FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 For the fiscal year ended June 27,
1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission file number 23103
APPLIED FILMS CORPORATION
(Exact name of registrant as specified in its charter)
COLORADO 84-1311581
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9586 I-25 Frontage Road, Longmont CO 80504
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (303) 774-3200
Securities registered pursuant to Section 12(b) of the Act:
Name of Exchange
Title of Each Class on Which Registered
Common Stock Nasdaq National Market
Securities registered pursuant to Section 12(g) of the Act: None
(Title of Class)
------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. |_|
The aggregate market value of the common stock held by non-affiliates of the
Registrant, based on a per share price of $3.25 as of September 1, 1998, was
$11,292,011. As of September 1, 1998, there were outstanding 3,474,465 shares of
the Company's Common Stock (no par value).
Documents Incorporated by Reference: Portions of the Company's Proxy Statement
for the Annual Meeting of Shareholders to be held October 27, 1998 are
incorporated by reference into Part III of this Report.
<PAGE>
PART I
ITEM 1: Business
The following discussion contains trend information and other
forward-looking statements (including statements regarding future operating
results, future capital expenditures, new product introductions, technological
developments and industry trends) that involve a number of risks and
uncertainties. The Company's actual results could differ materially from the
Company's historical results of operations and those discussed in the
forward-looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those identified in "ITEM 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the section entitled "Certain Factors." All period references
are to the Company's fiscal periods ended June 27, 1998, June 28, 1997 or June
29, 1996, unless otherwise indicated.
ITEM 1(a): General Development of Business
General
Applied Films Corporation ("Applied Films" or the "Company") utilizes and
develops thin film technology for the flat panel display ("FPD") industry. The
Company supplies thin film coated glass for use primarily in liquid crystal
displays ("LCDs") as well as other applications. The Company more recently began
selling thin film coating equipment to FPD manufacturers. Applied Films believes
that it is able to address a broad array of the FPD market through the
combination of its thin film coated glass business and its coating equipment
business.
FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, calculators, laptop computers, pagers, scientific
instruments, televisions, video games, gasoline pumps, automotive instruments,
point-of-sale terminals and a number of other electronic devices. Most FPDs
require optically transparent, electrically conductive thin films coated on
glass substrates. These thin films transmit electrical power to picture elements
of the displays and allow light to pass to the viewer. As FPDs become larger,
thinner, and more information intensive, the thin film coated glass used in the
displays must meet more demanding performance standards.
The Company primarily supplies thin film coated glass for TN LCDs. Applied
Films also sells a smaller portion of thin film coated glass for black and white
STN LCDs Lower information content TN LCDs are most commonly used for simple
displays such as those found on watches and calculators. Higher information
content STN LCDs are typically larger displays with higher information content
and are used for applications such as displays for cellular telephones, pagers
and personal digital assistants. Applied Films believes its position as a
leading supplier of thin film coated glass for lower information content LCDs
provides it with continued growth opportunities in the TN and STN LCD markets.
The coating of thin films onto glass for certain higher information content
FPDs involves a number of intermediate process steps, and is therefore more
suitably performed in-house by display manufacturers. Therefore, the Company has
begun offering its thin film coating equipment to manufacturers of 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 $17.5 million. As of June 27,
1998, the Company's backlog from such equipment sales was approximately
$950,000. Applied Films has also developed, and applied for a patent on, a
process for sputtering (a form of physical vapor deposition) magnesium oxide
("MgO") which the Company believes may represent a significant competitive
advantage in the emerging market for thin film coating equipment for PDPs.
The Company was originally incorporated in Colorado as Applied Films Lab,
Inc. On March 2, 1976. On May 1, 1992, the Company merged with Donnelly Coated
Corporation, a wholly owned subsidiary of Donnelly Corporation of Holland,
Michigan. During fiscal 1994, the Company ceased using capacity in Holland,
Michigan and began operating solely in Boulder, Colorado. During fiscal 1998,
the Company moved the majority of its
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manufacturing facilities to Longmont, Colorado. The remaining production
capacity at the Boulder facility is expected to be relocated to the Longmont
facility by September 30, 1998.
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
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 LCDs. The Company believes its technological capabilities, its history of
designing, developing and improving its own thin film manufacturing systems, and
its extensive operational experience provide it with competitive advantages in
selling thin film coating equipment to others.
Applied Films' goal is to become a major supplier of thin film coating
equipment to the emerging PDP market. The Company intends to address this market
by offering both pilot systems and full scale production systems for the
sputtering of the three thin film layers required by PDPs (indium tin oxide
("ITO"), MgO, and chrome-copper-chrome ("CrCuCr")). Currently the main
production method used for applying the MgO layer is vacuum evaporation which,
as displays become larger, presents difficulties for film uniformity. A major
drawback of the sputtering process for MgO has been its very slow sputtering
rate. However, the Company recently developed, and has filed a patent
application which the Company believes may allow MgO glass coatings to be
applied at lower cost, with increased speed 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 providing MgO film
samples to other prospective PDP customers. See "Certain Factors --
Uncertainties Related to Coating Equipment Business."
Capture Increased Share of Thin Film Coated Glass Market. Applied Films
believes its position as a leading supplier of thin film coated glass for the
FPD market provides it with continued growth opportunities in that market. The
Company will pursue continued growth of its coated glass business by (i) seeking
to be a 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 customers, and
(iii) pursuing strategic business relationships to expand the Company's customer
base and manufacturing capacity. For instance, the Company has entered into a
relationship with Nippon Sheet Glass Co., Ltd. ("NSG"), a major Japanese glass
manufacturer to supply much of the TN and black and white STN coated glass needs
of NSG's customers. This three-year agreement provides a framework for the sale
by the Company of its coated glass through NSG to NSG's customers. The agreement
can be terminated by either party on three months' notice and does not obligate
NSG to purchase a minimum amount of coated glass from the Company. The Company
believes that pursuant to this agreement, it will provide a significant portion
of NSG's customers' coated glass needs. In addition, during fiscal year 1998,
the Company announced its intent to enter into a 50/50 joint venture agreement
with NSG to produce thin film coated glass in Suzhou, China for use in LCD
displays. Under this joint venture, Applied Films anticipates having closer
access to its key customer base in Southeast Asia. Nevertheless, the Company is
aware of new capacity being brought online by competitors in Asia during
calendar years 1998 and 1999. This new capacity, coupled with weakening demand
and prices, will have an adverse effect on the Company's sales and financial
performance. See "Certain Factors -- International Markets."
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ITEM 1(b): Financial Information About Industry Segments
The Company supplies coated glass and glass coating equipment primarily to
LCD manufacturers, neither of which are currently considered to be in separate
industry segments. For further discussion see "ITEM 8: Financial Statements and
Supplementary Data -- Note 2: Significant Accounting Policies -- Recently Issued
Accounting Standards."
ITEM 1(c): Narrative Description of Business
Products and Manufacturing
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>
Fiscal Year Ended
June 27, 1998 June 28, 1997 June 29, 1996
(In thousands)
<S> <C> <C> <C>
TN Glass.................................................. $29,189 $24,366 $18,972
STN Glass................................................. 4,844 3,676 1,499
Other Coated Glass........................................ 7,210 4,257 2,141
Thin Film Coating Equipment............................... 13,908 2,784 ---
</TABLE>
Thin Film Coated Glass used for TN LCDs. Thin film coated glass for TN LCDs
is manufactured by depositing silicon dioxide ("SiO2") and ITO onto glass
purchased primarily in four thicknesses, 1.1 millimeters, 0.7 millimeters, 0.55
millimeters, and 0.4 millimeters. The thin film coated glass is sold in a
variety of sizes ranging from roughly 300 millimeters square to 400 millimeters
by 500 millimeters. TN LCDs are most commonly used for simple displays such as
those found on watches, calculators and electronic instruments. They offer good
contrast and acceptable response time for simple readout operations, are
relatively inexpensive to produce and require very low power to operate. TN LCDs
typically are not used for high information content displays such as those used
in laptop computers. However, TN LCDs are the best all around choice for many
products, and current advances in display technologies are permitting this lower
cost glass to be used for other, new applications such as in the automotive
industry.
Thin Film Coated Glass used for black and white STN LCDs. This product is
more complex and expensive to manufacture than thin film coated glass for TN
LCDs. STN LCD product in most instances, requires that the Company purchase
higher quality, flatter glass. In addition, glass for many STN LCDs requires a
thicker ITO coating to improve conductivity, commonly requiring a longer
production cycle time. The Company has converted one of its TN LCD coating
systems to meet these needs and, during fiscal 1998, brought on line a new
coating system capable of manufacturing thin film coated glass for black and
white STN LCDs. There is a wider range of information density on STN LCDs
ranging from low information displays such as personal digital assistants to
high information density displays.
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, chrome-copper-chrome 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 thin film coating
equipment for use in producing LCDs, PDPs and automatically dimming
(electrochromic) automotive mirrors. The Company's present coating equipment
product line includes three basic platforms: (i) the Venture Series in-line
vertical system which provides
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reduced particle defect levels and high throughput for use in FPD and other high
volume applications, (ii) the Pilot Series, a line of sputtering systems for
research and development, and limited production, and (iii) the Alliance Series,
which is a new platform being designed and built by the Company. The Pilot
system can be upgraded to a Venture system as customer requirements increase.
The Alliance Series is an advanced concept thin film equipment system addressing
automation, increasing display size and low-particulate requirements of FPD and
PDP display manufacturers. The design and building of the Alliance Series will
account for a significant portion of the Company's capital expenditures in
fiscal 1999. Included within each of the Company's platforms is the Company's
proprietary, user-friendly software using computer touch screens. The Company's
thin film coating 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 selling price from approximately $2.0 million
for a simply configured system to approximately $6.0 million for the largest
system.
Process Flow. One of the Company's primary process elements and core
competencies in the manufacture of thin film coated glass is the preparation of
the glass for coating in high volumes. The cleaning process, the lack of
pinholes in the coating, and the absence of any contamination on or under the
coating are critical in the manufacturing process. After cleaning and
preparation, the glass enters a HEPA filtered clean room where it is 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 Longmont and one based in
China. Sales in Taiwan, Japan and Korea are handled through outside sales
representatives who are supported by the Company's internal personnel. Other
Company personnel, including its Chief Executive Officer, Vice President - Sales
& Marketing 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 at various
levels within the Company. Much of the sales effort in the systems area is
undertaken by the Company's technical and marketing groups, including a sales
office in Japan. 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 post sales service and support. The Company generally sells
its thin film coating systems with progress payments.
Approximately 78% of the Company's fiscal 1998 gross sales were derived
from exports, primarily to Asia. See "Certain Factors -- International Markets."
In the same period, the Company served 131 customers in 15 countries. In fiscal
1998, the Company's ten largest customers accounted for approximately 78% of the
Company's gross sales. The principal demand for thin film coated glass is in
Asia and the Company's customers for thin film coating equipment have been in
Korea, Taiwan and the United States. The Company believes its potential
geographic market for thin film coating equipment includes all the major
geographic regions in which FPD manufacturing takes place. See "Certain Factors
- -- Uncertainties Related to Coating Equipment Business" and "-- Dependence on
Key Customers, Limited Number of Customers." Sales to two customers, Wintek
Corporation and Gentex Corporation, represented approximately 33% and 15% of
gross sales for fiscal 1998, respectively. Sales to both customers for fiscal
1998 included sales of thin film coating equipment and thin film coated glass.
Sales to these two customers are expected to decline significantly in fiscal
1999.
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.
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<TABLE>
Fiscal Year Ended
June 27, June 28, June 29,
1998 1997 1996
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Asia (other than Japan)........................................ $24,124 $17,059 $12,776
Japan.......................................................... 7,824 6,611 4,288
United States.................................................. 6,991 5,688 4,049
Europe and Other............................................... 2,304 2,941 1,499
</TABLE>
The Company believes the Japanese market represents a substantial national
market for coated glass. The Company has entered into an agreement with NSG to
supply TN and black and white STN coated glass which will assist the Company's
effort to further penetrate the Japanese market. The agreement, however, does
not obligate NSG to purchase any minimum amount of coated glass from the
Company. See "-- Strategy -- Expand Thin Film Coating Business."
A key aspect to serving the needs of its international customers is
just-in-time delivery of its products. The Company utilizes warehouses in Japan
and Hong Kong to meet this need. The Company has announced its intention to
enter into a 50/50 joint venture agreement with NSG to produce thin film coated
glass in Suzhou, China, for use in LCD displays. Under the joint venture
agreement, Applied Films will have closer access to its key customer base in
Southeast Asia and use of an existing production facility, while reducing
operating and transportation costs. The joint venture is in the start-up phase,
but the Company currently anticipates the joint venture will commence production
of products in calendar year 1999. NSG currently operates a production coater in
China which will be included in the joint venture. The joint venture will also
purchase a production coater from the Company. Both the Company and NSG are
expected to contribute equity capital of $3.2 million each during fiscal 1999.
The Company expects to fund this investment in the joint venture through
additional borrowings under its revolving credit facility and the sale of
coating equipment to the joint venture. See "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources." 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
Longmont 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.
Although international markets provide the Company with significant growth
opportunities, periodic economic downturns, trade balance issues, political
instability and fluctuations in interest and foreign currency exchange rates are
all risks that could affect global products and service demand. Many Pacific Rim
countries are currently experiencing banking and currency difficulties that have
led to economic recession in those countries. These difficulties are having a
material adverse effect on the Company's business. See "Certain Factors --
International Markets" and see "ITEM 7: Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Sales and purchases are generally denominated in U.S. dollars and Japanese
yen. The Company does not currently engage in currency hedging transactions. To
the extent the Company must transact business in foreign currencies and is
unable to match revenue received in foreign currencies with expenses paid in the
same currency, it is exposed to possible losses in foreign currency
transactions.
Seasonality
The Company's business is not particularly seasonal. However, production
output is affected by holidays, vacations and available workdays. The Company's
business is subject to significant quarterly and annual fluctuations. See
"Certain Factors -- Fluctuations in Demand and Annual and Quarterly Operating
Results."
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Working Capital
The Company extends credit to its customers, either through open accounts
or through letters of credit. Equipment customers generally make a significant
advance deposit followed by progress payments based upon equipment completion
and delivery. The Company utilizes inventory warehouses in Hong Kong and Japan.
Backlog of Orders
The Company generally does not maintain a material backlog of orders for
coated glass sales. Orders are generally shipped within 30 to 60 days of order
receipt. Backlog of orders are maintained for equipment sales due to the longer
lead and construction times. Backlog for equipment sales totaled $950,000 as of
June 27, 1998, versus $5.3 million as of June 28, 1997.
Environmental Matters
Like similar companies, the Company's operations and properties are subject
to a wide variety of increasingly complex and stringent federal, state, local
and international laws and regulations, including those governing the use,
storage, handling, generation, treatment, emission, release, discharge and
disposal of certain materials, substances and wastes, the remediation of
contaminated soil and groundwater, and the health and safety of employees
(collectively, "Environmental Laws"). As such, the nature of the Company's
operations exposes it to the risk of claims with respect to such matters and
there can be no assurances that material costs or liabilities will not be
incurred in connection with such claims.
Certain Environmental Laws regulate air emissions, water discharges,
hazardous materials and wastes and require public disclosure related to the use
of various hazardous or toxic materials. The Company's operations are also
governed by Environmental Laws relating to workplace safety and worker health.
Compliance with Environmental Laws may require the acquisition of permits or
other authorizations for certain activities and compliance with various
standards or procedural requirements.
Based upon its experience to date, the Company believes that the future
cost of compliance with existing Environmental Laws, and liability for known
environmental claims pursuant to such Environmental Laws, will not have a
material adverse effect on the Company's financial position or results of
operations and cash flows. However, future events, such as new information,
changes in existing Environmental Laws or their interpretation, and more
vigorous enforcement policies of regulatory authorities, may give rise to
additional expenditures or liabilities that could be material.
Suppliers
Thin Film 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 SiO2 and ITO. The Company currently purchases
SiO2 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.
See "Certain Factors -- Limited Sources of Supply."
Thin Film Coating Equipment. In its thin film equipment 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.
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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.
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 customer needs for thin film coated glass
features are important competitive factors. Although certain of the Company's
potential competitors have considerably greater financial, research, technical,
and sales and marketing resources than the Company, the Company believes that it
competes favorably with respect to each of these factors. The Company is aware
of approximately ten thin film coated glass competitors worldwide. Certain of
these competitors are also manufacturers of thin glass required for thin film
components and several are users of thin film coated glass. These are large
companies with significant research and development funding and extensive thin
film technology background. All of the Company's principal thin film coated
glass competitors are located outside the United States, primarily in Asia. The
Company is aware of new capacity being brought online by competitors during
calendar years 1998 and 1999. This new capacity, coupled with weakening demand
and prices, is having an adverse effect on the Company's sales. See "Certain
Factors -- Highly Competitive Market Environment."
Both Company suppliers and customers could, conceivably, vertically
integrate to manufacture the products produced by the Company.
In manufacturing thin film coating equipment, the Company competes against
two established equipment manufacturers which are much larger than the Company:
Ulvac Japan, Ltd. in Japan and Balzers Process Systems in Germany. Competition
is based on performance and process technology, after-sales support and service
and price, and the Company believes it competes favorably with respect to each
of these factors. Key performance and technology issues include technical
capability, systems design, product uniformity, yields, target utilization and
throughput. The Company is also the only major thin film coating equipment
manufacturer that also manufactures thin film coated glass for the FPD market.
The Company believes the experience, expertise and synergy resulting from this
provide it with a competitive advantage.
Research and Development
The Company's 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 1996, 1997 and 1998, research and development expenditures were 4.4%,
2.2%, and 2.3% of the Company's net sales for those years.
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 applications and due to the fact that patents become
part of the public record. The Company's success is heavily dependent upon its
proprietary processes. The Company believes that due to the rapid pace of
innovation within its industry, factors such as technological and creative
skilled personnel, the ability to develop and enhance systems, knowledge and
experience of management, reputation, product quality and customer service and
support are more important for establishing
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and maintaining a competitive position within the industry than are patent or
other legal protections for its technology. There can be no assurance, however,
that the steps taken by the Company to protect its proprietary rights will be
adequate, to prevent misappropriation of such rights or that third parties will
not independently develop a functionally equivalent or superior technology.
