<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 9, 2000.
REGISTRATION NO. 333-95389
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Amendment No. 2
To
Form S-1
REGISTRATION STATEMENT
UNDER THE
SECURITIES ACT OF 1933
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APPLIED FILMS CORPORATION
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
COLORADO 3674 84-1311581
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or Classification Code Number) Identification No.)
organization)
</TABLE>
9586 I-25 FRONTAGE ROAD
LONGMONT, COLORADO 80504
TEL.: (303) 774-3200
(Address, including zip code and telephone number, including area code, of
registrant's principal executive offices)
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LAWRENCE D. FIRESTONE
9586 I-25 FRONTAGE ROAD
LONGMONT, COLORADO 80504
TEL.: (303) 774-3200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
<TABLE>
<S> <C>
William J. Lawrence III Patricia Peterson
Varnum, Riddering, Schmidt & Howlett LLP Davis, Graham & Stubbs, LLP
333 Bridge St., N.W. 370 Seventeenth Street, Suite 4700
Grand Rapids, MI 49504 Denver, CO 80202
(616) 336-6000 (303) 892-9400
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering [ ]
------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------------------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
------------------------------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH
THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS
NOT AN OFFER TO SELL SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED FEBRUARY 7, 2000
PROSPECTUS
3,066,500 SHARES
APPLIED FILMS CO. LOGO
COMMON STOCK
Of the 3,066,500 shares of our common stock being sold in this offering, we
are offering 2,500,000 shares and certain selling shareholders are offering
566,500 shares. We will not receive any of the proceeds from the sale of shares
by the selling shareholders.
Our common stock is listed on the Nasdaq National Market under the symbol
"AFCO." On February 4, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $15.125 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES SIGNIFICANT RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
------------------------
<TABLE>
<CAPTION>
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PER SHARE TOTAL
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<S> <C> <C>
Public price................................................ $ $
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Underwriting discount....................................... $ $
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Proceeds, before expenses, to Applied Films................. $ $
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Proceeds to selling shareholders............................ $ $
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</TABLE>
The underwriters may also purchase up to an additional 459,975 shares of
common stock from us at the public offering price, less the underwriting
discounts, within 30 days from the date of this prospectus, to cover
over-allotments.
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. IT IS ILLEGAL FOR ANY PERSON TO TELL YOU OTHERWISE.
------------------------
NEEDHAM & COMPANY, INC.
D.A. DAVIDSON & CO.
FIRST SECURITY VAN KASPER
The date of this prospectus is , 2000
<PAGE> 3
[APPLIED FILMS CORPORATION LOGO]
[PHOTO]
A leading provider of thin film coated glass and thin film coating equipment
for the flat panel display industry.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in our common stock. You should read the entire prospectus
carefully, including "Risk Factors" and the financial statements and notes to
those statements appearing in this prospectus, before deciding to purchase our
common stock. Unless otherwise noted, all information in this prospectus assumes
that the underwriters do not exercise the option to purchase additional shares
from us in the offering. References to fiscal 1997, fiscal 1998, fiscal 1999 and
fiscal 2000 refer to the fiscal years ended June 28, 1997, June 27, 1998, July
3, 1999 and July 1, 2000.
APPLIED FILMS CORPORATION
We are a leader in thin film technology for the flat panel display ("FPD")
industry. We use our proprietary in-line coating systems to produce thin film
coated glass for use in a variety of displays incorporated in products ranging
from calculators to wireless communication devices. We also design and
manufacture thin film coating equipment for display manufacturers across the
entire continuum of the FPD industry. These manufacturers use our equipment to
apply thin films to glass for use in FPDs that include liquid crystal displays
("LCDs"), touch panels, active matrix computer displays and high-end plasma
displays for high definition televisions. Our ability to produce both thin film
coated glass and thin film coating equipment enables us to leverage our
expertise and provide effective solutions to the FPD market.
FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, personal digital assistants, calculators, laptop
computers, scientific instruments, televisions, desktop monitors, portable video
games, gasoline pumps, automotive instruments, point-of-sale-terminals and a
number of other electronic devices. According to DisplaySearch, the FPD market
is expected to grow from approximately $11.8 billion in 1998 to approximately
$39.8 billion by 2003, an annual growth rate of 27.5%. Growth in the FPD
industry is being driven by a number of market and technological forces,
including:
- the dramatic growth in wireless and portable communication devices;
- increased consumer demand for displayed information, driven largely by
the accessibility of information and entertainment on the Internet;
- technical characteristics of FPDs that make them ideally suited for
portable display applications, including thin profile, low weight, high
resolution and lower power consumption; and
- the emergence of active matrix LCDs and plasma displays as attractive
and viable alternatives to CRTs.
In response to these trends, the FPD industry is moving toward larger,
higher resolution displays, with a corresponding emphasis on advanced, efficient
and scalable production techniques. With shorter product development cycles and
rapidly evolving commercial opportunities, FPD manufacturers are seeking
relationships with suppliers that can clearly demonstrate technical expertise,
the ability to meet performance expectations and decreased time to market.
We offer FPD customers a fully integrated solution that supports the
customer through all phases of development and product life cycle. We are the
only company that supplies both thin film coated glass and thin film coating
equipment to manufacturers of FPDs. This position provides us competitive
advantages across our business lines, including technical expertise, cost
leadership, and customer training and support.
3
<PAGE> 5
To address the advanced thin film processing needs in the rapidly growing
market for high-end color FPDs, we recently introduced our ATX-700 thin film
coating system. This equipment platform features near vertical sputtering of
glass substrates, a minimized footprint (half of a traditional in-line system),
low particulate levels, and advanced automation capabilities. The modular design
and flexible configuration of the ATX-700 system allows us to target the capital
equipment needs of various high-end FPD market segments, including plasma
display panels ("PDPs") and active matrix LCDs. In December 1999, we announced
our first contract for the sale of an ATX-700 system.
We supply thin film coated glass for low and high resolution black and
white LCDs, such as those found in calculators or cellular telephones. We
produce thin film coated glass from our production facility in Longmont,
Colorado and from our joint venture with Nippon Sheet Glass Co., Ltd. in Suzhou,
China. This arrangement has reduced our costs of materials, labor and shipping,
allowing us to improve service to our customers in southeast Asia, including
shorter lead time on delivery of product. Recently, we have experienced
increased demand for our high resolution coated glass, driven principally by
increased demand for wireless communication devices.
Our objective is to enhance our position as a leading global supplier of
coated glass coating process technology and coating equipment to the entire FPD
industry. Essential elements of our strategy include the following:
- leverage our leadership in providing effective thin film solutions;
- capture opportunities created by growing demand in high-end FPD markets;
- capture opportunities in the coated glass market driven by growth in
wireless communications;
- continue to develop new coating and process technologies for existing
and emerging markets; and
- deliver superior customer service and support.
Our principal facilities and executive offices are located at 9586 I-25
Frontage Road, Longmont, Colorado 80504, and our telephone number is
303-774-3200. All trademarks or other service marks appearing in this prospectus
are trademarks or registered trademarks of the respective companies that utilize
them.
4
<PAGE> 6
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by Applied Films Corporation....... 2,500,000
Common stock offered by selling shareholders............ 566,500
Common stock to be outstanding after the offering....... 6,003,564 shares(1)
Use of proceeds......................................... To fund working capital to facilitate
the production and sale of coating
equipment, expansion of our production
capacity and sales and service
capabilities, debt reduction, research
and development and for other general
corporate purposes.
Nasdaq National Market symbol........................... AFCO
</TABLE>
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(1) Based on the number of common shares outstanding at February 3, 2000.
Excludes (i) outstanding options to purchase up to 492,905 shares of common
stock under outstanding options and (ii) an additional 94,732 shares of
common stock reserved for future issuance under our stock option and stock
purchase plans.
5
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
-------------------------------------------------- ---------------------
JULY 3, JUNE 27, JUNE 28, JUNE 27, JULY 3, JAN. 2, JAN. 1,
1995 1996 1997 1998 1999 1999 2000
------- -------- -------- -------- ------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS
DATA
Net sales......................... $30,990 $21,738 $34,050 $53,041 $31,523 $15,527 $15,696
Gross profit...................... 6,702 2,720 6,698 10,891 4,453 1,877 2,178
Operating income (loss)........... 2,190 (478) 2,953 4,581 (351) (694) (196)
Net income (loss)................. 1,102 (1,078) 1,621 2,857 (224) (529) 785
Diluted net income (loss) per
common share.................... $ .39 $ (.39) $ .58 $ .85 $ (.06) $ (.15) $ .22
Weighted average common shares
outstanding..................... 2,853 2,798 2,814 3,375 3,478 3,476 3,670
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1, 2000
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AS
ACTUAL ADJUSTED(1)
----------- -----------
(UNAUDITED)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA
Working capital........................................... $10,016 $40,526
Total assets.............................................. 30,094 60,604
Debt...................................................... 4,923 --
Total shareholders' equity................................ 15,612 51,045
</TABLE>
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(1) Adjusted to reflect the sale by us of 2,500,000 shares of common stock in
this offering at an assumed public offering price of $15.125 per share,
after deducting underwriting discounts and estimated offering expenses, and
giving effect to the application of the net proceeds.
6
<PAGE> 8
RISK FACTORS
You should carefully consider the following risks before making an
investment decision in our common stock. The risks described below are not the
only ones that we face. Additional risks and uncertainties not presently known
to us or that are currently deemed immaterial may also impair our business
operations. Our business, operating results or financial condition could be
materially adversely affected by, and the trading price of our common stock
could decline due to, any of these risks, and you may lose all or part of your
investment. You should refer to the other information included in this
prospectus, including our financial statements and related notes, before you
decide to purchase shares of our common stock.
This prospectus contains forward-looking statements that involve risks and
uncertainties, such as statements of our plans, objectives, expectations and
intentions. Our actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including the factors described
below and elsewhere in this prospectus. You should not place undue reliance on
these forward-looking statements.
OUR OPERATING RESULTS MAY FLUCTUATE.
We have experienced and may continue to experience significant annual and
quarter-to-quarter fluctuations in our operating results. Our annual and
quarterly operating results have fluctuated and may fluctuate in the future as a
result of a variety of factors including:
- customer demand, which is influenced by a number of factors, including
general economic conditions in the FPD industry, market acceptance of
our products and the products of our customers, changes in the product
mix demanded and offered, and the timing, cancellation or delay of
customer orders and shipments;
- competition, including competitive pressures on prices of our products
and those of our customers (for example, thin film coated glass prices
declined approximately 29% during fiscal 1999, adversely affecting our
net income), the introduction or announcement of new products by
competitors and the addition of new production capacity by competitors;
- the cyclical nature of the capital equipment market;
- manufacturing and operational issues that arise due to, among other
things, fluctuations in availability and cost of raw materials and
production capacity, the transfer of equipment and personnel to
manufacturing facilities at our joint venture in China, and the hiring
and training of additional staff;
- issues related to new product development, including most significantly
our ability to introduce new products and technologies on a timely basis
and the increased research, development and engineering costs and
marketing expenses associated with new product introductions;
- the timing of the recognition of revenues from capital equipment orders
can materially impact our operating results on a quarterly basis due to
the magnitude of each capital equipment order;
- sales and marketing issues, including our concentration, particularly in
the equipment area, on a small number of customers and discounts that
may be granted to certain customers; and
- fluctuations in foreign currency exchange rates.
7
<PAGE> 9
THE COATED GLASS MARKET IS HIGHLY COMPETITIVE AND SUBJECT TO PRICING PRESSURES.
The market to supply thin film coated glass to LCD manufacturers is highly
competitive. Many of our competitors have substantially greater financial,
technical, marketing and sales resources than we have. Prices for much of our
low resolution thin film coated glass products supplied to the LCD market
declined in past years, with a 29% price decrease during fiscal 1999. Recent
pricing stabilization late in fiscal 1999 may not continue, and we 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. Several of our competitors increased production capacity
during 1998 and 1999, which may result in pricing pressures on our products.
Many of our customers are under continuous pressure to reduce prices and we
expect to continue to experience downward pricing pressures on our thin film
coated glass products. We are frequently required to commit to price reductions
before we know that the cost reductions required to maintain profitability can
be achieved. To offset declining sales prices, we must achieve manufacturing
efficiencies and cost reductions and obtain orders for higher volume products.
If we are unable to offset declining sales prices, our gross margins will
decline.
Additional competitors may enter our markets, certain of which may offer
lower prices. For example, our suppliers and customers could vertically
integrate to manufacture the products we produce. Our suppliers of thin glass
are large, well-capitalized companies that could enter the LCD market by coating
the glass they produce and supplying LCD manufacturers directly. Because glass
is by far our largest material cost, a manufacturer of glass desiring to enter
this market could have a significant cost advantage if they chose to vertically
integrate. We are aware of one manufacturer of thin glass, Asahi Glass Company,
that also coats glass for the LCD market. Further, companies that manufacture
thin film glass coating equipment could begin producing thin film coated glass.
In addition, certain LCD manufacturers have vertically integrated to coat glass
for LCDs, and we expect further vertical integration into certain areas of LCD
manufacturing. Any such vertical integration or other competition could lead to
reduced sales and gross margins and could have a material adverse effect on our
business, operating results, financial condition and prospects.
OUR RECENT ENTRY INTO THE THIN FILM COATING EQUIPMENT BUSINESS EXPOSES US TO
RISKS ASSOCIATED WITH NEW BUSINESS VENTURES IN EMERGING MARKETS.
Until fiscal 1997, our business was focused almost exclusively on the sale
of thin film coated glass. Since then, we have devoted substantial resources to
the development and sale of the equipment for thin film coating, and we believe
our future growth depends significantly upon our success in the equipment
market.
We are 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, service and marketing personnel. We
entered the equipment business because of our expectations regarding continuing
rapid growth of the FPD market, but it is difficult to anticipate the direction
of future growth and to design equipment to meet the needs of a changing market.
Changes in technology could render our systems less attractive. If the market
for our thin film coating equipment fails to grow, or grows more slowly or in a
different direction than anticipated, we may be unable to realize the expected
return on our investment in developing the equipment market, and our business,
operating results, financial condition and prospects could be materially
adversely affected. In particular, we are anticipating growth in PDP
applications over the next two years. If commercialization of that technology
develops more slowly than we expect, our future results will be negatively
affected.
8
<PAGE> 10
Sales of our thin film coating equipment 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. Customers may postpone decisions regarding major capital
expenditures, such as our coating equipment, due to the rapid technological
change in the thin film coated glass industry. Customers that purchase thin film
coated glass from us could decide to purchase thin film coating equipment to
bring some or all of their thin film coated glass requirements in-house, thus
adversely affecting our sales of thin film coated glass to such customers.
Equipment sales also may be affected by customers' decisions to begin internal
production of glass coatings rather than relying on an outside supplier such as
ourselves.
The sales cycle of our thin film coating equipment is lengthy due to the
customized nature of the process, the customer's evaluation of its ordered
system and completion of any necessary upgrades, and the expansion or
construction of facilities. We may expend substantial funds and management
effort during the sales cycle, particularly in initial installations of newly
developed, complex products, which could have a negative impact on gross
margins.
WE MUST CONTINUE TO INVEST IN RESEARCH AND DEVELOPMENT TO COMPETE SUCCESSFULLY
IN A RAPIDLY CHANGING MARKETPLACE.
The market for thin film coated glass and coating equipment is
characterized by rapid change. Our future success depends upon our 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 our customers. Technological changes,
process improvements, or operating improvements that could adversely affect us
include:
- development of new technologies that improve manufacturing efficiency of
our competitors;
- changes in product requirements of our customers, as illustrated by the
shift in the FPD market from lower information content applications to
higher information content FPDs such as supertwisted nematic ("STN")
high resolution, active matrix LCDs and plasma displays;
- changes in the way coatings are applied to glass for LCDs;
- development of new materials that improve the performance of thin film
coated glass; and
- improvements in the alternative to the sputtering technology we use in
plasma displays.
We may not have sufficient funds to devote to research and development, or
our research and development efforts may not be successful in developing
products in the time, or with the characteristics, necessary to meet customer
needs. If we do not adapt to such changes or improvements, our competitive
position, operations and prospects would be materially adversely affected.
A SIGNIFICANT PART OF OUR BUSINESS IS DONE IN ASIA AND ANY DOWNTURN IN THE ASIAN
ECONOMY COULD ADVERSELY AFFECT US.
Sales to international customers represented approximately 83%, 78%, 85%
and 91% of our gross sales in fiscal 1997, 1998, 1999 and the first six months
of fiscal 2000, respectively. The principal international markets in which we
and our STEC joint venture operate are China (including Hong Kong), Korea,
Japan, Taiwan and Malaysia. Recent banking and currency problems in Asia have
had and may continue to have an adverse impact on our revenue and operations. We
believe international
9
<PAGE> 11
sales will continue to represent a significant portion of our sales, and that we
will be subject to the normal risks of conducting business internationally. Such
risks include:
- the burdens of complying with a wide variety of foreign laws;
- unexpected changes in regulatory requirements, and the imposition of
government controls;
- political and economic instabilities;
- export license requirements;
- foreign exchange risks;
- protective trade activities, such as 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 our
proprietary rights to the same extent as do the laws of the United States. Other
risks inherent in our international business include greater difficulties in
accounts receivable collection, which we have attempted to mitigate by insuring
our foreign accounts receivable.
WE DEPEND ON THE CONTINUING COOPERATION OF OUR JOINT VENTURE PARTNER IN CHINA.
Our future results will depend significantly on the results of our fifty
percent owned STEC joint venture with Nippon Sheet Glass Co., Ltd. ("NSG") in
China. The results of the joint venture depend on the continuing cooperation of
NSG. The success of the STEC joint venture is subject to a number of risks, over
many of which we have limited control. We rely on our joint venture partner,
NSG, to house the STEC joint venture within its glass fabrication facility and
to supply glass to the joint venture. We also rely on NSG's management personnel
to manage the day-to-day operations of the joint venture, and the managing
director of STEC is employed by the joint venture as well as by NSG. We do not
have employment agreements with any of the management at STEC. STEC's future
success will be dependent in part on our ability to continue to effectively
participate in the joint venture and manage our relationship with NSG. Our
business, operating results, financial condition or growth could be materially
adversely affected if NSG ceases to supply glass to the joint venture, focuses
its management and operational efforts on other activities or terminates the
joint venture.
