UNITED STATES 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 April 1, 2000
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 ___
6,034,823 shares of Common Stock were outstanding as of March 31, 2000.
<PAGE>
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of April 1, 2000
and July 3, 1999................................................... 3
Consolidated Statements of Operations for the Three and
Nine Months Ended April 1, 2000 and April 3, 1999.................. 4
Consolidated Statements of Cash Flows for the Nine
Months Ended April 1, 2000 and April 3, 1999....................... 5
Notes to Consolidated Financial Statements......................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 13
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K................................... 14
2
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(unaudited)
<TABLE>
April 1, 2000 July 3, 1999
------------- ------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents.................................................. $ 51,468 $ 1,163
Accounts receivable, net of allowance of $93 and $73....................... 8,699 5,501
Revenue in excess of billings.............................................. 1,335 1,560
Inventories, net........................................................... 10,032 8,152
Prepaid expenses and other................................................. 378 675
Income tax receivable...................................................... 489 711
Deferred tax asset, net.................................................... 260 169
-------- --------
Total current assets..................................................... 72,661 17,931
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land....................................................................... 270 270
Building................................................................... 226 226
Machinery and equipment.................................................... 15,689 15,491
Office furniture and equipment............................................. 328 444
Leasehold improvements..................................................... 1,441 1,340
-------- --------
Total property plant and equipment....................................... 17,954 17,771
Accumulated depreciation................................................... (10,235) (9,144)
-------- --------
Total property plant and equipment, net.................................. 7,719 8,627
-------- --------
Deferred tax asset......................................................... 140 --
Investment in affiliate.................................................... 4,923 3,637
-------- --------
Total Assets................................................................. $ 85,443 $ 30,195
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable..................................................... $ 8,181 $ 3,950
Accrued expenses........................................................... 1,693 1,656
Billings in excess of revenue.............................................. 1,711 --
Current portion of:
Deferred revenue........................................................ 236 236
Deferred gain........................................................... 56 56
Long-term debt.......................................................... 26 221
-------- --------
Total current liabilities............................................... 11,903 6,119
-------- --------
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion..................................... -- 7,180
Deferred revenue, net of current portion................................... 1,179 1,356
Deferred gain, net of current portion...................................... 659 700
Deferred tax liability..................................................... -- 182
-------- --------
Total liabilities........................................................ 13,741 15,537
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 10,000,000
shares authorized, 6,034,823 and 3,487,058
shares issued and outstanding, respectively.............................. 64,925 9,473
Retained earnings.......................................................... 6,777 5,185
-------- --------
Total stockholders' equity............................................... 71,702 14,658
-------- --------
Total liabilities & stockholders' equity..................................... $ 85,443 $ 30,195
======== ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
(unaudited)
<TABLE>
Three Months Ended Nine Months Ended
April 1, 2000 April 3, 1999 April 1, 2000 April 3, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Sales...................................... $11,759 $ 8,216 $27,455 $23,744
Cost of Goods Sold............................. 10,301 6,622 23,818 20,272
------- ------- ------- -------
Gross Profit................................... 1,458 1,594 3,637 3,472
Operating Expenses:
Selling, General and Administrative.......... 1,084 911 2,821 3,010
Research and Development..................... 360 274 1,024 747
------- ------- ------- -------
Income (Loss) from Operations.................. 14 409 (208) (285)
Other (Expense) Income:
Interest (Expense) Income...................... 32 (167) (200) (419)
Other Income (Expense), Net.................... 125 (27) 312 (26)
Equity Earnings in Affiliate................... 697 -- 1,515 --
------- ------- ------- -------
Income (Loss) before income taxes and
cumulative effect of change in accounting
principle.................................... 868 215 1,419 (730)
Income Tax Benefit (provision)................. (61) (72) 224 344
------- ------- ------- -------
Income (Loss) before cumulative effect of