Employees
As of fiscal year end 1998, the Company employed 296 people, including 241
in thin film coated glass production, 21 in thin film coating systems, 7 in
marketing and sales, 9 in research and development and 18 in accounting, human
resources, and other administrative personnel. None of the employees are
unionized. The Company considers its relationship with its employees to be good.
The Company focuses on enhancing sound manufacturing systems and applying
key concepts of high performance work systems to improve its ability to grow
rapidly, excel at product cost, quality, and delivery, and encourage continuous
improvement and innovation. The Company's fundamental work units are teams,
including multi-skilled production teams responsible for start-to-completion
manufacturing and teams focused on technology development, and innovation.
Coordination and direction are established through extensive work force
education, participative leadership and management, and shared goal setting,
communication, and performance feedback.
The Company operates under a participative management system which the
Company believes enhances productivity by emphasizing individual employee
opportunity and participation both in operating decisions and in the Company's
profitability. The Company maintains a discretionary monthly profit sharing plan
for full-time nonexecutive employees. The Company believes this emphasis assists
with enhanced productivity, cost control, and product quality and has helped the
Company attract and retain capable employees.
The Company announced in August, 1998 a reduction in production output and
workforce levels due to a slowdown in its Asian business. One of the Company's
thin film production coaters (System 7) was shut down effective August 3, 1998.
It is uncertain how long the Asian slowdown will continue or if additional
production output or workforce reductions will be necessary.
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
Name Age Position
<S> <C> <C>
Cecil Van Alsburg.............................. 61 Director, Chairman of the Board
Thomas T. Edman................................ 36 Director, President, Chief Executive Officer
John S. Chapin................................. 57 Director, Vice President - Research, Secretary
C. Richard Condon.............................. 53 Vice President - Engineering
Graeme Hennessey............................... 60 Vice President - Sales and Marketing
Thomas D. Schmidt.............................. 43 Chief Financial Officer and Treasurer
James Knister.................................. 60 Director
Chad D. Quist.................................. 36 Director
Jeffrey K. Fergason............................ 39 Director
Richard P. Beck................................ 65 Director
Roger Smith.................................... 57 Director of Materials
Russell W. Black............................... 38 Director of Operations - Thin Films Systems
John J. Kester................................. 48 Advanced Development Manager
</TABLE>
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Cecil Van Alsburg co-founded Applied Films Lab, Inc. in 1976 and served as
President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg has
also served as a director of Applied Films Corporation since its inception and
has been Chairman of the Board since January 1998. Prior to 1976, Mr. Van
Alsburg was employed in various capacities by Donnelly Corporation for which he
had worked since 1957. Mr. Van Alsburg majored in civil engineering and
architecture at the University of Michigan.
Thomas T. Edman has been employed by the Company since June 1996 and has
served as its President and Chief Executive Officer since May 1998. From June
1996 until May 1998, Mr. Edman served as Chief Operating Officer and Executive
Vice President. Mr. Edman has also served as a director of Applied Films
Corporation from July 1998 to the present. From 1993 until joining the Company,
he served as General Manager of the High Performance Materials Division of
Marubeni Specialty Chemicals, Inc., a subsidiary of a major Japanese trading
corporation. Mr. Edman obtained a bachelors of arts in East Asian studies
(Japan) from Yale and, in June 1993, a masters degree in business in
multinational management and marketing from The Wharton School at the University
of Pennsylvania.
John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and has
continuously served as Vice President - Research and a director of Applied Films
Corporation since its inception. Mr. Chapin is the inventor of the planar
magnetron and co-inventor of a reactive sputtering process control. Mr. Chapin
obtained a bachelors of science degree in geophysics from the Colorado School of
Mines and a masters degree in electrical engineering from the University of
Colorado.
C. Richard Condon co-founded Applied Films Lab, Inc. in 1976 and has
continuously served as its Vice President - Engineering since its inception. Mr.
Condon also served as a director of Applied Films Corporation from 1976 until
July 1998. Mr. Condon is responsible for the Company's advanced coating systems
design, with over 25 years experience in the thin film industry. Mr. Condon
obtained a bachelors of science degree in physics from the University of
Colorado and an associates degree in mechanical engineering from the Wentworth
Institute.
Graeme Hennessey has served as the Company's Vice President - Sales and
Marketing since April 1993. From 1980 until he joined the Company, Mr. Hennessey
was employed by Donnelly Corporation as a product line manager where he was
responsible for sales and marketing as well as manufacturing. Mr. Hennessey
obtained a bachelors of science degree in physics from Catholic University of
America and a masters degree in physics from Fordham University.
Thomas D. Schmidt has been employed by the Company since March 1997 and
serves as Chief Financial Officer and, since July 1998, as Treasurer. 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.
James A. Knister has been a director of the Company since 1992 and served
as the Company's non-employee Chairman from 1996 until January 1998. Mr. Knister
has been the Group Managing Director of Ventures at Donnelly Corporation since
January 1997. From 1967 until December 1996, Mr. Knister served in various
capacities at Donnelly Corporation including, from 1981 to 1994, as Senior Vice
President and Chief Financial Officer and, from 1994 until December 1996, as a
Senior Vice President. Mr. Knister also serves on the Board of Directors of
X-Rite, Incorporated. Mr. Knister obtained a bachelors of science degree in
industrial engineering and a masters degree in business administra tion from the
University of Michigan.
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.
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Jeffrey K. Fergason has been a director of the Company since 1997. Mr.
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.
Richard P. Beck has been a director of the Company since May 1998. Since
1992, Mr. Beck has served as Chief Financial Officer of Advanced Energy
Industries, Inc., a manufacturer of power conversion and control systems. Since
1995, Mr. Beck has also served as a director of Advanced Energy Industries, Inc.
From 1987 to 1992, Mr. Beck served as Executive Vice President and Chief
Financial Officer of Cimage Corporation, a computer software company. Mr. Beck
obtained a bachelor's of science degree in accounting and a masters degree in
business administration in finance from Babson College.
Roger Smith has served the Company since July 1998 as its Director of
Materials. From May 1993 until July 1998 Mr. Smith served as the Company's
Treasurer. Prior to joining the Company, Mr. Smith was employed for 33 years by
Donnelly Corporation in various capacities, including controller and project
manager.
Russell W. Black has been employed by the Company since December 1996 as
its Director of Operations -- Thin Film Systems. From 1994 until March 1996, Mr.
Black served as Engineering Manger at Applied Komatsu Technology, a capital
equipment supplier to the FPD industry, and from 1990 to 1993, as an Engineering
Manager at Varian Associates, Inc., a capital equipment supplier to the
semiconductor industry. Mr. Black obtained a bachelors of science degree in
engineering technology from California State Polytechnic University. In 1995,
Mr. Black pleaded guilty to one count of wire fraud in United States District
Court. Mr. Black was sentenced to 18 months probation and 50 hours of community
service and was ordered to pay approximately $7,500 in fines and restitution.
Mr. Black's probation was terminated by the court after 10 months.
John J. Kester 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 seven directors,
divided into three classes. Messrs. Van Alsburg and Chapin serve in the class
whose term expires in 1998; Mr. Quist serves in the class whose term expires in
1999, and Mr. Knister serves in the class whose term expires in 2000. Upon the
expiration of the term of each class of directors, directors comprising that
class will be elected for a three-year term at the next succeeding annual
meeting of shareholders. Messrs. Edman, Fergason and Beck were appointed to the
Board of Directors to fill vacancies, and their terms, therefore, expire in
1998. Upon the expiration of the term of a director appointed to fill a vacancy,
that director will be elected to an appropriate term at the next succeeding
annual meeting of shareholders. Each director holds office until that director's
successor has been duly elected and qualified. Selection of the nominees for the
Board of Directors is made by the entire Board of Directors.
Executive officers of the Company are elected by the Board of Directors on
an annual basis and serve until their successors have been duly elected and
qualified.
ITEM 1 (d): Information About Foreign Operations
See "ITEM 1(c): Narrative Description of Business -- Sales, Marketing, and
Customers."
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ITEM 2: Properties
The Company's headquarters and the majority of its manufacturing facilities
are located in Longmont, Colorado in approximately 127,000 square feet of leased
space. The Company also has production capacity in its Boulder facility, which
capacity is expected to be relocated to the Longmont facility by September 30,
1998. The Company has sales offices in China and Japan and utilizes inventory
warehouses in Japan and Hong Kong.
The Company believes its facilities are modern, well-maintained and
adequately insured and are well-utilized.
ITEM 3: Legal Proceedings
The Company is not presently involved in any legal proceedings which, if
not settled in favor of the Company, would individually or collectively, have a
material adverse impact on its financial condition.
ITEM 4: Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of fiscal 1998 to a
vote of the Company Shareholders.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The discussions in this Report on Form 10-K and the documents incorporated
herein by reference which are not statements of historical fact (including
statements in the future tense and those which include terms such as "believe,"
"will," "expect," and "anticipate") contain forward-looking statements that
involve risks and uncertainties. The Company's actual future results could
materially differ from those discussed. Factors that could cause or contribute
to such differences include, but are not limited to, the effect of changing
worldwide economic conditions, such as those in Asia, the risk of overall market
conditions, product demand and market acceptance risk, risks associated with
dependencies on suppliers, the impact of competitive products and pricing,
technological and product development risks, and other factors including those
discussed in ITEM 1 above in this Report and in the Management's Discussion and
Analysis of Financial Condition and Results of Operations in ITEM 7, as well as
those discussed elsewhere in this Report and the documents incorporated herein
by reference.
CERTAIN FACTORS
Fluctuations in Demand and Annual and Quarterly Operating Results
The Company has experienced and may continue to experience significant
annual and quarter- to-quarter fluctuations in its operating results. The
Company's annual and quarterly operating results may fluctuate as a result of a
variety of factors including: (i) customer demand, such as general economic
conditions in the FPD industry, market acceptance of products of both the
Company and its customers, changes in product mix, and the timing, cancellation
or delay of customer orders and shipments; (ii) competition, such as competitive
pressures on prices of the Company's products, as well as those of its
customers, and the introduction or announcement of new products by competitors;
and new production capacity added by competitors; (iii) manufacturing and
operations, such as fluctuations in availability and cost of raw materials and
production capacity, the transfer of equipment and personnel to the Company's
new manufacturing facilities, and the hiring and training of additional staff;
(iv) fluctuations in foreign currency exchange rates; (v) new product
development, such as increased research, development and engineering, as well as
marketing expenses associated with new product introductions and the Company's
ability to introduce new products and technologies on a timely basis; (vi) sales
and marketing, such as concentration of customers and discounts that may be
granted to certain customers; and (vii) the cyclical nature of the capital
equipment market. Because a significant portion of the Company's overhead is
fixed, at least in the short-term, the Company's results of operations may be
materially adversely affected if net sales decline for any reason. Further,
although the Company has achieved productivity improvements in recent quarters,
there can be no assurance of any future productivity improvements. See "ITEM 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
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Highly Competitive Market Environment
Competition in the thin film coated glass for the LCD market is, and is
expected to remain, intense. Several of the Company's competitors have
substantially greater financial, technical, marketing and sales resources than
the Company. There can be no assurance that the Company's present or future
competitors will not exert increased competitive pressures on the Company. In
particular, the Company may in the future experience pricing pressures as a
result of a decline in industry demand, excess inventory levels, increases in
industry capacity or the introduction of new technologies, and such price
competition could adversely affect the Company's business, operating results,
financial condition and prospects. Prices for much of the Company's TN thin film
coated glass supplied to the LCD market have declined in past years. Although
prices were stable for much of fiscal 1998, the Company began experiencing price
declines late in the fiscal year. The Company expects continuing price declines
for fiscal 1999. The Company is aware of plans by several competitors to
increase production capacity during 1998 and 1999. Increases in industry
capacity may result in intensified pricing pressures on the Company's products.
The Company's competitive position also could be adversely affected by raw
material price increases, which the Company may not be able to pass on to its
customers but which certain of its vertically integrated current and potential
competitors may be able to better absorb. To remain competitive, the Company
must continue to invest in and focus upon research and development, product and
process innovation, as well as sales and customer support. There can be no
assurance that the Company will be successful in such efforts or that such
factors will not have a material adverse effect on the Company's business,
operating results, financial condition or prospects. The Company's suppliers
and/or customers could vertically integrate to manufacture the products produced
by the Company. The Company's suppliers of thin glass are large,
well-capitalized companies which could enter the LCD market by coating the glass
they produce and supplying LCD manufacturers directly. Because glass is by far
the Company's largest material cost, a manufacturer of glass desiring to enter
this market could have a significant cost advantage. The Company is aware of two
manufacturers of thin glass that also coat glass for the LCD market, Asahi Glass
Company and Nippon Sheet Glass. Further, companies that manufacture equipment
for coating thin film glass could begin producing thin film coated glass. In
addition, certain LCD manufacturers have vertically integrated to coat glass for
LCDs and further vertical integration into certain areas of LCD manufacturing is
expected. Any such vertical integration could have a material adverse effect on
the Company's business, operating results, financial condition and prospects.
See "ITEM 1(c): Narrative Description of Business -- Competition."
Uncertainties Related to 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 has built 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
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business, operating results, financial condition and prospects could be
materially adversely affected. See "ITEM 1(c): Narrative Description of Business
- -- Competition." The Company's equipment business is subject to capital spending
levels in Asia. Certain plasma display manufacturers announced during fiscal
1998 plans to delay capital spending for new equipment. This announcement,
together with overall economic conditions in Asia will negatively impact fiscal
1999 results. Backlog for equipment sales totaled $950,000 as of June 27, 1998,
versus $5.3 million as of June 28, 1997.
International Markets
Sales to international customers represented approximately 82%, 83% and 78%
of the Company's gross sales in fiscal 1996, 1997 and 1998, respectively. The
Company's principal international markets are China (including Hong Kong),
Korea, Japan, Taiwan and Malaysia. Additionally, the Company's joint venture
with NSG is expected to be located in China. Recent banking and currency
problems in the Asian regions, however, have had and will continue to have an
adverse impact on the Company's revenue and operations. The Company believes
that international sales will continue to represent a significant portion of its
gross sales, and that, in addition to the aforementioned banking and currency
problems, it will be subject to the normal risks of conducting business
internationally, including unexpected changes in regulatory requirements,
imposition of government controls, political and economic instabilities, export
license requirements, foreign exchange risks, tariffs and other barriers,
difficulties in staffing and managing foreign sales operations and potentially
adverse tax consequences. In addition, the laws of certain foreign countries may
not protect the Company's proprietary rights to the same extent as do the laws
of the United States. See "ITEM 1(c): Narrative Description of Business --
Proprietary Rights." Other risks inherent in the Company's international
business include greater difficulties in accounts receivable collection, the
potential of protective trade activities or laws and the burdens of complying
with a wide variety of foreign laws. See "ITEM 1(c): Narrative Description of
Business -- Sales, Marketing, and Customers." The Company's business, operating
results, financial condition or growth could be materially adversely affected by
these risks.
The Company's international sales are generally denominated in dollars,
although a portion of its sales to Japanese customers are denominated in yen. In
fiscal 1998, approximately 11% and 89% of the Company's total gross sales were
denominated in yen and dollars, respectively. Any strengthening of the dollar in
relation to the currencies of the Company's competitors or customers could
adversely affect the Company's competitiveness. Although a strengthening dollar
may result in some offsetting cost reductions on the raw materials imported by
the Company, there can be no assurance that such cost reductions would enable
the Company to remain competitive. Moreover, a strengthening of the dollar or
other competitive factors could put pressure on the Company to denominate a
greater portion of its Japanese sales in yen, thereby increasing the Company's
exposure to fluctuations in the dollar-yen exchange rate. In addition, the
Company's joint venture in China may be impacted by foreign currency
fluctuations. There can be no assurance that fluctuations in exchange rates will
not adversely affect the Company's competitive position or result in foreign
exchange losses, either of which could materially adversely affect the Company's
business, operating results, financial conditions and prospects. See "ITEM 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Overview."
Limited Sources of Supply
There are relatively few manufacturers of thin glass, which raw material
accounts for a majority of the Company's materials cost. The Company currently
relies primarily on four glass suppliers, Pilkington Micronics, Ltd., Glaverbel
Societe Anonyme, Central Glass Co., Ltd., and Nippon Sheet Glass Co., Ltd., all
of which are located outside the United States. The Company does not have
long-term supply contracts with any of these suppliers, and thus has no
contractual assurance of a firm price, over an extended term, or of a long-term
commitment to supply product. In periods of short supply, the Company could have
difficulty obtaining the necessary quantities of glass at a competitive cost.
Such interruptions could occur for numerous reasons, including labor
difficulties at some point in the chain of manufacturing or distribution. In
addition, the Company may not be able to pass raw material price increases along
to its customers, especially in periods of soft demand for the Company's
products or excess capacity. Current and potential competitors of the Company
that both manufacture and coat glass could be able to better absorb such raw
material cost increases due to their vertical integration. If the Company were
to experience significant delays, interruptions, or shortages in its material
supply or material supplier price increases, the Company's business,
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operating results, financial condition and prospects could be materially
adversely affected. See "ITEM 1(c): Narrative Description of Business --
Suppliers."
Rapid Technological Change
The market for thin film coated glass is characterized by rapid change. The
Company's future success depends upon its ability to introduce new products,
improve existing products and processes to keep pace with technological and
market developments, and to address the increasingly sophisticated and demanding
needs of its customers. In order to remain competitive, the Company believes it
must continue to invest in research and development. The Company expects to
increase its research and development, expenditures in fiscal 1999 which could
adversely affect fiscal 1999 operating results. Technological changes, process
improvements, or operating improvements which could adversely affect the Company
include: (i) development of new technologies which improve manufacturing
efficiency of the Company's competitors; (ii) changes in product requirements of
the Company's customers; (iii) significant changes in the way coatings are
applied to glass for LCDs; and (iv) other changes such as improvements in the
design of cathodes. If the Company does not adapt to such changes or
improvements, the Company's competitive position, operations and prospects would
be materially, adversely affected. In addition, there are alternative
technologies to sputtering technology for three of the thin film coating layers
used in PDPs. Materials applied by the Company to thin glass to provide
conductivity or other properties are generally available and are not patented.