Our operations and assets in China are subject to significant political,
economic, legal and other uncertainties in China. China currently does not have
a comprehensive and highly developed system of laws, particularly with respect
to foreign investment activities and foreign trade. Enforcement of existing and
future laws and contracts is uncertain, and implementation and interpretation of
laws may be inconsistent. We could also be adversely affected by a number of
factors, including inadequate development or maintenance of infrastructure,
inability to repatriate funds or a deterioration of the general political,
economic or social environment in China.
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY.
The market price of our common stock has been, and we expect will continue
to be, subject to significant fluctuations. Factors affecting our market price
include:
- quarterly variations in our results of operations;
- the announcement of new products or product enhancements by us or our
competitors;
- changes in earnings estimates or buy/sell recommendations by analysts;
10
<PAGE> 12
- the limited number of shares of common stock available for purchase or
sale in the public markets;
- the operating and stock price performance of comparable companies;
- technological innovations by us or our competitors; and
- general market conditions or market conditions specific to the
industries in which we operate.
Recent stock prices for many technology companies have fluctuated in ways
unrelated or disproportionate to the operating performance of the companies.
Such fluctuations may adversely affect the market price of our common stock.
OUR OPERATING RESULTS DEPEND ON MARKET CONDITIONS IN THE FLAT PANEL DISPLAY
INDUSTRY.
Our business depends on the purchasing requirements of manufacturers of
FPDs, which, in turn, depends upon the current and anticipated market demand for
FPDs. We cannot assure you that the FPD market will continue to grow, or that
any growth will have a positive impact on our future business or results of
operations. Unfavorable economic conditions that relate to the consumer
electronics or other industries in which we operate, or that result in
reductions in capital expenditures by our customers, could have a material
adverse effect on the FPD market. Our business, operating results, financial
condition and prospects would be materially adversely affected by any future
downturns in the FPD market.
WE ARE DEPENDENT ON A SMALL NUMBER OF SUPPLIERS OF CERTAIN RAW MATERIALS AND ARE
VULNERABLE TO INCREASED PRICES FOR RAW MATERIALS.
We currently rely on four glass suppliers, Pilkington Micronics, Ltd.,
Glaverbel Societe Anonyme, Central Glass Co., Ltd. and Nippon Sheet Glass Co.,
Ltd. for most of our thin glass. All of these manufacturers are located outside
the United States. We do not have long-term supply contracts with any of these
suppliers, and thus have no contractual assurance of a firm price, over an
extended term, of a long-term commitment to supply our principal raw material.
In periods of short supply, we 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. If the price of glass increases, we may not be
able to pass the price increases along to our customers, especially in periods
of soft demand for our products or excess capacity. Current and potential
competitors that both manufacture and coat glass could be better able to absorb
raw material cost increases due to their vertical integration. We also have a
limited number of qualified suppliers of target materials for our coating
process. If we were to experience significant delays, interruptions, or
shortages in the supply of raw material or material price increases for raw
materials, our business, operating results, financial condition and prospects
could be materially adversely affected.
WE DEPEND ON A SMALL NUMBER OF SIGNIFICANT CUSTOMERS.
Our ten largest customers accounted for approximately 59%, 78%, 62% and 81%
of our gross sales in fiscal 1997, 1998, 1999 and the first six months of fiscal
2000, respectively. In fiscal 1999, sales to NSG and Varitronix represented 15%
and 11% of gross sales, respectively. Each of these customers represented over
10% of gross sales in the first six months of fiscal 2000. The loss of, or a
significant reduction of purchases by, one or more of these customers would
materially adversely affect our business, operating results, financial condition
and prospects. There are a limited number of potential customers in the LCD
market and we expect that sales to a relatively small number of customers will
continue to account for a high percentage of our revenues in the LCD market in
the foreseeable future. We have not entered into long-term agreements with our
thin film coated glass
11
<PAGE> 13
customers and they are not obligated to continue to buy their thin film coated
glass from us. Moreover, in the event that customers purchase thin film coating
equipment from us or from one of our competitors and begin coating 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
equipment from other customers, our business, operating results, financial
condition and prospects could be materially adversely affected.
WE CONDUCT BUSINESS IN FOREIGN CURRENCIES, AND FLUCTUATION IN THE VALUES OF
THOSE CURRENCIES COULD RESULT IN FOREIGN EXCHANGE LOSSES.
In fiscal 1999, approximately 21% and 79% of our total gross sales were
denominated in yen and dollars, respectively. Any strengthening of the dollar in
relation to the currencies of our competitors or customers, or strengthening or
weakening of the yen in relation to other currencies in which our customers or
competitors do business, could adversely affect our competitiveness. Although a
strengthening dollar may result in some offsetting cost reductions on the raw
materials we import, such cost reductions may not be sufficient to enable us to
remain competitive. Moreover, a strengthening of the dollar or other competitive
factors could put pressure on us to denominate a greater portion of our Japanese
sales in yen, thereby increasing our exposure to fluctuations in the dollar-yen
exchange rate. Our joint venture in China transacts much of its business in
Chinese Yuan Renminbi. While this currency has remained fairly constant in
value, any devaluation of the Chinese Yuan Renminbi would adversely affect our
business, operating results, financial conditions and prospects. We cannot
assure you that fluctuations in exchange rates will not adversely affect our
competitive position or result in foreign exchange losses, either of which could
materially adversely affect our business, operating results, financial
conditions and prospects.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT OUR ABILITY TO MANAGE OUR
BUSINESS.
Our future success will depend largely upon the continued services of our
executive officers and certain other key employees. The loss of the services of
one or more of the executive officers or other key employees could materially
adversely affect our business. We do not have employment agreements or key-man
life insurance on any of our executive officers or other key employees. Our
future success will depend in part upon our ability to attract and retain
additional qualified managers, engineers and other employees. Our business,
operating results, financial condition or growth could be materially adversely
affected if we were unable to attract, hire, assimilate, and train these
employees in a timely manner.
OUR RAPID GROWTH MAY MAKE IT MORE DIFFICULT TO MANAGE OUR BUSINESS EFFECTIVELY.
In order to support potential future growth, we will need to improve our
productivity, invest in additional research and development, enhance our
management information systems and add management personnel. We cannot assure
you that we will continue to grow or be effective in managing our future growth,
expanding our facilities and operations or attracting and retaining qualified
personnel. Failure to do these things could have a material adverse effect on
our business, operating results, financial condition, and prospects.
WE MAY NOT BE ABLE TO ADEQUATELY PROTECT OR ENFORCE OUR INTELLECTUAL PROPERTY
RIGHTS.
We rely primarily upon trade secret laws and employee and third-party
nondisclosure agreements to protect our proprietary technology. The steps we
have taken to protect our proprietary rights might not be adequate to prevent
misappropriation of such rights. We are not aware that our products or other
proprietary rights infringe the proprietary rights of third parties. However,
third parties may assert infringement claims against us in the future and such
claims may require us to enter into license agreements or result in protracted
and costly litigation, regardless of their merits. We may not
12
<PAGE> 14
be able to obtain licenses to use third-party technology and such licenses, if
available, may not be available to us on commercially reasonable terms. These
factors may adversely affect our business, operating results, financial
condition or growth.
SOME ANTI-TAKEOVER PROVISIONS MAY AFFECT THE PRICE OF OUR COMMON STOCK.
Our articles of incorporation and bylaws contain various provisions,
including notice provisions, provisions for staggered terms of office of the
Board of Directors, fair price provisions, and provisions authorizing us to
issue preferred stock, that may make it more difficult for a third-party to
acquire, or may discourage acquisition bids for, our company. Such provisions
could limit the price that certain investors would be willing to pay in the
future for shares of the our common stock. In addition, the rights of holders of
common stock may be adversely affected by the rights of holders of any preferred
stock that may be issued in the future that would be senior to the rights of the
holders of the common stock.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS, OUR OPERATIONS COULD BE
SUSPENDED.
We use hazardous chemicals in producing our products. As a result, we are
subject to a variety of local, state and federal governmental regulations
relating to the storage, discharge, handling, emission, generation, manufacture
and disposal of toxic or other hazardous substances used to manufacture our
products, compliance with which is expensive. The failure to comply with current
or future regulations could result in the imposition of substantial fines,
suspension of production, alteration of its manufacturing processes or cessation
of operations.
MANAGEMENT WILL HAVE BROAD DISCRETION OVER THE USE OF PROCEEDS OF THE OFFERING.
Our management will have significant flexibility in applying the net
proceeds of this offering. You will be relying on the judgment of our management
regarding the application of the proceeds.
FUTURE SALES OF OUR COMMON STOCK MAY CAUSE OUR STOCK PRICE TO DECLINE.
All of our outstanding shares, other than shares owned by affiliates, are
freely tradeable without restriction or further registration. Affiliates must
comply with the volume and other requirements of Rule 144, except for the
holding period requirements, in the sale of their shares. Our directors and
executive officers have agreed that for a period of 180 days after the date of
this prospectus, they will not directly or indirectly sell any shares of common
stock without the consent of Needham & Company, Inc. Sales of substantial
amounts of common stock by our stockholders, or even the potential for such
sales, may have a depressive effect on the market price of our common stock and
could impair our ability to raise capital through the sale of our equity
securities.
THE ISSUANCE OF SHARES IN THIS OFFERING WILL CAUSE IMMEDIATE AND SUBSTANTIAL
DILUTION.
The public offering price is expected to be substantially higher than the
net tangible book value per share of the common stock. Investors purchasing
shares of common stock in this offering will, therefore, incur immediate and
substantial dilution in net tangible book value per share. To the extent that
stock options (currently outstanding or subsequently granted) are exercised that
have an exercise price that is lower than the public offering price, there will
be further dilution.
13
<PAGE> 15
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. Typically, these statements contain words
such as "anticipate," "believe," "could," "estimate," "expect," "intend," "may,"
"should," "will" and "would" or similar words. You should read statements that
contain these words carefully because they discuss our future expectations,
contain projections of our future results of operations or of our financial
position or state other "forward-looking" information. There may be events in
the future that we are not able to accurately predict or control. The factors
listed above in the section captioned "Risk Factors," as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in these
risk factors and elsewhere in this prospectus could have a material adverse
effect on our business, results of operations and financial position.
14
<PAGE> 16
USE OF PROCEEDS
The net proceeds to us from the sale of our common stock are estimated to
be approximately $35.4 million, assuming a public offering price of $15.125 per
share, after deducting the estimated underwriting discounts and offering
expenses.
We plan to use the net proceeds of the offering for:
- working capital, primarily to facilitate the production and sale of
coating equipment (approximately $17.0 million);
- expansion of our production capacity and sales and service capabilities
in the United States and China (approximately $9.0 million);
- debt reduction (approximately $5.0 million);
- research and development (approximately $3.0 million); and
- other general corporate purposes, including potential acquisitions.
Our coating equipment systems require substantial working capital due to
the six to ten month fabrication process, the multi-million dollar cost of each
system and the payment terms we receive from our customers. We believe the use
of a portion of the net proceeds for working capital, including the purchase of
components with long lead times, will reduce the lead time necessary to produce
and deliver coating systems.
We may also use a portion of the net proceeds to acquire complementary
products, technologies or businesses when and if any opportunities arise. We
currently have no commitments or agreements and are not engaged in any
negotiations with respect to any such transactions.
While the amounts indicated above reflect what we currently expect to spend
on these matters, opportunities may arise that cause us to change the allocation
of proceeds among the categories described. Prior to using the net proceeds, we
plan to invest the net proceeds in bank deposits or short-term interest-bearing
investment grade securities.
We recently extended our $11.5 million credit facility with a commercial
bank. The credit facility will expire on September 17, 2002. As of February 3,
2000, we had approximately $4.5 million outstanding under our credit facility.
Interest on outstanding balances under the credit facility is payable quarterly
and accrues based on the prime rate and/or the Eurodollar rate, at our election,
at the beginning of each month, plus a factor varying based on our earnings
before interest, taxes, depreciation and amortization. The interest rate at
February 3, 2000 was 7.8%. Amounts repaid under the line of credit may be
reborrowed.
We will not receive any of the proceeds from the shares sold by the selling
shareholders. We have agreed to pay the expenses, other than underwriting
discounts, relating to the sale of these shares.
DIVIDEND POLICY
Our policy is to retain earnings to provide funds for the operating and
expansion of our business. We have not paid any dividends on our stock and do
not intend to pay any cash dividends on our common stock in the foreseeable
future. We currently intend to retain our earnings to finance the future growth
of our business. Future dividends, if any, will be determined by our board of
directors.
15
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization at January 1, 2000, on an
actual basis and as adjusted to give effect to the sale of 2,500,000 shares of
our common stock at an assumed public offering price of $15.125 per share, after
deducting estimated underwriting discounts and offering expenses, and the
application of the net proceeds as set forth in "Use of Proceeds." This table
should be read in conjunction with our consolidated financial statements
included in this prospectus.
<TABLE>
<CAPTION>
JANUARY 1, 2000
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt........................................................ $ 4,923 $ --
Shareholders' equity:
Preferred Stock, no par value, 1,000,000 shares
authorized; no shares outstanding actual or as
adjusted.............................................. -- --
Common Stock, no par value, 10,000,000 shares
authorized, 3,503,564 shares outstanding actual;
6,003,564 shares outstanding as adjusted(1)........... 9,525 44,958
Other Cumulative Comprehensive Income.................. 118 118
Retained earnings...................................... 5,969 5,969
------- -------
Total shareholders' equity........................ 15,612 51,045
------- -------
Total long-term debt and shareholders'
equity...................................... $20,535 $51,045
======= =======
</TABLE>
- -------------------------
(1) Based on the number of shares outstanding as of January 1, 2000. Excludes
(i) 573,000 shares of common stock reserved for issuance under our 1993,
1997 and Outside Director Stock Option Plans, under which options to
purchase 492,905 shares of common stock were outstanding as of January 1,
2000, and (ii) 14,637 shares of common stock reserved for future issuance
under our Employee Stock Purchase Plan.
16
<PAGE> 18
PRICE RANGE OF COMMON STOCK
Our common stock has been traded on the Nasdaq National Market under the
symbol "AFCO" since November 21, 1997. The following table sets forth, for the
quarters indicated, the high and low sale prices per share of our common stock
as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal 1998
Second Quarter (since November 21, 1997)............... $ 9.13 $ 8.25
Third Quarter.......................................... 11.31 7.13
Fourth Quarter......................................... 9.63 4.56
Fiscal 1999
First Quarter.......................................... $ 5.63 $ 2.81
Second Quarter......................................... 3.88 2.63
Third Quarter.......................................... 4.25 1.81
Fourth Quarter......................................... 4.25 2.50
Fiscal 2000
First Quarter.......................................... $ 4.00 $ 3.13
Second Quarter......................................... 14.69 3.00
Third Quarter (through February 4, 2000)............... 18.23 12.88
</TABLE>
On February 4, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $15.125 per share. As of February 3, 2000, there
were approximately 57 shareholders of record of the common stock.
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to our
balance sheet data as of June 27, 1998 and July 3, 1999, and, with respect to
our consolidated statement of operations data for each of the three years in the
period ended July 3, 1999, have been derived from our consolidated financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in its report included elsewhere in this prospectus.
The consolidated balance sheet data as of July 3, 1995, June 27, 1996 and June
28, 1997 and the consolidated statement of operations data for the years ended
July 3, 1995 and June 27, 1996 have been derived from audited consolidated
financial statements that are not included in this prospectus. Balance sheet
data as of January 2, 1999 and January 1, 2000, and statement of operations data
for the six months ended January 2, 1999 and January 1, 2000 have been derived
from our unaudited financial statements included elsewhere in this prospectus.
In our opinion, the unaudited financial information includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the results for the periods presented. Results for the six
months ended January 1, 2000 are not necessarily indicative of the results to be
expected for the full year. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED SIX MONTHS ENDED
-------------------------------------------------- -----------------
JULY 3, JUNE 27, JUNE 28, JUNE 27, JULY 3, JAN. 2, JAN. 1,
1995 1996 1997 1998 1999 1999 2000
------- -------- -------- -------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Net sales................................. $30,990 $21,738 $34,050 $53,041 $31,523 $15,527 $15,696
Cost of goods sold........................ 24,288 19,018 27,352 42,150 27,070 13,650 13,518
------- ------- ------- ------- ------- ------- -------
Gross profit.............................. 6,702 2,720 6,698 10,891 4,453 1,877 2,178
Operating expenses:
Selling, general and administrative... 3,502 2,233 2,996 5,067 3,760 2,099 1,710
Research and development.............. 1,010 965 749 1,243 1,044 472 664
------- ------- ------- ------- ------- ------- -------
Operating income (loss)................... 2,190 (478) 2,953 4,581 (351) (694) (196)
Interest income (expense)................. (816) (780) (822) (496) (572) (251) (240)
Other income (expense), net............... 224 (244) 95 252 59 -- 193
Equity earnings in affiliate.............. -- -- -- -- 382 -- 818
------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes and
cumulative effect of change in
accounting principle.................... 1,598 (1,502) 2,226 4,337 (482) (945) 575
Income tax benefit (provision)............ (496) 424 (605) (1,480) 258 416 260
------- ------- ------- ------- ------- ------- -------
Net income (loss) before cumulative effect
of change in accounting principle....... 1,102 (1,078) 1,621 2,857 (224) (529) 835
------- ------- ------- ------- ------- ------- -------
Cumulative effect of change in accounting
principle............................... -- -- -- -- -- -- 50
Net income (loss)......................... $ 1,102 $(1,078) $ 1,621 $ 2,857 $ (224) $ (529) $ 785
======= ======= ======= ======= ======= ======= =======
Net income (loss) per share
Basic................................. $ 0.39 $ (0.39) $ 0.58 $ 0.90 $ (0.06) $ (0.15) $ 0.23
======= ======= ======= ======= ======= ======= =======
Diluted............................... $ 0.39 $ (0.39) $ 0.58 $ 0.85 $ (0.06) $ (0.15) $ 0.22
======= ======= ======= ======= ======= ======= =======
Weighted average common shares outstanding
Basic................................. 2,853 2,798 2,796 3,181 3,478 3,476 3,490
======= ======= ======= ======= ======= ======= =======
Diluted............................... 2,853 2,798 2,814 3,375 3,478 3,476 3,670
======= ======= ======= ======= ======= ======= =======
CONSOLIDATED BALANCE SHEET DATA
Working capital........................... $ 5,312 $ 6,232 $ 5,534 $10,747 $11,955 $12,455 $10,016
Total assets.............................. 20,128 18,198 21,541 28,697 30,195 28,127 30,094
Long-term debt, net of current portion.... 7,464 8,501 6,448 4,175 7,180 7,319 4,819
Total shareholders' equity................ 6,020 5,058 6,740 14,826 14,658 14,332 15,612
</TABLE>
18
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and notes thereto included in this prospectus.
