SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended October 2, 1999
Commission File Number 23103
APPLIED FILMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1311581
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9586I-25 Frontage Rd., Longmont, Colorado 80504
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 774-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.Yes _X_ No ___
3,493,418 shares of Common Stock were outstanding as of October 25, 1999.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1. Financial Statements: 3
Consolidated Balance Sheets as of October 2, 1999 and 3
July 3, 1999
Consolidated Statements of Operations for the Three Months 5
Ended October 2, 1999 and October 3, 1998
Consolidated Statements of Cash Flows for the Three Months 6
Ended October 2, 1999 and October 3, 1998
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 15
Market Risk
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 16
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
October 2, 1999 July 3, 1999
--------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 466 $ 1,163
Accounts receivable, net:
Coated glass and other 5,065 5,501
Income earned, not yet billed - 1,560
Inventories, net 8,265 8,152
Prepaid expenses and other 421 675
Income Tax Receivable 711 711
Deferred tax asset, net 112 169
-------- --------
Total current assets 15,040 17,931
-------- --------
Property, Plant and Equipment:
Land 270 270
Building 226 226
Machinery and equipment 15,160 15,211
Office furniture and equipment 304 444
Leasehold improvements 1,340 1,340
Construction-in-progress 281 280
-------- --------
17,581 17,771
Accumulated depreciation (9,362) (9,144)
-------- --------
Total Property Plant and Equipment, Net 8,219 8,627
-------- --------
Investment in Affiliate 3,925 3,637
-------- --------
Total Assets $ 27,184 $ 30,195
======== ========
</TABLE>
3
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
October 2, 1999 July 3, 1999
--------------- ------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities:
Trade accounts payable $ 3,541 $ 3,950
Accrued expenses 1,611 1,712
Current portion of:
Deferred revenue 235 37
Deferred gain 56 56
Long-term debt 161 221
-------- --------
Total current liabilities 5,604 5,976
-------- --------
Non-Current Liabilities:
Long-term debt, net of current portion 4,683 7,180
Deferred revenue, net of current portion 1,242 1,499
Deferred gain, net of current portion 686 700
Deferred tax liability 181 182
-------- --------
Total liabilities 12,396 15,537
-------- --------
Stockholders' Equity:
Common stock, no par value, 10,000,000
shares authorized, 3,493,418 and 3,487,058
shares issued and outstanding, respectively 9,489 9,471
Retained earnings 5,299 5,187
-------- --------
Total stockholders' equity 14,788 14,658
-------- --------
Total liabilities & stockholders' equity $ 27,184 $ 30,195
======== ========
</TABLE>
4
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APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
Three Months Ended
October 2, 1999 October 3, 1998
--------------- ---------------
<S> <C> <C>
Net Sales
Total Net Sales $ 7,388 $ 9,351
Cost of Goods Sold 6,475 8,158
-------- --------
Gross Profit 913 1,193
Operating Expenses:
Selling, General and Administrative 809 1,304
Research and Development 349 260
-------- --------
Income (Loss) from Operations (245) (371)
Other (Expense) Income:
Interest Expense (139) (112)
Other Income (Expense) 180 136
Equity Earnings in Affiliate 449 --
-------- --------
Income (Loss) before income taxes and cumulative
effect of change in accounting principle 245 (347)
Income Tax Benefit (Provision) (83) 130
-------- --------
Income (Loss) before cumulative effect of change
in accounting principle 162 (217)
Cumulative effect of change in accounting principle (50) 0
-------- --------
Net Income (Loss) $ 112 $ (217)
======== ========
Income (Loss) per share before cumulative effect
of change in accounting principle:
Basic $0.05 $(0.06)
===== =======
Diluted $0.05 $(0.06)
===== =======
Cumulative effect of change in accounting
principle net of taxes $0.02 $0.00
===== =====
Net Income (Loss) Per Share:
Basic $0.03 $(0.06)
===== =======
Diluted $0.03 $(0.06)
===== =======
Weighted Average Common Shares Outstanding:
Basic 3,489 3,475
===== =====
Diluted 3,489 3,504
===== =====
</TABLE>
5
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APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
Three Months Ended Three Months Ended
October 2, 1999 October 3, 1998