Development of a new material which improves the performance of thin film coated
glass and better addresses customer needs could, if not adopted by the Company,
have a material adverse effect on the Company's operations and prospects. There
can be no assurance that the Company will be successful in meeting the demands
of the marketplace or that one or more of these factors will not have a material
adverse effect on the Company's business, operating results, financial condition
or prospects. See "ITEM 1(c): Narrative Description of Business -- Products and
Manufacturing."
Evolving FPD Market
The Company believes that much of the growth in the FPD market will be in
higher information content FPDs, such as STN LCDs, active matrix LCDs ("AM
LCDs"), and PDPs. See "ITEM 1(c): Narrative Description of Business -- Products
and Manufacturing." During fiscal 1998 less than 12% of the Company's coated
glass revenues were derived from the sale of coated glass used in black and
white STN displays. The Company has to date directed most of its production
capacity to the TN coated glass which is presently used in lower information
content applications. While the Company has recently made 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 "ITEM 1(a): General Development of Business --
Strategy" and "ITEM 1(c): Narrative Description of Business -- Products and
Manufacturing." The Company's business depends substantially on the purchasing
requirements of manufacturers of FPDs, which, in turn, depend upon the current
and anticipated market demand for FPDs. Sales of thin film coated glass to these
manufacturers are expected to continue to represent a significant portion of the
Company's net sales. Although the market for FPDs has experienced significant
growth, there can be no assurance that such growth will continue at all, or that
any growth will have a positive impact on the Company's future business or
results of operations. The Company's business, operating results, financial
condition and prospects would be materially adversely affected by any future
downturns in the FPD market.
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Dependence on Key Customers, Limited Number of Customers
The Company's ten largest customers accounted for, in the aggregate,
approximately 56%, 59% and 78% of the Company's gross sales in fiscal years
1996, 1997 and 1998, respectively. In fiscal 1998, sales to Wintek Corporation
and Gentex Corporation represented 33% and 15% of gross sales, respectively.
Sales to both customers for fiscal 1998 included sales of thin film coating
equipment and thin film coated glass. The Company expects significantly reduced
sales to these customers in fiscal 1999. 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 "ITEM 1(c): Narrative Description of Business
- -- Sales, Marketing, and Customers."
Management of Growth
In order to support potential future growth, the Company will need to
improve its productivity, invest in additional research and development, enhance
its management information systems and add additional management personnel.
There can be no assurance that the Company will continue to grow or be effective
in managing its future growth, expanding its facilities and operations or
attracting and retaining additional qualified personnel. Any failure to
effectively manage growth, expand its operations or attract and retain personnel
could have a material adverse effect on the Company's business, operating
results, financial condition, and prospects. See "-- Fluctuations in Demand and
Annual and Quarterly Operating Results," "-- Dependence on Management and Other
Key Personnel," and "ITEM 1(c): Narrative Description of Business -- Employees."
Declining Average Selling Prices; Dependence upon Productivity Improvements
Many of the Company's customers are under continuous pressure to reduce
prices and, therefore, the Company expects to continue to experience downward
pricing pressures on its thin film coated glass products. The Company is
frequently required to commit to price reductions before it has determined that
assumed cost reductions can be achieved. To offset declining average sales
prices, the Company must achieve manufacturing efficiencies and cost reductions
and obtain orders for higher volume products. If the Company is unable to offset
declining average sales prices, the Company's gross margins will decline, and
such decline will materially adversely affect the Company's business, operating
results, financial condition and prospects. See "-- Fluctuations in Demand and
Annual and Quarterly Operating Results" and "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations." The Company has
improved its manufacturing productivity in recent years, enabling increased
capacity and sales. The continued growth of the Company is substantially
dependent upon the Company's ability to continue to improve the productivity of
its existing manufacturing assets. The inability of the Company to improve
productivity could have a material adverse effect on the Company's business,
operating results, financial condition and prospects.
Dependence on Management and Other Key Employees
The Company's success during the foreseeable future will depend largely
upon the continued services of its executive officers, and certain other key
employees. These executive officers and key employees include: Chairman of the
Board, Cecil Van Alsburg; President and Chief Executive Officer, Thomas T.
Edman; Vice President -- Research, John S. Chapin; Vice President --
Engineering, C. Richard Condon; Vice President -- Sales and Marketing, Graeme
Hennessey; Chief Financial Officer and Treasurer, Thomas D. Schmidt; Director of
Materials, Roger Smith; 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
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could materially adversely affect the Company's business. The Company does not
have employment agreements or key-man life insurance on any of its executive
officers or other key employees. The Company's future success will be dependent
in part upon the Company's ability to attract and retain additional qualified
managers, engineers and other employees. The Company's business, operating
results, financial condition or growth could be materially adversely affected if
the Company were unable to attract, hire, assimilate, and train these employees
in a timely manner. See "ITEM 1(c): Narrative Description of Business --
Employees" and "ITEM 1(c): Narrative Description of Business -- Executive
Officers, Directors and Key Employees."
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. During fiscal year 1998, the Company began relocation of its
production facilities from Boulder to Longmont, Colorado. 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 such new facility will result in greater
manufacturing capacity or lower manufacturing costs than those currently
experienced by the Company. The Company will incur duplicate facility costs,
operating expenses and lost production output 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
adversely affected the Company's fiscal 1998 operating results, and may
adversely affect fiscal 1999 operating results. Failure to complete relocation
to Longmont facility could have a material adverse effect on the Company's
business, results of operations and financial condition. During fiscal 1999, the
Company expects to expand its international operations by means of its announced
joint venture in Suzhou, China with NSG. See "ITEM 1(c): Narrative Description
of Business -- Facilities."
Limited Protection of Proprietary Rights
The Company relies primarily upon trade secret laws and employee and
third-party nondisclosure agreements to protect its proprietary technology.
There can be no assurance that the steps taken by the Company to protect its
proprietary rights will be adequate to prevent misappropriation of such rights
or that third parties will not independently develop a functional equivalent or
superior technology. The Company is not aware that its products or other
proprietary rights infringe the proprietary rights of third parties. There can
be no assurance, however, that third parties will not assert infringement claims
against the Company in the future or that any such claims will not require the
Company to enter into license agreements or result in protracted and costly
litigation, regardless of the merits of such claims. In addition, there can be
no assurance that the Company will be able to obtain licenses to dispute a
third-party technology or that such licenses, if available, would be available
on commercially reasonable terms. There can be no assurance that these factors
will not adversely affect the Company's business, operating results, financial
condition or growth. See "ITEM 1(c): Narrative Description of Business --
Proprietary Rights."
General Economic Conditions
A deterioration in the level of consumer confidence and general economic
conditions could result in a decline of purchases and production by the
Company's customers and thus have an adverse effect on the sale of the Company's
products. A high percentage of the Company's products are used in LCDs for many
consumer electronic products. In addition, the Company's products are used in
certain displays used for commercial and industrial purposes. Unfavorable
economic conditions or factors that relate to these industries, particularly any
conditions that might result in reductions in capital expenditures by end
customers, could have a material adverse effect on the Company's business,
operating results, financial conditions or growth. See "ITEM 1(c): Narrative
Description of Business -- Products and Manufacturing" and see "-- International
Markets."
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PART II
ITEM 5: Market for Registrant's Common Stock and Related Security Holder
Matters
Prior to November 21, 1997, there was no public market for the Company's
Common Stock. The Common Stock was approved for quotation on the Nasdaq National
Market under the symbol AFCO, beginning November 21, 1997. At September 4, 1998,
the number of common Shareholders of record was 52.
The range of high and low bid quotations for the Company's Common Stock as
quoted (without retail markup or markdown and without commissions) on the Nasdaq
National Market since its initial public offering is provided below. They do not
necessarily represent actual transactions.
<TABLE>
High Bid Low Bid
Fiscal 1998
<S> <C> <C>
Second Quarter (since November 21, 1997) 9 1/8 8 1/4
Third Quarter 11 5/16 7 1/8
Fourth Quarter 9 5/8 4 9/16
</TABLE>
The Company has not declared or paid any cash dividends on its capital
stock. The Company currently intends to retain all future earnings to finance
its business. Accordingly, the Company does not anticipate paying cash or other
dividends on its Common Stock in the foreseeable future. Furthermore, the
Company's revolving credit facility prohibits the declaration or payment of any
cash dividends on the Common Stock. See "ITEM 7: Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
ITEM 6: Selected Financial Data
The following selected consolidated financial data is qualified by
reference to, and should be read in conjunction with, the Company's fiscal 1998
Consolidated Financial Statements and notes thereto and the discussion thereof
included elsewhere in this Form 10-K. The selected consolidated statements of
operations for the fiscal years ended June 1996, 1997 and 1998 and the related
balance sheet data as of and for the fiscal years ended June 1997 and 1998
derived from consolidated financial statements have been audited by Arthur
Andersen LLP, independent accountants, whose report with respect thereto is
included elsewhere in this Form 10-K. The selected consolidated statements of
operations data for the fiscal years ended June 1994 and 1995 and the related
consolidated balance sheet data as of June 1994, 1995 and 1996 have been derived
from audited consolidated financial statements of the Company not included in
this Form 10-K.
17
<PAGE>
<TABLE>
Summary Consolidated Financial Data
(In thousands, except per share data)
Fiscal Year Ended
June 27, June 28, June 29, July 1, July 2,
1998 1997 1996 1995 1994
Statement of Operations Data
<S> <C> <C> <C> <C> <C>
Net sales........................................ $53,041 $34,050 $21,738 $30,990 $29,765
Gross profit..................................... 10,891 6,698 2,720 6,702 4,484
Operating income (loss).......................... 4,581 2,953 (478) 2,190 (79)
Net income (loss)................................ 2,857 1,621 (1,078) 1,102 (201)
Diluted net income (loss) per common share....... $ 0.85 $ 0.58 $ (0.39) $ 0.39 $ (0.07)
Weighted average common shares outstanding....... 3,375 2,814 2,798 2,800 2,800
Balance Sheet Data
Working capital.................................. $10,747 $ 5,534 $ 6,232 $ 5,312 $ 7,077
Total assets..................................... 28,697 21,541 18,198 20,128 21,891
Long term debt, net of current portion........... 4,175 6,448 8,501 7,464 9,992
Total shareholders' equity....................... 14,826 6,740 5,058 6,020 4,565
</TABLE>
ITEM 7: Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this Report.
This Report, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used herein, the terms "believe," "anticipate," "intend," "goal," "expect"
and similar expressions may identify forward-looking statements. The Company's
actual results, performance or achievements may differ materially from those
expressed or implied by such forward-looking statements. Factors that could
cause or contribute to such material differences include those disclosed in the
"Certain Factors" section of this Report.
Overview
The Company was founded in Colorado as Applied Films Labs, Inc. on March 2,
1976 and was involved in both applied thin films research and development and
limited thin films production. On May 1, 1992, the Company merged with Donnelly
Coated Corporation, a wholly owned subsidiary of Donnelly Corporation of
Holland, Michigan which was primarily involved in the manufacture and sale of
thin film coated glass for LCDs. The Company maintained manufacturing facilities
and production capacity in both Boulder, Colorado and Michigan, until the end of
1993 when the Michigan facility and production capacity were no longer utilized.
Since 1994, the Company had maintained all of its manufacturing operations in
Boulder, Colorado. During fiscal year 1998, the Company began relocating its
Boulder operations to a new facility in Longmont, Colorado. The move is expected
to be completed by September 30, 1998.
The Company's sales have historically 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. 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 orders. The Company's ten largest customers for coated
glass accounted for, in the aggregate, approximately 56%, 59% and 78% of gross
sales in fiscal 1996, 1997
18
<PAGE>
and 1998, respectively. Prices for much of the Company's TN thin film coated
glass supplied to the LCD market have declined over the years, although prices
were generally stable during fiscal 1998. During the fourth quarter of fiscal
1998, the Company was affected by price declines for certain Asian customers.
The Company expects continued downward pressure on its selling prices, which
will negatively impact sales, gross profit and net income.
The principal demand for the Company's thin film coated glass is by LCD
manufacturers, most of which are located in Asia. Total gross sales to
international customers represented approximately 82%, 83% and 78% of the
Company's gross sales in fiscal 1996, 1997 and 1998, 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 $2.8 million, $4.4 million and
$6.0 million in fiscal 1996, 1997, and 1998, respectively. The Company does not
currently engage in international currency hedging transactions to mitigate its
foreign exchange exposure, however, the Company does purchase raw glass in yen
from Japan which partially offsets foreign currency risks on thin film coated
glass sales. The Company's purchases of raw material denominated in yen were
approximately $1.6 million, $4.6 million and $8.9 million in fiscal 1996, 1997
and 1998, respectively. At June 27, 1998, accounts receivable denominated in yen
were approximately $839,000 or approximately 11% of total accounts receivable.
The Company is generally paid by its customers for its yen denominated sales
within approximately 15 to 45 days of the date of sale. See "Certain Factors --
International Markets."
During fiscal 1997, the Company began selling thin film coating equipment
to FPD manufacturers, which sales totaled $2.8 million. During fiscal 1998,
sales of thin film coating equipment totaled $13.9 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. To date, the Company has priced its coating equipment in U.S. dollars.
Many Pacific Rim countries are currently experiencing banking and currency
difficulties that have led to economic recession in those countries. The Asian
financial situation has affected capital spending plans by LCD and plasma
display manufacturers. Certain plasma display manufacturers in Japan and Korea
announced plans during the year to delay, by up to a year, commercialization of
plasma displays which may impact their capital equipment purchases and resulting
sale of equipment by the Company. As of June 27, 1998, the Company's backlog
from systems sales was approximately $950,000 versus $5.3 million as of June 28,
1997. The Company expects sales of its thin film coating equipment to be at a
substantially reduced level for fiscal 1999 versus fiscal year 1998.
Sales during the fourth quarter reflected a weakening demand, reduced
prices and overall lower sales within the Company's core thin film coated glass
business. Sales of thin film coated glass were derived primarily from demand by
LCD manufacturers for low information content displays used in applications such
as games, watches, calculators, cell phones etc. The Asian financial situation
has reduced demand and prices for thin film coated glass used by LCD
manufacturers. In addition, sales of thin film coated glass for domestic
electrochromic applications declined during the quarter. The Company expects
sales of thin film coated glass for both LCD and electrochromic applications to
be at substantially reduced levels for fiscal 1999 versus fiscal 1998. In August
1998, the Company announced plans to reduce coated glass production output and
workforce levels.
During fiscal 1998, the Company initiated operation of a new thin film
coated glass production coating line at its new facility in Longmont (Weld
County), Colorado. In addition, the Company is in the process of relocating its
remaining production operations from its existing Boulder facilities to the new
facility in Longmont. As previously disclosed, the Company expects this
relocation will negatively impact thin film coated glass sales and operating
results of the Company. The relocation is expected to be completed by September
30, 1998.
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.
19
<PAGE>
<TABLE>
Fiscal Year Ended
June 27, June 28, June 29,
1998 1997 1996
---------- ---------- -------
<S> <C> <C> <C>
Statement of Operations Data:
Net sales...................................... 100.0% 100.0% 100.0%
Cost of goods sold............................. 79.5 80.3 87.5
--------- --------- ------
Gross profit...................................... 20.5 19.7 12.5
Operating expenses:
Selling, general & administrative............... 9.6 8.8 10.3
Research and development........................ 2.3 2.2 4.4
---------- --------- -------
Operating income (loss)........................... 8.6 8.7 (2.2)
Interest expense.................................. (0.9) (2.4) (3.6)
Other income (expense)............................ 0.5 0.3 (1.2)
---------- --------- -------
Income (loss) before income taxes................. 8.2 6.6 (7.0)
Income tax benefit (provision).................... (2.8) (1.8) 2.0
---------- --------- -------
Net income (loss)................................. 5.4% 4.8% (5.0)%
======== ======== ========
</TABLE>
Sales
Net sales were $21.7 million, $34 million and $53 million in fiscal years
1996, 1997 and 1998, respectively. This represented an increase of 57% from 1996
to 1997 and 56% from 1997 to 1998. Thin film coated glass sales increased from
$21.7 million to $31.2 million from 1996 to 1997 and from $31.2 million to $39.1
million from 1997 to 1998. The increase in coated glass sales from 1996 to 1997
was primarily due to the worldwide recovery in demand for thin film coated glass
during this period. The increase in coated glass sales from 1997 to 1998
resulted from increasing demand as well as new production capacity added by the
Company during fiscal 1998. Sales of thin film coating equipment, which began in
fiscal 1997, increased from $2.8 million in fiscal 1997 to $13.9 million in
fiscal 1998. Backlog for equipment sales totaled $950,000 as of June 27, 1998,
versus $5.3 million as of June 28, 1997. The Company expects net sales of thin
film coated glass and thin film coating equipment to decline in fiscal 1999
versus fiscal 1998.
Gross Profits
The Company's gross profits were $2.7 million, $6.7 million and $10.9
million in fiscal years 1996, 1997 and 1998, respectively. As a percentage of
net sales, gross profit margins were 12.5%, 19.7% and 20.5% in fiscal years
1996, 1997 and 1998, respectively. Gross profits increased from 1996 to 1997 and
from 1997 to 1998 due primarily to increasing sales levels of thin film coated
glass as well as gross profit contribution from thin film coating equipment
sales which began in fiscal 1997, and increased from fiscal 1997 to fiscal 1998.
Between 1997 and 1998, gross profit margins as a percent of sales increased for
thin film equipment and declined for thin film coated glass. The decline in
coated glass margins was attributable primarily to start-up costs for a new
production coater installed during fiscal 1998 as well as lost production
output, and duplicate facility and other costs associated with relocation of
production facilities from Boulder to Longmont, Colorado. The Company expects to
complete its facility relocation by September 30, 1998. The Company expects
lower gross profits for both thin film coated glass and thin film coating
equipment for fiscal 1999 versus fiscal 1998.
Selling, General and Administrative
The Company's selling, general and administrative expenses totaled $2.2
million, $3.0 million and $5.1 million for fiscal years 1996, 1997 and 1998,
respectively. Selling, general and administrative expenses increased from 1996
to 1997 and from 1997 to 1998 due to higher salaries, additional personnel and
related expenses, sales commissions, including commissions on increased thin
film equipment sales, as well as increased employee profit sharing expenses. As
a percentage of sales, selling, general and administrative costs were 10.3%,
8.8% and 9.6% for fiscal years 1996, 1997 and 1998, respectively.