This Prospectus, including the disclosures below, contains certain
forward-looking statements that involve substantial risks and uncertainties.
When used herein, the terms "believe," "anticipate," "intend," "goal,"
"expects," and similar expressions may identify forward-looking statements. Our
actual results, performance or achievements may differ materially from those
anticipated or implied by such forward-looking statements. Factors that could
cause or contribute to such material differences include those disclosed in the
"Risk Factors" section of this prospectus, which prospective purchasers of the
common stock offered hereby should consider carefully.
OVERVIEW
We were incorporated in Colorado as Applied Films Labs, Inc. on March 2,
1976, with our main offices located in Boulder, Colorado. Since inception, our
business has evolved from applied thin films research and development to the
production and sale of thin film coated glass and coating equipment. During
fiscal years 1998 and 1999, we relocated our Boulder operations to a new
headquarters and manufacturing facility in Longmont, Colorado.
Our net sales to date have been derived primarily from the sale of thin
film coated glass to manufacturers of LCDs. Thin film coated glass sales and
related costs are recognized when products are shipped. Historically, net 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 have a significant long-term
backlog of thin film coated glass orders. Our ten largest customers for thin
film coated glass accounted for, in the aggregate, approximately 59%, 78%, 62%
and 81% of gross sales in fiscal 1997, 1998, 1999 and the first six months of
fiscal 2000, respectively.
During fiscal 1997, we began selling thin film coating equipment to FPD
manufacturers. Net sales of thin film coating systems are recognized primarily
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, we have priced our coating
equipment in U.S. dollars. Net sales of thin film coating equipment in fiscal
years 1997, 1998, 1999 and the first six months of fiscal 2000 were $2.8
million, $13.9 million, $4.6 million and $428,000, respectively. Coating
equipment backlog as of January 1, 2000 was $6.1 million, compared to $2.5
million as of January 2, 1999.
The principal demand for the our thin film coated glass is by LCD
manufacturers, most of which are located in Asia. Total gross sales to
international customers represented approximately 83%, 78%, 85% and 91% of our
gross sales in fiscal 1997, 1998, 1999 and the first six months of fiscal 2000,
respectively. We expect international sales will continue to represent a
significant portion of our net sales. We sell most of our thin film coated glass
to foreign customers in U.S. dollars except for sales to certain Japanese
customers that are in yen. Gross sales denominated in yen were approximately
$4.4 million, $6.0 million, $6.7 million and $4.5 million in fiscal 1997, 1998,
1999 and the first six months of fiscal 2000, respectively.
In fiscal 1999, the FPD industry experienced adverse market conditions in
both the thin film coated glass market and the thin film coating equipment
market. During fiscal 1999, there was a downturn in the Asian economy and many
FPD manufacturers located in Asia delayed capital
19
<PAGE> 21
spending on new coating equipment. In addition, market prices for thin film
coated glass declined approximately 29% during fiscal 1999. During the course of
this downturn we reduced costs in our U.S. operations and expanded our lower
cost operations at our joint venture in China. Recently, the Asian economy has
improved and worldwide demand for FPDs has risen, resulting in increasing demand
for coated glass and thin film coating equipment.
China Joint Venture. In April 1999 we entered into our STEC joint venture
with NSG to produce coated glass in Suzhou China for resale both through our
company and through NSG. The joint venture represents a strategic effort to
establish manufacturing capacity in the Far East and reduce our total
manufacturing costs. Upon formation of the joint venture, each partner sold a
production coater to the joint venture and moved a portion of its manufacturing
capacity to STEC. We anticipate selling one additional production coater to the
joint venture in the fall of 2000. The equipment being sold is a Venture 5000
system that is currently being operated in our Longmont, Colorado facility.
Sales to the joint venture are on arms-length terms.
We will recognize 50% of STEC's net income as "Equity earnings in
affiliate" on our consolidated statement of operations. We buy coated glass
manufactured by the joint venture and resell it to our customers in Asia. The
income from these sales will continue to flow through our consolidated statement
of operations. The joint venture buys glass from NSG at NSG's cost, or at the
lowest price available to us in the market. We expect that the lower cost
structure from reduced labor, materials and transportation costs will result in
higher margins on our sales of glass manufactured by STEC. The joint venture may
also solicit business in China to the extent it has excess capacity that is not
being utilized to produce glass for our customers and those of NSG. Profits on
sales by the joint venture will be part of the joint venture's net income.
The joint venture has determined that it will utilize available cash flows
to repay debt. Accordingly, we do not expect to receive dividends from the joint
venture in the foreseeable future. See "Results of Operations -- Six Months
Ended January 1, 2000 Compared with Six Months Ended January 2, 1999 -- Income
Tax Benefit (Provision)." The only cash flow we will receive from the joint
venture will be a 2% royalty on all joint venture sales, payable quarterly. We
expect that the joint venture will not materially affect revenues, operating
income or cash flows from operating activities, but will increase net income.
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth information derived from the consolidated
statements of operations expressed as a percentage of net sales for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS
FISCAL YEAR ENDED ENDED
------------------------------ -----------------
JUNE 28, JUNE 27, JULY 3, JAN. 2, JAN. 1,
1997 1998 1999 1999 2000
-------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales.................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................... 80.3 79.5 85.9 87.9 86.1
----- ----- ----- ----- -----
Gross profit................................. 19.7 20.5 14.1 12.1 13.9
Operating expenses:
Selling, general and administrative..... 8.8 9.6 11.9 13.5 10.9
Research and development................ 2.2 2.3 3.3 3.0 4.2
----- ----- ----- ----- -----
Operating income (loss)...................... 8.7 8.6 (1.1) (4.4) (1.2)
Interest expense............................. (2.4) (0.9) (1.8) (1.6) (1.5)
Other income (expense)....................... 0.3 0.5 0.2 -- 1.2
Equity earnings in affiliate................. -- -- 1.2 -- 5.2
----- ----- ----- ----- -----
Income (loss) before income taxes............ 6.6 8.2 (1.5) (6.0) 3.7
Income tax benefit (provision)............... (1.8) (2.8) .8 2.7 1.7
----- ----- ----- ----- -----
Net income (loss) before cumulative effect of
change in accounting principle............. 4.8 5.4 (.7) (3.3) 5.4
Cumulative effect of change in accounting
principle.................................. -- -- -- -- .3
----- ----- ----- ----- -----
Net income (loss)............................ 4.8% 5.4% (.7)% (3.3)% 5.1%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JANUARY 1, 2000 COMPARED WITH SIX MONTHS ENDED JANUARY 2, 1999
Net Sales. Net sales increased 1% to $15.7 million in the first six months
of fiscal 2000 from $15.5 million in the first six months of fiscal 1999. This
reflected stronger demand for STN glass offset by a decline in equipment sales
from the same period last year. Net sales for thin film coated glass increased
approximately 10% for the first six months of fiscal 2000 compared to the first
six months of fiscal 1999. Equipment sales decreased approximately 75% in the
first six months of fiscal 2000 compared to the first six months of fiscal 1999.
Gross Profit. Gross profit increased to $2.2 million in the first six
months of fiscal 2000 from $1.9 million in the first six months of fiscal 1999.
As a percentage of net sales, gross profit margins were 14% in the first six
months of fiscal 2000 compared with 12% in the first six months of fiscal 1999.
Gross profit margins for thin film coated glass for the first six months of
fiscal 2000 were positively affected by the increase in sales of STN coated
glass. Gross profit margins for coating equipment for the first six months of
fiscal 2000 were favorably affected by the sale of spare parts, and by the
reduction of warranty reserves by $300,000 due to better than expected warranty
claims experience.
Selling, General and Administrative. Selling, general and administrative
expenses decreased 19% to $1.7 million in the first six months of fiscal 2000
from $2.1 million in the first six months of fiscal 1999 due primarily to lower
overhead expenses resulting from cost reduction efforts and lower sales
commissions. The first six 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
21
<PAGE> 23
administrative costs were 11% for the first six months of fiscal 2000 compared
to 14% for the first six months of fiscal 1999.
Research and Development. Research and development expenses rose 41% to
$664,000 for the first six months of fiscal 2000 from $472,000 in the first six
months of fiscal 1999. This was due to increased salary costs and depreciation
expenses for equipment used in process development. As a percentage of net
sales, research and development expenses were 4% in the first six months of
fiscal 2000 and 3% in the first six months of fiscal 1999.
Equity Earnings in Affiliate. Equity earnings in affiliate were $818,000
for the first six months of fiscal 2000. The joint venture was not operating for
the comparable period in fiscal 1999.
Interest Expense. Interest expense decreased to $240,000 for the first six
months of fiscal 2000 from $251,000 in the first six months of fiscal 1999.
Average debt levels were lower during the first six months of fiscal 2000
compared to the first six months of fiscal 1999, due to the reduction in
borrowing upon receipt of the final payment on the equipment sale to the joint
venture.
Other Income (Expense). Other income was approximately $193,000 for the
first six months of fiscal 2000 due primarily to a gain on foreign currency and
royalty income from the joint venture.
Income Tax Benefit (Provision). We had an income tax benefit of $260,000
in the first six months of fiscal 2000 compared to a benefit of $416,000 in the
first six months of fiscal 1999. The effective tax rate during the second
quarter of fiscal 2000 was a benefit equal to 103% of our income, as further
discussed below, and was a benefit equal to 47% of our loss during the second
quarter of fiscal 1999.
During fiscal 2000, we determined that the earnings from the joint venture
would not be distributed to us for the forseeable future; therefore a provision
for U.S. income taxes need not be provided on the earnings from the joint
venture. During fiscal 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 2000
determination, the taxes originally provided during fiscal 1999, as well as
those provided through the first quarter of fiscal 2000 on the earnings from the
joint venture, were reversed in the second quarter of fiscal 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 the
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.
FISCAL 1999 COMPARED TO FISCAL 1998 AND FISCAL 1997
Net Sales. Net sales were $31.5 million, $53.0 million and $34.1 million
in fiscal 1999, 1998 and 1997, respectively. This represented a decrease of 41%
from fiscal 1998 to fiscal 1999 and a 56% increase from fiscal 1997 to fiscal
1998. Thin film coated glass sales dropped from $39.1 million to $26.9 million
from fiscal 1998 to fiscal 1999 and increased from $31.2 million to $39.1
million from fiscal 1997 to fiscal 1998. The 31% decrease from fiscal 1998 to
fiscal 1999 was caused by a softening in demand from our customers and was
industry-wide, which caused surplus inventory for us and for the industry. This
condition fueled a price war and we experienced a drop in thin film coated glass
prices of 29%. The Asian economic crisis caused a number of customers to
postpone capital equipment spending through much of fiscal 1999. The increase in
thin film coated glass sales from 1997 to 1998 resulted from increasing demand
as well as from new production capacity that we added during fiscal 1998. Sales
of thin film coating equipment decreased from $13.9 million in fiscal 1998 to
$4.6 million in fiscal 1999, and increased from $2.8 million in fiscal 1997 to
$13.9 million in fiscal 1998.
22
<PAGE> 24
Gross Profits. Gross profits were $4.5 million, $10.9 million and $6.7
million in fiscal 1999, 1998 and 1997, respectively. The pricing pressures the
thin film coated glass market experienced in fiscal 1999 caused our gross
margins to decline from fiscal 1998. Gross profits increased in fiscal 1998 from
fiscal 1997 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. As a percentage of net sales, gross profit margins
were 14.1%, 20.5% and 19.7% in fiscal 1999, 1998 and 1997, respectively. Between
fiscal 1997 and fiscal 1998, gross profit margins as a percent of net sales
increased for thin film equipment and declined for thin film coated glass.
Selling, General and Administrative. Selling, general and administrative
expenses ("SG&A"), totaled $3.8 million, $5.1 million and $3.0 million for
fiscal 1999, 1998 and 1997, respectively. As a percentage of sales, selling,
general and administrative costs were 11.9%, 9.6% and 8.8% for fiscal years
1999, 1998 and 1997, respectively. SG&A decreased 26% from $5.1 million in
fiscal 1998 to $3.8 million in fiscal 1999 due to a concentrated cost reduction
effort. Commissions from film coating equipment sales were lower in fiscal 1999
as well due to the reduced sales level in the systems business. SG&A increased
from fiscal 1997 to fiscal 1998 due to higher salaries, additional personnel and
related expenses, sales commissions, including commissions on increased film
coating equipment sales, as well as increased employee profit sharing expenses.
Research and Development. Research and development expenses totaled $1.0
million, $1.2 million and $749,000 for fiscal 1999, 1998 and 1997, respectively.
Research and development expenditures consisted primarily of salaries, outside
contractor expenses and other expenses related to our ongoing product
development efforts. The changes from fiscal 1998 to fiscal 1999 and from fiscal
1997 to fiscal 1998 were primarily attributable to changes in staffing and
material and supplies expense related to advanced development projects. The
advanced development team completed the design, fabrication, process proving and
debugging of our latest ATX-700 technology during fiscal 1999. As a percentage
of net sales, research and development expenses were 3.3%, 2.3% and 2.2% in
fiscal 1999, 1998 and 1997, respectively. In fiscal 1997, research and
development expenses were net of reimbursements for research contracts.
Interest Expense. Interest expense was $572,000, $496,000 and $822,000 for
fiscal 1999, 1998 and 1997, respectively. The increase in long-term borrowings
in fiscal 1999 funded the $3.2 million up front capital requirement of the STEC
joint venture in China. Total bank debt was $7.4 million, $4.3 million and $7.6
million as of fiscal year end 1999, 1998 and 1997, respectively. In addition, we
incurred debt guarantee fees paid to Donnelly Corporation of $103,000 and
$250,000 for fiscal 1998 and 1997, respectively.
Other Income (Expense). Other income (expense) was $59,000, $252,000 and
$95,000 in fiscal 1999, 1998 and 1997, respectively. This fluctuation was due
primarily to fluctuations in foreign exchange gains.
Income Tax Benefit (Provision). We recorded a $258,000 tax benefit during
fiscal 1999. We anticipate receiving a refund of $522,000 from excess fiscal
1999 estimated payments and from applying the tax loss carryback to previous
fiscal years. The income tax provision was $1,480,000 and $605,000 for fiscal
years 1998 and 1997, respectively. The effective tax rate for fiscal 1998 was
34% compared with 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 ten fiscal quarters ended January 1, 2000. In the opinion of
management, such information has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus
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<PAGE> 25
and reflects all necessary adjustments (consisting of only normal recurring
adjustments) necessary for a fair presentation of 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 any trends reflected in such results may not
continue in the future. Our results of operations may be subject to significant
quarterly variations.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999 FISCAL 2000
QUARTER ENDED QUARTER ENDED QUARTER ENDED
------------------------------------- --------------------------------- ---------------
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JULY SEP. JAN.
1997 1997 1998 1998 1998 1998 1999 1999 1999 2000
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales........................... $11,251 $13,173 $15,312 $13,305 $9,351 $6,176 $8,216 $7,779 $7,388 $8,308
Cost of goods sold.................. 8,801 10,588 12,355 10,406 8,158 5,493 6,622 6,798 6,475 7,042
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Gross profit........................ 2,450 2,585 2,957 2,899 1,193 683 1,594 981 913 1,266
Operating expenses:
Selling, general and
administrative................ 986 1,109 1,336 1,636 1,304 794 911 750 809 902
Research and development........ 330 287 324 302 260 212 274 297 349 315
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Operating income (loss)............. 1,134 1,189 1,297 961 (371) (323) 409 (66) (245) 49
Interest expense.................... (171) (87) (103) (135) (112) (140) (167) (147) (139) (101)
Other income (expense).............. 24 29 86 113 136 (135) (27) 78 180 14
Equity earnings in affiliate........ -- -- -- -- -- -- -- 382 449 369
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Income (loss) before income taxes... 987 1,131 1,280 939 (347) (598) 215 247 245 331
Income tax benefit (provision)...... (328) (385) (435) (332) 130 286 (72) (86) (83) 343
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Net income (loss) before cumulative
effect of change in accounting
principle......................... 659 746 845 607 (217) (312) 143 161 162 674
Cumulative effect of change in
accounting principle.............. -- -- -- -- -- -- -- -- 50 --
------- ------- ------- ------- ------ ------ ------ ------ ------ ------
Net income (loss)................... $ 659 $ 746 $ 845 $ 607 $ (217) $ (312) $ 143 $ 161 $ 112 $ 674
======= ======= ======= ======= ====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the above unaudited information as a
percentage of total net sales.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1999 FISCAL 2000
QUARTER ENDED QUARTER ENDED QUARTER ENDED
-------------------------------- -------------------------------- --------------
SEPT. DEC. MAR. JUNE SEPT. DEC. MAR. JULY SEP. JAN.