change in accounting principle................. 807 143 1,643 (386)
Cumulative effect of change in accounting
principle, net of taxes...................... -- -- (50) --
------- ------- ------- -------
Net Income (Loss).............................. $ 807 $ 143 $ 1,593 $ (386)
======= ======= ======= =======
Income (Loss) per share before cumulative
effect of change in accounting principle:
Basic...................................... $ 0.20 $ 0.04 $ 0.44 $ (0.11)
======= ======= ======= ========
Diluted.................................... $ 0.18 $ 0.04 $ 0.41 $ (0.11)
======= ======= ======= ========
Cumulative effect of change in accounting
principle, net of taxes $ 0.00 $ 0.00 $ (0.01) $ 0.00
======= ======= ======= ========
Net Income (Loss) Per Share:
Basic...................................... $ 0.20 $ 0.04 $ 0.43 $ (0.11)
======= ======== ======= ========
Diluted.................................... $ 0.18 $ 0.04 $ 0.40 $ (0.11)
======= ======== ======= ========
Weighted Average Common Shares Outstanding:
Basic...................................... 4,005 3,480 3,662 3,477
======= ======== ======= ========
Diluted.................................... 4,382 3,480 3,967 3,477
======= ======== ======= ========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
Nine Months Ended Nine Months Ended
April 1, 2000 April 3, 1999
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................................................... $ 1,593 $ (386)
Depreciation and amortization.............................................. 1,342 1,292
Amortization of deferred gain on lease and Joint Venture................... (219) (42)
Amortization and write-off of Joint Venture................................
organizational costs....................................................... 102 --
Undistributed earnings in affiliate........................................ (1,463) --
Other...................................................................... (5) 25
Changes in --
Accounts receivable, net................................................ (1,638) 2,088
Revenue in excess of billings........................................... (1,335) --
Inventories............................................................. (1,880) 1,863
Prepaid expenses and other.............................................. 297 (500)
Accounts payable and accrued expenses................................... 4,269 (4,109)
Income taxes receivable (payable)....................................... 222 (327)
Deferred gain on equipment sale to Joint Venture........................ -- 1,449
Deferred income taxes................................................... (413) (174)
Billings in excess of revenue........................................... 1,711 --
------- -------
Net cash flows from operating activities................................... 2,583 1,179
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant & equipment..................................... (357) $ (845)
Costs incurred for completed machinery construction.......................... -- (359)
Change in notes receivable from employees.................................... -- (10)
Investment in Joint Venture.................................................. -- (3,236)
------- -------
Net cash used in investing activities........................................ (357) (4,450)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long Term Debt................................................. 3,443 10,988
Repayment of Long Term Debt.................................................. (10,818) (7,382)
Stock issuance on stock purchase plan, and stock options..................... 137 39
Proceeds from secondary offering............................................. 55,317 0
------- -------
Net cash (used in) provided by financing activities.......................... 48,079 3,645
Net increase in cash......................................................... 50,305 374
Cash and cash equivalents, beginning of period............................... 1,163 81
------- -------
Cash and cash equivalents, end of period..................................... $51,468 $ 455
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest....................................................... $ 351 $ 735
======= =======
Cash received for income taxes net of amounts refunded $ -- $ (100)
======= =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation, (the "Company"), was originally incorporated in
1992 as a Michigan corporation. In June 1995, the Company reincorporated in
Colorado. The Company's principal line of business is the manufacture and sale
of thin film coated glass for use in flat panel and liquid crystal displays.
During fiscal 1997, the Company began selling its thin film 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 of 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., Ltd.
("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.
JOINT VENTURE INCOME TAXES
During fiscal year 2000, the Company determined that the earnings from the
Joint Venture would not be distributed to the Company for the foreseeable
future, therefore a provision for U.S. income taxes need not be provided on the
earnings from the Joint Venture. During fiscal year 1999, the Company accrued
for income taxes to be paid on the earnings in the Joint Venture at a rate of
34%. Based on the fiscal year 2000 determination, the taxes originally provided
during fiscal year 1999, as well as thos provided through the first quarter of
fiscal year 2000 on the earnings from the Joint Venture, were reversed in the
second quarter of fiscal year 2000 resulting in a tax benefit for the second
quarter of fiscal year 2000 of $343,000.