20
<PAGE>
Research and Development
Research and development expenses totaled $965,000, $749,000 and $1,243,000
for fiscal years 1996, 1997 and 1998, respectively. In fiscal 1996 and fiscal
1997, research and development costs were net of reimbursements for research
contracts. Research and development expenditures consisted primarily of
salaries, outside contractor expenses and other expenses related to the
Company's ongoing product development efforts. The changes from 1996 to 1997 and
from 1997 to 1998 were primarily attributable to changes in staffing and
material and supplies expense related to advanced development projects. As a
percentage of net sales, research and development expenses were 4.4%, 2.2% and
2.3% in fiscal years 1996, 1997 and 1998, respectively. The Company expects
research and development spending for fiscal 1999 to increase slightly versus
spending for fiscal 1998.
Interest Expense
The Company's interest expense was $780,000, $822,000 and $496,000 for
fiscal years 1996, 1997 and 1998, respectively. This overall decrease was due
primarily to the decrease in long-term borrowings by the Company. Total debt was
$9.9 million, $7.6 million and $4.3 million as of fiscal year end 1996, 1997 and
1998, respectively. In addition, the Company incurred debt guarantee fees paid
to Donnelly Corporation of $250,000 and $103,000 for fiscal years 1997 and 1998,
respectively. The Company expects higher debt levels and interest expense for
fiscal 1999 versus fiscal 1998.
Other Income (Expense)
Other income (expense) was ($244,000), $95,000 and $252,000 in fiscal years
1996, 1997 and 1998, respectively. This fluctuation was due primarily to the
fact that the Company had a foreign exchange loss in fiscal 1996 and foreign
exchange gains in fiscal 1997 and 1998. It is uncertain whether foreign exchange
gains or losses will be incurred in the future.
Income Tax Benefit (Provision)
The Company had an income tax benefit for fiscal 1996 of $424,000 due to a
net operating loss for the fiscal year. The income tax provision was $605,000
and $1,480,000 for fiscal years 1997 and 1998, respectively. The effective tax
rate for fiscal 1998 was 34% versus 27% for fiscal 1997 due to utilization of
net operating loss carry forwards in fiscal 1997.
Quarterly Results of Operations
The following table sets forth summary unaudited quarterly financial
information for the last eight fiscal quarters. In the opinion of management,
such information has been prepared on the same basis as the audited financial
statements appearing elsewhere in this Report and reflects all necessary
adjustments (consisting of only normal, recurring adjustments) for a fair
presentation of such unaudited quarterly results when read in conjunction with
the audited financial statements and notes thereto. The operating results for
any quarter are not necessarily indicative of results for any future period and
there can be no assurance that any trends reflected in such results will
continue in the future. The Company's results of operations may be subject to
significant quarterly variations. See "Certain Factors -- Fluctuations in Demand
and Annual and Quarterly Operating Results."
21
<PAGE>
<TABLE>
Quarter Ended Quarter Ended
--------------------------------------------- --------------------------------------------
Fiscal 1997 Fiscal 1998
--------------------------------------------- --------------------------------------------
Sept. Dec. March June Sept. Dec. March June
1996 1996 1997 1997 1997 1997 1998 1998
------ ------ ------ ------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales ...................... $ 6,279 $ 7,806 $ 9,935 $ 10,030 $ 11,251 $ 13,173 $ 15,312 $ 13,305
Cost of goods sold ............. 5,235 6,593 7,768 7,756 8,801 10,588 12,355 10,406
-------- -------- -------- -------- -------- -------- -------- --------
Gross profit ................... 1,044 1,213 2,167 2,274 2,450 2,585 2,957 2,899
Operating expenses:
Selling, general and
administrative ................. 544 642 923 887 986 1,109 1,336 1,636
Research and development ..... 192 115 181 261 330 287 324 302
-------- -------- -------- -------- -------- -------- -------- --------
Operating income (loss) ........ 308 456 1,063 1,126 1,134 1,189 1,297 961
Interest expense ............... (251) (200) (191) (180) (171) (87) (103) (135)
Other income (expense) ......... 7 34 10 44 24 29 86 113
-------- -------- -------- -------- -------- -------- -------- --------
Income (loss) before income
taxes ......................... 64 290 882 990 987 1,131 1,280 939
Income tax benefit (provision) . (17) (79) (240) (269) (328) (385) (435) (332)
-------- -------- -------- -------- -------- -------- -------- --------
Net income (loss) .............. $ 47 $ 211 $ 642 $ 721 $ 659 $ 746 $ 845 $ 607
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
The following table sets forth the above unaudited information as a percentage
of total net sales.
<TABLE>
Quarter Ended Quarter Ended
Fiscal 1997 Fiscal 1998
Sept. Dec. March June Sept. Dec. March June
1996 1996 1997 1997 1997 1997 1998 1998
------ ------ ------- ------ ----- ------ ----- -----
<S> <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%
Cost of goods sold ........ 83.4 84.4 78.2 77.3 78.2 80.4 80.7 78.2
----- ----- ----- ----- ----- ----- ----- -----
Gross profit .............. 16.6 15.6 21.8 22.7 21.8 19.6 19.3 21.8
Operating Expenses:
Selling, general and
administrative ........ 8.7 8.2 9.3 8.8 8.8 8.4 8.7 12.3
Research and development 3.1 1.5 1.8 2.6 2.9 2.2 2.1 2.3
----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss) ... 4.8 5.9 10.7 11.3 10.1 9.0 8.5 7.2
Interest expense .......... (3.9) (2.6) (1.9) (1.8) (1.5) (0.7) (0.7) (1.0)
Other income (expense) .... 0.1 0.4 0.1 0.4 0.2 0.3 0.6 0.9
----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income
taxes .................... 1.0 3.7 8.9 9.9 8.8 8.6 8.4 7.1
Income tax benefit
(provision) ............. (0.3) (1.0) (2.4) (2.7) (2.9) (2.9) (2.9) (2.5)
----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) ......... 0.7% 2.7% 6.5% 7.2% 5.9% 5.7% 5.5% 4.6%
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The variation in quarterly sales during fiscal 1997 and fiscal 1998 was due
to increasing sales of thin film coated glass as well as increasing sales of
thin film coating equipment. Net sales of thin film coated glass for fiscal 1998
totaled $39.1 million versus $31.2 million during fiscal year 1997. Sales and
related costs of coated glass products are recognized when products are shipped.
Sales of thin film coating equipment totaled $13.9 million in fiscal 1998 versus
$2.8 million in fiscal 1997. During the first quarter of fiscal 1997, the
Company began recognizing revenue from the sale thin film coating equipment. The
Company utilizes the percentage of completion accounting method for recognizing
sales of equipment. See "ITEM 8: Financial Statements and Supplementary Data --
Note 2: Significant Accounting Policies -- System Sales." For fiscal year 1998,
quarterly sales of thin film coating equipment were $2.1 million for the first
fiscal quarter, $3.3 million during the second fiscal quarter, $5.1 million
during the third fiscal quarter and $3.4 million during the fourth fiscal
quarter. In comparison, sales of thin film coating equipment totaled $109,000 in
the first quarter of fiscal 1997, $564,000 in second quarter of fiscal 1997,
$1.6 million in the third quarter of fiscal 1997 and $554,000 in the fourth
quarter of fiscal 1997.
22
<PAGE>
Total gross profits increased quarter to quarter from fiscal 1997 to fiscal
1998, except for the fourth fiscal quarter 1998. As a percentage of sales, gross
profits increased in the first and second quarters of fiscal 1998 versus the
first and second quarters of fiscal 1997. Gross profit margins as a percentage
of sales declined in the third and fourth quarters of fiscal 1998 versus the
third and fourth quarters of fiscal 1997. This decrease was due primarily to
start-up costs and ramp-up of the new production coater installed during fiscal
1998 as well as costs associated with relocating the Company's production
facilities to Longmont, Colorado which adversely affected our thin film coated
glass production and operating costs. Also, during the fourth quarter of fiscal
1998, the Asian situation impacted the Company's sales levels, adversely
impacting the Company's gross profit margins.
Selling, general and administrative expenses increased during the quarters
of fiscal 1998 due to higher sales commissions for thin film equipment sales,
higher staffing expenses, and increased profit sharing for the Company's
employees. In addition, the Company incurred expenses for the relocation of our
facilities and equipment to Longmont during the third and fourth quarters of
fiscal 1998.
Interest expense was lower during fiscal 1998 versus fiscal 1997 due
primarily to reduced debt levels in fiscal 1998. Other income increased for
fiscal 1998 due primarily to higher foreign exchange gains.
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 affected if sales of thin film coated glass or thin film coating
equipment decline for any reason. The Company expects fiscal 1999 quarterly
sales, gross profits, operating income and net income to be at levels lower than
comparable quarters of fiscal 1998.
Liquidity and Capital Resources
The Company has primarily funded its operations with cash generated from
operations, proceeds from an initial public offering of the Company's Common
Stock, and with borrowings. Cash provided by operating activities for fiscal
year 1998 were $208,000 compared to $4.0 million for the corresponding period in
fiscal 1997 due primarily to changes in working capital In November and December
1997, the Company received net proceeds of $5.2 million in connection with its
initial public offering. The proceeds were used to pay down long-term debt and
for working capital. As of June 27, 1998, the Company had cash and cash
equivalents of approximately $81,000 and working capital of $10.7 million. As of
June 27, 1998, accounts receivable were approximately $7.4 million.
The Company has an $11.5 million credit facility with a commercial bank
which expires June 30, 2000 which originally included a $3.0 million term loan
and an $8.5 million line of credit. On March 27, 1998 the credit facility was
amended to convert the term loan and increase the line of credit to $11.5
million. As of June 27, 1998, the Company had approximately $3.9 million
outstanding on its credit facility.
Capital expenditures for the fiscal year ended June 27, 1998 were $5.4
million, compared to $1.9 million for the fiscal year ended June 28, 1997. The
increase in capital spending for fiscal 1998 was due primarily to the addition
of a new production coater as well as capital improvements to the Company's new
Longmont, Colorado facility. Capital expenditures for fiscal year 1999 are
expected to be approximately $3.0 million. Those capital expenditures will
consist primarily of expenditures to design and build the new Alliance equipment
system as well as to complete improvements at the Company's new facility in
Longmont, Colorado. During fiscal 1998, the Company began operation of its new
thin film production coating line and is continuing to move its production
operations from Boulder to Longmont, Colorado. The Company expects to complete
the relocation to Longmont by September 30, 1998. During the fourth quarter of
fiscal 1998, the Company completed the sale of its Boulder facility. During the
third quarter, the Company completed the transfer of a purchase option for its
Longmont, Colorado facility. Total net proceeds from these transactions were
approximately $3.0 million.
The Company believes that its working capital and capital resource needs
will continue to be met by operations and borrowings under the existing credit
facility. The credit facility generally restricts the Company's ability to make
capital expenditures, incur additional indebtedness, enter into capital leases
or guarantee such obligations. To remain in compliance with the credit
agreement, the Company must also maintain certain financial ratios. Due to
business conditions, the Company expects cash flow from operations to decrease
in fiscal year 1999 versus fiscal year 1998 and expects increased borrowings
under its credit facility. In addition, during fiscal 1999,
23
<PAGE>
the Company expects to contribute approximately $3.2 million of equity capital
to the new joint venture in China with Nippon Sheet Glass. This equity
contribution is expected to be funded by additional borrowings under the
Company's credit facility and the sale of coating equipment to the joint
venture.
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 50% 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 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 80% 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.
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 cost 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 that will
specify what it plans to do if it or important external companies are not Year
2000 compliant in a timely manner. The Company expects to prepare its
contingency plan during calendar year 1999.
Recent Financial Accounting Standards Board Statement
Several new accounting standards have been issued in fiscal 1997 and 1998
that will impact the Company in fiscal years 1999 and forward. Management
believes that these accounting standards will not have a material impact on the
operating results of the Company when implemented.
24
<PAGE>
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information". SFAS No.
131 requires that public companies report information about their operating
segments based on the financial information used by the chief operating decision
maker in their annual financial statements and requires those companies to
report selected information in their interim statements. SFAS No. 131 is
effective for fiscal years beginning after December 15, 1997. Management has not
yet determined the segments, if any, that will be required to be reported in
connection with adoption of SFAS No. 131. For further discussion of these
accounting standards, see "ITEM 8: Financial Statements and Supplementary Data
- -- Note 2: Significant Accounting Policies."
ITEM 7A: Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
Approximately $3.9 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 June 27, 1998, the Company had approximately $839,000 of its
accounts receivable and $2,027,000 of its accounts payable denominated in yen.
The Company believes that a moderate change in the Japanese yen/U.S. dollar
exchange rate would not materially affect operating results or financial
condition of the Company.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect the Company's operating results or
financial condition. The potential impact is likely greater the greater the
magnitude of the rate change. See also "ITEM 8: Financial Statements and
Supplementary Data -- Note 10: Significant Accounting Policies -- Fair Value of
Financial Instruments."
ITEM 8: Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Public Accountants.................................. 26
Consolidated Balance Sheets as of June 27, 1998,
June 28, 1997 and June 29, 1996........................................ 27
Consolidated Statements of Operations for the fiscal
years ended June 27, 1998, June 28, 1997 and June 29, 1996............. 29
Consolidated Statements of Stockholders' Equity for the fiscal
years ended June 27, 1998, June 28, 1997 and June 29, 1996............. 30
Consolidated Statements of Cash Flows for the fiscal years
ended June 27, 1998, June 28, 1997 and June 29, 1996................... 31
Notes to Consolidated Financial Statements................................ 33
25
<PAGE>
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 27, 1998 and June
28, 1997 and the related consolidated statements of operations, stockholders'
equity and cash flows for the fiscal years ended June 27, 1998, June 28, 1997
and June 29, 1996. 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 27, 1998 and June 28, 1997, and the
consolidated results of their operations and their cash flows for the fiscal
years ended June 27, 1998, June 28, 1997 and June 29, 1996, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
July 21, 1998.
26
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
June 27, June 28,
ASSETS 1998 1997
------ ------ -----
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 81 $ 297
Accounts and trade notes receivable, net-
Coated glass and other 6,010 6,316
Income earned, not yet billed (Note 2) 1,436 145
Inventories, net (Note 2) 10,055 6,160
Prepaid expenses and other 948 428
Deferred tax asset, net (Note 6) 837 250
-------- --------
Total current assets 19,367 13,596
-------- --------
PROPERTY, PLANT AND EQUIPMENT (Note 2):
Land 270 733
Building 240 2,747
Machinery and equipment 16,477 11,587
Office furniture and equipment 502 452
Leasehold improvements 1,022 425
Construction-in-progress 877 1,209
-------- --------
19,388 17,153
Accumulated depreciation (10,129) (9,330)
-------- --------
9,259 7,823
-------- --------
INVESTMENT IN AFFILIATE (Notes 4 and 9) 71 122
-------- --------
$ 28,697 $ 21,541
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
27
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
June 27, June 28,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable $ 5,241 $ 3,802
Accrued expenses 2,955 1,272
Income received but not yet earned (Note 2) -- 1,500
Income taxes payable 291 352
Current portion of deferred gain (Note 2) 56 --
Current portion of long-term debt (Note 3) 77 1,136
-------- --------
Total current liabilities 8,620 8,062
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion (Note 3) 4,175 6,448
Deferred gain, net of current portion (Note 2) 756 --
Deferred tax liability, net (Note 6) 320 291
-------- --------
Total liabilities 13,871 14,801
-------- --------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)
STOCKHOLDERS' EQUITY:
Common stock, no par value, 10,000,000
shares authorized; 3,472,688 and 2,799,998
shares issued and outstanding at June 27, 1998 and
June 28, 1997, respectively 9,424 4,245
Less: common shares held by affiliate (Note 4) -- (26)
Deferred compensation (Note 5) (7) (31)
Retained earnings 5,409 2,552
-------- --------
Total stockholders' equity 14,826 6,740
-------- --------
$ 28,697 $ 21,541
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
28
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
For The Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
<S> <C> <C> <C>
NET SALES $ 53,041 $ 34,050 $ 21,738
COST OF GOODS SOLD 42,150 27,352 19,018
-------- -------- --------
GROSS PROFIT 10,891 6,698 2,720
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 5,067 2,996 2,233
RESEARCH AND DEVELOPMENT
EXPENSES 1,243 749 965
-------- -------- --------
INCOME (LOSS) FROM OPERATIONS 4,581 2,953 (478)
-------- -------- --------
OTHER (EXPENSE) INCOME:
Gain (loss) on foreign currency
exchange (Note 2) 174 96 (286)
Other income (loss), net 23 (20) 30
Interest income 55 19 12
Interest expense (496) (822) (780)
-------- -------- --------
(244) (727) (1,024)
-------- -------- --------
INCOME (LOSS) BEFORE INCOME
TAXES 4,337 2,226 (1,502)
INCOME TAX PROVISION (BENEFIT) 1,480 605 (424)
-------- -------- --------
NET INCOME (LOSS) $ 2,857 $ 1,621 $ (1,078)
======== ======== ========
NET INCOME (LOSS) PER SHARE:
Basic $0.90 $0.58 $(0.39)
==== ==== =====
Diluted $0.85 $0.58 $(0.39)
==== ==== =====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING:
Basic 3,181 2,796 2,798
===== ===== =====
Diluted 3,375 2,814 2,798
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JUNE 27, 1998, JUNE 28, 1997 AND JUNE 29, 1996
(In thousands, except share data)
<TABLE>
Total
Stock-
Common Stock Held by Affiliate Deferred Retained holders'
Shares Amount Shares Amount Compensation Earnings Equity
<S> <C> <C> <C> <C> <C> <C> <C>
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 - - (3,749) (26) - - (26)
---------- ------- -------- ------- ------- ------- -------
BALANCES, June 29, 1996 2,799,998 4,245 (3,749) (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 (3,749) (26) (31) 2,552 6,740
Issuance of shares in
connection with IPO
(net of underwriters'
commissions of
$297,500) 676,439 5,205 - - - - 5,205
Liquidation of affiliate (3,749) (26) 3,749 26 - - -
Net income - - - - - 2,857 2,857
Amortization of deferred
compensation - - - - 24 - 24
---------- ------- ------- ------- -------- ------- -------
BALANCES, June 27, 1998 3,472,688 $9,424 - $ - $ (7) $ 5,409 $14,826
========== ====== ======= ======= ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
For The Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
CASH FLOWS FROM OPERATING
ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) $ 2,857 $ 1,621 $(1,078)
Adjustments to reconcile net
income (loss) to net cash flows
from operating activities-
Depreciation and amortization 1,800 1,473 1,405
Amortization of deferred compensation 24 61 142
Amortization of deferred gain (22) -- --
Deferred income tax provision (benefit) (558) (112) (170)
(Gain) loss on disposals of property, plant and equipment (4) 6 2
Undistributed earnings of affiliate (50) (7) (12)
Changes in-
Accounts and trade notes receivable, net (985) (3,656) 2,361
Inventories (3,895) 654 (1,960)
Income taxes receivable -- 332 (332)
Prepaid expenses and other (520) (385) 461
Accounts payable-trade 1,439 1,401 (1,037)
Income received not yet earned (1,500) 1,500 --
Accrued expenses 1,683 798 (445)
Income taxes payable (61) 352 (130)
------- ------- -------
Net cash flows from operating activities 208 4,038 (793)
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
31
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
For The Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
CASH FLOWS FROM INVESTING ACTIVITIES:
<S> <C> <C> <C>
Purchase of property, plant and equipment $ (5,415) $ (1,936) $ (933)
Reimbursement of equipment costs -- 161 387
Proceeds from sale of property, plant and equipment 3,018 60 85
Investment in joint venture (71) -- --
Proceeds from liquidation of investment in affiliate 172 -- --
Other -- (20) (12)
-------- -------- --------
Net cash flows from investing activities (2,296) (1,695) (473)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 16,715 8,128 12,444
Repayment of long-term debt (20,048) (10,434) (11,685)
Proceeds from sale of common stock, net of underwriting
commissions of $297,500 5,205 -- --
-------- -------- --------
Net cash flows from financing activities 1,872 (2,306) 759
-------- -------- --------
NET (DECREASE) INCREASE IN CASH (216) 37 (507)
CASH AND CASH EQUIVALENTS,
beginning of period 297 260 767
-------- -------- --------
CASH AND CASH EQUIVALENTS,
end of period $ 81 $ 297 $ 260
======== ======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of
amounts capitalized $ 767 $ 593 $ 783
======== ======== ========
Cash paid for income taxes, net of
amounts refunded $ 2,109 $ 123 $ 208
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
32
<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 glass for use in flat panel and liquid crystal displays. During 1997, the
Company began selling its 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 owned 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 six shares for every one held. All share and per share amounts
have been retroactively restated to reflect this event.