1997 1997 1998 1998 1998 1998 1999 1999 1999 2000
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales................................ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold....................... 78.2 80.4 80.7 78.2 87.2 88.9 80.6 87.4 87.6 84.8
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Gross profit............................. 21.8 19.6 19.3 21.8 12.8 11.1 19.4 12.6 12.4 15.2
Operating Expenses:
Selling, general and administrative.... 8.8 8.4 8.7 12.3 13.9 12.9 11.1 9.6 11.0 10.9
Research and development................. 2.9 2.2 2.1 2.3 2.8 3.4 3.3 3.8 4.7 3.8
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Operating income (loss).................. 10.1 9.0 8.5 7.2 (3.9) (5.2) 5.0 (.8) (3.3) 0.5
Interest expense......................... (1.5) (0.7) (0.7) (1.0) (1.2) (2.3) (2.0) (1.9) (1.9) (1.2)
Other income (expense)................... 0.2 0.3 0.6 0.9 1.5 (2.2) (0.3) 1.0 2.4 0.2
Equity earnings in affiliate............. -- -- -- -- -- -- -- 4.9 6.0 4.4
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Income (loss) before income taxes........ 8.8 8.6 8.4 7.1 (3.6) (9.7) 2.6 3.2 3.2 3.9
Income tax benefit (provision)........... (2.9) (2.9) (2.9) (2.5) 1.4 4.6 (0.9) (1.1) (1.1) 4.1
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss) before cumulative
effect of change in accounting
principle.............................. 5.9 5.7 5.5 4.6 (2.2) (5.1) 1.7 2.1 2.1 8.0
Cumulative effect of change in accounting
principle.............................. -- -- -- -- -- -- -- -- .7 --
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Net income (loss)........................ 5.9% 5.7% 5.5% 4.6% (2.2)% (5.1)% 1.7% 2.1% 1.4% 8.0%
===== ===== ===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
The variation in quarterly sales during fiscal 1999 and fiscal 1998 was due
to reduced demand from customers for thin film coated glass and the resulting
excess inventories of thin film coated glass as well as a reduction in capital
spending and equipment purchases in the thin film coated glass industry. Net
sales of thin film coated glass for fiscal 1999 totaled $26.9 million compared
with $39.1 million during fiscal 1998. Sales and related costs of thin film
coated glass products are recognized when products are shipped. Sales of thin
film coating equipment totaled $4.6 million in fiscal 1999 compared with
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<PAGE> 26
$13.9 million in fiscal 1998. During the first quarter of fiscal 1997, we began
recognizing revenue from the sale of thin film coating equipment. We utilize the
percentage of completion accounting method for recognizing sales of equipment.
See "Notes to Consolidated Financial Statements -- Note 2: Significant
Accounting Policies -- Equipment Sales Revenue Recognition."
For fiscal 1999, quarterly sales of thin film coating equipment were $1.2
million for the first fiscal quarter, $0.5 million during the second fiscal
quarter, $2.5 million during the third fiscal quarter and $0.4 million during
the fourth fiscal quarter. In comparison, sales of thin film coating equipment
for fiscal 1998 totaled $2.1 million in the first fiscal quarter, $3.3 million
in the second fiscal quarter, $5.1 million in the third fiscal quarter and $3.4
million in the fourth fiscal quarter.
Total gross profits decreased quarter over quarter during fiscal 1999
compared to fiscal 1998. As a percentage of sales, gross profits decreased in
the first and second quarters of fiscal 1999 versus the first and second
quarters of fiscal 1998. Gross profits as a percentage of sales increased in the
third quarter and decreased again in the fourth quarter of fiscal 1999 versus
the third and fourth quarters of fiscal 1998. As a percent of sales, gross
profits declined 31% to 14.1% in fiscal 1999 from 20.5% in fiscal 1998. This
drop corresponds to the 29% overall drop in selling prices for the thin film
coated glass industry in fiscal 1999 as well as the reduced revenues in the thin
film coating equipment business.
Selling, general and administrative expenses decreased 26% during the
quarters of fiscal 1999 due to a concentrated cost reduction effort that
included controls on overhead spending during the year as well as reduced
commissions for thin film coating equipment sales. Included in the SG&A expenses
during fiscal 1999 are one time charges totaling $433,000 for the completion of
the relocation of our facilities to Longmont, Colorado and severance charges.
Interest expense was higher during fiscal 1999 than in fiscal 1998 due
primarily to increased debt levels in fiscal 1999. Other income increased for
fiscal 1998 due primarily to higher foreign exchange gains.
Equity earnings in affiliate was a new addition to our results of
operations in fiscal 1999. The STEC joint venture was funded in January 1999,
began production in April 1999, and closed its first quarter of operations as of
July 3, 1999 profitably, contributing $382,000 to our net income.
Because a significant portion of our overhead is fixed, our quarterly
results of operations may be materially affected if sales of thin film coated
glass or thin film coating equipment decline for any reason.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations with cash generated from operations, proceeds
from an initial public offering of our common stock, and with borrowings. Cash
provided by operating activities for fiscal 1999 was $3.9 million compared to
$208,000 for the corresponding period in fiscal 1998 due primarily to the
reduction in inventory and proceeds from sale to the joint venture. In 1999, we
borrowed $3.2 million under our line of credit to fund the initial capital
requirements of our STEC joint venture. As of January 1, 2000, cash and cash
equivalents were approximately $1.4 million and working capital was $10.0
million. As of January 1, 2000, accounts receivable were approximately $5.6
million.
Our $11.5 million credit facility with a commercial bank will expire on
September 17, 2002. As of January 1, 2000, approximately $4.6 million was
outstanding on our credit facility. The interest rate under the credit facility
was 8.5% at January 1, 2000. The credit facility generally restricts our ability
to make capital expenditures, incur additional indebtedness, enter into capital
leases or guarantee such obligations. To remain in compliance with the credit
agreement, we must also
25
<PAGE> 27
maintain certain financial ratios. At January 1, 2000 we were in compliance with
all of the financial covenants in our credit facility.
Capital expenditures were $53,000, $2.9 million and $5.4 million for the
six months ended January 1, 2000, fiscal 1999 and fiscal 1998, respectively. We
anticipate capital expenditures of approximately $1.0 million in the remainder
of fiscal 2000, consisting primarily of expenses related to the completion of
the new ATX-700 coating system and other thin film coating test equipment and
support equipment. The majority of capital spending in fiscal 1999 was for the
development and construction of the new ATX-700 platform which was built and is
located in our Longmont, Colorado facility.
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 of this offering.
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.
RECENT FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT
Several new accounting standards have been issued in fiscal 1997 and 1998
that have impacted us in fiscal 1999 and will impact us going forward. We
believe these accounting standards will not have a material impact on our
operating results when implemented.
MARKET RISK EXPOSURE
Market risk represents the risk of loss that may impact our financial
position, results of operations, or cash flows due to adverse changes in
financial market prices. We are exposed to market risk through interest rates.
This exposure is directly related to our normal funding and investing
activities.
Approximately $4.6 million of our borrowed debt is subject to changes in
interest rates as of January 1, 2000; however, we do not use derivatives to
manage this risk. This exposure is linked primarily to the Eurodollar rate, and
secondarily to the prime rate. We have historically locked in Eurodollar rates
on 30 to 60 day intervals, and have not experienced major fluctuations in rates.
A one percent change in interest rates would result in an approximate $46,000
annual impact on pre-tax income based on the quarters and borrowing level of
debt subject to interest fluctuations.
FOREIGN EXCHANGE EXPOSURE
We are exposed to foreign exchange risk associated with our accounts
receivable and payable denominated in foreign currencies, primarily in Japanese
yen. At January 1, 2000, we had approximately $1.7 million of accounts
receivable and $2.5 million of accounts payable denominated in yen compared with
January 2, 1999, when we had approximately $600,000 of accounts receivable and
$1.4 million of our accounts payable denominated in yen. A one percent change in
exchange rates would result in an approximate $7,500 net impact on pre-tax
income based on the quarter end foreign currency denominated accounts receivable
and accounts payable balances. Our customers typically pay us for our yen
denominated sales within approximately 15 to 45 days of the date of sale. We
occasionally offer cash discounts for early payment and pre-payment.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect our operating results or financial
condition. The potential impact is likely greater the greater the magnitude of
the rate change. See also "Note 11 to Consolidated Financial Statements -- Fair
Value of Financial Instruments."
26
<PAGE> 28
BUSINESS
We are a leader in thin film technology for the flat panel display ("FPD")
industry. We use our proprietary in-line coating systems to produce thin film
coated glass for use in a variety of displays incorporated in products ranging
from calculators to wireless communication devices. We also design and
manufacture thin film coating equipment for display manufacturers across the
entire continuum of the FPD industry. These manufacturers use our equipment to
apply thin films to glass for use in FPDs, including LCDs, touch panels, active
matrix computer displays and high end plasma displays for high definition
televisions. Our ability to produce both thin film coated glass and thin film
coating equipment enables us to leverage our expertise and provide effective
solutions to the FPD market.
INDUSTRY BACKGROUND
FPDs are found in a wide variety of consumer and industrial products,
including cellular telephones, personal digital assistants, calculators, laptop
computers, pagers, scientific instruments, televisions, portable video games,
gasoline pumps, automotive instruments, point-of-sale terminals and a number of
other electronic devices. According to DisplaySearch, the market for FPDs used
in mobile phones is expected to grow from approximately $569 million in 1998 to
approximately $4.63 billion in 2003, a compound annual growth rate of 52.1%.
Additionally, the emerging market for FPDs used in high definition televisions
is expected to grow from approximately $71 million in 1998 to $3.1 billion by
2003, an annual growth rate of 113.3%, according to DisplaySearch.
According to DisplaySearch, the FPD market is expected to grow from
approximately $11.8 billion in 1998 to approximately $39.8 billion by 2003, an
annual growth rate of 27.5%. Growth in the FPD industry is being driven by a
number of market and technological forces, including:
- the strong growth in wireless and portable communication devices;
- increased consumer demand for displayed information, driven largely by
the accessibility of information and entertainment on the Internet;
- technical characteristics of FPDs that make them ideally suited for
portable display applications, including thin profile, low weight, high
resolution and lower power consumption; and
- the emergence of active matrix LCDs and plasma displays as attractive
and viable alternatives to CRTs.
We address two distinct markets within the FPD industry: the market for
thin film coated glass and the market for thin film coating equipment. The
market for our thin film coated glass is primarily comprised of manufacturers of
products using black and white displays, such as those used in cellular
telephones, calculators, or electronic games. These manufacturers typically
purchase thin film coated glass from specialized suppliers such as ourselves.
The market for our thin film coating equipment is primarily made up of
manufacturers of products using high information content, color displays, such
as high resolution LCDs and PDPs used in computer monitors and high definition
televisions. The processes used to produce these displays involve intermediate
process steps more suitably performed in-house by the display manufacturers.
Consequently, these manufacturers have a need for thin film coating equipment to
internally apply thin film coatings in their own display fabrication facilities.
To a lesser extent, the market for thin film coating equipment also includes
manufacturers of lower information content displays that choose to vertically
integrate and produce thin film coated glass internally.
27
<PAGE> 29
The following chart identifies the core technologies used in FPDs and
various applications for each type of display:
[GRAPH] DISPLAY TECHNOLOGY
There are a number of trends that are converging in the FPD industry in
response to the evolving needs of display manufacturers driven by consumer
demand. Among them are the following:
- Larger size. The FPD industry is moving toward larger, thinner displays,
driving the need for high performance coating equipment that can
accommodate larger panel sizes.
- Higher resolution. An increasing share of the FPD market is moving to
higher resolution displays, thus driving the need for more advanced thin
film technologies.
- Improved production efficiencies. FPD manufacturers are continuously
seeking opportunities to improve operating efficiencies and reduce
production costs. As a result, attention is increasingly focused on
optimizing equipment uptime, maximizing throughput, increasing automation
and improving yields.
- Flexibility. FPD manufacturers seek modular solutions to their coating
equipment needs allowing them to scale production to respond to market
demand.
With shorter product development cycles and rapidly evolving technologies,
manufacturers are seeking relationships with suppliers that can clearly
demonstrate technical expertise, the ability to meet performance expectations
and decrease time to market.
APPLIED FILMS SOLUTION
We offer FPD customers a fully integrated solution that supports the
customer through all phases of development and product life cycle. We are the
only company that supplies both thin film coated glass for low resolution
displays and also the coating equipment for manufacturers of both low and high
resolution displays. Our ability to supply both coated glass and coating process
systems enables us to supply and support a broad range of FPD technologies. Our
increasing emphasis on coating process systems and the introduction of the
ATX-700 advanced coating platform positions us to take advantage of anticipated
growth in the markets for high resolution LCD and plasma displays.
Thin Film Coating Equipment. To address the evolving needs of FPD
manufacturers and leverage our expertise in process technology, we recently
developed and introduced the ATX-700. The
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<PAGE> 30
ATX-700 is a modular and scalable advanced thin film coating system that answers
the needs of the PDP and active matrix markets for small, flexible systems that
minimize particulate generation and can easily be adapted to automation.
The advanced ATX-700 platform, coupled with our process technology and
extensive experience in operating our own coating equipment, provides us with
significant competitive advantages in selling our coating equipment. By
continually refining our own systems in a commercial operating environment, we
have achieved significant processing efficiencies and quality improvements. Our
operational experience enables us to better understand and respond to customer
specific needs in the design and construction of the customer's system. We are
also able to provide customers useful production, training and performance data
from our in-house production systems as they look to further commercialize their
own processes. We are currently providing process qualification samples to
several leading FPD manufacturers. In December 1999, we announced our first
contract for the sale of an ATX-700 system. We are actively soliciting and
negotiating additional system orders.
We believe our proprietary technology and know-how enables us to
effectively address the advanced technical requirements of FPD manufacturers.
For example, we developed and applied for patent protection for a process which
materially increases the reactive sputtering speed of magnesium oxide ("MgO").
We believe this process may represent a significant competitive advantage in the
emerging market for coating equipment for plasma displays. In addition, we have
designed our advanced platforms to provide technical, processing, and
operational advantages to our customers. We believe our technological expertise
will be of increasing importance to our equipment business as the technical
requirements of FPDs continue to evolve.
Thin Film Coated Glass. We are the leading worldwide supplier of thin film
coated glass for low resolution black and white LCDs and we have a smaller, but
growing share of the market for thin film coated glass for high resolution black
and white LCDs. Our design, construction and operation of our own coating
equipment to supply these markets gives us a significant cost advantage over our
competitors, most of which must purchase equipment from third parties. In
addition, our hands-on operating experience provides us competitive advantages,
including:
- the ability to make continuous process and system improvements resulting
in higher throughput, better yields, greater equipment uptime and more
efficient target utilization;
- our expertise in substrates, coating materials and glass preparation
under cleanroom conditions; and
- the development of reliable, cost effective conveyance systems enabling
movement of the glass at varied speeds in a controlled fashion.
We meet our customers' needs by supplying glass from our plant in Longmont,
Colorado and increasingly from our joint venture in Suzhou, China. This joint
venture is strategically positioned in southeast Asia in close proximity to our
customer base, enabling just-in-time delivery, minimizing working capital
requirements, and reducing raw glass, direct labor and transportation costs.
STRATEGY
Our objective is to enhance our position as a leading global supplier of
coated glass and coating process technology and equipment to the entire FPD
industry. Essential elements of our strategy include the following:
Leverage our Leadership in Providing Effective Thin Films Solutions. We
leverage our thin film technology and process capabilities to address the
evolving requirements for more sophisticated, technologically advanced FPDs. The
FPD industry includes a broad range of technologies used in a wide variety of
products. We supply coated glass and coating process systems, enabling our
customers
29
<PAGE> 31
to produce a full range of FPDs. We believe our technological capabilities, our
history of designing, developing and improving our own thin film manufacturing
systems, and our extensive operational experience provide us with competitive
advantages in selling thin film coating equipment and coated glass to FPD
manufacturers.
Capture Opportunities Created by Growing Demand in High-End FPD
Markets. As consumers continue to demand more sophisticated displays, FPD
manufacturers are focusing on and increasing capacity to produce high resolution
displays. The recovery of the Asian economy is also creating increased demand
for coating systems as Asian manufacturers build production capacity to satisfy
demand. To address this demand, we have developed the ATX-700, a modular and
scalable advanced thin film coating system. The ATX-700 provides a solution to
the automation, increasing display size and low-particulate requirements of FPD
manufacturers. We provide a complete solution to our customers' needs by
offering all necessary stages of the coating process, from the first step of
glass cleaning through the final stage of inspection, packaging and shipment.
The ATX-700 platform can be configured to address a variety of manufacturing
requirements through the entire FPD continuum, including advanced, high
resolution active matrix and plasma displays.
Capture Opportunities in the Coated Glass Market Driven by Growth in
Wireless Communications. The proliferation of wireless communication devices
such as cellular telephones and PDAs is creating increased demand for thin film
coated glass used in these devices. As the leading supplier of thin film coated
glass, we are well positioned to take advantage of this opportunity. We are
aggressively pursuing the opportunity by seeking to be a low cost producer, by
continuing to upgrade our own coating systems and by achieving technology-based
manufacturing efficiencies. In particular, our joint venture in China, which is
strategically located near several major manufacturers of displays for wireless
communication devices, allows us to most effectively service these customers. We
also seek continued growth in other areas of our thin film coated glass business
by leveraging our long-standing relationships with many of the world's key FPD
manufacturers.
Continue to Develop New Coating and Process Technologies for Existing and
Emerging Markets. We are using our thin films expertise to address the evolving
needs of the FPD industry. For example, we pioneered the commercialization of
several advanced process technologies including the application of MgO, indium
tin oxide ("ITO") and chrome copper chrome ("CrCuCr") on glass. In addition, we
recently developed coatings for the touch screen market and initiated sample
testing of thin films for use in organic LED ("OLEDs"). We intend to continue to
develop new coating and process technologies to meet the evolving needs of our
customers.
Deliver Superior Service and Support. We meet our customers' FPD needs by
providing in-house and on-site training, ongoing customer service, and support
through all phases of development and production. Our expertise and experience
as a supplier of thin film coated glass is a competitive advantage that enables
us to better assist customers in installing, testing and operating the coating
equipment we provide. Our fully operational commercial coating lines enable us
to demonstrate equipment and train customers in an actual production environment
at our facilities. This hands-on training and support, combined with our modular
design, benefits our customers by reducing start-up times, maximizing equipment
uptime and improving operational efficiencies.