UNAUDITED FINANCIAL INFORMATION
The accompanying interim financial information as of April 1, 2000 and for
the three and nine month periods ended April 3, 1999 and April 1, 2000 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 April 1, 2000 are not necessarily indicative of
the results to be expected for the entire year.
CHANGE IN ACCOUNTING PRINCIPLE
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. The Company
adopted the application of SOP 98-5 in the first quarter of fiscal 2000 and
wrote off certain start-up costs related to the Joint Venture in China. The
effect of that change is $50,000 net of tax. This item was recorded as a change
in accounting principle at the time of adoption.
6
<PAGE>
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has evaluated SAB 101 and believes that there is no significant effect
on the revenue recognition policies currently in place.
FISCAL YEAR
The Company has adopted a fiscal year ending on the Saturday nearest June
30, which will result in fiscal years composed of 52 or 53 weeks. Fiscal years
1999 and 2000 include 53 and 52 weeks respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories at April 1, 2000 and July 3, 1999 consist of the following (000's):
<TABLE>
April 1, 2000 July 3, 1999
------------- ------------
<S> <C> <C>
Raw materials, net.............................................................. $ 4,254 $ 4,195
Work-in-process................................................................. 24 23
Materials for manufacturing systems............................................. 157 192
Finished goods.................................................................. 5,597 3,742
---------- ---------
$ 10,032 $ 8,152
========== =========
</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 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.
The Company typically offers warranty coverage for equipment sales for a period
of 12 months once installation is complete. 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, depreciation, development materials and supplies. The
Company incurred approximately $360,000 and $274,000 of research and development
costs for the third quarter of fiscal years 2000 and 1999, respectively.
FOREIGN CURRENCY TRANSACTIONS
The Company generated approximately 92% and 85% of its revenues in the
first nine months of fiscal year 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 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.
7
<PAGE>
RELATED PARTIES
In addition to the Company's Joint Venture investment described in Note 1,
the Company has engaged in the following related party transaction. During the
nine months ended April 1, 2000, the Company had approximately $178,000 in sales
to a company of which a member of the board of directors is the president.
(3) SALES BY GEOGRAPHIC REGION
The breakdown of total sales by geographic region is as follows (000's):
<TABLE>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
April 1, 2000 April 3, 1999 April 1, 2000 April 3, 1999
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Asia (other than Japan).... $ 5,709 $ 5,253 $ 15,210 $ 14,002
Japan...................... 5,216 1,750 10,253 5,771
United States.............. 884 1,187 2,308 3,898
Europe and Other........... 289 287 571 983
---------- ---------- ----------- -----------
Gross sales................ 12,098 8,477 28,342 24,654
Less: sales returns and
allowances................. (339) (261) (887) (910)
---------- ---------- ----------- -----------
Net sales.................. $ 11,759 $ 8,216 $ 27,455 $ 23,744
========== ========== =========== ===========
</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. Certain financial information for
each segment is provided below (000's):
<TABLE>
Three Months Ended Three Months Ended Nine Months Ended Nine Months Ended
April 1, 2000 April 3, 1999 April 1, 2000 April 3, 1999
------------------ ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Net sales:
Thin film coated glass......... $10,274 $5,727 $25,542 $19,555
Thin film coating equipment.... 1,485 2,489 1,913 4,189
------- ------ ------- -------
Total net sales:.................... 11,759 8,216 27,455 23,744
======= ====== ======= =======
Operating income (loss):
Thin film coated glass......... $ 556 $ (491) $ 1,701 $ (368)
Thin film coating equipment.... (542) 900 (1,909) 83
------- ------ ------- -------
Total operating income (loss)....... $ 14 $ 409 $ (208) $ (285)
======= ====== ======= =======
Identifiable assets:
Thin film coated glass......... $5,785 $7,590 $ 5,785 $ 7,590
Thin film coating equipment.... 1,328 1,501 1,328 1,501
Corporate and other............ 606 85 606 85
------- ------ ------- -------
Total identifiable assets........... $7,719 $9,176 $ 7,719 $ 9,176
======= ====== ======= =======
</TABLE>
(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., Ltd. ("NSG") in China to manufacture,
process, sell and export certain types of thin film coated glass.