Initial Public Offering
In November 1997, the Company completed an initial public offering (the
"Offering") of 1,900,000 shares. In connection with this offering, Donnelly sold
its 50% interest in the Company, consisting of 1,400,000 shares. An additional
500,000 shares were newly issued in the Offering. In December 1997, an
additional 176,439 shares were issued to the underwriters in connection with
completion of the Offering. Donnelly paid substantially all costs of this
underwriting, other than commissions related to the 500,000 new shares.
(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.
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,
1997 and 1996 include 52 weeks.
Cash and Cash Equivalents
The Company generally considers all highly liquid investments with an original
maturity of less than ninety days to be cash equivalents.
33
<PAGE>
Concentration of Credit Risk
The Company provides credit, in the normal course of business, to large
electronics manufacturers, located primarily in Asia. Due to the recent monetary
crisis in Asia, the Company has experienced a slowdown in orders in the fourth
quarter, continuing subsequent to year end. As a result, management has
developed a restructuring plan, subsequent to year end, designed to reduce costs
and improve operating efficiencies. To limit the Company's credit risk,
management performs ongoing credit evaluations of its customers and requires
letters of credit from certain foreign customers prior to shipment. Sales within
Asia totaled approximately $40,624,000, $26,145,000 and $17,064,000 in the years
ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively. At June 27,
1998, approximately $4,853,000 of the Company's coated glass sales were
receivable from Asian companies and all of the income earned, not yet billed,
was from contracts with Asian companies. Although the Company is directly
impacted by economic conditions in Asia and in the electronics industry,
management does not believe significant credit risk exists at June 27, 1998.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories at June 27, 1998 and June 28, 1997, consist of the following:
<TABLE>
June 27, June 28,
1998 1997
<S> <C> <C>
Raw materials, net $ 6,555,000 $3,840,000
Work-in-process 11,000 9,000
Materials for manufacturing systems 302,000 158,000
Finished goods 3,187,000 2,153,000
------------ -------------
$10,055,000 $6,160,000
========== =========
</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. Interest of approximately $85,000, $9,000 and $0 was capitalized
during fiscal years 1998, 1997 and 1996, respectively. Depreciation is computed
on straight-line or accelerated methods over the following estimated useful
lives:
<TABLE>
Estimated
Useful Lives
<S> <C>
Building 30 years
Machinery and equipment 3-10 years
Office furniture and equipment 3-5 years
Leasehold improvements 4-15 years
</TABLE>
Deferred Gain
The Company has entered into a lease transaction with a third party for the
Company's new manufacturing and administrative facility in Longmont, Colorado
(Note 9). The Company originally held a purchase option for this facility, which
was subsequently sold. The gain recognized from the sale of this purchase option
is being deferred and amortized over the term of the lease of 15 years.
34
<PAGE>
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 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 $0 and $1,500,000 at June 27, 1998 and June
28, 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 $1,436,000 and $145,000 at June 27, 1998 and June 28, 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 $1,243,000, $749,000
and $965,000 of research and development costs for the years ended June 27,
1998, June 28, 1997 and June 29, 1996, respectively, net of reimbursements
received from a contracting research organization.
Foreign Currency Transactions
The Company generated approximately 78% and 83% of its revenues in fiscal years
1998 and 1997, respectively, from sales to foreign corporations. In addition,
many of its raw materials are purchased from foreign corporations. The majority
of the Company's sales and purchases are denominated in U.S. dollars, with the
remainder denominated in Japanese Yen. For those transactions denominated in
Japanese Yen, the Company records the sale or purchase at the spot exchange rate
in effect on the date of sale. Receivables from such sales or payables for such
purchases are translated to U.S. dollars using the end of the period spot
exchange rate. Transaction gains and losses are charged or credited to income
during the year.
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.
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:
35
<PAGE>
<TABLE>
1998 1997 1996
Fully Fully Fully
Primary Diluted Primary Diluted Primary Diluted
<S> <C> <C> <C> <C> <C> <C>
Primary earnings per share (as reported
under the prior method) $ 0.84 $0.56 $(0.39)
Effect of removal of options issued within
12 months of IPO in connection with
adoption of SFAS No. 128 0.06 0.02 -
------ ------- --------
Basic earnings per share 0.90 0.58 (0.39)
Fully diluted earnings per share (as reported
under the prior method) $0.86 $0.56 $(0.39)
Effect of stock options (0.05) - -
Effect of use of average market price for
options as opposed to end of year price
used under previous method (0.01) 0.02 -
------ ------ ------ ------ ------ ------
Diluted earnings per share $ 0.85 $ 0.85 $0.58 $0.58 $(0.39) $(0.39)
===== ====== ==== ==== ===== =====
</TABLE>
A reconciliation between the number of shares used to calculate basic and
diluted earnings per share is as follows (in thousands of shares):
<TABLE>
1998 1997 1996
<S> <C> <C> <C>
Weighted average number of common
shares outstanding (shares used in
basic earnings per share computation) 3,181 2,796 2,798
Effect of stock options (treasury stock
method) 194 18 -
------ ------ ------
Shares used in diluted earnings per share
computation 3,375 2,814 2,798
===== ===== =====
</TABLE>
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 fiscal years
1998 and 1997 there were no material differences between net income and
comprehensive income.
Recently Issued Accounting Standards
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 requires that public companies
report information about their operating segments based on the financial
information used by the chief operating decision maker in their annual financial
statements and requires those companies to report selected information in their
interim statements. SFAS 131 is effective for fiscal years beginning after
December 15, 1997. Management has not yet determined the segments, if any, that
will be reported in connection with adoption of SFAS No. 131.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") issued Statement of
Position ("SOP") 98-1 "Accounting for the Costs of Computer Software Developed
or Obtained for Internal Use." SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. Once the
capitalization criteria of SOP 98-1 have been met, certain internal and external
direct costs of materials, services and interest should be capitalized. SOP 98-1
is effective for financial statements for fiscal years beginning after December
15, 1998, which is fiscal year 2000 for the Company. The Company believes that
the application of SOP 98-1 will not have a material impact on its financial
statements.
36
<PAGE>
In April 1998, the AcSEC issued SOP 98-5 "Reporting on the Costs of Start-up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs and requires such costs to be expensed as incurred.
Generally, initial application of SOP 98-5 should be reported as the cumulative
effect of a change in accounting principle. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. Presently, the
Company is deferring certain start-up costs related to the joint venture in
China (Note 9). The Company expects that the effect of the application of SOP
98-5 in the first quarter of fiscal 2000 to be approximately $100,000, net of
tax. This effect will be reflected as a cumulative effect of a change in
accounting principle at the time of adoption.
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results on the hedged item in the income statement, and requires
that a company must formally document, designate, and assess the effectiveness
of transactions that receive hedge accounting. SFAS No. 133 is effective for
years beginning after June 15, 1999 and may be implemented as of the beginning
of any fiscal quarter after June 15, 1998. The Company has not yet quantified
the impact of adopting SFAS No. 133 on its financial statements and has not
determined the timing of or method of its adoption of SFAS No. 133. However,
SFAS No. 133 could increase volatility in earnings and other comprehensive
income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
(3) LONG-TERM DEBT
<TABLE>
June 27, June 28,
1998 1997
<S> <C> <C>
Revolving credit facility, due June 30, 2000, secured by eligible accounts
receivable, inventory, equipment and fixtures, as defined in the Agreement;
interest payable quarterly and accruing based on the Prime rate and/or the
Eurodollar rate, at the election of the Company at the beginning of each month,
plus a factor varying based on earnings before interest, taxes, depreciation and
amortization, as defined by the Agreement (8% and 7.406%,
respectively, at June 27, 1998) $3,910,000 $ -
Line of credit with a bank, due June 30, 1997, (see amended terms discussed
below) - 7,138,000
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
</TABLE>
37
<PAGE>
<TABLE>
June 27, June 28,
1998 1997
<S> <C> <C>
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% 310,000 371,000
Other capital leases of equipment 32,000 -
----------- ----------
4,252,000 7,584,000
Less-current portion (77,000) (1,136,000)
------------ ----------
Total long-term debt $4,175,000 $6,448,000
========= =========
</TABLE>
On March 27, 1998, the Company entered into an Amended and Restated Credit
Agreement (the "Agreement"), which consolidated all outstanding debt into a
revolving credit facility with maximum availability of $11,500,000, due on June
30, 2000. 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. As of June 27, 1998, the entire facility was available
to the Company in accordance with these provisions. At the beginning of each
month, the Company may elect to have a portion of the borrowings bear interest
at the Eurodollar rate and any additional borrowings bear interest at the Prime
rate. As of June 27, 1998, the Company had $3,000,000 of borrowings at the
Eurodollar rate.
Maturities of debt at June 27, 1998, are as follows:
<TABLE>
Fiscal Year-
<S> <C>
1999 $ 77,000
2000 3,994,000
2001 92,000
2002 89,000
2003 -
Thereafter -
------------
Total $4,252,000
============
</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 was owned by founding 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. This Partnership owned
and leased certain Boulder office and manufacturing facilities to the Company
under a noncancelable lease (see Note 9) until they were sold in June 1998. The
Company paid the Partnership monthly rent and paid all property taxes and
insurance costs. The Company paid rent of approximately $241,000 under this
agreement during each of the years ended June 29, 1996 and June 28, 1997, and
$248,000 in the year ended June 27, 1998. In November 1995, the Partnership
acquired approximately 15,000 shares of the Company's common stock. Accordingly,
the Company reduced its investment in the affiliate for its 25% share of the
Partnership's investment in the Company.
In connection with the sale of the Boulder facilities, the Partnership was
dissolved and liquidated. As a result, the Company received 25% of the shares of
the Company's stock owned by the Partnership.
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 August 1997. On July 22, 1997, Donnelly extended this
guarantee for the duration of the Agreement with the same maximum amount
guaranteed of $5 million. During fiscal
38
<PAGE>
1998, approximately $103,000 of additional interest was accrued and paid. This
guarantee expired in connection with the Offering.
(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 27, 1998,
the Company has expensed $590,000, 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 172,500 shares of common stock, as amended. The exercise price of
options granted under the 1997 Plan is determined by the board of directors
based upon estimated fair market value. The options granted are to vest ratably
over four years.
Statement of Financial Accounting
Standards No. 123 ("SFAS 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 Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), provided that pro forma disclosures are
made of net income or loss, assuming the fair value based method of SFAS 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.
Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal 1998
and 1997 using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
1998 1997
<S> <C> <C>
Risk-free interest rate 5.66% 6.32%
Expected lives 5 years 5 years
Expected volatility 64% 51%
Expected dividend yield 0% 0%
</TABLE>
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. Until the Company's common stock was publicly traded, the
expected market volatility was estimated using the estimated average volatility
of three publicly held companies which the Company believes to be similar with
respect to the markets in which they compete. Actual volatility of the Company's
stock may vary. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value
of the options granted.
39
<PAGE>
The total fair value of options granted was computed to be approximately
$147,000 and $230,000 for the years ended June 27, 1998 and June 28, 1997,
respectively. The amounts are amortized ratably over the vesting period of the
options. Pro forma stock-based compensation, net of the effect of forfeitures,
was $89,000 and $5,000 for the fiscal years ended June 27, 1998 and June 28,
1997, respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS 123, the Company's net income would have been reported as
follows (in thousands, except share data):
<TABLE>
1998 1997
<S> <C> <C>
Net income:
As reported $2,857 $1,621
===== =====
Pro forma (unaudited) $2,768 $1,616
===== =====
Basic earnings per share:
As reported $ 0.90 $ 0.58
====== ======
Pro forma $ 0.87 $ 0.58
====== ======
</TABLE>
A summary of the 1993 and 1997 Plans is as follows:
<TABLE>
For the Fiscal Years Ended
June 27, 1998 June 28, 1997 June 29, 1996
--------------- --------------- --------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 345,100 $3.43 260,183 $2.83 273,602 $2.82
Granted 34,545 $7.20 84,917 $5.26 - -
Canceled - - - - (13,419) $2.57
---------- ------- ---------- ------- ---------- ------
Outstanding at end of year 379,645 $3.77 345,100 $3.43 260,183 $2.83
======= ==== ======= ==== ======= ====
Exercisable at end of year 255,695 $3.05 200,111 $2.78 126,427 $2.58
======= ==== ======= ==== ======= ====
Weighted average fair value of
options granted $2.89
=====
</TABLE>
The following table summarizes information about employee stock options
outstanding and exercisable at June 27, 1998:
<TABLE>
Options Outstanding Options Exercisable
Number of Weighted
Options Average Weighted Number Weighted
Outstanding at Remaining Average Exercisable at Average
Range of June 27, Contractual Exercise June 27, Exercise
Exercise Prices 1998 Life in Years Price 1998 Price
----------------- ------ --------------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
$2.32 122,766 4.90 $2.32 122,766 $2.32
$3.29 137,417 7.60 3.29 103,063 3.29
$5.26 84,917 8.90 5.26 29,866 5.26
$7.20 34,545 9.25 7.20 - -
-------- ------- -------- ------
379,645 $3.77 255,695 $3.05
======= ======= ======= ======
</TABLE>
40
<PAGE>
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.
On June 27, 1998, the Company granted 1,777 shares to employees under this plan
at a grant price of $4.84 per share.
(6) INCOME TAXES
The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
The net deferred tax asset (liability) is comprised of the following:
<TABLE>
June 27, June 28,
1998 1997
<S> <C> <C>
Inventories $ 118,000 $ 85,000
Accrued expenses 771,000 215,000
Partnership income (24,000) --
Foreign currency gain (28,000) --
Valuation allowance -- (50,000)
--------- ---------
Total current deferred tax asset, net 837,000 250,000
--------- ---------
Property, plant and equipment (670,000) (442,000)
Deferred compensation 216,000 208,000
Deferred gain 303,000 --
Other (169,000) (57,000)
--------- ---------
Total non-current deferred tax liability, net (320,000) (291,000)
--------- ---------
Total deferred tax asset (liability), net $ 517,000 $ (41,000)
========= =========
</TABLE>
41
<PAGE>
Income tax provision (benefit) for the years ended June 27, 1998, June 28, 1997
and June 29, 1996 consist of the following:
<TABLE>
Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
<S> <C> <C> <C>
Taxes currently payable:
Federal $ 1,858,000 $ 695,000 $ (232,000)
State 180,000 22,000 (22,000)
----------- ----------- -----------
Total current portion 2,038,000 717,000 (254,000)
Taxes deferred:
Federal (509,000) (143,000) (155,000)
State (49,000) 31,000 (15,000)
----------- ----------- -----------
Total deferred portion (558,000) (112,000) (170,000)
----------- ----------- -----------
Total tax provision $ 1,480,000 $ 605,000 $ (424,000)
=========== =========== ===========
</TABLE>
Reconciliations between the effective statutory federal income tax expense
(benefit) rate and the Company's effective income tax provision (benefit) rate
as a percentage of net income (loss) before taxes were as follows:
<TABLE>
Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
<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)%
(Decrease) increase in valuation allowance (1.1)% (0.5)% 4.1%
Effect of FSC (4.4)% (5.8)% -
Other 2.3% (3.8)% 5.0%
-------- -------- --------
34.1% 27.2% (28.2)%
</TABLE>
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 $482,000,
$247,000 and $29,000 in fiscal years 1998, 1997 and 1996, respectively, related
to this plan.
(8) SIGNIFICANT CUSTOMERS
During fiscal years 1998, 1997 and 1996, approximately 78%, 83% and 82%,
respectively, of the Company's gross sales were to overseas customers. The
Company's ten largest customers accounted for in the aggregate, approximately
78%, 59% and 56% of the Company's gross sales in fiscal 1998, 1997 and 1996,
respectively. In addition, two individual customers represented 33% and 15% of
sales, respectively, in 1998. These customers were not individually
42
<PAGE>
significant in 1997 or 1996. The loss of, or a significant reduction or
purchases by, one or more of these customers would have a material adverse
effect on the Company's operating results.