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<PAGE> 32
PRODUCTS
Our thin film coated glass and processing systems are used in a broad
spectrum of FPD displays. We design and manufacture thin film coating equipment
for FPD manufacturers and for our own in-house production of coated glass. We
also supply thin film coated glass primarily for LCDs used in wireless
communication devices and other electronic devices.
The following table illustrates the FPD markets we serve:
<TABLE>
<CAPTION>
MARKET
-------------------------------------------------------------------------
BLACK AND WHITE TOUCH COLOR ACTIVE
TN STN PANEL STN MATRIX PDP
-------- --------------- ------------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
Thin Film SiO(2) SiO(2) ITO Optical (1) (1) (1)
Coated Glass ITO Thick ITO Coatings
Coating Process Systems Venture Venture 5000 or ATX-700 ATX-700 ATX-700 ATX-700
5000 ATX-700
</TABLE>
- -------------------------
(1) For the color STN, active matrix and PDP markets where thin films are used
as intermediate layers, we supply process qualification samples of coated
glass for the development and prototyping needs of actual and prospective
equipment customers.
THIN FILM COATING EQUIPMENT
Our coating equipment product line includes two platforms:
The ATX-700 Series. The recently introduced ATX-700 is an advanced thin
film coating system that provides a solution to the increasing display size and
low-particulate requirements of PDPs and other FPDs. The ATX-700 features near
vertical sputtering of glass substrates, a minimized footprint (half of a
traditional in-line system), lower particulate levels, and reduced manual labor
requirements because of robotic handling. We also offer the ATX-700P, a pilot
version of the ATX-700 for small volume production. The selling price of the
ATX-700 typically ranges from $4 to $7 million, depending on system
configuration. The selling price of the ATX-700P typically ranges from $1 to $2
million. In December 1999, we announced our first contract for the sale of an
ATX-700 system.
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<PAGE> 33
[ATX-700 DIAGRAM]
The ATX-700 is modular and can be configured to meet multiple thin film
coating requirements for the high-end FPD market, including plasma displays and
active matrix LCDs. The ATX-700 is particularly well suited for the high growth
plasma display market where we can offer our unique patent-pending magnesium
oxide sputtering process. We believe this process allows MgO to be applied with
greater uniformity than the current vacuum evaporation method. We believe the
process also results in increased yields, increased throughput and reduced
costs. The ATX-700 platform is designed to apply other critical coatings in the
plasma display fabrication facility, including ITO and CrCuCr. This capability
allows the display manufacturer to use a common platform in multiple locations
in the manufacturing line, creating operational efficiencies. The ATX-700 can
also be configured for the low temperature ITO and chrome black matrix processes
used to produce active matrix LCDs.
The Venture Series. The Venture Series platform is an in-line vertical
system used to apply ITO, silicon dioxide ("SiO(2)") and other thin films,
primarily in producing coated glass for black and white LCDs. The Venture Series
platform features high throughput, reduced particle defects and the capability
for double sided coatings. The selling price of the Venture Series system ranges
from $4 to $6 million. We will continue to market this system to LCD
manufacturers in selected markets.
THIN FILM COATED GLASS
TN Coated Glass. We are the world's leading producer of twisted nematic
("TN") coated glass, which is used for low resolution black and white LCDs. Our
customers incorporate these LCDs into consumer products that include watches,
calculators, and electronic instruments. To produce TN coated glass, we use our
proprietary in-line coating systems to deposit SiO(2) and ITO onto high quality
glass panels. We then package and ship the coated glass panels to our customers
for incorporation into their products.
STN Coated Glass. The most rapidly growing portion of our coated glass
business is the market for STN coated glass. STN coated glass is used for high
resolution black and white LCDs used in cellular telephones, personal digital
assistants, office copiers, portable video games and related products. The
growing market for STN coated glass is particularly impacted by increased demand
for wireless communication devices. STN coated glass requires thicker thin film
coating layers and greater uniformity to improve conductivity. Because it is
more complex and expensive to produce than TN coated glass, STN coated glass
presently provides us with higher revenues and gross margins for each panel of
glass produced.
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Touch Screens. In June of 1999, we entered into a joint marketing
agreement with Information Products, Inc., covering worldwide marketing and
distribution of coated glass for touch screen applications. We began commercial
production and shipment of touch screen products in the fourth calender quarter
of 1999. Touch screens are used as the input interface on a variety of consumer
and industrial products, including the high growth PDA and related communication
markets. To produce the coatings used in touch screens, we deposit a very thin,
highly uniform layer of ITO. In addition, we are developing an optical coating
to meet anti-reflection requirements in this market.
Other Thin Film Coated Glass. Our other thin film coated glass includes
ITO coatings for automatically dimming electrochromic mirrors, and chrome and
rhodium coatings for dental mirrors. We also produce more limited quantities of
advanced coated glass panels for the development and prototype needs of our
coating equipment customers and prospective customers. These thin film coated
glass products involve complex coatings for a variety of high resolution color
FPDs, including color STN displays, active matrix LCDs, and PDPs.
SALES, MARKETING AND CUSTOMERS
Sales of our equipment involve a broad-based effort at various levels
within our organization. Much of the sales effort in the equipment area is
undertaken by our technical and marketing groups, including sales offices in
Japan and China. Other personnel, including our Chief Executive Officer and Vice
President -- Sales and Marketing, make regular trips to visit foreign customers
to finalize contracts and ensure proper customer service. The sales cycle for
thin film coating equipment is long, involving multiple visits to and by the
customer and up to twelve months of technical sales effort. Equipment sales
efforts are assisted by 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. We generally sell our thin film coating equipment on
a progress payment basis. We generally sell our thin film coated glass on open
account, most of which are insured, or backed by letter of credit. Our customer
payment history has been excellent.
Approximately 85% of our fiscal 1999 gross sales were derived from exports,
primarily to Asia. In the same period, we served 122 customers in 16 countries.
In fiscal 1999, our ten largest customers accounted for approximately 62% of our
gross sales. The principal demand for thin film coated glass is in Asia and our
customers for thin film coating equipment have historically been located in
Korea, China, Taiwan and the United States. We believe our potential geographic
market for thin film coating equipment includes all the major geographic regions
in which FPD manufacturing takes place. Sales to two customers, NSG and
Varitronix, represented approximately 15% and 11% of gross sales for fiscal
1999, respectively. Sales to both of these customers for fiscal 1999 consisted
solely of sales of thin film coated glass.
TECHNOLOGY
Virtually all FPDs require optically transparent, electrically conductive
thin films coated on substrates such as glass. These thin films transmit
electrical power to picture elements of the displays and allow light to pass to
the viewer, creating the actual picture on the screen. The FPD market is placing
increasing performance and other demands on the thin film coated glass used in
FPDs, particularly with regard to imperfections, which must be fewer and
smaller. As FPDs become larger and more resolution and information intensive, it
becomes more crucial to maintain the lack of pinholes in the film, the absence
of contamination on or under the film, and the physical, chemical and electrical
uniformity, as well as the micro flatness of the substrate. In addition, the
substrate cleaning process becomes more critical, and handling of the glass
through the system must be more carefully controlled for quality.
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Process. We believe that we are a world leader in thin film process
technology. One of our 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 Class 1000 clean room where it is loaded into the coating
system. After removal of the substrate from the system, it must be inspected for
defects and optical, electrical and thickness properties. We continually work to
improve our glass cleaning and product inspection capabilities.
The coating equipment which we design and produce enables us and other
manufacturers of thin film coated glass to apply very thin, transparent layers
of thin film coatings to glass. The coatings which we apply are deposited in
microscopic thicknesses by physically bombarding, or sputtering, a cathode
source coating material (a chemical compound or element) with argon ions.
Individual atoms and molecules of the source material are separated from the
source by bombardment to form a vapor that condenses as a film onto the glass.
Sputtering provides many advantages including material flexibility, thickness
consistency, adaptability to large substrates and high volume production, defect
and contamination control, adhesion and thin film density. Our technology of
applying a thin film coating to glass or other substrate enables the display
into which the glass or substrate is incorporated to function as a complex
switch which controls light emission or transmission from each of the thousands
of segments or pixels that comprise an FPD. Our primary thin film coated glass
product is made by applying a thin layer of SiO(2) to prevent sodium in glass
from leeching into the thin film conductive coatings which are subsequently
applied. After the SiO(2) is applied, ITO is applied to provide conductive
properties, permitting the glass to be used for various FPD applications.
Particularly in FPDs, optically transparent, electrically conductive films, such
as those we apply, find common application in transferring electrical power to
the picture elements of the displays and allowing light to pass to the viewer.
The quality of the coatings, the cycle time of the process, the utilization
of materials, and other factors are controlled by our proprietary information
and technology. For example, we are improving the utilization of the cathode
source material. We also developed a method of reducing cathode voltage and are
developing the application of this method to ITO coatings. We believe this will
improve the conductivity of the ITO coating. Our glass coating process has
declined from approximately 11 hours in-process-time and nine separate manual
handling steps in 1985, to approximately 30 minutes and four manual handling
steps currently. All of the coating and heat treating steps now occur within the
equipment. The glass must be moved in a carefully controlled fashion at high
temperatures over a wide range of speeds through a vacuum system. We have
developed a simple, cost effective and reliable means of moving glass with high
yields. We are continually enhancing our technology to improve the performance
of our equipment, both in terms of the characteristics of the coating obtained
and the efficiency of the equipment. We continue to work on the conductivity of
our ITO coatings and the barrier qualities of our SiO(2). We are also continuing
to work on improving our systems not only to obtain better quality coatings, but
also to obtain better utilization of coating materials.
We are continually seeking advances to thin film technologies which have
commercial promise. We developed a process called geometrically enhanced metal
oxide sputtering, which increases the speed of reactive sputtering of certain
materials such as MgO. A patent application is pending with respect to this
process.
Technological Foundations. John S. Chapin, Vice President--Research and
Development and one of our founders, invented the planar magnetron which first
enabled manufacturers of thin film coated glass (as well as of semiconductor
chips) to economically deposit sputtered thin film coatings. Another founder,
Research Engineer Richard Condon, was a pioneer in the development of the
in-line
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coating process which is currently used by much of the industry. We believe we
maintain a competitive advantage because we design, build and operate our own
thin film coating equipment for thin film coated glass. Further, because our
primary business has been producing thin film coated glass, we are able to
effectively incorporate our production know-how into new generation coating
equipment and improvements in existing coating equipment. We believe this
provides us with a capital cost advantage over most of our competitors. This
also enables us to compete effectively in the market for thin film coated glass
manufacturing equipment.
MANUFACTURING AND FACILITIES
Our Longmont, Colorado headquarters contains approximately 127,000 square
feet and includes our general offices, research and development facilities, and
manufacturing and production facilities. This facility is leased from an
independent third party. We design and manufacture our thin film coating
equipment and produce coated glass at these facilities. In Longmont, we
currently operate three coated glass production lines and four development lines
for developing coating and equipment processes. We can concurrently build three
coating systems at our Longmont facility and have sufficient space to build up
to six coating systems with minor facility upgrades.
In fiscal 1999, we entered into a joint venture with Nippon Sheet Glass
Co., Ltd., a major Japanese glass manufacturer to supply the low and high
resolution coated glass market from a production base in Suzhou, China. The
joint venture facilities were incorporated into existing NSG glass production
facilities and contain approximately 40,000 square feet. This joint venture,
Suzhou NSG -- AFC Thin Film Electronics LTD, known as "STEC", has involved the
transfer of thin film coated glass manufacturing capacity to China. The joint
venture operates two coating systems. In the second half of calendar 2000, we
plan to transfer a Venture 5000 system from our Longmont facility to the STEC
facilities, bringing the number of coating systems to three. We intend to build
sufficient inventory to meet customer needs while the Venture 5000 system is
being transferred from Longmont to STEC. Therefore, we do not expect the
transfer of the system to materially affect revenues. STEC's location in Asia
allows us to produce coated glass in facilities immediately adjacent to our
source of raw glass, NSG, and in close proximity to our Asian customer base.
This arrangement has reduced our labor, shipping and freight costs while
allowing us to improve customer service. In its first three months of
operations, STEC became cash flow positive and profitable. We intend to continue
to leverage STEC's strategic position by expanding its manufacturing capacity in
the future. We will also continue to evaluate business opportunities that
strengthen our position with our customers.
In addition to our Longmont and STEC facilities, we have leased warehouse
space in Japan and Hong Kong from which we supply coated glass customers on a
just-in-time basis. We also have a sales office in Shenzhen, China.
SUPPLIERS
Thin Film Coating Equipment. In our thin film coating equipment business,
we use various suppliers of machined components, pump systems, logic controllers
and other commercially available components and features. We have multiple
sources for the principal components in this aspect of our business. We own and
control the proprietary parts of the process. For the proprietary fabricated
parts there are various suppliers who can produce components to our
specifications.
Thin Film Coated Glass. The raw glass that we use in our manufacturing
process represents our most significant material cost. The required quality, in
terms of thickness, flatness and visible imperfections, limits the number of
available suppliers. Five companies worldwide currently manufacture to these
quality standards. We currently purchase glass from four of these suppliers. We
are vulnerable to increased costs of raw glass. We regularly evaluate methods of
reducing our cost of
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glass. Our other primary raw materials for thin film coated glass are SiO(2) and
ITO. We currently purchase SiO(2) from two suppliers and believe alternative
sources of supply could be developed if necessary. We purchase ITO from two
suppliers, while at least one additional supplier remains qualified and ready to
supply us. Other coating materials which we currently use to a lesser extent
include materials which are available from a small number of suppliers.
COMPETITION
Thin Film Coating Equipment. In manufacturing thin film coating equipment,
we compete against two established equipment manufacturers which are much larger
than the we are: 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. We believe we compete 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. We are the only major thin film coating equipment manufacturer that
also manufactures thin film coated glass for the FPD market. We believe the
experience, expertise and synergy resulting from this provide us with a
competitive advantage.
Thin Film Coated Glass. Competition in the market for thin film coated
glass for FPDs is intense. Competition is based primarily on price,
availability, and to a lesser extent on quality, delivery, and customer service.
In addition, we believe the ability to anticipate shifts in the market and
customer needs for thin film coated glass features are important competitive
factors. We are 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 our principal thin
film coated glass competitors are located outside the United States, primarily
in Asia. Our primary competitors for thin film coated glass are Samsung/Corning,
Merck Display Technology, Wellite, and Shenzhen Leybold.
RESEARCH AND DEVELOPMENT
Our success can be attributed to focused research and development programs
in thin film technology, processes and equipment. We will continue to emphasize
improvements in current equipment technology, the development of new film
deposition capabilities, and the modification of thin film material properties.
The foundations of our success are based on engineering solutions for efficient
ITO and SiO(2) deposition for the FPD industry. These solutions include cost
effective reactive depositions, simplified process control, and innovative
coating equipment designs. We continue to build on these traditions in the
development of process control and coater design which lower the cost of
ownership.
We are innovators in developing coating equipment systems. Our ATX-700
platform meets demanding specifications for the reduction of film defects and
the elimination of particulates and provides major advances through the glass
fixturing in a near vertical configuration. We continue to reconfigure and
incorporate available hardware into the ATX-700 to further reduce film defects.
Additionally, the heart of the film deposition system, the sputtering cathode,
will continue to be improved. Improvements in cathode design will increase the
utilization of the source cathode material which will lower operating costs and
extend the time between source cathode material changes. Also, new cathode
designs will expand the operation range of the cathode. Cathode modification
will allow new film material properties to be attained.
We are also innovators in developing new thin film technologies for
emerging markets:
- Plasma displays. We are capable of applying the three films (MgO, ITO
and CrCuCr) required in the production of PDPs. We work closely with all
the major PDP manufacturers
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in Asia, the United States and Europe to develop the highest quality
films. We will continue to work to align MgO material properties with
panel quality requirements.
- Active matrix LCDs. The active matrix LCD and high resolution display
markets require thick ITO coatings deposited at low temperatures. These
markets are also demanding additional films with low particulate and
defect levels. We are developing new coating methods to meet the
requirements of these films.
- Touch screens. We have already begun the production of the basic film
required for the touch panel market. We are now pursuing the development
of new alloys which will meet evolving touch panel market needs. We are
pursuing the highest quality films with the fewest optical layers to
keep production costs as low as possible.
- OLEDs. This is the term used for a new class of organic materials that
emit light when a voltage is applied to them. We are initiating sample
testing of our standard ITO films for use in OLEDs. We are developing a
very smooth ITO layer which will avoid electrical shorting through the
organic layer.
INTELLECTUAL PROPERTY
We believe that due to the rapid pace of innovation within our 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 and maintaining a competitive position within the industry than
patent or other legal protections for our technology. We, nevertheless, rely on
confidentiality agreements, licensing agreements and other forms of contractual
provisions to protect our intellectual property. We currently have one patent
application pending for the geometrically enhanced metal oxide sputtering
process. There can be no assurance, however, that the steps taken by us to
protect our 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.
STEC JOINT VENTURE
STEC was formed as a limited liability company under the laws of the
People's Republic of China. NSG and we are each 50% joint venture partners, and
the term of the joint venture is 50 years. Profits, dividends, risks and losses
are also shared by the partners in proportion to their equity contributions. The
total investment plan for STEC involves $16 million, of which $6.4 million is
currently in equity and $9.6 million in debt. Each party has made its $3.2
million equity contribution in cash.
Governance. The STEC board of directors is comprised of three appointees
for each partner with each director serving a two year term. For the first two
year term after formation, we have the right to appoint the chairman of the
board, and NSG has the right to appoint the general manager, who may serve
concurrently as a director.
All board actions require a unanimous vote of the directors present.
Matters subject to board decision include approval of annual operating and
capital budgets; distribution of profits and losses; hiring, compensation and
retention of senior management; lease, sale, pledge or other encumbrance of all
or a substantial portion of STEC's assets; increase in required capital of STEC;
borrowing; significant purchase, product sales and other important contracts;
amendments of the Articles of Association; and merger or dissolution of STEC.
