personal computer systems by the end of fiscal 1999.
In addition to reviewing its internal systems, the Company has begun formal
communications with its significant vendors concerning Year 2000 compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be sufficiently Year 2000 compliant so as to avoid an adverse
impact on the Company's operations, financial condition and results of
operations. The Company does not believe that its products and services involve
any material Year 2000 risks, and does not believe it is subject to any express
or implied warranties related to its products.
The Company does not presently anticipate that the costs to address the
Year 2000 issue will have a material adverse effect on the Company's financial
condition, results of operations or liquidity. Present estimated costs for
remediation are $40,000.
The Company presently anticipates that it will complete its Year 2000
assessment and remediation by the end of fiscal 1999. However, there can be no
assurance that the Company will be successful in implementing its Year 2000
remediation plan according to the anticipated schedule. In addition, the Company
may be adversely affected by the inability of other companies whose systems
interact with the Company to become Year 2000 compliant and by potential
interruptions of utility, communication or transportation systems as a result of
Year 2000 issues.
Although the Company expects its internal systems to be Year 2000 compliant
as described above, the Company intends to prepare a contingency plan specifying
what it intends to do if it, or critical external companies, are not Year 2000
compliant in a timely manner. The Company expects to prepare its contingency
plan during calendar year 1999.
16
<PAGE>
Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
Approximately $6.4 million of the Company's borrowed debt is subject to
changes in interest rates; however, the Company does not use derivatives to
manage this risk. This exposure is linked primarily to the Eurodollar rate, and
secondarily to the prime rate. The Company believes that a moderate change in
either the Eurodollar rate or the prime rate would not materially affect
operating results or financial condition of the Company.
Foreign Exchange Exposure
The Company is exposed to foreign exchange risk associated with its
accounts receivable and payable denominated in foreign currencies, primarily in
Japanese yen. At October 3, 1998, the Company had approximately $957,000 of its
accounts receivable and $1.6 million of its accounts payable denominated in yen.
At June 27, 1998, the Company had approximately $839,000 of its accounts
receivable and $2.0 million of its accounts payable denominated in yen. The
Company believes that a moderate change in the Japanese yen/U.S. dollar exchange
rate would not materially affect operating results or financial condition of the
Company.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect the Company's operating results or
financial condition. The potential impact is likely greater the greater the
magnitude of the rate change.
17
<PAGE>
PART II
OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Description
27 Financial Data Schedule (EDGAR filing only)
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
APPLIED FILMS CORPORATION
Date: November 17, 1998 /s/ Thomas T. Edman
Thomas T. Edman
President and Chief Executive Officer
Date: November 17, 1998 /s/ Thomas D. Schmidt
Thomas D. Schmidt
Chief Financial Officer
19
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-28-1998
<PERIOD-END> OCT-03-1998
<CASH> 463,000
<SECURITIES> 0
<RECEIVABLES> 6,699,000
<ALLOWANCES> 0
<INVENTORY> 9,406,000
<CURRENT-ASSETS> 18,371,000
<PP&E> 20,477,000
<DEPRECIATION> (10,565,000)
<TOTAL-ASSETS> 28,860,000
<CURRENT-LIABILITIES> 6,484,000
<BONDS> 6,667,000
0
0
<COMMON> 9,432,000
<OTHER-SE> 5,187,000
<TOTAL-LIABILITY-AND-EQUITY> 28,860,000
<SALES> 9,351,000
<TOTAL-REVENUES> 9,351,000
<CGS> 8,158,000
<TOTAL-COSTS> 8,158,000
<OTHER-EXPENSES> 1,564,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 112,000
<INCOME-PRETAX> (347,000)
<INCOME-TAX> (130,000)
<INCOME-CONTINUING> (217,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217,000)
<EPS-PRIMARY> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