The Joint Venture began operations during the fourth quarter of fiscal year
1999. The Company does not consolidate revenues and earnings from the Joint
Venture. The Company records 50% of the net 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.
8
<PAGE>
Fiscal year to date, the Company purchased coated glass totaling $4.6
million from the Joint Venture, of which $1.2 million remained in inventory at
quarter end. In addition, the Company received a royalty payment of
approximately $50,000 from the Joint Venture during the quarter, and the Company
accrued additional royalties receivable totaling $49,000 for the quarter ended
April 1, 2000. In April 2000, the Company extended the Joint Venture debt
guarantee of approximately $1.7 million.
All of our transactions with the Joint Venture are at "arms length" and are
transacted in U.S. dollars.
Summarized income information for the three months ended April 1, 2000 and
for the nine months ended April 1, 2000, is presented below (000's):
<TABLE>
Three Months Nine Months
Ended Ended
April 1, 2000 April 1, 2000
------------- -------------
<S> <C> <C>
STEC
Operating revenues......................................................... $ 5,837 $ 17,300
------------- ------------
Net income (loss).......................................................... $ 1,482 $ 2,883
============= ============
AFCO's equity in earnings:
Equity in earnings of STEC................................................. $ 691 $ 1,392
============= ============
</TABLE>
<TABLE>
Summarized balance sheet information for STEC as of April 1, 2000 and July 3,
1999 is presented below (000's):
April 1, 2000 July 3, 1999
------------- ------------
<S> <C> <C>
Assets:
Current assets............................................................. $ 7,781 $ 5,411
Property, plant and equipment.............................................. 9,738 10,414
------------- -------------
$ 17,519 $ 15,825
============= =============
Capitalization and Liabilities:
Current liabilities........................................................ $ 7,562 $ 7,125
Long-term debt............................................................. 3,138 1,596
Common shareholders' equity................................................ 6,819 7,104
------------- -------------
$ 17,519 $ 15,825
============= =============
</TABLE>
9
<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 and
the consolidated financial statements and notes included in the Company's
Registration Statement on Form S-1 (Registration No. 333-95389). This report
contains certain forward-looking statements (within the meaning of the Private
Securities Litigation Reform Act of 1995) that involve substantial risks and
uncertainties, including those described below, the effect of changing worldwide
economic conditions, such as those in Asia, the effect of overall market
conditions, product demand and market acceptance risk, risks associated with
dependencies on suppliers, the impact of competitive products and pricing,
technological and product development risks, and other risk factors. For a
discussion of these and other risks and uncertainties, see the Company's
Registration Statement on Form S-1 (Registration No. 333-95389) and the section
"Risk Factors" in that Registration Statement. When used herein, the terms
"believe," "anticipate," "intend," "goal," "expect," and similar expressions may
identify forward-looking statements. The Company's actual results, performance
or achievements may differ materially from those expressed or implied by such
forward-looking statements.
Overview
The majority of our sales are derived from the sale of thin film coated
glass to manufacturers of liquid crystal displays ("LCDs"). Most of our LCD
manufacturing customers are located in Asia. . In June of 1998, we formed a
50/50 joint venture in China with Nippon Sheet Glass Co. ("NSG"), to process,
sell and export certain types of thin film coated glass. Sales to international
customers represented approximately 92% of our total gross sales and 92% of thin
film coated glass sales in the first nine months of fiscal 2000. We expect
international sales will continue to represent a significant portion of our net
sales. During fiscal 1997, we began selling thin film coating equipment to flat
panel display ("FPD") and other manufacturers. Revenues for thin film coating
equipment totaled $4.6 million for fiscal year 1999, and $1.9 million for the
first nine months 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 we expect such variations to continue. We are typically
able to ship our thin film coated glass within 30 days of receipt of the order
and, therefore, do not customarily have a significant long-term backlog for
coated glass sales. Historically, we have experienced significant price pressure
from time to time in our thin film coated glass business. We expect continued
downward pressure on our selling prices in the future.