In the event of deadlock, the conflict is referred to our President and the
corporate officer in charge of the Fine Glass Division of NSG. If the parties
fail to reach agreement within six months and the deadlock materially impairs
the continued operation of STEC in a manner consistent with
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past practice or an agreed business plan, either partner may notify the other
that it wishes to withdraw from the joint venture. In the event of such
withdrawal, the fair market value of STEC will be agreed by the parties or by an
appraiser if they cannot agree. The party receiving the notice has the option to
purchase the interest of the other party at 85% of the fair market value
attributable to the withdrawing party's ownership interest, or to require the
other party to purchase its interest at 115% of the fair market value of its
interest.
Relationship Between Partners and Joint Venture. Each joint venture
partner provides marketing, promotion and sales assistance to STEC. NSG has
agreed to cause its subsidiary SNSG to sell glass substrate to STEC, and the
joint venture will purchase all of its glass substrate from SNSG unless a
customer specifies substrate from another manufacturer. The purchase price for
SNSG glass substrate is at the lowest price and on competitive terms and
conditions with respect to quality and delivery compared to those offered to us
by any third party.
Financing. If the Board approves third party debt financing with a lender
who requires the guarantee of the parties, each party must provide a several
guaranty of such borrowings in accordance with its then current equity interest.
Guarantors will receive a guarantee fee to be agreed by the parties, and STEC
will indemnify the guarantors. STEC has entered into a $3.5 million revolving
credit agreement with Sumitomo Bank, which we and NSG have guaranteed. NSG's
guarantee is secured by all of the assets of the joint venture.
Restrictions on Transfer. Neither party may sell, pledge or otherwise
dispose of all or any portion of its equity interest in STEC to any third party
without the prior written consent of the other party and approval by the Chinese
regulatory authorities. Each party has a right of first refusal regarding
transfers by the other party.
If NSG sells its subsidiary SNSG to an entity not controlled by it, we have
the option to purchase NSG's equity interest in STEC, or to sell our equity
interest to NSG. Following determination of the fair market value of STEC by
agreement of the parties or by an appraisal, we may elect to purchase NSG's
interest in STEC at its fair market value, or to sell our interest in STEC at
120% of its fair market value.
EMPLOYEES
As of January 1, 2000, we employed 183 people. None of the employees are
unionized. We consider our relationship with our employees to be good.
We focus on enhancing sound manufacturing systems and applying key concepts
of high performance work systems to improve our ability to grow rapidly, excel
at product cost, quality, and delivery, and encourage continuous improvement and
innovation. Our 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.
We operate under a participative management system which we believe
enhances productivity by emphasizing individual employee opportunity and
participation both in operating decisions and in our profitability. We maintain
a discretionary monthly profit sharing plan for full-time nonexecutive
employees. We believe this emphasis assists with enhanced productivity, cost
control, and product quality and has helped us attract and retain capable
employees.
ENVIRONMENTAL REGULATIONS
Our operations create a small amount of hazardous waste. The amount of
hazardous waste we produce may increase in the future depending on changes in
our operations. The general issue of the
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disposal of hazardous waste has received increasing focus from federal, state,
local, and international governments and agencies and has been subject to
increasing regulation.
LEGAL PROCEEDINGS
We are not presently involved in any legal proceedings which, if not
settled in our favor, would, individually or collectively, have a material
adverse impact on our financial condition.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers, directors and key employees are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Cecil Van Alsburg.................... 63 Director and Chairman of the Board
Thomas T. Edman...................... 37 Director, President and Chief Executive Officer
John S. Chapin....................... 58 Director and Vice President -- Research, Secretary
Graeme Hennessey..................... 61 Vice President -- Sales and Marketing
Lawrence D. Firestone................ 41 Chief Financial Officer and Treasurer
C. Richard Condon.................... 54 Research Engineer
Roger Smith.......................... 58 Director of Materials
Jim Scholhamer....................... 33 Director of Operations -- Thin Film Coatings
Russell W. Black..................... 39 Director of Operations -- Thin Film Systems
John J. Kester....................... 49 Director of Advanced Development
Chad D. Quist........................ 37 Director
Richard P. Beck...................... 66 Director
Vincent Sollitto, Jr................. 51 Director
</TABLE>
Cecil Van Alsburg co-founded Applied Films Lab, Inc. in 1976 and served as
our President and Chief Executive Officer from 1976 to May 1998. Mr. Van Alsburg
has also served as a director of our company 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 our company since June 1996 and has
served as our 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 served as a director of our company since July
1998. From 1993 until joining our 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 has a bachelors of
arts degree in East Asian studies (Japan) from Yale and, in June 1993, received
a masters degree in business administration from The Wharton School at the
University of Pennsylvania.
John S. Chapin co-founded Applied Films Lab, Inc. in 1976 and has served as
Vice President -- Research, Corporate Secretary, and a director of our company
since its inception. Mr. Chapin is the inventor of the planar magnetron and
co-inventor of a reactive sputtering process control. Mr. Chapin has 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.
Graeme Hennessey has served as our Vice President -- Sales and Marketing
since April 1993. From 1980 until he joined our 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 has
a bachelors of science degree in physics from Catholic University of America and
a masters degree in physics from Fordham University.
Lawrence D. Firestone has served as our Chief Financial Officer and
Treasurer since July 1999. From March 1996 until March 1999, Mr. Firestone
served as Vice President and Chief Operating Officer of Avalanche Industries,
Inc., a custom cable and harness manufacturer. From 1993 to 1996, Mr. Firestone
served as Director of Finance and Operations for the Woolson Spice and Coffee
Company, a gourmet coffee roasting and distribution company, and from 1988 to
1993, as Vice
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President and Chief Financial Officer for TechniStar Corporation, a manufacturer
of robotic automation equipment. From 1981 to 1988, Mr. Firestone served in
various capacities and finally as Vice President and Chief Financial Officer at
Colorado Manufacturing Technology, a contract manufacturer that specialized in
PC board and cable assembly. Mr. Firestone has a bachelors of science degree in
business/accounting from Slippery Rock State College.
C. Richard Condon co-founded Applied Films Lab, Inc. in 1976 and served as
its Vice President -- Engineering from its inception through December 1999. Mr.
Condon is now employed as a Research Engineer. Mr. Condon served as a director
of our company from 1976 until July 1998. Mr. Condon is responsible for our
advanced coating systems design, with over 25 years experience in the thin film
industry. Mr. Condon has a bachelors of science degree in physics from the
University of Colorado and an associates degree in mechanical engineering from
the Wentworth Institute.
Roger Smith has served our company since July 1998 as our Director of
Materials. From May 1993 until July 1998, Mr. Smith served as our Treasurer.
Prior to joining our company, Mr. Smith was employed for 33 years by Donnelly
Corporation in various capacities, including controller and project manager.
Jim Scholhamer has been employed by us since August 1997. Mr. Scholhamer
currently is the Director of Operations for Thin Film Coatings and was
previously the Engineering Manager. From 1992 until he joined the Company, Mr.
Scholhamer held the titles of Manufacturing Manager and Process Engineer at
Viratec Thin Films, Inc., located in Minnesota. From 1989 to 1992, Mr.
Scholhamer served as Production Manager and Process Engineer at Ovonic Synthetic
Materials, Inc., a division of Energy Conversion Devices, located in Michigan.
Mr. Scholhamer has a bachelors of science degree in engineering from the
University of Michigan.
Russell W. Black has been employed by us since December 1996 as Director of
Operations -- Thin Film Systems. From 1994 until March 1996, Mr. Black served as
Engineering Manager at Applied Komatsu Technology, a capital equipment supplier
to the FPD industry, and from 1990 to 1993, as an Engineering Manager at Varian
Associates, Inc., a capital equipment supplier to the semiconductor industry.
Mr. Black obtained a bachelors of science degree in engineering technology from
California State Polytechnic University. In 1995, Mr. Black pleaded guilty to
one count of wire fraud in United States District Court. Mr. Black was sentenced
to 18 months probation and 50 hours of community service and was ordered to pay
approximately $7,500 in fines and restitution. Mr. Black's probation was
terminated by the court after 10 months.
John J. Kester has been employed by us since June 1997 as our Advanced
Development Director. From 1995 until he joined us, Dr. Kester served as
Research and Development Manager for the photovoltaic module manufacturer,
Golden Photon Inc., a subsidiary of ACX Inc. From 1989 to 1995, he was the
Physics Division Chief at the Seiler Research Laboratory at the United States
Air Force Academy. From 1982 to 1989 he worked in the Central Research
Laboratory of Dow Chemical Company. Dr. Kester has a bachelors degree from The
Colorado College and masters and doctorate degrees in physics from Washington
University in St. Louis, Missouri.
Chad D. Quist has been a director of our company since April 1997. Mr.
Quist is the President of Information Products, Inc., a wholly-owned subsidiary
of Donnelly Corporation, and has recently assumed responsibility for the
electrochromic business unit for Donnelly Corporation as its Vice President. Mr.
Quist 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 has a bachelors degree in engineering from
Stanford University and a masters degree in business administration from the
Kellogg Graduate School of Business at Northwestern University.
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Richard P. Beck has been a director of our 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
has a bachelors of science degree in accounting and a masters degree in business
administration in finance from Babson College.
Vincent Sollitto, Jr. has been a director of our company since October
1999. Mr. Sollitto has been the Chief Executive Officer since June 1996 and a
member of the Board of Directors since July 1996 at Photon Dynamics, Inc. From
August 1993 to 1996, Mr. Sollitto was the General Manager of Business Unit
Operations for Fujitsu Microelectronics, Inc. From April 1991 to August 1993, he
was the Executive Vice President of Technical Operations at Supercomputer
Systems, Incorporated. Mr. Sollitto spent 21 years in various positions,
including Director of Technology and Process at International Business Machines
Corporation, before joining Supercomputer Systems, Incorporated. Mr. Sollitto
serves as a director of Irvine Sensors Corp. Mr. Sollitto is a graduate of Tufts
College where he received a B.S.E.E. in 1970.
Our Board of Directors is currently composed of six directors, divided into
three classes. Messrs. Beck and Quist serve in the class whose term expires in
2002; Messrs. Van Alsburg and Chapin serve in the class whose term expires in
2001; and Messrs. Edman and Sollitto serve 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. Each director holds office until that
director's successor has been duly elected and qualified. Selection of nominees
for the Board of Directors is made by the entire Board of Directors.
The Board of Directors elects executive officers on an annual basis.
Executive officers serve until their successors have been duly elected and
qualified.
COMPENSATION OF DIRECTORS
Directors who are not officers, employees or consultants are paid an annual
fee of $10,000 and $800 per board or committee meeting attended. Such directors
are reimbursed for their expenses for each meeting attended. Directors who are
officers, employees or consultants are not compensated for their service on the
board.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has an Audit Committee and a Compensation Committee.
The Audit Committee makes recommendations regarding the firm to be
appointed as independent accountants, approves the scope of the audit, reviews
the results of the audit with the independent accountants and approves the audit
fee payable to our independent accountants. The Audit Committee is comprised of
Mr. Beck, Mr. Quist and Mr. Sollitto.
The Compensation Committee makes recommendations regarding the compensation
arrangements for top management and key employees, including salaries and
bonuses. The Compensation Committee also administers the Stock Option Plans and
the Employee Stock Purchase Plan. The Compensation Committee is comprised of Mr.
Beck, Mr. Quist and Mr. Sollitto.
42
<PAGE> 44
EXECUTIVE COMPENSATION
The following table sets forth the annual and long-term compensation we pay
to our Chief Executive Officer and each of our four most highly compensated
executive officers, collectively referred to as the "Named Executives," for
services rendered during fiscal 1999, 1998 and 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
----------------------- ------------
OTHER ALL
ANNUAL SECURITIES OTHER
FISCAL COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY ($) OPTIONS(#) (1)
--------------------------- ------ -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Cecil Van Alsburg(2).............. 1999 $110,628 -- -- $3,122
Chairman of the Board 1998 189,427 -- -- 3,867
1997 174,658 -- -- --
Thomas T. Edman................... 1999 $136,310 -- 15,000 $3,371
President, Chief Executive Officer 1998 141,114 -- -- 2,955
1997 120,197 -- 34,545 --
C. Richard Condon................. 1999 $112,142 -- -- $2,774
Vice President -- Engineering 1998 116,292 -- -- 2,247
1997 109,157 -- -- --
Roger Smith(3).................... 1999 $112,142 -- -- $3,047
Director of Materials 1998 118,492 -- -- 2,360
1997 109,174 -- -- --
Graeme Hennessey.................. 1999 $129,818 -- -- $3,211
Vice President -- Sales and 1998 137,297 -- -- 2,829
Marketing 1997 126,384 -- -- --
</TABLE>
- -------------------------
(1) Represents Company matches under our salary savings plan.
(2) Mr. Van Alsburg retired from involvement in our daily operations effective
July 2, 1999 and will not receive compensation as an executive officer going
forward.
(3) Mr. Smith performed the Director of Accounting duties from May 1999 through
July 1999. Mr. Smith ceased to be an executive officer upon the election of
Mr. Firestone as chief financial officer in July 1999.
STOCK OPTION AND PURCHASE PLANS
1993 Stock Option Plan. In May 1993, the Board of Directors approved the
Applied Films Corporation Stock Option Plan. A total of 276,500 shares of common
stock are reserved for issuance upon exercise of options to be granted under the
1993 Plan. The 1993 Plan is administered by the Board of Directors. Subject to
the provisions of the 1993 Plan, the administrator of the 1993 Plan has the
discretion to determine the optionees and the terms of the option grants. The
exercise price of an option granted under the 1993 Plan may not be less than the
fair market value per share of the common stock on the date of grant. Shares
obtained upon the exercise of options granted pursuant to the 1993 Plan may not
be sold until the expiration of a one year period commencing on the exercise
date of such options. The options terminate not more than 10 years from the date
of grant, subject to earlier termination on the optionee's death, disability or
termination of employment. Options are not
43
<PAGE> 45
assignable or otherwise transferable except by will or the laws of descent and
distribution. The options granted pursuant to the 1993 Plan vest equally over a
four-year period. As of January 1, 2000, options to purchase 241,594 shares were
outstanding and 34,906 shares remained available for future grants pursuant to
the 1993 Plan.
1997 Stock Option Plan. On April 29, 1997, the Board of Directors adopted,
and the shareholders approved, the 1997 Stock Option Plan, as amended in
September 1997 and October 1999. The 1997 Plan provides for the issuance of
272,500 shares of common stock. The purpose of the 1997 Plan is to encourage
stock ownership by certain of our officers and employees instrumental to our
success and to give them a greater personal interest in our success. The 1997
Plan will be administered by the Board of Directors or the Compensation
Committee. The Board, or the Compensation Committee, within the limitations of
the 1997 Plan, determines the persons to whom options will be granted; the
number of shares to be covered by each option; the option purchase price per
share; the manner of exercise; the time, manner and form of payment upon
exercise of an option; and restrictions such as repurchase rights or obligations
of the Company. Options granted under the 1997 Plan may not be granted at a
price less than fair market value of the common stock on the date of grant.
Options granted under the 1997 Plan will expire not more than 10 years from the
date of grant. Options granted under the 1997 Plan are generally not
transferable during an optionee's lifetime but are transferable at death by will
or by the laws of descent and distribution. As of January 1, 2000, options to
purchase 237,491 shares were outstanding and 35,009 shares remained available
for future grants pursuant to the 1997 Plan.
Outside Director Stock Option Plan. On October 26, 1999, the Board of
Directors approved the Applied Films Corporation Outside Director Stock Option
Plan. The Outside Director Plan has 24,000 shares of common stock reserved for
issuance upon the exercise of options. The purpose of the Outside Director Plan
is to encourage stock ownership by nonemployee directors, to provide those
individuals with additional incentive to manage our company effectively and to
contribute to our success, and to provide a form of compensation which will
attract and retain highly qualified individuals as members of the Board of
Directors. The Outside Director Plan is administered by the Board of Directors
or the Compensation Committee. The Board, or the Compensation Committee, within
the limitations of the Outside Director Plan, determines the persons to whom
options will be granted; the number of shares to be covered by each option; the
option purchase price per share; the manner of exercise; the time, manner and
form of payment upon exercise of an option; and restrictions such as repurchase
rights or obligations of our company. Options granted under the Outside Director
Plan may not be granted at a price less than fair market value of the common
stock on the date of grant. Options under the Outside Director Plan will expire
not more than 10 years from the date of grant and are generally not transferable
during an optionee's lifetime but are transferable at death by will or by the
laws of descent and distribution. As of January 1, 2000, options to purchase
13,820 shares were outstanding and 10,180 shares remained available for future
grants pursuant to the Outside Director Plan.
Employee Stock Purchase Plan. On September 5, 1997, the Board of Directors
adopted, and the shareholders subsequently approved, the Applied Films
Corporation Employee Stock Purchase Plan. The Purchase Plan permits eligible
employees to purchase shares of common stock through payroll deductions. Shares
are 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. At January 1, 2000, 15,363 shares had been
issued under the Purchase Plan.
44
<PAGE> 46
STOCK OPTION GRANTS
Under the Option Plans, key employees and certain non-employee directors
may be granted options to purchase common stock. An aggregate of 573,000 shares
of common stock were reserved for issuance pursuant to the Option Plans. Shown
below is information on grants of stock options during fiscal 1999 to Named
Executives.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SHARES GRANTED APPRECIATION FOR
UNDERLYING TO ALL EXERCISE OPTION TERM(3)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ---------------------
NAME GRANTED(1) FISCAL YEAR $/SH(2) DATE 5% 10%
---- ---------- ------------ -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas T. Edman................ 15,000 100% $2.75 4/27/09 $26,689 $70,415
</TABLE>
- -------------------------
(1) Options become exercisable one year after date of grant.
(2) The exercise price is equal to or greater than the fair market value of the
shares on the date the option is granted. The exercise price may be paid in
cash.
(3) These amounts are based on assumed rates of appreciation only. Actual gains,
if any, on stock option exercises will depend on overall market conditions
and on the future performance of our common stock. The amounts reflected in
this table may not be realized.