---------------------- ----------------------
Cash Flows From Operating Activities
<S> <C> <C>
Net income (loss) $ 112 $ (217)
Depreciation and amortization 426 454
Amortization of deferred gain on lease and joint venture (73) (14)
Reduction of joint venture organizational costs 102 --
Undistributed earnings in affiliate (390) --
Other -- 3
Changes in --
Accounts receivable net 1,996 723
Inventories (113) 648
Prepaid expenses and other 254 (93)
Accounts payable and accrued expenses (510) (1,839)
Income taxes payable -- (292)
Deferred income taxes 56 128
----------- -----------
Net cash flows from operating activities 1,860 (499)
=========== ===========
Cash Flows From Investing Activities
Purchases of property, plant & equipment (18) (162)
Costs incurred for transfers from construction in progress -- (946)
Investment in Affiliate -- (506)
Change in notes receivable from employees -- (10)
----------- -----------
Net cash used in investing activities $ (18) $ (1,624)
=========== ===========
Cash Flows from Financing Activities
Proceeds from Long Term Debt 50 4,440
Repayment of Long Term Debt (2,607) (1,943)
Stock issuance on stock purchase plan, and stock options 18 8
----------- -----------
Net cash (used in) provided by financing activities (2,539) 2,505
=========== ===========
Net increase (decrease) in cash (697) 382
Cash and cash equivalents, beginning of period 1,163 81
----------- -----------
Cash and cash equivalents, end of period $ 466 $ 463
=========== ===========
Supplemental cash flow information
Cash paid for interest, net of amounts capitalized $ 148 $ 183
=========== ===========
Cash paid (received) for income taxes net of
amounts refunded $ -- $ 34
=========== ===========
</TABLE>
6
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Company Organization and Operations
Applied Films Corporation, (the "Company"), was originally incorporated in 1992
as a Michigan corporation. In June 1995, the Company reincorporated in Colorado.
The Company's principal line of business is the manufacture and sale of thin
film coated glass for use in flat panel and liquid crystal displays. During
fiscal 1997, the Company began selling its thin film coated glass manufacturing
equipment to flat panel display manufacturers. The Company experiences risks
common to technology companies, including highly competitive and evolving
markets for its products.
The Company was formed in May 1992 as the result of a merger between Applied
Films, Inc. ("AFI") and a wholly owned subsidiary of Donnelly Corporation
("Donnelly"), Donnelly Coated Corporation ("DCC"). As a result of the merger,
Donnelly owned 50% of the outstanding common stock of the Company, with the
remaining 50% owned by the former shareholders of AFI. On November 26, 1997,
Donnelly sold all its shares of Applied Films stock during the Company's initial
public offering. In June of 1998, the Company formed a 50/50 Joint Venture (the
"Joint Venture") in China with Nippon Sheet Glass Co. ("NSG"), to process, sell
and export certain types of thin film coated glass.
(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 for federal income tax purposes. The accounts of the subsidiary have
been consolidated with the accounts of the Company in the accompanying financial
statements. All intercompany accounts and transactions have been eliminated in
the consolidation.
Unaudited Financial Information
The accompanying interim financial information as of October 2, 1999 and for the
three month periods ended October 3, 1998 and October 2, 1999 are unaudited. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) have been included that are necessary to provide a fair statement
of the results of those interim periods presented. The results of operations for
the quarter ended October 2, 1999 are not necessarily indicative of the results
to be expected for the entire year.
Change in Accounting Principle
The Company deferred certain start-up costs related to the Joint Venture in
China. The Company adopted the application of SOP 98-5 in the first quarter of
fiscal 2000 and wrote off those startup costs, the effect of that change is
$50,000 net of tax. This item has been recorded as a change in accounting
principle at the time of adoption. In April 1998, the SEC 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.
Fiscal Year
The Company has adopted a fiscal year ending on the Saturday nearest June 30,
which will result in fiscal years composed of 52 or 53 weeks. Fiscal years 1998
and 1999 include 52 and 53 weeks respectively.