We sell most of our thin film coated glass to foreign customers in U.S.
dollars except for sales to certain Japanese customers which are denominated in
Japanese yen. Gross sales in Japanese yen were approximately $6.7 million for
fiscal 1999, and $9.3 million for the first nine months of fiscal 2000.
Currently, we do not engage in international currency hedging transactions to
mitigate our foreign exchange exposure, however, we purchase raw glass from
certain Japanese suppliers in transactions denominated in yen, which partially
offsets foreign currency risks on thin film coated glass sales. Our purchases of
raw material denominated in Japanese yen were approximately $5.8 million in
fiscal 1999 and $6.9 million for the first nine months of fiscal 2000. As of
April 1, 2000, accounts receivable denominated in Japanese yen were
approximately $3.2 million or approximately 37% of total accounts receivable. As
of April 1, 2000, accounts payable denominated in yen were approximately $3.0
million or 37 of total accounts payable. We are generally paid by customers for
Japanese yen denominated sales within approximately 15 to 45 days following the
date of sale.
Revenues for 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 completion of the thin film
coating equipment is generally nine to twelve months. To date, the Company has
priced its thin film coating equipment in U.S. dollars. Coating equipment
backlog at the end of the third quarter of fiscal 2000 was $9.2 million versus
$423,000 at fiscal year end 1999 and $0 as of the end of the third quarter of
fiscal 1999.
As of April 1, 2000, we had no borrowings on our line of credit, compared
to $7.0 million at the end of fiscal 1999. This reduction allowed us to improve
our liquidity ratios which positively affected the borrowing rate. We will
continue to emphasize increased working capital.
10
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended April 1, 2000 Compared With Three Months Ended April 3,
1999
Net Sales. Net sales increased 43% to $11.8 million in the third quarter of
fiscal 2000 from $8.2 million in the third quarter of fiscal 1999. The increase
reflected stronger demand for coated glass as well as a shift to a higher
concentration of STN glass. Net sales for thin film coated glass increased
approximately 79% for the third quarter of fiscal 2000 compared to the third
quarter of fiscal 1999. Equipment sales decreased approximately 40% for the
third quarter of fiscal 2000 compared to the third quarter of fiscal 1999.
Gross Profit. Gross profit decreased 9% to $1.5 million in the third
quarter of fiscal 2000 from $1.6 million in the third quarter of fiscal 1999. As
a percentage of net sales, gross profit margins were 12% in the third quarter of
fiscal 2000 compared with 19% in the third quarter of fiscal 1999. Gross profit
margins for thin film coated glass for the third quarter of fiscal 2000 were
positively affected by the increase of STN glass sales. Gross profit margins for
coating equipment for the third quarter of fiscal 2000 were favorably affected
by the sale of spare parts as well as revenue from initiating production of the
two ATX-700 Systems. Gross profit margins for the third quarter of 1999 were
positively impacted by the sale of the Venture 5000 System to the Joint Venture.
Selling, General and Administrative. Selling, general and administrative
expenses increased 16% to $1.1 million in the third quarter of fiscal 2000 from
$911,000 in the third quarter of fiscal 1999 due primarily to increased salary
costs, sales commissions, sales expenses and facility expenses. As a percentage
of net sales, selling, general and administrative costs were 9% for the third
quarter of fiscal 2000 compared to 11% for the third quarter of fiscal 1999.
Research and Development. Research and development expenses rose 31% to
$360,000 in the third quarter of fiscal 2000 from $274,000 in the third quarter
of fiscal 1999. This was due to increased salary, development materials and
depreciation expenses from equipment used in process development. As a
percentage of net sales, research and development expenses were 3% in each of
the third quarter of fiscal 2000 and 1999.
Equity Earnings in Affiliate. Equity earnings in affiliate were $697,000
for the third quarter of fiscal 2000. We experienced a $250,000 one-time gain in
equity earnings from the reversal of a marketing assistance fee that was accrued
from inception on sales. Going forward those fees will not accrue and instead
will be included in operating earnings. The Joint Venture was not operating for
the comparable period in fiscal 1999.