OPTION EXERCISES AND HOLDINGS
Shown below is information with respect to unexercised options to purchase
shares of our common stock granted under the Option Plans to the Named
Executives and held by them at July 3, 1999. None of the Named Executives
exercised any stock options during fiscal 1999.
<TABLE>
<CAPTION>
NUMBER OF SHARES
SUBJECT TO UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD IN-THE-MONEY OPTIONS AT
AT JULY 3, 1999 JULY 3, 1999(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Cecil Van Alsburg..................... 34,545 0 $13,355 $ 0
Thomas T. Edman....................... 17,273 32,273 0 5,625
C. Richard Condon..................... 34,545 0 13,355 0
Roger Smith........................... 34,545 0 13,355 0
Graeme Hennessey...................... 34,545 0 18,697 0
</TABLE>
- -------------------------
(1) The value of unexercised options reflects the increase in market value of
the common stock from the date of grant through July 3, 1999 (when the
closing price of the common stock was $3.125 per share). Value actually
realized upon exercise by the Named Executives will depend on the value of
our common stock at the time of exercise.
OTHER PLANS
In August 1992, the Board of Directors adopted a profit sharing plan for
all full-time, non-executive employees. Historically, the amount contributed to
the profit sharing pool, subject to the approval of the Board of Directors, has
been approximately 10% of our pretax income before royalty and profit sharing
expense. We have made monthly profit sharing payments to employees based on
their employee pay level and length of service.
45
<PAGE> 47
CERTAIN TRANSACTIONS
We supply thin film coated glass to Information Products, Inc. for use in
touch screen displays. Chad Quist, a director of our company, is the President
of Information Products, Inc. In fiscal 1999, our net sales to Information
Products, Inc. totalled $1.0 million and $111,000 for the first six months of
fiscal 2000. We believe the terms of our sales to Information Products, Inc.
were negotiated on an arms-length basis and are no less favorable than the terms
we would have negotiated with an independent third party.
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as January 1, 2000, and as adjusted to
reflect the sale of the shares offered hereby, certain information regarding
beneficial ownership of the common stock by: (i) each person known by us to own
beneficially more than 5% of the outstanding shares of common stock, (ii) each
of our directors, (iii) each Named Executive, (iv) the selling shareholders and
(v) all directors and executive officers as a group. The Selling Shareholders
are Cecil Van Alsburg, John S. Chapin, C. Richard Condon and Roger Smith.
<TABLE>
<CAPTION>
SHARES
SHARES BENEFICIALLY BENEFICIALLY OWNED
OWNED PRIOR TO THE AFTER
OFFERING(2) NUMBER OF OFFERING(2)(3)
------------------- SHARES BEING ------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT OFFERED NUMBER PERCENT
--------------------------- --------- ------- ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Cecil Van Alsburg(4).................... 591,862 17% 250,000 341,862 6%
John S. Chapin(5)....................... 569,862 16% 250,000 319,862 5%
C. Richard Condon(6).................... 125,761 4% 50,000 75,761 1%
Roger Smith(7).......................... 34,545 1% 16,500 18,045 *
Benson Associates LLC(8)................ 338,700 10% -- 338,700 6%
Thomas Edman(9)......................... 32,609 1% -- 32,609 *
Chad D. Quist........................... -- -- -- -- --
Richard P. Beck......................... 1,000 * -- 1,000 *
Vincent Sollitto, Jr.................... -- -- -- -- --
Graeme Hennessey........................ 34,545 1% -- 34,545 1%
Executive Officers and Directors as a
group (9 persons)(10)................. 1,354,689 37% 550,000 804,689 13%
</TABLE>
- -------------------------
* Represents beneficial ownership of less than one percent of outstanding common
stock.
(1) The address of each 5% shareholder is c/o Applied Films Corporation, 9586
I-25 Frontage Road, Longmont, Colorado 80504, except for Benson Associates
LLC which is 111 SW 5th, Suite 2130, Portland, Oregon 97204.
(2) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission, and includes voting power and
investment power with respect to shares. Shares issuable upon the exercise
of outstanding stock options that are currently exercisable or become
exercisable within 60 days from January 1, 2000 are considered outstanding
for the purpose of calculating the percentage of common stock owned by such
person but not for the purpose of calculating the percentage of common
stock owned by any other person.
(3) The number of shares of common stock deemed outstanding after this offering
includes the 2,500,000 shares of common stock that are being offered for
sale by the Company in this offering, but does not include any of the up to
459,975 additional shares of common stock to be purchased from us if the
underwriters' over-allotment option is exercised in full.
(4) Includes (i) 556,317 shares held by Mr. Van Alsburg, (ii) 1,000 shares held
by Mr. Van Alsburg's spouse, and (iii) options to purchase 34,545 shares of
common stock exercisable within 60 days.
46
<PAGE> 48
(5) Includes (i) 364,603 shares held by Mr. Chapin, (ii) 170,714 shares held by
the John Chapin Family Trust, of which Mr. Chapin is the Trustee, and (iii)
options to purchase 34,545 shares of common stock exercisable within 60
days. Mr. Chapin disclaims beneficial ownership of the shares held by the
John Chapin Family Trust.
(6) Includes (i) 91,216 shares held by Mr. Condon and (ii) options to purchase
34,545 shares of common stock exercisable within 60 days.
(7) Consists of options to purchase 34,545 shares of common stock exercisable
within 60 days.
(8) In a Schedule 13G, dated February 12, 1999, Benson Associates LLC
("Benson") disclosed on behalf of its investment advisory clients that it
had acquired beneficial ownership of 354,000 shares of Common Stock. Benson
has sole power to dispose of and vote all such shares. Additional
information provided to us indicates that Benson subsequently sold its
beneficial ownership of 15,300 shares of common stock.
(9) Includes (i) 6,700 shares held by Mr. Edman and (ii) options to purchase
25,909 shares of common stock exercisable within 60 days.
(10) Includes options to purchase 164,089 shares of common stock exercisable
within 60 days.
47
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
The following description of our capital stock and provisions of our
amended and restated articles of incorporation and amended and restated bylaws
is a summary and is qualified in its entirety by the provisions of our articles
of incorporation and bylaws, which have been filed as exhibits to our
registration statement, of which this prospectus is a part.
Upon completion of this offering, our authorized capital stock will consist
of 10,000,000 shares of common stock and 1,000,000 shares of preferred stock,
all without par value. As of February 3, 2000, 3,503,564 shares of common stock
and no shares of preferred stock were issued and outstanding.
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
submitted to a vote of the shareholders. Holders of common stock do not have the
right to cumulate votes with respect to election of directors. Accordingly,
holders of a majority of the shares of common stock voting in any election of
directors will have the ability to elect all of the directors standing for
election. Holders of common stock are entitled to receive ratably such
dividends, if any, as may be declared by the board of directors of legally
available funds, subject to any preferences that may be awarded to any
outstanding preferred stock. In the event of a liquidation, dissolution and
winding up of our company, holders of common stock are entitled to share ratably
in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding preferred stock. Holders of common stock have no
preemptive, subscription, redemption or conversion rights. All of the
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, when issued and paid for,
fully paid and nonassessable.
PREFERRED STOCK
The board of directors has the authority to issue 1,000,000 shares of
preferred stock in one or more series and to fix the relative rights and
preferences of the preferred stock, including dividend rights, conversion
rights, voting rights, redemption rights, liquidation preferences and numbers of
shares constituting any series, without any further vote or action by
shareholders. The issuance of preferred stock with voting and conversion rights
and dividend and liquidation preferences may adversely affect the rights of
holders of common stock. Issuances of preferred stock may have the effect of
delaying, deferring or preventing a change of control, may discourage bids for
our stock at a premium over the market price, and may adversely affect the
market price, and the voting and other rights of the holder of the common stock.
Upon completion of this offering, we will have no outstanding shares of
preferred stock. We have no current plans to issue any preferred stock.
TRANSFER AGENT
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust, Denver, Colorado.
CERTAIN ARTICLE AND BYLAW PROVISIONS AND PROVISIONS OF COLORADO LAW
Our Amended and Restated Articles of Incorporation contain the following
provisions that may have the effect of delaying, deferring or preventing a
hostile takeover or change of control:
- the terms of the board of directors are staggered into three classes;
- cumulative voting in elections is prohibited;
- we cannot engage in a business combination with an interested
shareholder unless the business combination is approved in a prescribed
manner. A "business combination" includes
48
<PAGE> 50
a merger or consolidation, the sale, lease, exchange, pledge or other
transfer of our assets or our dissolution and liquidation, and an
"interested shareholder" is a person who owns beneficially 10% or more of
our voting stock;
- when considering a tender offer or a merger acquisition proposal, the
board of directors may consider factors other than potential financial
benefits to shareholders, including the adequacy and fairness of the
consideration to be received, the potential social and economic impact
on us, our employees and vendors, and the communities in which we
operate;
- generally, a business combination with another corporation or our
voluntary dissolution and liquidation is permissible only with the
affirmative vote of 66 2/3% of the outstanding voting securities; and
- our shareholders may amend our bylaws or adopt new bylaws only by the
affirmative vote of 66 2/3% of the outstanding voting securities.
INDEMNIFICATION; LIMITATION OF LIABILITY
Pursuant to provisions of the Colorado Business Corporation Act, we have
adopted provisions in our articles and have entered into director and officer
indemnity agreements that permit us to indemnify our directors to the fullest
extent permitted by Colorado law, except that we will not indemnify any director
(i) in connection with a proceeding by or in the right of the corporation in
which the director was judged liable to the corporation; or (ii) in connection
with any other proceedings charging that the director derived an improper
personal benefit in which the director was judged liable on this basis. We have
also entered into indemnity agreements with certain of our officers providing
for similar indemnification. In addition, our articles eliminate the personal
liability of our directors to us or to our shareholders for monetary damages for
breach of their duty of due care, except that there is no elimination or
limitation of liability for any breach of a director's duty of loyalty to us or
to our shareholders, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, acts providing for an
unlawful distribution of our assets, or any transaction from which the director
directly or indirectly derived an improper personal benefit.
49
<PAGE> 51
UNDERWRITING
The Underwriters named below, represented by Needham & Company, Inc., D.A.
Davidson & Co. and First Security Van Kasper (the "Representatives"), have
severally agreed to purchase from us and the selling shareholders, the number of
shares of common stock indicated below opposite their respective names at the
public offering price less the underwriting discount set forth on the cover page
of this prospectus. We are selling 2,500,000 shares and the selling shareholders
are selling an aggregate of 566,500 shares. The Underwriting Agreement provides
that the obligations of the underwriters to pay for and accept delivery of such
shares of common stock are subject to certain conditions precedent, and that the
underwriters are committed to purchase and pay for all shares, if any shares are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
----------- ----------------
<S> <C>
Needham & Company, Inc......................................
D. A. Davidson & Co.........................................
First Security Van Kasper...................................
---------
Total.................................................. 3,066,500
=========
</TABLE>
The Representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public at the offering price set
forth on the cover page of this prospectus. The underwriters may allow selected
dealers a concession of not more than $ per share, and the underwriters
may allow, and such dealers may reallow, a concession of not more than $
per share. After the offering to the public, the offering price and other
selling terms may be changed by the Representatives. No such reduction shall
change the amount of proceeds we and the selling shareholders will receive, as
set forth on the cover page of the prospectus. The common stock is listed on the
NASDAQ National Market.
We have granted an option to the underwriters, exercisable during the
30-day period after the date of this prospectus, to purchase up to 459,975
shares of common stock at the same price per share as the initial 3,066,500
shares that the underwriters are committed to purchase. To the extent the
underwriters exercise this option, each of the underwriters will be committed,
subject to certain conditions, to purchase such additional shares in
approximately the same proportion as shown in the above table and we will be
obligated to sell these shares to the underwriters. The underwriters may
purchase such shares only to cover over-allotments made in connection with the
sale of common stock offered in this prospectus. If purchased, the underwriters
will offer such additional shares on the same terms as those on which the
initial 3,066,500 shares are being offered. If the underwriters' over-allotment
options exercised in full, the total price to public would be $ , the total
underwriting discount and commissions would be $ , and the total proceeds to
us would be $ , before deducting expenses.
The following table summarizes the compensation we and the selling
shareholders will pay to the underwriters:
<TABLE>
<CAPTION>
TOTAL TOTAL
PER WITHOUT WITH
SHARE OVER-ALLOTMENT OVER-ALLOTMENT
----- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commission we will pay.......... $ $ $
Underwriting discounts and commissions the selling
shareholders will pay....................................
</TABLE>
We will pay all of the expenses of the offering, estimated to be $300,000,
other than underwriting discounts and commissions to be paid by the selling
shareholders with respect to the shares sold by them.
50
<PAGE> 52
We have agreed to indemnify the underwriters against certain liabilities
that may be incurred in connection with this offering, including civil
liabilities under the Securities Act.
Pursuant to the terms of lock up agreements, all of our executive officers
and directors, holding in the aggregate approximately 1,225,140 shares of common
stock after this offering, have agreed with the Representatives not to sell,
dispose of, contract to sell, grant any option to sell, transfer or otherwise
dispose of, directly or indirectly, shares of common stock for a period of 180
days after the date of this prospectus, without the prior written consent of
Needham & Company, Inc. We have agreed not to sell, contract to sell, grant any
option to purchase, transfer or otherwise dispose of, directly or indirectly,
shares of common stock, other than the issuance of shares of common stock upon
the exercise of outstanding options, the grant of options to purchase shares, or
the issuance of shares of common stock under the 1993 Plan, the 1997 Plan, the
Outside Director Plan and the Purchase Plan, for a period of 180 days after the
date of this prospectus, without the prior written consent of Needham & Company,
Inc.
The Representatives have advised us that the underwriters do not expect
sales to accounts over which they exercise discretionary authority to exceed 5%
of the number of shares of common stock offered hereby.
In connection with the offering, the underwriters and other persons
participating in the offering may engage in transactions that stabilize,
maintain or otherwise affect the market price of the common stock. These
transactions may include stabilization transactions effected in accordance with
the Securities Exchange Act of 1934 pursuant to which such persons may bid for a
purchase common stock for the purpose of stabilizing the market price.
Specifically, the underwriters may over-allot in connection with the offering,
creating a short position in the common stock for their own account. To cover
over-allotments or to stabilize the price of the common stock, the underwriters
may bid for and purchase common stock in the open market. The Underwriters may
also impose a penalty bid whereby they may reclaim selling concessions allowed
to an underwriter or a dealer for distributing common stock in the offering if
the underwriters repurchase previously distributed common stock in transactions
to cover their short position, in stabilization transactions or otherwise.
Finally, the underwriters may bid for, and purchase, shares of common stock in
market making transactions. These activities may stabilize or maintain the
market price of the common stock above market levels that might otherwise
prevail in the open market. The underwriters are not required to engage in these
activities and, if they are undertaken, they may be discontinued at any time.
In connection with this offering, certain underwriters and selling group
members (if any) or their respective affiliates who are qualifying registered
market makers on the Nasdaq National Market may engage in passive market making
transactions in our common stock on the Nasdaq National Market in accordance
with Regulation M under the Securities Exchange Act of 1934 during the two
business day period before commencement of offers or sales of the common stock
offered hereby. The passive market making transactions must comply with
applicable volume and price limits and be identified as such. In general, a
passive market maker may display its bid at a price not in excess of the highest
independent bid for the security; if all independent bids are lowered below the
passive market maker's bid, however, such bid must then be lowered when certain
purchase limits are exceeded.
51
<PAGE> 53
LEGAL MATTERS
The validity of the shares of common stock offered by this prospectus will
be passed upon for us and the selling shareholders by Varnum, Riddering, Schmidt
& Howlett LLP, Grand Rapids, Michigan. Certain legal matters relating to this
offering will be passed upon for the underwriters by Davis, Graham & Stubbs,
LLP, Denver, Colorado.
EXPERTS
The consolidated financial statements included in this prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their report with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports.
ADDITIONAL INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission relating to the common stock offered by this prospectus.
This prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules to the registration
statement. Statements contained in this prospectus concerning the contents of
any contract or other document referred to are not necessarily complete and in
each instance we refer you to the copy of the contract or other document filed
as an exhibit to the registration statement, each such statement being qualified
in all respects by such reference.
For further information with respect to us and the common stock offered
hereby, reference is made to the Registration Statement. A copy of the
Registration Statement can be inspected by anyone without charge at the Public
Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's Regional Offices located at 7
World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison
Street, Chicago, Illinois 60601. Copies of such materials can be obtained by
mail from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. The Commission maintains a
Web site (which can be found at http://www.sec.gov) that contains information
regarding registrants that file electronically with the Commission.
52
<PAGE> 54
APPLIED FILMS CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................... F-3
Consolidated Balance Sheets as of June 27, 1998, July 3,
1999 and January 1, 2000 (unaudited)...................... F-4
Consolidated Statements of Operations for the fiscal years
ended June 28, 1997, June 27, 1998, July 3, 1999, and the
six months ended January 2, 1999 and January 1, 2000
(unaudited)............................................... F-6
Consolidated Statements of Stockholders' Equity for the
fiscal years ended June 28, 1997, June 27, 1998, and July
3, 1999................................................... F-7
Consolidated Statements of Cash Flows for the years ended
June 28, 1997, June 27, 1998, July 3, 1999, and the six
months ended January 2, 1999 and January 1, 2000
(unaudited)............................................... F-8
Notes to Consolidated Financial Statements.................. F-10
</TABLE>
F-1
<PAGE> 55
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-2
<PAGE> 56
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 July 3, 1999 and the related consolidated statements of operations,
stockholders' equity and cash flows for the fiscal years ended June 28, 1997,
June 27, 1998 and July 3, 1999. 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 July 3, 1999,
and the consolidated results of their operations and their cash flows for the
fiscal years ended June 28, 1997, June 27, 1998 and July 3, 1999, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Denver, Colorado,
July 27, 1999.