The breakdown of sales by geographic region is as follows:
<TABLE>
Fiscal Years Ended
June 27, June 28, June 29,
1998 1997 1996
<S> <C> <C> <C>
Asia (other than Japan) $32,800,000 $19,534,000 $12,776,000
Japan 7,824,000 6,611,000 4,288,000
United States 12,224,000 5,997,000 4,049,000
Europe and Other 2,304,000 2,941,000 1,499,000
-------------- -------------- --------------
Gross sales 55,152,000 35,083,000 22,612,000
Less: sales returns and
allowances (2,111,000) (1,033,000) (874,000)
-------------- -------------- --------------
Net sales $53,041,000 $34,050,000 $21,738,000
========== ========== ==========
</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 $174,000, $96,000 and $(286,000) of foreign currency
exchange rate gain (loss) on foreign currency exchange rate fluctuations for the
fiscal years ended June 27, 1998, June 28, 1997 and June 29, 1996, respectively.
The Company currently has approximately $839,000 of its accounts receivable and
$2,028,000 of its accounts payable denominated in Japanese Yen as of June 27,
1998.
(9) COMMITMENTS
The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities. The Company entered into a new
lease for the Company's manufacturing and administrative location in Longmont,
Colorado, which is accounted for as an operating lease. The lease payments
commenced on January 30, 1998, and payments are fixed until the first day of the
second lease year, at which time payments increase annually one and one-half
percent plus one-half of the increase in the Consumer Price Index per annum.
Lease payments have been normalized over the term of the lease. The initial
lease term is 15 years, with two additional 5 year options to extend.
Additionally, on June 12, 1998, the Company entered into two short-term leases
for the Boulder facilities, which terminate August 31, 1998, to facilitate
moving to the Company's new location. Lease payments for both of the short-term
leases are fixed for the term of the leases.
The future minimum rental payments under the leases are as follows:
<TABLE>
Fiscal year-
<S> <C>
1999 $ 929,000
2000 821,000
2001 834,000
2002 846,000
2003 859,000
Thereafter 8,909,000
-------------
$13,198,000
=============
</TABLE>
The Company announced its intent to enter into a joint venture with one of its
suppliers of glass to produce coated glass. In connection with its investment in
this joint venture, the Company is expected to invest $3,200,000 of equity in
the form of cash as well as sell coating equipment to the joint venture. As of
June 27, 1998, the Company has
43
<PAGE>
invested approximately $71,000 in organizational costs in the formation of this
venture which are included in Investment in Affiliate in the accompanying
consolidated balance sheets.
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents approximates fair value due to
the nature of the investments and the length of maturity of these investments.
The fair value of the Company's debt is based on borrowing rates that would
approximate existing rates; therefore, there is no material difference in their
fair market value and the carrying value.
(11) YEAR 2000 (Unaudited)
The Company utilizes software and related technologies within its business
processes that may be impacted by the year 2000 issue. The year 2000 issue
exists because many computer systems and applications currently use two digit
date fields to designate a year. Date sensitive systems may recognize the year
2000 as 1900, or not at all. This inability to properly treat the year 2000
could cause systems to process critical financial and operational information
incorrectly.
The Company has completed its initial assessment of all currently used computer
systems, as well as production equipment used and coating equipment sold, and
developed a plan to correct the systems that will be affected. The Company
continues to evaluate appropriate courses of corrective action, including the
replacement of certain systems. The Company began in 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 80% 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. The Company estimates that the implementation stage is
approximately 50% complete for its major systems. In addition, the Company is
relying on outside vendors to provide new system upgrades to mitigate the year
2000 issue.
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 that will
specify what it plans to do if it or important external companies are not Year
2000 compliant in a timely manner. The Company expects to prepare its
contingency plan during calendar year 1999.
If such modifications and conversions are not completed timely, the year 2000
issue may have a material impact on the operations of the Company. Management
does not anticipate these activities will have a material adverse impact on the
financial position, results of operations or cash flows of the Company. Present
estimated costs for remediation are approximately $40,000.
44
<PAGE>
ITEM 9: Changes in and Disagreements With Accountants and Financial Disclosure
There have been no changes in or significant disagreements with
Accountants.
PART III
ITEM 10: Directors and Executive Officers of the Registrant
The information set forth on page 4, under the caption "Nominees for
Election as Directors" of the Registrant's definitive Proxy Statement dated
September 17, 1998, is hereby incorporated by reference.
ITEM 11: Executive Compensation
Information relating to compensation of the Registrant's executive officers
and directors is contained on page 7, under the captions "Compensation of
Directors" and "Compensation of Executive Officers," in the Registrant's
definitive Proxy Statement dated September 17, 1998, and is incorporated herein
by reference.
ITEM 12: Security Ownership of Certain Beneficial Owners and Management
Information relating to security ownership of certain beneficial owners and
management is contained on page 9, under the caption "Compensation of Executive
Officers -- Executive Compensation -- Security Ownership of Management" in the
Registrant's definitive Proxy Statement dated September 17, 1998, and is
incorporated herein by reference.
ITEM 13: Certain Relationships and Related Transactions
Information relating to certain relationships and related transactions is
contained on page 12, under the caption "Certain Transactions" in the
Registrant's definitive Proxy Statement dated September 17, 1998, and is
incorporated herein by reference.
PART IV
ITEM 14: Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements.
The Registrant's consolidated financial statements, for the year ended June
27, 1998, together with the Report of Independent Certified Public Accountants
are filed as part of this Form 10-K report. See "ITEM 8: Financial Statements
and Supplementary Data." The supplemental financial information listed and
appearing hereafter should be read in conjunction with the financial statements
included in this report.
2. Financial Statement Schedules.
Financial statement schedules are not submitted because they are not applicable
or because the required information is included in the consolidated financial
statements or notes thereto.
3. Exhibits.
Reference is made to the Exhibit Index which is found on the last page of
the body of this Form 10-K Annual Report preceding the exhibits.
45
<PAGE>
(b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K during the last quarter
of the fiscal year ended June 27, 1998.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report.
(d) Financial Statement Schedules
The response to this section of Item 14 is submitted as a separate section
of this report.
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
APPLIED FILMS CORPORATION
By: /s/ Thomas T. Edman
Thomas T. Edman, President
September 17, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated on
September 17, 1998. The persons named below each hereby appoint Thomas T. Edman
and Thomas D. Schmidt, and each of them severally, as his attorney in fact, to
sign in his name and on his behalf, as a director or officer of the Registrant,
and to file with the Commission any and all amendments to this report on Form
10-K.
Signatures Title
President, Chief Executive Officer and Director
/s/ Thomas T. Edman principal executive officer)
Thomas T. Edman
Chief Financial Officer and Treasurer (principal
/s/ Thomas D. Schmidt accounting and financial officer)
Thomas D. Schmidt
/s/ John S. Chapin Director
John S. Chapin
/s/ Cecil Van Alsburg Director
Cecil Van Alsburg
/s/ James A. Knister Director
James A. Knister
/s/ Chad D. Quist Director
Chad D. Quist
/s/ Jeffrey K. Fergason Director
Jeffrey K. Fergason
/s/ Richard P. Beck Director
Richard P. Beck
47
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
3.1 Amended and Restated Articles of Incorporation of Applied Films
Corporation are incorporated by reference to Exhibit 3.1 of
Registrant's Registration Statement on Form S-1, as amended (Reg.
No. 333- 35331).
3.2 Amended and Restated Bylaws of Applied Films Corporation are
incorporated by reference to Exhibit 3.2 of Registrant's
Registration Statement on Form S-1, as amended (Reg. No.
333-35331).
4.1 Specimen common stock certificate is incorporated by reference to
Exhibit 4.1 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.1 1993 Stock Option Plan is incorporated by reference to Exhibit 4
of Registrant's Registration Statement on Form S-8 (Reg. No.
333-51175).
10.2 1997 Stock Option Plan is incorporated by reference to Exhibit
10.2 of Registrant's Registration Statement on Form S-1, as
amended (Reg. No. 333-35331).
10.3 Employee Stock Purchase Plan is incorporated by reference to
Exhibit 10.3 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.4 Form of Indemnity Agreement between Registrant and each of its
Directors and Executive Officers is incorporated by reference to
Exhibit 10.4 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.5 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 is incorporated by reference to
Exhibit 10.5 of Registrant's Registration Statement on Form S-1,
as amended (Reg. No. 333-35331).
10.6 First Amendment to Amended and Restated Credit Agreement, dated
as of March 27, 1998, between Registrant and NBD Bank.
10.7 Lease Agreement dated January 30, 1998, between 9586 East
Frontage Road, Longmont, CO 80504 LLC and Registrant is
incorporated by reference to Exhibit 10.9 of Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
December 27, 1997.
10.8 Agreement, dated as of November 18, 1997, between Nippon Sheet
Glass Co., Ltd., NSG Fine Glass Co., Ltd. and Registrant.
11.1 Statement re: computation of per share earnings
21.1 Subsidiary of Applied Films Corporation is incorporated by
reference to Exhibit 21 of Registrant's Registration Statement on
Form S-1, as amended (Reg. No. 333-35331).
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on page 47)
27.1 Financial Data Schedule (EDGAR filing only)
<PAGE>
Exhibit 10.6
FIRST AMENDMENT TO
AMENDED AND RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT, dated as
of March 27, 1998 (this "Amendment"), between APPLIED FILMS CORPORATION, a
Colorado corporation (the "Company"), and NBD BANK, a Michigan banking
corporation, of Detroit, Michigan (the "Bank").
A. The parties hereto have entered into an Amended and Restated Credit
Agreement, dated as of June 30, 1997 (the "Credit Agreement"), which is in full
force and effect. A requirement of the Credit Agreement was that Donnelly
Corporation provide a guaranty of the Company's obligations under the Credit
Agreement. The Bank has now released Donnelly Corporation from its obligations
under its guaranty.
B. The Company desires to amend the Credit Agreement as herein provided to
reflect the guaranty's release, to increase the amount available under the
Commitment, and to make certain other amendments, and the Bank is willing to so
amend the Credit Agreement.
Based upon these recitals, the parties agree as follows:
1. Amendment. Upon the Company satisfying the conditions set forth in
paragraph 4 (the date that this occurs being called the "effective date"), the
Credit Agreement shall be amended as follows:
(A) The terms "Available Guaranty Amount", "Comfort Letter",
"Guarantor", "Guaranty", and "Guaranty Amount" are each deleted from the
Credit Agreement.
(B) The term "Borrowing Base" is amended in its entirety, to read as
follows:
"Borrowing Base" means, as of any date, the sum of (a) an amount
equal to 85% of the value of Eligible Accounts Receivable, plus (b) an
amount equal to the lesser of (i) 40% of the value of Eligible
Inventory and (ii) $4,000,000, plus (c) an amount equal to 60% of the
value of Eligible Fixed Assets."
(C) The term "Commitment" is amended in its entirety, to read as
follows:
"Commitment" means the Bank's commitment to make Loans and Letter
of Credit Advances pursuant to Section 2.1 in amounts not exceeding an
aggregate principal amount outstanding at any time of $11,500,000 as
such amount may be reduced from time to time pursuant to Section 2.2,
provided, that the aggregate principal amount of all outstanding
Letters of Credit shall not exceed $3,000,000.
(D) The term "Eligible Fixed Assets" is amended in its entirety, to
read as follows:
"Eligible Fixed Assets" means, as of any date, those tangible
fixed assets owned by the Company in which the Company has granted to
the Bank a
<PAGE>
first-priority perfected security interest pursuant to the Security
Agreement and which are either (i) listed and valued in an appraisal
dated April 21, 1997, performed by Norman Levy and Associates, which
has been furnished to the Bank, valued at the fair market value
established in the appraisal, as up-dated at the Bank's request from
time to time, or (ii) acquired by the Company after the appraisal
identified above, valued at the acquired cost until such time as the
Bank requests an appraisal, after which they shall be valued at the
fair market value established in the appraisal, but not including any
fixed asset (a) that is not usable in the business of the Company, (b)
that is located outside the United States (which shall not be deemed
to include any territories of the United States), (c) that is subject
to, or any accounts or other proceeds resulting from the sale or other
disposition thereof could be subject to, any Lien (except those in
favor of the Bank under the Security Documents), (d) that is not in
the possession of the Company, (e) that is held for sale or lease or
is the subject of any lease, (f) that is subject to any trademark,
trade name or licensing arrangement, or any law, rule or regulation,
that could limit or impair the ability of the Bank to promptly
exercise all rights of the Bank under the Security Documents, (g) if
such fixed asset is located on premises not owned by the Company
unless the landlord or other owner of the premises has waived its
distraint, lien, and similar rights with respect to the fixed asset
and has agreed to permit the Bank to enter the premises after an Event
of Default has occurred pursuant to a waiver and agreement of the
owner in favor of and satisfactory to the Bank, (h) with respect to
which any insurance proceeds are not payable to the Bank as a loss
payee or are payable to any loss payee other than the Bank or the
Company, or (i) that for any other reason is at any time reasonably
deemed by the Bank to be ineligible.
(E) The term "Eurodollar Rate" is amended in its entirety, to read as
follows:
"Eurodollar Rate" means, with respect to any Eurodollar Rate Loan
and the related Eurodollar Interest Period, the per annum rate that is
equal to the sum of (a) the per annum margin amount determined by
reference to the chart set forth below, determined quarterly by the
Bank from the financial statements submitted by the Company under
Section 5.1(d)(ii) for the months of March, June, September, and
December, plus (b)the rate per annum obtained by dividing (i) the per
annum rate of interest at which deposits in Dollars for such
Eurodollar Interest Period and in an aggregate amount comparable to
the amount of such Eurodollar Rate Loan are offered to the Bank by
other prime banks in the London or Nassau interbank market, selected
in the Bank's discretion, at approximately 11:00 am. London or Nassau
time, as the case may be, on the second Eurodollar Business Day prior
to the first day of such Eurodollar Interest Period by (ii) an amount
equal to one minus the stated maximum rate (expressed as a decimal) of
all reserve requirements (including, without limitation, any marginal,
emergency, supplemental, special or other reserves) that is specified
on the first day of such Eurodollar Interest Period by the Board of
Governors of the Federal Reserve System (or any successor agency
thereto) for determining the maximum reserve requirement with respect
to eurocurrency funding
2
<PAGE>
(currently referred to as "Eurocurrency liabilities" in Regulation D
of such Board) maintained by a member bank of such System, all as
conclusively determined by the Bank, such sum to be rounded up, if
necessary, to the nearest whole multiple of one-hundredth of one
percent (1/100 of 1%).
Ratio calculated
under Section 5.2(a) Margin
(i) Less than or equal to 1.75%
1.5 to 1.0
(ii) Greater than 1.5 to 1.0 but 2.00%
less than or equal to 2.0 to 1.0
(iii) Greater than 2.0 to 1.0 but 2.25%
less than or equal to 2.5 to 1.0
(iv) Greater than 2.5 to 1.0 but 2.50%
less than or equal to 3.0 to 1.0
(v) Greater than 3.0 to 1.0 2.75%
(F) The term "Security Documents" is amended by deleting the phrase
"the Guaranty, the Comfort Letter,".
(G) The first sentence of Section 2.4(a) is amended by deleting the
following phrase:
", provided, however, that a Eurodollar Rate Loan may be
requested only if the aggregate outstanding principal amount of the
Eurodollar Rate Loans (including the requested Loan) plus the Letter
of Credit Advances would not exceed the Guaranty Amount"
(H) The first paragraph of Section 2.5(e) is amended in its entirety
to read as follows:
"(e) Security Documents. A confirmation of the Security Agreement
duly executed on behalf of the Company substantially in the form of
Exhibit F granting or confirming to the Bank the collateral and
security intended to be provided pursuant to Section 2. 10, together
with:"
(I) Section 2. 10 is amended in its entirety to read as follows:
"Security and Collateral. To secure the payment when due of the
Revolving Credit Note and all other obligations of the Company under
this Agreement to the Bank, the Company shall execute and deliver to
the Bank the Security Documents
3
<PAGE>
granting or confirming security interests in all present and future
accounts, inventory, equipment, and fixtures of the Company, provided,
however, the Company need not grant to the Bank a security interest in
fixed assets which are not Eligible Fixed Assets."
(J) Each reference in Sections 5. 1(d)(ii), (iv), and (v) to 10 days
after the end of each month is amended to read "20 days".
(K) Section 5.2(d) is amended in its entirety to read as follows:
"Make any capital expenditures during any fiscal year of the
Company, the aggregate amount of which exceeds $5,500,000."
(L) Section 6.1(b) is amended by deleting the phrase "or the
Guarantor" each time it appears therein.
(M) Section 6.1(e) is amended by deleting the phrase "or the
Guarantor" each time it appears therein and adding the word "or" before the
phrase "any of its Subsidiaries" each time it appears therein.
(N) Section 6.1(h) is amended by deleting the phrase "or the
Guarantor" each time it appears therein and adding the word "or" before the
phrase "any of its Subsidiaries" each time it appears therein, and adding
the word "or" before the phrase "any Subsidiary" in the last full line of
that subsection.
(O) Section 7.4 is amended by deleting the phrase "or the Guarantor"
each time it appears therein.
(P) Exhibit A, Revolving Credit Note, is amended in its entirety by
substituting therefor the Amended and Restated Revolving Credit Note
attached as Exhibit A (the "Amended Note").
(Q) Exhibit C, Request for Advance, is amended in its entirety by
substituting therefor the Request for Advance attached as Exhibit C.
(R) Exhibit D, Request for Continuation or Conversion of Loan, is
amended in its entirety by substituting therefor the Request for
Continuation or Conversion of Loan attached as Exhibit D.
(S) Exhibit E, Borrowing Base Certificate, is amended in its entirety
by substituting therefor the Borrowing Base Certificate attached as Exhibit
E.
(T) Exhibit G, Confirmation of Guaranty, Subordination Agreement, and
Comfort Letter, is deleted.
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2. References to Credit Agreement; Confirmation of Security Agreement. From
and after the effective date of this Amendment, references to the Credit
Agreement in the Credit Agreement and all other documents issued under or with
respect thereto (as each of the foregoing is amended hereby or pursuant hereto)
shall be deemed to be references to the Credit Agreement as amended hereby. The
Company further confirms the continuing effect of the Security Agreement as
security for the payment of all debt now or hereafter owing by the Company to
the Bank, including without limitation the debt arising under the Credit
Agreement as amended hereby and the Amended Note.