Interest Income (Expense). Interest income was $32,000 in the third quarter
of fiscal 2000 from ($167,000) in the third quarter of fiscal 1999. Our bank
debt was reduced to zero in the third quarter of fiscal 2000 compared to $7.4
million that was borrowed against our line of credit in the third quarter of
fiscal 1999, due to the proceeds from the secondary offering.
Other Income (Expense). Other income (expense) was approximately $125,000
for the third quarter of fiscal 2000 versus ($27,000) during the third quarter
of fiscal 1999. The increase in income is due to a gain on foreign currency
exchange and the accrued royalty income from the Joint Venture during the third
quarter of fiscal 2000, compared with a loss on foreign currency exchange for
the same period last year.
Income Tax Benefit (Provision). We had an income tax provision of ($61,000)
in the third quarter of fiscal 2000 compared to a provision of ($72,000) in the
third quarter of 1999. The effective tax rate was 35% of U.S. Earnings during
the third quarter of fiscal 2000, and was 34% during the third quarter of fiscal
1999.
Nine Months Ended April 1, 2000 Compared With Nine Months Ended April 3,
1999
Net Sales. Net sales increased 16% to $27.4 million in the first nine
months of fiscal 2000 from $23.7 million in the first nine months of fiscal
1999. This reflected stronger demand for STN glass. Net sales for thin film
coated glass increased approximately 31% for the first nine months of fiscal
2000 compared to the first nine months of fiscal 1999. Equipment sales decreased
approximately 54% in the first nine months of fiscal 2000 compared to the first
nine months of fiscal 1999. The 1999 fiscal third quarter included the sale of a
refurbished Venture 5000 System to the Joint Venture.
11
<PAGE>
Gross Profit. Gross profit increased 5% to $3.6 million in the first nine
months of fiscal 2000 from $3.4 million in the first nine months of fiscal 1999.
As a percentage of net sales, gross profit margins were 13% in the first nine
months of fiscal 2000 compared with 15% in the first nine months of fiscal 1999.
Gross profit margins for thin film coated glass for the first nine months of
fiscal 2000 were positively affected by the increasing sales of STN coated
glass. Gross profit margins for coating equipment for the first nine months of
fiscal 2000 were favorably affected by the sale of spare parts, warranty
reserves that were reduced by $300,000 due to better than expected warranty
claims experience, and the initiation of production of the two ATX-700 systems
that began in the third quarter.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 6% to $2.8 million in the first nine months of fiscal 2000
from $3.0 million in the first nine months of fiscal 1999 due primarily to lower
overhead expenses resulting from cost reduction efforts. The first nine months
of fiscal 1999 was also affected by one-time charges for severance and facility
moving costs of $316,000. As a percentage of net sales, selling, general and
administrative costs were 10% for the first nine months of fiscal 2000 compared
to 13% for the first nine months of fiscal 1999.
Research and Development. Research and development expenses rose 37% to
$1.0 million for the first nine months of fiscal 2000 from $747,000 in the first
nine months of fiscal 1999. This was due to increased salary, development
materials and depreciation expenses for equipment used in process development.
As a percentage of net sales, research and development expenses were 4% in the
first nine months of fiscal 2000 and 3% in the first nine months of fiscal 1999.
Equity Earnings in Affiliate. Equity earnings in affiliate were $1.5
million for the first nine months of fiscal 2000. The Joint Venture was not
operating for the comparable period in fiscal 1999.
Interest Income (Expense). Interest expense decreased to ($200,000) for the
first nine months of fiscal 2000 from ($419,000) in the first nine months of
fiscal 1999. Average debt levels were lower and eventually reduced to zero
during the first nine months of fiscal 2000 compared to the first nine months of
fiscal 1999, due to the reduction in borrowing upon receipt of the final payment
on the equipment sale to the Joint Venture and the proceeds from the secondary
offering.
Other Income (Expense). Other income was approximately $312,000 for the
first six months of fiscal 2000 due primarily to a gain on foreign currency and
royalty income from the Joint Venture. This compares to a ($26,000) expense in
the prior year as the Joint Venture was not yet producing royalty income.