7
<PAGE>
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories at October 2, 1999 and July 3, 1999 consist of the following:
<TABLE>
October 2, 1999 July 3, 1999
--------------- ------------
<S> <C> <C>
Raw materials, net.................................... $ 3,157,000 $ 4,195,000
Work-in-process....................................... 24,000 23,000
Materials for manufacturing systems................... 173,000 192,000
Finished goods........................................ 4,911,000 3,742,000
----------- -----------
$ 8,265,000 $ 8,152,000
=========== ===========
</TABLE>
Thin Film Coated Glass Revenue Recognition
Thin film coated glass revenues are recognized upon shipment to the customer. A
provision for estimated sales returns and allowances is recognized in the period
of the sale.
Thin Film Equipment Sales Revenue Recognition
Revenues relating to the sales of thin film coating equipment are recognized on
the percentage-of completion method, measured by the percentage of the total
costs incurred and applied to date in relation to the estimated total costs to
be incurred for each contract. Management considers costs incurred and applied
to be the best available measure of progress on these contracts. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance. General an administrative costs are charged to expense as
incurred. Changes in performance, contract conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. The Company
typically offers warranty coverage for equipment sales for a period of 12 months
after final acceptance. The Company estimates the anticipated costs to be
incurred during the warranty period and accrues a reserve as a percentage of
revenue as revenue is recognized. These reserves are evaluated periodically
based on actual experience and anticipated activity. Provisions for anticipated
losses on contracts, if any, will be made in the period they become evident.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of
salaries and supplies. The Company incurred approximately $349,000 and $260,000
of research and development costs for the first quarter of fiscal year 2000 and
1999, respectively.
Foreign Currency Transactions
The Company generated approximately 92% and 87% of its revenues in the first
three months of fiscal 2000 and for fiscal year 1999, 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
8
<PAGE>
transactions denominated in Japanese yen, the Company records the sale or
purchase at the spot exchange rate in effect on the date of sale. Receivables
from such sales or payables for such purchases are translated to U.S. dollars
using the end of period spot exchange rate. Transaction gains or losses are
charged or credited to income during the period.
(3) Sales by Geographic Region The breakdown of total sales by geographic region
is as follows:
<TABLE>
Three Months Ended Three Months Ended
October 2, 1999 October 3, 1998
--------------- ---------------
(unaudited)
<S> <C> <C>
Asia (other than Japan).............................. $ 5,297,000 $ 5,930,000
Japan................................................ 1,614,000 2,229,000
United States........................................ 643,000 1,270,000
Europe and Other..................................... 151,000 324,000
-------------- --------------
Gross sales.......................................... 7,705,000 9,753,000
Less: sales returns and allowances................... (317,000) (402,000)
-------------- --------------
Net sales............................................ $ 7,388,000 $ 9,351,000
============== ==============
</TABLE>
(4) Segment Information
The Company manages its business and has segregated its activities into two
business segments, the sale of "Thin film coated Glass" for use primarily in
liquid crystal displays ("LCDs"), and the sales of "Thin Film Coating Equipment"
to Flat Panel Display ("FPD") manufacturers. The Company adopted SFAS No. 131 at
fiscal year end 1999. Certain financial information for each segment is provided
below:
<TABLE>
Three Months Ended Three Months Ended
October 2, 1999 October 3, 1998
--------------- ---------------
<S> <C> <C>
Net sales:
Thin film coated glass $ 7,159 $ 8,192
Thin film coating equipment 229 1,159
Operating (loss) income:
Thin film coated glass` $ 397 $ 70
Thin film coating equipment (641) (441)
Total operating (loss) $ (245) $ (371)
Identifiable assets:
Thin film coated glass $ 6,407 $ 7,857
Thin film coating equipment 37 188
Total identifiable assets $ 6,444 $ 8,045
</TABLE>
9
<PAGE>
(5) Investment in and Transactions with Joint Venture
In June 1998, the Company formed a 50/50 joint venture (the "Joint Venture")
with Nippon Sheet Glass Co. ("NSG") in China to manufacture, process, sell and
export certain types of thin film coated glass. Each party contributed $3.2
million in cash to the Joint Venture. During the third quarter the Company sold
refurbished equipment to the Joint Venture for use in the process of thin film
coating of glass. The sales price of approximately $5.1 million, was payable in
February, June and August 1999. The Company received the first two payments in
February and June and the final payment in early September 1999.