3. Representations and Warranties. The Company represents and warrants to
the Bank that:
(a) (i) The execution, delivery and performance of this Amendment and
all agreements and documents delivered pursuant hereto by the Company have
been duly authorized by all necessary corporate action and do not and will
not violate any provision of any law, rule, regulation, order, judgment,
injunction, or award presently in effect applying to it, or of its articles
of incorporation or by-laws, or result in a breach of or constitute a
default under any material agreement, lease, or instrument to which the
Company is a party or by which it or its properties may be bound or
affected; (ii) no authorization, consent, approval, license, exemption or
filing of a registration with any court or governmental department, agency,
or instrumentality is or will be necessary to the valid execution,
delivery, or performance by the Company of this Amendment and all
agreements and documents delivered pursuant hereto; and (iii) this
Amendment and all agreements and documents delivered pursuant hereto by the
Company are the legal, valid, and binding, obligations of the Company,
enforceable against it in accordance with the terms thereof.
(b) After giving effect to the amendments contained herein, the
representations and warranties contained in Article IV (other than Section
4.6) of the Credit Agreement are true and correct on and as of the
effective date hereof with the same force and effect as if made on and as
of such effective date.
(c) No Event of Default has occurred and is continuing or will exist
under the Credit Agreement as of the effective date hereof
4. Conditions to Effectiveness. This Amendment and the amendments provided
for herein shall become effective on and as of the date first above written (the
"Effective Date"), provided that all of the following conditions precedent shall
have been satisfied:
(a) This Amendment and the Amended Note shall have been duly executed
and delivered by the Company.
(b) The Bank shall have received a certified copy of resolutions of
the Board of Directors of the Company authorizing the execution and
delivery of this Amendment by the Company.
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(c) No Default or Event of Default shall have occurred and be
continuing.
(d) The Company shall have paid the principal of and all outstanding
interest due under the Term Loan.
5. Miscellaneous. The terms used but not defined herein shall have the
respective meanings ascribed thereto in the Credit Agreement. Except as
expressly amended hereby, the Credit Agreement and all other documents issued
under or with respect thereto are ratified and confirmed by the Bank and the
company and shall remain in full force and effect, and the Company acknowledges
that it has no defense, off-set, or counterclaim with respect thereto.
6. Counterparts. This Amendment may be executed in any number of
counterparts, all of which taken together shall constitute one and the same
instrument and any of the parties hereto may execute this Amendment by signing
any such counterpart.
7. Expenses. The Company agrees to pay and save the Bank harmless from
liability for all costs and expenses of the Bank arising in respect of this
Amendment, including the reasonable fees and expenses of Dickinson Wright PLLC,
counsel to the Bank, in connection with preparing and reviewing this Amendment
and any related documents.
8. Governing Law. This Amendment is a contract made under, and shall be
governed by and construed in accordance with, the laws of the State of Michigan
applicable to contracts made and to be performed entirely within such state and
without giving effect to the choice law principles of such state.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date first written above.
APPLIED FILMS CORPORATION NBD BANK
By: /s/ Thomas D. Schmidt By: /s/ William C. Goodhue
Thomas D. Schmidt William C. Goodhue
Its: Chief Financial Officer Its: Vice President
199136.1
<PAGE>
AMENDED AND RESTATED
REVOLVING CREDIT NOTE
$11,500,000 March 27, 1998
Detroit, Michigan
FOR VALUE RECEIVED, the undersigned, APPLIED FILMS CORPORATION, a Colorado
corporation (the "Company"), promises to pay to the order of NBD BANK, a
Michigan banking corporation, of Detroit, Michigan (the "Bank"), at the
principal banking office of the Bank in lawful money of the United States of
America and in immediately available funds, the principal sum of Eleven Million
Five Hundred Thousand Dollars ($11,500,000), or such lesser amount as is noted
in the books and records of the Bank, on the Termination Date; and to pay
interest on the unpaid principal balance hereof from time to time outstanding,
in like money and funds, for the period from the date hereof until the Revolving
Credit Loans shall be paid in full, at the rates per annum and on dates provided
in the Credit Agreement referred to below.
This Note evidences one or more Revolving Credit Loans made under an
Amended and Restated Credit Agreement dated as of even date herewith (as amended
or modified from time to time, the "Credit Agreement"), between the Company and
the Bank, to which reference is made for a statement of the circumstances under
which this Note is subject to prepayment and under which its due date may be
accelerated. Capitalized terms used but not defined in this Note shall have the
respective meanings assigned to them in the Credit Agreement.
The Bank is authorized by the Company to note in its records the date,
amount and type of each Loan, the interest rate and duration of the related
Eurodollar Interest Period (if applicable), the amount of each payment or
prepayment of principal thereon, and the other information provided for in such
records, which records shall constitute prima facie evidence of the information
so noted, provided that the Bank's failure to make any such notation shall not
relieve the Company of its obligation to repay the outstanding principal amount
of this Note, all accrued interest hereon, and any amount payable with respect
thereto in accordance with this Note and the Credit Agreement.
This Note is issued in substitution for the Revolving Credit Note dated
June 30, 1997, in the principal amount of $8,500,000, previously issued by the
Company to the Bank pursuant to the Agreement (the "Prior Note"). This Note
shall evidence, and the Company promises to pay, in addition to the principal
amount outstanding hereunder and all interest thereon accrued, all accrued and
unpaid interest on the Prior Note.
The Company and each endorser or guarantor hereof waives demand,
presentment, protest, diligence, notice of dishonor and any other formality in
connection with this Note. Should the indebtedness evidenced by this Note or any
part thereof be collected in any proceeding or be placed in the hands of
attorneys for collection, the Company agrees to pay, in addition to the
principal and interest payable hereon, all costs of collecting this Note,
including attorneys' fees and expenses.
APPLIED FILMS CORPORATION
By: /s/ Thomas D. Schmidt
Thomas D. Schmidt
Its: Chief Financial Officer
<PAGE>
EXHIBIT C
(Revised March, 1998)
REQUEST FOR ADVANCE
(date)
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
Attention:________________
Applied Films Corporation, a Colorado corporation (the "Company"), requests
a [Letter of Credit Advance] [Revolving Credit Loan] pursuant to Section 2.4 of
the Amended and Restated Credit Agreement, dated as of June 30, 1997 (as
amended, the "Credit Agreement"), between the Company and the Bank, in the
amount of $ ________, to be issued on _________, 19___, and to be evidenced by
the Company's Revolving Credit Note. Capitalized terms used but not defined
herein shall have the respective meanings assigned to them in the Credit
Agreement.
Such Revolving Credit Loan shall be made as a [insert either Eurodollar
Rate Loan or Floating Rate Loan) and the initial Eurodollar Interest Period, if
the requested Advance is a Eurodollar Rate Loan, shall be [insert permitted
Eurodollar Interest Period].
Such Letter of Credit Advance shall be made by the Bank issuing its Letter
of Credit for the account of the Company in the maximum amount of $ _________ to
and for the benefit of _________________ with a stated expiry date of
_________________, 19____, and containing the further terms and conditions set
forth in the attached letter of credit application to the Bank.
In support of this request, the Company represents and warrants to the Bank
that:
A. The representations and warranties contained in Article IV of the Credit
Agreement are true and correct on and as of the date hereof, and will be true
and correct on the date such Advance is made (both before and after such Advance
is made), as if such representations and warranties were made on and as of such
dates.
B. No Event of Default, and no event or condition which might become such
an Event of Default with notice or with lapse of time, or both, has occurred and
is continuing or will exist on the date of such Advance is made (whether before
or after such Advance is made).
Accepting the proceeds of the Advance by the Company shall constitute a further
representation and warranty that the representations and warranties made herein
are true and correct at the time the proceeds are disbursed.
APPLIED FILMS CORPORATION
By:___________________________________
Its:___________________________________
<PAGE>
EXHIBIT D
(Revised March, 1998)
REQUEST FOR CONTINUATION OR CONVERSION OF LOAN
(date)
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
Attention:
The undersigned (the "Company") requests that $ ___________ of the
principal amount of the Revolving Credit Loan originally made on __________,
19___ , which Loan is currently a [insert type of Loan based on type of interest
rate applicable], to be continued as or converted to, as the case may be, a
[insert type of Loan requested based on type of interest rate desired) on
__________, 19___ . If such Loan is requested to be converted to a Eurodollar
Rate Loan, the Company elects a Eurodollar Interest Period for such Loan of
[insert permitted Eurodollar Interest Period]. Capitalized terms used but not
defined herein shall have the respective meanings assigned to them in the
Amended and Restated Credit Agreement, dated as of June 30, 1997 (as amended,
the "Credit Agreement"), between the Company and NBD Bank.
In support of this request, the Company certifies that:
A. The representations and warranties contained in Article IV of the Credit
Agreement are true and correct on and as of the date hereof, and will be true
and correct on the date of the continuation or conversion of such Loan, as if
such representations and warranties were made on and as of such dates.
B. No Event of Default has occurred and is continuing or will exist on the
date of the continuation or conversion of such Loan.
C. Acceptance of the continuation or conversion of such Loan by the Company
shall be deemed to be a further representation that the representations made
herein are true and correct at the time such proceeds are disbursed.
APPLIED FILMS CORPORATION
By:______________________________
Its:______________________________
<PAGE>
EXHIBIT E
(Revised March, 1998)
BORROWING BASE CERTIFICATE
(date)
NBD Bank
611 Woodward Avenue
Detroit, Michigan 48226
Attention: _______________
Reference is made to the Amended and Restated Credit Agreement, dated as of
June 30, 1997 (as amended, the "Credit Agreement"), between Applied Films
Corporation, a Colorado corporation (the "Borrower"), and NBD Bank, a Michigan
banking corporation of Detroit, Michigan (the "Bank"). Capitalized terms used
but not defined herein shall have the respective meanings assigned to them in
the Credit Agreement.
The Borrower represents and warrants to the Bank that the following
computations of the Borrowing Base, and the related supporting schedules
attached hereto, are true and correct as of the close of business on _________,
19___ , and conform with the terms of the Credit Agreement:
Borrowing Base
1. (1) Eligible Accounts Receivable.............................$_________
(b) 85% of Eligible Accounts Receivable......................$_________
2. (a) Value of Eligible Inventory..............................$_________
(b) 40% of Value of Eligible Inventory.......................$_________
(c) Maximum Eligible Inventory Value.........................$4,000,000
3. (a) Fair Market Value of Eligible Fixed Assets...............$_________
(b) 60% of Eligible Fixed Assets.............................$_________
4. Borrowing Base
(1(b), plus the lesser of 2(b) and 2(c), plus 3(b))...............$_________
5. Aggregate outstanding principal amount of Revolving Credit
Loans plus Letter of Credit Advances..............................$_________
6. 4 minus 5 - if negative, remit difference to the Bank
under Section 3.1(c) of the Credit Agreement......................$_________
<PAGE>
The Borrower further represents and warrants to the Bank that as of the
close of business on ___________, 19___:
1. The representations and warranties contained in Article IV of the Credit
Agreement and in the Security Agreement are true and correct on and as of such
date, as if such representations and warranties were made on and as of such
date. For purposes of this certificate, the representations and warranties
contained in Section 4.6 of the Credit Agreement shall be deemed made with
respect to both the financial statements referred to therein and the most recent
financial statements delivered pursuant to Section 5.1 (d) of the Credit
Agreement.
2. No Event of Default or event or condition which might become an Event of
Default with notice or lapse of time, or both, has occurred and is continuing.
APPLIED FILMS CORPORATION
By:_____________________________
Its:___________________________
<PAGE>
Exhibit 10.8
AGREEMENT
between
NIPPON SHEET GLASS CO., LTD.
and
NSG FINE GLASS CO., LTD.
and
APPLIED FILMS CORPORATION
DATED AS OF 18TH DAY OF NOVEMBER, 1997
<PAGE>
AGREEMENT
TABLE OF CONTENTS
Clause No. Title Page
Clause I Definitions..................................................2
Clause 2 Sales of Products............................................2
Clause 3 Sales of Substrate Glass.....................................4
Clause 4 Market Information...........................................5
Clause 5 Technical Assistance.........................................5
Clause 6 Technology and Confidentiality...............................5
Clause 7 Force Majeure................................................7
Clause 8 Term.........................................................7
Clause 9 Termination..................................................8
Clause 10 Arbitration..................................................8
Clause 11 Notice.......................................................8
Clause 12 Miscellaneous................................................9
EXHIBIT-A Terms and Conditions of Sale...............................A-1
i
<PAGE>
AGREEMENT
This Agreement, made as of this 18th day of November, 1997, by and among:
NIPPON SHEET GLASS CO., LTD.
a corporation duly organized and existing under the laws of Japan and having its
principal office of business at 8-1 Nishi-Hashimoto 5-chome, Sagamihara City,
Kanagawa Pref. 229-11 Japan (hereinafter called "NSG")
and:
NSG FINE GLASS CO., LTD.
a corporation duly organized and existing under the laws of Japan and having its
principal office of business at 8-1 Nishi-Hshimoto 5-chome, Sagamihara City,
Kanagawa Pref. 229-11 Japan and a wholly owned subsidiary company of NSG
(hereinafter called "NFN")
and:
APPLIED FILMS CORPORATION
a corporation duly organized and existing under the laws of the state of
Colorado, U.S.A. and having its principal office of business at 6797 Winchester
Circle, Boulder, CO 80301 U.S.A. (hereinafter called "AFC")
WITNESSETH THAT:
WHEREAS, NSG is engaged in the sale of substrate glass and ITO coated glass, and
NFN is engaged in the manufacture of substrate glass and ITO coated glass for
supply to NSG, and AFC is engaged in the manufacture and sale of ITO coated
glass.
WHEREAS, NSG desires to sell ITO coated glass manufactured by AFC to its
customers, and AFC desires to penetrate into Japanese market through NSG's sales
channel.
WHEREAS, NSG desires to sell substrate glass to AFC and AFC desires to purchase
substrate glass from NSG to meet certain of its requirement for ITO glass.
NOW, THEREFORE, it is mutually agreed between the parties as follows:
<PAGE>
1. DEFINITIONS
For the purpose of this Agreement, the following terms shall have the following
meanings:
(1) "Products" shall mean ITO coated glass manufactured by AFC in
accordance with such specifications as may be mutually agreed among the
parties hereto from time to time.
(2) "Substrate Glass" shall mean polished or unpolished glass which is cut
to size and seamed for further process of ITO coating.
(3) "Customers" shall mean NSG's existing customers and other customers
which will, from time to time, be designated by AFC and agreed by NSG.
2. SALES OF PRODUCTS
(1) Grant
AFC hereby grants to NSG and NSG accepts from AFC the non-exclusive and
non-transferable right to sell the Products to the Customers during the term of
this Agreement, pursuant to those purchase orders issued by NFN that are
accepted by AFC from time to time; provided, however, that AFC is under no
obligation to accept any or all purchase orders issued by NFN and/or NSG. The
sale and purchase of the Products shall be subject to the terms and conditions
set forth on attached Exhibit A.
(2) Sales Channel
The Products shall be purchased from AFC by NFN and then supplied to NSG for the
sale to the Customers.
(3) Sales Forecast
NSG shall prepare and provide AFC with a sales forecast of the Products from
time to time. Upon receipt of the sales forecast from NSG, AFC shall advise NSG
of its prospect of the delivery, and shall use its best efforts to meet NSG's
requirement. AFC shall notify NSG in writing of any significant change in the
prospect of the delivery as soon as possible after the change is made.
(4) Individual Purchase Order
NFN shall issue an individual purchase order to AFC specifying the details of
each purchase agreed upon among the parties hereto such as specifications of the
Products and packing, delivery date, destination, and etc. (hereinafter called
"Individual Purchase Order"). Such Individual Purchase Order shall become valid
only after receipt by NFN of order acceptance and confirmation from AFC.
(5) Prices and Terms
From October 1, 1997 to September 30, 1998, the price to be charged by AFC for
the Products delivered in accordance with the Individual Purchase Order shall be
the amount equal to ninety-five percent (95%) of the selling price of NSG for
the Products to the Customers. Commencing October 1, 1998, the price to be
charged by AFC for the Products delivered in accordance with the Individual
Purchase Order shall be the amount equal to ninety-six percent
2
<PAGE>
(96%) of the selling price of NSG for the Products to the Customers.
Provided, however, that in case the Products are sold to NANOX CO., LTD., the
rate applicable shall be ninety-six percent (96%) of the selling price.
(6) Costs and expenses
The Products shall be in the custody of AFC until they are delivered to the
Customers. AFC shall bear all costs and expenses incurred in and until the
delivery to the Customers, including without limitation, freight, storage,
transportation, insurance premium, duties, landing charges and local taxes.
(7) Payment
All payment of NFN to AFC hereunder shall be made by remittance in Japanese Yen
within thirty (30) days after the end of the month in which the shipment of the
Products out of a warehouse is made by AFC on the corresponding Individual
Purchase Order.
(8) Warranty
AFC warrants that the Products meet the specifications as mutually agreed upon
among the parties hereto and are free from defects in workmanship as well as
materials during a period of six (6) months from the date of each delivery
hereunder. THERE ARE NO OTHER WARRANTIES (EXCEPT AS EXPRESSLY SET FORTH IN THIS
PARAGRAPH OR IN ANY WRITTEN WARRANTIES SUPPLIED BY AFC TO NFN OR NSG) EITHER
EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
(9) Quality Claims against Defective Products
Any claim by NFN or NSG in regard to any latent defect in the Products shall be
sent in writing within the warranty period stipulated in Paragraph (8) of this
Article 2., except that claim relating to other than latent defect shall be sent
within sixty (60) days after the delivery to the Customers, and must be
dispatched with full particulars certifying such defect. In case a claim is laid
against NSG by one or more of its Customers ("Claiming Customer(s)") with
respect to the Products, AFC shall assist NSG with reasonable assistance and
have direct consultation with that Customer so that NSG can amicably settle the
claim with the Claiming Customer(s). In case any of these claims is objectively
judged reasonable after consultation between the parties hereto and such claim
results solely from any act or omission or negligent work of AFC, then AFC
shall, at NFN's or NSG's option:
i) replace the defective Products free of charge within sixty (60) days
following receipt of such claim;
ii) accept cancellation of the corresponding part of the Individual
Purchase Order; or
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<PAGE>
iii) take responsibility for the losses and damages incurred by such claim
of the Claiming Customer(s) if the claim is objectively judged
reasonable after direct consultation with that Customer.