Income Tax Benefit (Provision). We had an income tax benefit of $224,000 in
the first nine months of fiscal 2000 compared to a benefit of $344,000 in the
first nine months of fiscal 1999. The effective tax rate was 15.7% for the first
nine months of fiscal 2000, the cause of this rate is noted below, and was 47%
during the first nine months of fiscal 1999.
During fiscal year 2000, we determined that the earnings from the Joint
Venture would not be distributed to us for the foreseeable future, therefore a
provision for U.S. income taxes need not be provided on the earnings from the
Joint Venture. During fiscal year 1999, we accrued for income taxes to be paid
on the earnings in the Joint Venture at a rate of 34%. Based on the fiscal year
2000 determination, the taxes originally provided during fiscal year 1999, as
well as those provided through the first quarter of fiscal year 2000 on the
earnings from the Joint Venture, were reversed in the second quarter of fiscal
year 2000, resulting in a tax benefit of $260,000 for the first six months of
fiscal 2000.
Cumulative effect of change in accounting principle. During the first six
months of fiscal 2000 we wrote off organizational costs associated with our
Joint Venture totaling $50,000 net of taxes, to account for the adoption of SOP
98-5, which requires that historically deferred start-up and organization costs
be written off.
12
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations with cash generated from operations, proceeds
from an initial public offering, proceeds from a secondary offering of our
common stock and with borrowings. Cash provided by operating activities for the
first nine months of fiscal 2000 was $2.6 million compared to $1.2 million for
the corresponding period in fiscal 1999 due primarily to net income, changes in
accounts receivable/payables, accrued expenses, billings in excess of revenues
and depreciation expense, offset partially by an increase in inventory and
accounts receivable. In March 2000, we completed the secondary offering of
common stock selling 2.5 million additional shares, and we received net proceeds
from the offering of $55.3 million. In early September 1999, we received
approximately $1.6 million as the final payment for the sale of coating
equipment to the Joint Venture. As of April 1, 2000, we had cash and cash
equivalents of approximately $51.5 million and working capital of $60.8 million.
As of January 1, 2000, accounts receivable were approximately $8.7 million.
Our $11.5 million credit facility with a commercial bank will expire on
September 17, 2002. As of April 1, 2000, there was no outstanding balance on our
credit facility compared with $7.0 million outstanding on July 3, 1999. $11.5
million of this facility was available to us on April 1, 2000, at an interest
rate of 9%.
Cash used by investing activities for the first nine months of fiscal 2000
was $384,000 compared to $4.5 million for the first nine months of fiscal 1999.
Capital expenditures for the nine months ended April 1, 2000, were approximately
$384,000, compared to $1.2 million for the nine month period ended April 3,
1999. We anticipate capital expenditures of approximately $700,000 in the
remainder of fiscal 2000.
We believe that our working capital and capital resource needs will
continue to be met by operations, borrowings under the existing credit facility
and the proceeds from the sale of stock that was completed in the third quarter.
YEAR 2000 COMPLIANCE
The Year 2000 issue has not had a material adverse effect on our financial
condition, results of operations or liquidity. However, the systems of other
companies that interact with us may not be Year 2000 compliant, which may
adversely affect us.
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.
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 April 1, 2000, the Company had approximately $3.2 million of
its accounts receivable and $3.0 million of its accounts payable denominated in
Japanese yen. At July 3, 1999, the Company had approximately $605,000 of its
accounts receivable and $1.1 million of its accounts payable denominated in
Japanese yen. A one percent change in exchange rates would result in an
approximate $2,000 net impact on pre-tax income based on the quarter end foreign
currency denominated accounts receivable and accounts payable balances.
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.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
- ----------- -----------
27 - Financial Data Schedule (EDGAR filing only)
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
APPLIED FILMS CORPORATION
Date: May 1, 2000 /s/ Thomas T. Edman
Thomas T. Edman
President and Chief Executive Officer
Date: May 1, 2000 /s/ Lawrence D. Firestone
Lawrence D. Firestone
Chief Financial Officer
<PAGE>
Exhibit Index
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
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