The Joint Venture began operations during the fourth quarter of fiscal 1999. The
Company recorded 50% of income from operations of the Joint Venture after
elimination of the impact of interentity transactions. The functional currency
for the Joint Venture is the applicable local currency. The earnings recorded by
the Company from the Joint Venture are translated at average rates prevailing
during the period.
During the first quarter, the Company purchased coated glass totaling $1,324,000
from the Joint Venture, of which $454,000 remained in inventory at quarter end.
In addition, the Company accrued royalties receivable totaling $ 43,000 for the
quarter ended October 2, 1999.
10
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of the Company's financial condition
and results of operations should be read in conjunction with the Company's
consolidated financial statements and notes thereto included in this report.
This report contains certain forward-looking statements (within the meaning of
the Private Securities Litigation Reform Act of 1995) that involve substantial
risks and uncertainties, including those described below, the effect of changing
worldwide economic conditions, suc as those in Asia, the effect of overall
market conditions, product demand and market acceptance risk, risks associated
with dependencies on suppliers, the impact of competitive products and pricing,
technological and product development risks, and other risk factors. For a
discussion of these and other risks and uncertainties, see the Company's Annual
Report on Form 10-K for the fiscal year ended July 3, 1999, Part I, "Certain
Factors." When used herein, the terms "believe," "anticipate," "intend," "goa "
"expect," and similar expressions may identify forward-looking statements. The
Company's actual results, performance or achievements may differ materially from
those expressed or implied by such forward-looking statements.
OVERVIEW
The majority of the Company's sales are derived from the sale of thin film
coated glass to manufacturers of liquid crystal displays ("LCDs"). Most of the
Company's LCD manufacturing customers are located in Asia. Sales to
international customers represented approximately 92% of the Company's total
gross sales and 92% of thin film coated glass sales in the first three months of
fiscal 2000. The Company expects international sales will continue to represent
a significant portion of its net sales. During fiscal 1997, the Company began
selling thin film coating equipment to flat panel display ("FPD") and other
manufacturers. Sales of thin film coating equipment totaled $4.6 million for
fiscal year 1999, and $229,000 for the first quarter of fiscal 2000.
Sales and related costs of coated glass sales are recognized when products
are shipped to the customer. Historically, sales have varied substantially from
quarter to quarter, and the Company expects such variations to continue. Because
a significant portion of the Company's overhead is fixed, the Company's gross
profit and results of operations may be adversely affected by fluctuations in
sales and prices. The Company is typically able to ship its thin film coated
glass within 30 days of receipt of the order and, therefore, does not
customarily have a significant long-term backlog of coated glass. Historically,
the Company has experienced significant price pressure from time to time in its
thin film coated glass business. The Company expects continued downward pressure
on its selling prices in the future.
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 $2.2 million for the fiscal 1999 first
quarter and $1.3 million for the fiscal 2000 first quarter. The Company does not
currently engage in international currency hedging transactions to mitigate its
foreign exchange
11
<PAGE>
exposure, however, the Company does purchase raw glass from Japan which
partially offsets foreign currency risks on thin film coated glass sales. The
Company's purchases of raw material denominated in yen were approximately $1.6
million in the fiscal 1999 first quarter and $0.9 million for the fiscal 2000
first quarter. As of October 2, 1999, accounts receivable denominated in yen
were approximately $713,000 or approximately 12% of total accounts receivable.
As of October 2, 1999, accounts payable denominated in yen were approximately
$994,000 or 28% of total accounts payable. The Company is generally paid by its
customers for its yen denominated sales within approximately 15 to 45 days of
the date of sale.
Net sales of thin film coating equipment are recognized on the
percentage-of-completion method, measured by the percentage of the total costs
incurred and applied to date in relation to the estimated total costs to be
incurred for each contract. The lead time for the sale of thin film coating
equipment is generally six to twelve months. To date, the Company has priced its
coating equipment in U.S. dollars. Coating equipment backlog at the end of the
first quarter of fiscal 2000 was $358,000 versus $423,000 at fiscal year end
1999 and $449,000 as of the end of the first quarter of fiscal 1999.