(10) Infringement
AFC shall indemnify and hold each of NFN, NSG and the Customers harmless from
all cost, expense and liability, including attorney's fees, arising out of any
claim or action based on infringement by the Products of any patent or other
intellectual property rights other than an infringement inhering in any written
direction by NFN, to the extent that the foregoing costs, expenses, claims, etc.
result from a final unappealable judgment against AF C. Upon the occurrence of
such a claim or action, then NFN and/or NSG shall promptly notify AFC thereof
and AFC, at its option, may, but is not obligated to, assume the defense
thereof.
(11) Dead Stock
In the event that any of the Customers rescind, change or cancel any order of
the Products after the Products have been shipped by AFC, NSG shall use
reasonable efforts to assist AFC in the sale of all such Products that were
subject to such order rescission, change or cancellation.
3. SALES OF SUBSTRATE GLASS
(1) Supply of Substrate Glass
NSG shall sell to AFC and AFC shall purchase from NSG the Substrate Glass for
the manufacture of the ITO coated glass under the terms and conditions as
mutually agreed upon between NSG and AFC. AFC shall use reasonable efforts to
purchase the Substrate Glass from NSG up to fifty percent (50%) of its total
requirement, as far as the Substrate Glass supplied by NSG is competitive in
respect of price, quality and/or terms of delivery.
(2) Processing
The processing of the Substrate Glass shall be made by NFN or SUZHOU NSG
ELECTRONICS CO., LTD. a wholly owned subsidiary company of NSG or MJM CO., LTD.
an 15% owned affiliate company of NSG (hereinafter collectively called
"Affiliates"). In case the processing is made by a party other than NSG or its
Affiliates, NSG shall obtain a prior written approval of AFC.
(3) Prices, Terms and Conditions for Sales
The sales price of the Substrate Glass and other terms and conditions for sale
shall be mutually agreed upon in writing by the parties hereto. Such terms and
conditions shall be reviewed when necessary. The delivery of the Substrate Glass
shall be made on the conditions of Ex Works. All orders placed by AFC shall be
executed by NSG only after they have been confirmed in writing.
(4) Payment
Each payment shall be made by AFC by telegraphic transfer in Japanese Yen within
ninety (90) days
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<PAGE>
after Bill of Lading date.
(5) Warranty
NSG warrants that the Substrate Glass meets the specifications as mutually
agreed upon between AFC and NSG and is free from defects in workmanship as well
as materials during a period of six (6) months from the date of each delivery
hereunder. THERE ARE NO OTHER WARRANTIES (EXCEPT AS EXPRESSLY SET FORTH IN THIS
PARAGRAPH OR IN ANY WRITTEN WARRANTIES SUPPLIED BY AFC TO NFN OR NSG) EITHER
EXPRESS OR IMPLIED, INCLUDING ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE.
(6) Quality Claims against Defective Glass Substrate
Any claim by AFC in regard to any latent defect in the Substrate Glass shall be
sent in writing within the warranty period stipulated in Paragraph (5) of this
Article 3., except that claim relating to other than latent defect shall be sent
within sixty (60) days after the delivery to AFC, and must be dispatched with
full particulars certifying such defect. In case any of these claims is
objectively judged reasonable and such claim results solely from any act or
omission or negligent work of NSG, then NSG shall, at AFC's option:
i) replace the defective Substrate Glass free of charge within sixty (60)
days following receipt of such claim;
ii) accept cancellation of the corresponding part of the orders; or
iii) take responsibility for the losses and damages incurred by such claim
if the claim is objectively judged reasonable.
4. MARKET INFORMATION
NSG shall, at regular intervals, report to AFC any market information collected
and acquired by NSG in relation to the Products.
5. TECHNICAL ASSISTANCE
In case AFC and NFN agree that AFC is in need of NFN's technical assistance for
the manufacture of the Products, NFN shall, at AFC's cost, render to AFC such
technical assistance on the terms and conditions as mutually agreed upon between
AFC and NFN.
6. TECHNOLOGY AND CONFIDENTIALITY
During the term of this Agreement, AFC and NSG may disclose or make available to
each other's representatives from time to time, orally, visually and/or in
writing, as each party at its sole discretion deems necessary, certain trade
secrets, know-how, designs, and proprietary, commercial, financial, and
technical information relating to their respective present or future design,
5
<PAGE>
development, or business activities which is either provided in written or
graphic form (or in materials otherwise embodied within electronic media) and is
clearly marked "Confidential", or is verbally or visually disclosed (whether in
sample or prototype or relating to methods and process) and identified as
Confidential at the time of disclosure and is set forth in writing and
transmitted from the disclosing party to the receiving party and marked
"Confidential" within thirty (30) days after the verbal or visual disclosure
("Proprietary Information").
The parties agree as follows:
A. Each party acknowledges that all Proprietary Information disclosed to a
representative of the receiving party hereunder is deemed to be and
shall remain the property of the disclosing party.
B. For a period of five (5) years from the date of disclosure, the
receiving party will keep all Proprietary Information of the disclosing
party confidential and will not, directly or indirectly disclose, use
or exploit such information for any purpose other than to pursue the
goals and objectives of this Agreement, if such Agreement is still in
effect. This paragraph shall survive termination of this Agreement.
C. In consideration for disclosure of the Proprietary Information, the
receiving party also agrees to the following conditions:
(i) The receiving party shall not reproduce or permit reproduction
of any Proprietary Information in any form or embodied within
any media, without the prior express written consent of the
disclosing party.
(ii) The receiving party will disclose the Proprietary Information
to only those of its employees, or agents of the receiving
party who need the information to perform their duties in
connection with the evaluation or use of the Proprietary
Information. Such employees or agents shall be instructed as
to the obligations of confidentiality of this Agreement and
shall be bound by such obligations.
(iii) The receiving party shall not provide or otherwise make
available, nor permit or otherwise allow any of its employees
to provide or otherwise make available to the whole or any
portion of the Proprietary Information, in any form, to any
third party.
(iv) The receiving party shall take all actions necessary to ensure
that no third party entity or individual affiliated with it or
its employees in any way obtains or uses the Proprietary
Information without the prior express written consent of the
disclosing party.
D. Each party understands that the disclosing party does not grant any
license or right to know-how, patents, copyrights, or trademarks or
other rights or property of the disclosing party, by implication or
otherwise, relating to the Proprietary Information.
6
<PAGE>
E. The receiving party's obligations to maintain the Proprietary
Information in confidence and not to use the Proprietary Information
shall not apply with respect to any of the following embodied within
the Proprietary Information:
(i) Information which is disclosed through public use or in
printed publications, but only to the extent that the public
disclosure is through no fault of the receiving party.
(ii) Information which the receiving party can show, by clear and
convincing evidence embodied within written documents, was
in the receiving party's possession at the time of disclosure
by the disclosing party.
(iii) Information disclosed to the receiving party by a third party
having no obligations of confidentiality or nonuse to the
disclosing party or any other third parties with respect to
such information.
(iv) Information ordered to be disclosed by a court or governmental
agency. Provided, however, that if receiving party receives a
subpoena or other order relating to the disclosure of the
Proprietary Information, it will promptly notify the
disclosing party and cooperate with the disclosing party in
opposing such action if the disclosing party requests.
F. Any and all written or graphic materials provided to the receiving
party by the disclosing party (including any copies thereof or notes
relating thereto made by the receiving party), in whatever form and
embodied within whatever media, and any other notes, memoranda or
documents prepared by the receiving party or its employees or agents
relating to any of the Proprietary Information, shall be returned to
the disclosing party upon request.
7. FORCE MAJEURE
Neither party hereto shall be liable to any of the other parties for failure to
perform its obligation hereunder due to the occurrence of any event beyond the
reasonable control of such party and affecting its performance including,
without limitation, act of god, act of government, earthquakes, labor strike,
traffic accident, fire, war or shortage of law materials. Notwithstanding the
foregoing, the occurrence of any of the above events shall not relieve any of
the parties of its obligation to make payment required hereunder.
8. TERM
This Agreement shall become effective on the date first above written and,
unless earlier terminated, remain in force for a period of three (3) years, and
shall be automatically renewed and continued thereafter on a year to year basis
unless either party gives the other parties at least three (3) months prior
written notices to terminate this Agreement before the expiration of the
original term or any such extension of this Agreement.
7
<PAGE>
9. TERMINATION
(1) In the event that either party fails to perform any obligation
hereunder or otherwise commits any breach of this Agreement, any of the
other parties may terminate this Agreement by giving to the party in
default a written notice, a copy of which shall be sent to the other
party. Such termination shall become effective thirty (30) days after
the said notice has duly been delivered to the party in default, unless
the failure or breach is corrected within said thirty (30) days period.
(2) In the event that any proceeding for insolvency or bankruptcy is
instituted by or against any of the parties or a receiver is appointed
for any of the parties, the other party may forthwith terminate this
Agreement.
(3) Termination of this Agreement for any reason shall be without prejudice
to all liabilities and obligations of any party accrued prior to the
date of termination, provided, however, that all payment to be made
under this Agreement shall become due when such termination occurs due
to the causes as provided in this Article 9.
(4) In the event of termination of this Agreement, the parties hereto shall
cooperate and make reasonable efforts to dispose any stock of the
Products which AFC possesses on the date of termination.
10. ARBITRATION
(1) All dispute, controversies or differences which may arise among the
parties hereto, out of, in relation to or in connection with this
Agreement, shall be settled through friendly negotiations with the
spirit of mutual benefits, and if an amicable settlement is not
reached, then they shall be finally settled by arbitration in Singapore
in accordance with the arbitration rules of the Singapore International
Arbitration Centre ("SIAC") under auspices of the SIAC. The award
rendered by arbitrator(s) shall be final and binding upon both parties.
The arbitration proceedings shall be conducted in the English language.
(2) This Agreement shall be governed as to all matters, including validity,
construction and performance, by and under the laws of the State of New
York, U.S.A..
11. NOTICE
All notices, demands or other communications required or permitted to be given
hereunder shall be in writing and, unless the context otherwise requires, be;
(i) personally delivered; (ii) delivered by courier; (iii) transmitted by
facsimile followed immediately by a confirmation letter by a postage prepaid
mail to the following address or such other address as the parties may notify
from time to time:
8
<PAGE>
If to NSG:
Mail address: 8-1 Nishi-Hashimoto 5-chome, Sagamihara City, Kanagawa Pref.
229-11 Japan
Facsimile: 0427-75-1596
Attention: Mr. Kazuyuki Izumi, General Manager
If to NFN:
Mail address: 8-1 Nishi-Hashimoto 5-chome, Sagamihara City, Kanagawa Pref.
229-11 Japan
Facsimile: 0427-75-1596
Attention: Mr. Kazuyuki Izumi, General Manager
If to AFC:
Mail address: 6797 Winchester Circle, Boulder, CO 80301
Facsimile: (303) 530-3214
Attention: Mr. Tom Edman
With a Copy to:
Mail address: Varnum, Riddering, Schmidt & HowlettLLP
Bridgewater Place, P.O. Box 352, Grand Rapids, MI 49501-0352
Facsimile: (616) 336-7000
Attention: Mr. William Lawrence III
Except as otherwise specified herein, all such notices, demands or other
communications shall be deemed to have been given and received (i) upon receipt
if personally delivered, or (ii) if delivered by courier on the seventh (7th)
day following the date of consignment, or (iii) if by facsimile on the day when
it is transmitted.
12. MISCELLANEOUS
(1) The rights and obligations of this Agreement are personal to the
parties and shall not be assigned without the prior written consent of
the other parties.
(2) If any term or clause of this Agreement shall be judged to be invalid
for any reason whatsoever, such invalidity shall not affect the
validity of the remainder of this Agreement and such invalid term or
clause shall be replaced with such other term or clause which is valid
in all respects and has an effect as close as possible to that of such
replaced one.
(3) No failure to exercise and no delay in exercising, on the part of
either party, any right, power, remedy or privilege granted thereunder
shall operate as a waiver thereof, nor shall any single or partial
exercise of any right, power, remedy or privilege preclude any other or
future exercise thereof or the exercise of any other right, power,
remedy or privilege. The rights and remedies herein provided are
cumulative and inclusive of any rights or remedies
9
<PAGE>
provided by law.
(4) This Agreement constitutes the entire agreement between the parties
hereto with reference to the subject matter hereof and there are no
understanding, representation or warranty of any kind except as set
forth herein and shall not be amended or modified in any manner, or
released, discharged, abandoned, or otherwise terminated except as
expressly provided herein or by an instrument in writing signed by duly
authorized officers or representatives of the parties hereto.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized officers or representatives on the date first above
written.
NIPPON SHEET GLASS CO., LTD.
/s/ Yozo Izuhara
By: Yozo Izuhara
Title: Managing Director
NSG FINE GLASS CO., LTD.
/s/ Masakiyo Tachibana
By: Masakiyo Tachibana
Title: President
APPLIED FILMS CORPORATION
/s/ Cecil Van Alsburg
By: Cecil Van Alsburg
Title: President
#199122/1
10
<PAGE>
EXHIBIT-A
TERMS AND CONDITIONS OF SALE
1. Terms of Contract
Seller agrees to sell to Buyer the goods identified on the Agreement dated 18
Nov. 1997 (the "Agreement") pursuant to the terms set forth below and any
documents or specifications expressly incorporated herein. Seller's agreement to
sell the goods to Buyer is conditional on Buyer's agreement to these terms, and
no additional or different terms stated in any purchase order other form
utilized by Buyer shall become part of the contract for sale unless agreed to by
Seller in a writing signed by its authorized representative. In the event of any
inconsistency between the terms of this Exhibit-A and the Agreement, the terms
and conditions of the Agreement shall control.
2. Authority of Seller's Representative
No affirmation, representation or warranty concerning the goods made by an
agent, employee or representative of Seller shall be binding on Seller, unless
the affirmation, representation or warranty is specifically included in the
Agreement.
3. Force Majeure
Seller shall not be responsible or liable for any delay or failure to deliver
which directly or indirectly results from or is contributed to by any fire,
flood, explosion, strike, foreign or domestic embargo, seizure, act of God,
insurrection, war, the adoption or enactment of any law, ordinance, regulation,
ruling or order directly or indirectly interfering with the production or
delivery hereunder, or the lack of usual means of transportation beyond Seller's
control. In the event that any one or more deliveries pursuant to the Agreement
is suspended or delayed be reason of any of the foregoing events, Seller may, at
its option, terminate the Agreement or delay delivery until such disabilities
have ceased to exist.
In the event Seller's supply of product is insufficient to meet current shipping
requirements due to any disability described above, Seller may allocate its
supply of product for its own use and among its customers on such basis as
Seller in the exercise of its discretion may determine, and in such event Seller
shall not be liable to Buyer for failure to deliver all or any part of the
quantities sold hereunder.
4. Installment Deliveries as Separate Sales
Each installment of goods to be delivered pursuant to the Agreement is to be
considered as a separate sale and Buyer shall be liable to pay the agreed price
for each such installment without regard to any failure to deliver other
installments, and Seller's breach or default in the delivery of any installment
shall not give Buyer the right to refuse to receive any other installments.
5. Packaging
Seller shall package the goods in a manner it deems reasonable unless otherwise
specified in the Agreement.
A-1
<PAGE>
6. Buyer's Failure to Make Payment
All amounts not paid when due shall incur a late charge of one percent (1%) per
month to the extent allowed by law. Buyer's failure to pay any amount when due
shall also entitle Seller to suspend performance of any other purchase orders
from Buyer.
7. Waiver
No claim or right arising out of breach of the Agreement can be waived unless
the waiver is supported by consideration and is in writing signed by the
aggrieved party.
8. Time for Bringing Action
Any arbitration action by Buyer for breach of the Agreement must be commenced
within one (1) year after the cause of action has accrued.
A-2
<PAGE>
EXHIBIT 11.1
APPLIED FILMS CORPORATION
COMPUTATION OF EARNINGS PER COMMON SHARE
(in thousands, except per share amounts)
<TABLE>
June 27, June 28, June 29,
1998 1997 1996
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income (loss) $ 2,857 $ 1,621 $ (1,078)
Weighted average number of common shares
outstanding 3,181 2,796 2,798
Basic earnings per share $ 0.90 $ 0.58 $ (0.39)
======= ======= ========
DILUTED EARNINGS PER SHARE
Net income (loss) $ 2,857 $ 1,621 $ (1,078)
Shares outstanding:
Weighted average number of common shares
outstanding 3,181 2,796 2,798
Assuming exercise of stock options 380 345 274
Assuming repurchase of treasury stock (186) (327) (274)
Net incremental shares 194 18 -
Weighted average number of common shares
outstanding, as adjusted 3,375 2,814 2,798
Diluted earnings per share $ 0.85 $ 0.58 $ (0.39)
======= ======= ======
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this Form 10-K
and to the incorporation of our report into the Company's previously filed
Registration Statement File Numbers 333-47951, 333-47967 and 333-51175.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Denver, Colorado,
September 17, 1998.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-27-1998
<PERIOD-START> JUN-29-1997
<PERIOD-END> JUN-27-1998
<CASH> 81,000
<SECURITIES> 0
<RECEIVABLES> 7,446,000
<ALLOWANCES> 0
<INVENTORY> 10,055,000
<CURRENT-ASSETS> 19,367,000
<PP&E> 19,388,000
<DEPRECIATION> (10,129,000)
<TOTAL-ASSETS> 28,697,000
<CURRENT-LIABILITIES> 8,620,000
<BONDS> 4,175,000
0
0
<COMMON> 9,424,000
<OTHER-SE> 5,402,000
<TOTAL-LIABILITY-AND-EQUITY> 28,697,000
<SALES> 53,041,000
<TOTAL-REVENUES> 53,041,000
<CGS> 42,150,000
<TOTAL-COSTS> 42,150,000
<OTHER-EXPENSES> 6,058,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 496,000
<INCOME-PRETAX> 4,337,000
<INCOME-TAX> 1,480,000
<INCOME-CONTINUING> 2,857,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,857,000
<EPS-PRIMARY> 0.90
<EPS-DILUTED> 0.85
</TABLE>