In fiscal 1999, the Company experienced a 29% drop in prices for thin film
coated glass as well as a reduction in demand. This situation forced the Company
to realign its cost structure to better fit market conditions. In fiscal 1999,
the Company took a $433,000 one time charge to earnings to cover the cost of
severence and the completion of the move of the Company. The Company continues
to focus on its cost structure to ensure profitable growth going forward.
The Company reduced the borrowings on its line of credit to $4,500,000 as
of October 2, 1999 from $7,000,000 at the end of fiscal 1999. This reduction
allowed the Company to improve its liquidity ratios which positively affected
its borrowing rate. The Company will continue to make increased working capital
and reduction of debt high priorities.
RESULTS OF OPERATIONS
Three Months Ended October 2, 1999 Compared with Three Months Ended October 3,
1998
Net Sales. Net sales decreased 21% to $7.4 million in the first quarter of
fiscal 2000 from $9.4 million in the first quarter of fiscal 1999. The decrease
reflected slightly weaker demand and lower selling prices for thin film coated
glass and a decline in equipment sales. Net sales for thin film coated glass
decreased approximately 13% from the first quarter of fiscal 1999 to the first
quarter of fiscal 2000. Equipment sales decreased approximately 80% from the
first quarter of fiscal 1999 to the first quarter of fiscal 2000.
Gross Profit. Gross profit decreased to $0.9 million in the first quarter
of fiscal 2000 from $1.2 million in the first quarter of fiscal 1999. As a
percentage of net sales, gross profit margins were 12% in the first quarter of
fiscal 2000 versus 13% in the first quarter of fiscal 1999. Gross profit margins
for thin film coated glass for the first quarter of fiscal 2000 were negatively
affected by declining sales volumes. Gross profit margins for coating equipment
for the first quarter of fiscal 2000 were favorably affected by the sale of
spare parts as well as warranty reserves which were reduced by $150,000 due to
better than expected claims experience.
12
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses decreased 38% to $809,000 in the first quarter of fiscal 2000 from $1.3
million in the first quarter of fiscal 1999 due primarily to lower overall
overhead expenses resulting from cost reduction efforts and lower sales
commissions. During the first quarter of 1999, the Company had one-time charges
for severance and facility move costs of $316,000. As a percentage of net sales,
selling, general and administrative costs were 12% for the first quarter of
fiscal 2000 compared to 14% for the first quarter of fiscal 1999.
Research and Development. Research and development expenses rose 34% to
$349,000 in the first quarter of fiscal 2000 from $260,000 in the first quarter
of fiscal 1999. This was due to increased salary and depreciation expenses from
equipment used in process development. As a percentage of net sales, research
and development expenses were 5% in the first quarter of fiscal 2000 and 3% in
the first quarter of fiscal 1999.
Equity Earnings in Affiliate. Equity Earnings in affiliate were $449,000
for the first quarter of fiscal 1999. The Joint Venture was not operational for
the same period in the prior fiscal year.
Interest Expense. Interest expense increased to $139,000 in the first
quarter of fiscal 2000 from $112,000 in the first quarter of fiscal 1999.
Average debt levels were higher during the first quarter of fiscal 2000 compared
to the first quarter of fiscal 1999, due to the Company's $3.2 million
investment in the joint venture that was funded using debt. The balance sheet
reflects a lower debt balance at the close of the first quarter; however, the
reduction in debt took place late in the quarter.
Other Income (Expense). Other income (expense) was approximately $180,000
for the first quarter of fiscal 2000 versus $136,000 during the first quarter of
fiscal 1999 due primarily to a gain on foreign currency and the addition of
royalty income from the Joint Venture to this category.
Income Tax Benefit (Provision). The Company had an income tax expense of
($83,000) in the first quarter of fiscal 2000 compared to a benefit of $130,000
in the first quarter of 1999. The effective tax rate was approximately 34%
during both the first quarter of fiscal 2000 and first quarter of fiscal 1999.
Cumulative effect of change in accounting principle. The Company
experienced a write off of organizational costs associated with its Joint
Venture in China of $50,000 net of taxes, to account for the adoption of SOP
98-5 requiring that start-up and organization costs will be expensed as
incurred.
Liquidity and Capital Resources
The Company has primarily funded its operations with cash generated from
operations, proceeds from an initial public offering of the Company's stock
during fiscal 1998 and with additional debt borrowings. Cash provided by (used
in) operating activities for the first three months of fiscal 2000 was $1.9
million compared to ($499,000) for the corresponding period in fiscal 1999 due
primarily to changes in accounts receivable/payables, accrued expenses, and
depreciation expense, offset partially by net losses incurred during the first
three months of fiscal 2000. In early September 1999, the Company received
approximately $1.6 million as the final payment for the sale of coating
equipment to the Joint Venture. As of October 2, 1999, the Company had cash and
cash equivalents of approximately $466,000 and working capital of $9.6 million.
As of October 2, 1999, accounts receivable were approximately $5.8 million.
13
<PAGE>
The Company has an $11.5 million credit facility with a commercial bank
which expires September 17, 2002. As of October 2, 1999, the Company had
approximately $4.5 million outstanding on its credit facility. Approximately
$7.0 million of this facility was available to the Company on October 2, 1999.
Cash used by investing activities for the first three months of fiscal 2000
was $18,000 compared to $1.6 million for the first three months of fiscal 1999.
Capital expenditures for the three months ended October 2, 1999 were
approximately $18,000, compared to $1.1 million for the three month period ended
October 3, 1998. Capital expenditures for the current fiscal year are expected
to be approximately $0.7 million.
The Company believes that its working capital and capital resource needs
will continue to be met by operations and by additional borrowings under its
credit facility.
Year 2000 Compliance
The Year 2000 issue is the result of computer systems that use two digits rather
than four to define the applicable year, which may prevent such systems from
accurately processing dates ending in the year 2000 and after. This could result
in system failures or in miscalculations causing disruption of operations,
including, but not limited to, an inability to process transactions, to send and
receive electronic data, or to engage in routine business activities and
operations.
The Company has completed a full assessment of all currently used computer
systems as well as production and coating equipment systems and has corrected
those areas that will be affected by the year 2000 issue. The Company did
utilize outside vendors to assist in the upgrade of certain systems and
estimates that the Company is approximately 99% complete with respect to its
systems. The Company has tested each of these systems for year 2000 compliance.
In addition to reviewing its internal systems, the Company continues formal
communications with its significant vendors concerning Year 2000 compliance.
There can be no assurance that the systems of other companies that interact with
the Company will be sufficiently Year 2000 compliant so as to avoid an adverse
impact on the Company's operations, financial condition and results of
operations. The Company does not believe that its products and services involve
any material Year 2000 risks.
The Company does not presently anticipate that the costs to address the Year
2000 issue will have a material adverse effect on the Company's financial
condition, results of operations or liquidity.
Although the Company expects its internal systems to be Year 2000 compliant as
described above, the Company intends to prepare a contingency plan early in the
calendar fourth quarter addressing the steps to be taken if important external
companies such as suppliers are not Year 2000 compliant in a timely manner.
14
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Item 3: Quantitative and Qualitative Disclosures About Market Risk
Market Risk Exposure
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
Approximately $4.5 million of the Company's borrowed debt is subject to
changes in interest rates; however, the Company does not use derivatives to
manage this risk. This exposure is linked primarily to the Eurodollar rate, and
secondarily to the prime rate. The Company believes that a moderate change in
either the Eurodollar rate or the prime rate would not materially affect
operating results or financial condition of the Company.
Foreign Exchange Exposure
The Company is exposed to foreign exchange risk associated with its
accounts receivable and payable denominated in foreign currencies, primarily in
Japanese yen. At October 2, 1999, the Company had approximately $713,000 of its
accounts receivable and $994,000 of its accounts payable denominated in yen. At
July 3, 1999, the Company had approximately $605,000 of its accounts receivable
and $1.1 million of its accounts payable denominated in yen.
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 depends upon the magnitude of the rate
change.
15
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PART II
OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8-K
a. Exhibits
Exhibit No. Description
27 Financial Data Schedule (EDGAR filing only)
16
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
APPLIED FILMS CORPORATION
Date: October 29, 1999 /s/ Thomas T. Edman
Thomas T. Edman
President and Chief Executive Officer
Date: October 29, 1999 /s/ Lawrence D. Firestone
Lawrence D. Firestone
Chief Financial Officer
17
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0
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