F-3
<PAGE> 57
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 27, JULY 3, JANUARY 1,
ASSETS 1998 1999 2000
------ -------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents....................... $ 81 $ 1,163 $ 1,426
Accounts and trade notes receivable, net of
allowance of $133, $73 and $62--
Coated glass and other..................... 6,010 5,501 5,635
Income earned, not yet billed.............. 1,436 -- --
Due from affiliate......................... -- 1,560 --
Inventories, net................................ 10,055 8,152 9,530
Prepaid expenses and other...................... 948 675 333
Income tax receivable........................... -- 711 523
Deferred tax asset, net......................... 837 169 322
-------- ------- -------
Total current assets....................... 19,367 17,931 17,769
-------- ------- -------
Property, Plant and Equipment:
Land............................................ 270 270 270
Building........................................ 240 226 226
Machinery and equipment......................... 17,354 15,491 15,344
Office furniture and equipment.................. 502 444 323
Leasehold improvements.......................... 1,022 1,340 1,441
-------- ------- -------
19,388 17,771 17,604
Accumulated depreciation........................ (10,129) (9,144) (9,772)
-------- ------- -------
9,259 8,627 7,832
-------- ------- -------
Deferred tax asset, net.............................. -- -- 139
Investment in Affiliate.............................. 71 3,637 4,354
-------- ------- -------
$ 28,697 $30,195 $30,094
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
<PAGE> 58
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
JUNE 27, JULY 3, JANUARY 1,
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1999 2000
------------------------------------ -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Current Liabilities:
Trade accounts payable.......................... $ 5,241 $ 3,950 $ 5,992
Accrued expenses................................ 2,955 1,656 1,365
Income taxes payable............................ 291 -- --
Current portion of--
Deferred revenue........................... -- 236 236
Deferred gain.............................. 56 56 56
Long-term debt............................. 77 221 104
------- ------- -------
Total current liabilities.................. 8,620 6,119 7,753
Non-Current Liabilities:
Long-term debt, net of current portion.......... 4,175 7,180 4,819
Deferred revenue, net of current portion........ -- 1,356 1,238
Deferred gain, net of current portion........... 756 700 672
Deferred tax liability, net..................... 320 182 --
------- ------- -------
Total liabilities.......................... 13,871 15,537 14,482
------- ------- -------
Commitments (Note 9)
Stockholders' Equity:
Preferred stock, no par value, 1,000,000 shares
authorized; no shares outstanding............. -- -- --
Common stock, no par value, 10,000,000 shares
authorized; 3,472,688 and 3,487,058 shares
issued and outstanding at June 27, 1998 and
July 3, 1999, respectively.................... 9,424 9,473 9,525
Deferred compensation........................... (7) -- --
Other Cumulative Comprehensive Income........... -- -- 118
Retained earnings............................... 5,409 5,185 5,969
------- ------- -------
Total stockholders' equity................. 14,826 14,658 15,612
------- ------- -------
$28,697 $30,195 $30,094
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-5
<PAGE> 59
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------ -----------------------
JUNE 28, JUNE 27, JULY 3, JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
-------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net Sales:
Non-affiliated................... $ 34,050 $53,041 $28,582 $15,527 $15,696
Joint Venture.................... -- -- 2,941 -- --
-------- ------- ------- ------- -------
34,050 53,041 31,523 15,527 15,696
Cost Of Goods Sold.................... 27,352 42,150 27,070 13,650 13,518
-------- ------- ------- ------- -------
Gross Profit.......................... 6,698 10,891 4,453 1,877 2,178
Selling, General and Administrative
Expenses............................ 2,996 5,067 3,760 2,099 1,710
Research and Development Expenses..... 749 1,243 1,044 472 664
-------- ------- ------- ------- -------
(Loss) Income from
Operations.......................... 2,953 4,581 (351) (694) (196)
-------- ------- ------- ------- -------
Other (Expense) Income:
Gain on foreign currency
exchange....................... 96 174 24 (16) 15
Equity earnings in affiliate..... -- -- 382 -- 818
Other (loss) income, net......... (20) 23 16 6 171
Interest income.................. 19 55 19 10 7
Interest expense................. (822) (496) (572) (251) (240)
-------- ------- ------- ------- -------
(727) (244) (131) (251) 771
-------- ------- ------- ------- -------
(Loss) Income Before Income Taxes and
Cumulative Effect of Change in
Accounting Principle................ 2,226 4,337 (482) (945) 575
Income Tax Benefit
(Provision)......................... (605) (1,480) 258 416 260
-------- ------- ------- ------- -------
Income (Loss) before Cumulative Effect
of Change in Accounting Principle... 1,621 2,857 (224) (529) 835
Cumulative Effect of Change in
Accounting Principle................ -- -- -- -- 50
-------- ------- ------- ------- -------
Net Loss (Income)..................... $ 1,621 $ 2,857 $ (224) $ (529) $ 785
======== ======= ======= ======= =======
Net (Loss) Income Per Share:
Basic............................ $ 0.58 $ 0.90 $ (0.06) $ (0.15) $ 0.23
======== ======= ======= ======= =======
Diluted.......................... $ 0.58 $ 0.85 $ (0.06) $ (0.15) $ 0.22
======== ======= ======= ======= =======
Weighted Average Common Shares
Outstanding:
Basic............................ 2,796 3,181 3,478 3,476 3,490
======== ======= ======= ======= =======
Diluted.......................... 2,814 3,375 3,478 3,476 3,670
======== ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 60
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE FISCAL YEARS ENDED JULY 3, 1999, JUNE 27, 1998
AND JUNE 28, 1997
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
OTHER
COMMON STOCK HELD BY AFFILIATE CUMULATIVE TOTAL
------------------ ----------------- DEFERRED COMPREHENSIVE RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT COMPENSATION GAIN EARNINGS EQUITY
--------- ------ ------- ------- ------------ ------------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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)................. 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
Net (loss)................. -- -- -- -- -- -- (224) (224)
ESPP stock issuance........ 10,564 33 -- -- -- -- -- 33
Exercise of stock
options.................. 3,806 16 -- -- -- -- -- 16
Amortization of deferred
compensation............. -- -- -- -- 7 -- -- 7
Changes in cumulative
translation adjustments...... -- -- -- -- -- -- -- --
--------- ------ ------ ---- ---- -- ------ -------
Balances, July 3, 1999......... 3,487,058 $9,473 -- $ -- $ -- $-- $5,185 $14,658
========= ====== ====== ==== ==== == ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 61
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SIX MONTHS ENDED
------------------------------ -----------------------
JUNE 28, JUNE 27, JULY 3, JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
-------- -------- -------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net (loss) income........................ $ 1,621 $ 2,857 $ (224) $ (529) $ 785
Adjustments to reconcile net (loss)
income to net cash flows from operating
activities--
Depreciation and amortization....... 1,473 1,800 1,759 861 847
Amortization of deferred
compensation...................... 61 24 7 -- --
Amortization of deferred gain on
lease............................. -- (22) (56) (28) (28)
Amortization of deferred revenue on
sale to joint venture............. -- -- (52) -- (118)
Amortization and write-off of joint
venture organizational costs...... -- -- -- -- 102
Deferred income tax
provision/benefit................. (112) (558) 530 44 (474)
(Gain) loss on disposals of
property, plant and equipment..... 6 (4) (20) 1 (2)
Equity in earnings of affiliate..... (7) (50) (330) -- (701)
Deferred gain on equipment sale to
Joint Venture..................... -- -- 1,588 -- --
Cost of equipment sale to Joint
Venture........................... -- -- 1,693 -- --
Changes in--
Accounts and trade notes
receivable, net.............. (3,656) (985) 385 2,545 1,426
Inventories.................... 654 (3,895) 1,903 535 (1,378)
Prepaid expenses and other..... (385) (520) 273 (159) 342
Accounts payable-trade......... 1,401 1,439 (1,291) (1,998) 2,040
Deferred revenue............... 1,500 (1,500) -- --
Accrued expenses............... 798 1,683 (1,243) (751) (289)
Income taxes payable
(receivable)................. 684 (61) (1,002) (363) 188
------- ------- ------- ------- -------
Net cash flows from operating
activities................... $ 4,038 $ 208 $ 3,920 $ 158 $ 2,740
------- ------- ------- ------- -------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE> 62
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED SIX MONTHS ENDED
----------------------------- -----------------------
JUNE 28, JUNE 27, JULY 3, JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
-------- -------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash Flows From Investing Activities:
Purchase of land............................. $ (269) $ -- $ -- $ -- $ --
Purchase of building......................... (270) -- -- -- --
Purchases of machinery and equipment......... (1,320) (4,339) (2,736) (1,892) (53)
Reimbursement of equipment costs............. 161 -- -- -- --
Purchases of office furniture and
equipment.................................. (73) (53) (25) (9) --
Purchases of leasehold improvements.......... (4) (1,023) (198) (168) --
Proceeds from sale of equipment.............. 60 12 159 -- --
Proceeds from sale of building............... -- 2,172 -- -- --
Investment in affiliate...................... -- (71) (3,236) (522) --
Proceeds from liquidation of investment in
affiliate.................................. -- 172 -- -- --
Proceeds from sale of lease purchase
option..................................... -- 834 -- -- --
Other........................................ 20 -- -- -- --
-------- -------- ------- ------- -------
Net cash flows from investing
activities............................ (1,695) (2,296) (6,036) (2,591) (53)
-------- -------- ------- ------- -------
Cash Flows From Financing Activities:
Proceeds from borrowings of long-term debt... 8,128 16,715 12,747 7,508 1,016
Repayment of long-term debt.................. (10,434) (20,048) (9,598) (4,217) (3,494)
Issuance of common stock..................... -- 5,205 49 32 54
-------- -------- ------- ------- -------
Net cash flows from financing
activities............................ (2,306) 1,872 3,198 3,323 (2,424)
-------- -------- ------- ------- -------
Net Increase (Decrease) In Cash................... 37 (216) 1,082 890 263
Cash And Cash Equivalents, beginning of period.... 260 297 81 81 1,163
-------- -------- ------- ------- -------
Cash And Cash Equivalents, end of period.......... $ 297 $ 81 $ 1,163 $ 971 $ 1,426
======== ======== ======= ======= =======
Supplemental Cash Flow Information:
Cash paid for interest, net of amounts
capitalized................................ $ 593 $ 767 $ 735 $ 282 $ 228
======== ======== ======= ======= =======
Cash paid (received) for income taxes, net... $ 123 $ 2,109 $ (100) $ (100) $ --
======== ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE> 63
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INCLUDING INFORMATION APPLICABLE TO UNAUDITED PERIODS)
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation, (the "Company"), was originally incorporated in
1992 as a Michigan corporation. In June 1995, the Company reincorporated in
Colorado. The Company's principal line of business is the manufacture and sale
of thin film glass for use in flat panel and liquid crystal displays. During
1997, the Company began selling its thin film coating 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.
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.
JOINT VENTURE
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 (Note 4).
(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.
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 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 for the first six
months of fiscal year 2000 of $260,000.
F-10
<PAGE> 64
UNAUDITED INTERIM RESULTS
The accompanying interim consolidated financial statements as of January 1,
2000, and for the six months ended January 2, 1999 and January 1, 2000, together
with the related notes, are unaudited. The unaudited interim financial
statements have been prepared on the same basis as the annual financial
statements and, in the opinion of management, reflect all adjustments, which
include only normal recurring adjustments, necessary to present fairly the
Company's financial position, results of operations and its cash flows as of
January 1, 2000 and for the six months ended January 2, 1999 and January 1,
2000. The results for the six months ended January 1, 2000 are not necessarily
indicative of the results to be expected for the year ending July 1, 2000.
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
1997, 1998, 1999 and 2000 include 52, 52, 53 and 52 weeks, respectively.
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.
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 experienced a slowdown in orders during fiscal 1998
and continuing through most of 1999. To limit the Company's credit risk,
management performs ongoing credit evaluations of its customers and requires
letters of credit from certain of its foreign customers prior to shipment. Sales
within Asia totaled approximately $26.1 million, $40.6 million and $26.5 million
in the years ended June 28, 1997, June 27, 1998 and July 3, 1999, respectively.
At July 3, 1999, approximately $5.2 million of the Company's coated glass sales
were receivable from 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 July 3, 1999.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at June 27, 1998, July 3, 1999, and January 1, 2000 consist
of the following:
<TABLE>
<CAPTION>
JUNE 27, JULY 3, JANUARY 1,
1998 1999 2000
----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials, net........................ $ 6,555,000 $4,195,000 $4,282,000
Work-in-process........................... 11,000 23,000 24,000
Materials for manufacturing systems....... 302,000 192,000 152,000
Finished goods............................ 3,187,000 3,742,000 5,072,000
----------- ---------- ----------
$10,055,000 $8,152,000 $9,530,000
=========== ========== ==========
</TABLE>
F-11
<PAGE> 65
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. Depreciation is computed on straight-line or accelerated
methods over the following estimated useful lives. Leasehold improvements are
depreciated over the lesser of the useful life of the asset or the lease term.
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
------------
<S> <C>
Building.................................................... 30 years
Machinery and equipment..................................... 3-10 years
Office furniture and equipment.............................. 3-5 years
</TABLE>
DEFERRED GAIN
During June 1997, the Company entered into a lease transaction with a third
party for the Company's new manufacturing and administrative facility in
Longmont, Colorado, which included a purchase option early in the lease period.
The Company sold this purchase option to another third party, who exercised this
option and purchased the building. The Company then entered into a new lease of
the facilities (see Note 9). The Company received $834,000 for this purchase
option, which is deferred and is being amortized over the term of the lease of
15 years.
COATED GLASS REVENUE RECOGNITION
Coated glass revenues are recognized upon shipment to the customer. A
provision for estimated sales returns and allowances is recognized in the period
of the sale.
EQUIPMENT SALES 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.
Income received but not yet earned, 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 $1.4 million at June 27, 1998, represents revenues earned prior to
billing. The Company offers warranty coverage for equipment sales for a period
ranging from 3 to 12 months after being placed in service. 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, are made in the period
they become evident.
DEFERRED REVENUE
During fiscal 1999, the Company sold refurbished thin film coating
equipment to a 50% owned Joint Venture (see Note 4). Because the Company owns
50% of the Joint Venture, the Company recorded 50% of the revenue and related
cost of the sale and has deferred 50% of the gross margin, approximately $1.4
million, (representing the Company's intercompany profit due to its ownership of
F-12
<PAGE> 66
the Joint Venture), which will be recognized over seven years, the estimated
depreciable life of the equipment. The amortization of the gross margin is
included with equity in earnings of affiliate in the accompanying statements of
operations.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and consist
primarily of salaries and supplies. The Company incurred approximately $749,000,
$1.2 million and $1.0 million of research and development costs for the years
ended June 28, 1997, June 27, 1998 and July 3, 1999, respectively, net of
reimbursements received from a contracting research organization.
FOREIGN CURRENCY TRANSACTIONS
The Company generated 78% and 85% of its revenues in fiscal years 1998 and
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 or payables for such sales or
purchases are translated into 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, and any unrealized gains or losses are recorded as other income
or loss at period end.
NET (LOSS) INCOME PER SHARE
During fiscal year 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings per Share". SFAS No. 128
establishes standards for computing and presenting basic and diluted earnings
per share (EPS). Under this statement, basic earnings (loss) per share is
computed by dividing the net earnings or loss by the weighted average number of
shares of common stock outstanding. Diluted earnings (loss) per share is
determined by dividing the net earnings or loss by the sum of (1) the weighted
average number of common shares outstanding and (2) if not anti-dilutive, the
effect of outstanding warrants and stock options determined utilizing the
treasury stock method.
A reconciliation between the number of shares used to calculated basic and
diluted earnings per share is as follows (in thousands of shares):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
------------------------
JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
----- ----- ----- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Weighted average number of common shares
outstanding (shares used in basic
earnings per share computation)....... 2,796 3,181 3,478 3,477 3,490
Effect of stock options (treasury stock
method)............................... 18 194 N/A N/A 180
----- ----- ----- ----- -----
Shares used in diluted earnings per
share computation..................... 2,814 3,375 3,478 3,477 3,670
===== ===== ===== ===== =====
</TABLE>
As the Company recognized a loss for fiscal year 1999, the effect of common
stock issuable upon exercise of all options has been excluded from the
computation of diluted earnings per share for fiscal year 1999. Additionally,
based on the weighted average exercise price for all options outstanding
F-13
<PAGE> 67
during the period being in excess at the average market price for the year there
are no additional potentially dilutive securities for the period.
ADOPTION OF NEW ACCOUNTING STANDARDS
The Company adopted SFAS No. 130, "Reporting Comprehensive Income" in
fiscal year 1999. 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 June 1997, the Financial Accounting Standard Boards ("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 No.
131 is effective for fiscal years beginning after December 15, 1997. Management
evaluates the business of the Company through analysis of the coated glass and
thin films coating equipment lines of business (see Note 10).
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.
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. Through
the end of fiscal 1999, the Company has been deferring certain start-up costs
related to the Joint Venture in China (see Note 4). The application of SOP 98-5
in the first quarter of fiscal 2000 was recorded as a change in accounting
principle.
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, as amended by SFAS
No. 137, is effective for years beginning after June 15, 2000. 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.
F-14
<PAGE> 68
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 it believes that there is no effect on the
revenue recognition policies currently in place.
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.
RELATED PARTIES
In addition to the Company's Joint Venture investment described in Note 1,
the Company has engaged in the following related party transactions. During
fiscal 1999, the Company had $1.0 million in sales to a company of which a
member of the board of directors is the president.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the current
year presentation.
(3) LONG-TERM DEBT
<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
---------- ----------
<S> <C> <C>
Revolving credit facility, due September 30, 2000
(subsequently extended to September 17, 2002), 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 7.71%,
at June 27, 1998 and July 3, 1999, respectively).......... $3,910,000 $7,000,000
Note payable secured by a deed of trust on land and
buildings, payable in 60 monthly installments of principal
and interest of $7,692 (final payment due June 27, 2002);
with interest accruing at 8.79%........................... 310,000 241,000
Note payable for insurance policy secured by any insurance
proceeds and dividends, payable in 17 monthly installments
of principal and interest of $13,984 (final payment due
April 18, 2000); with interest accruing at 7.17%.......... -- 137,000
Other capital leases of equipment........................... 32,000 23,000
---------- ----------
4,252,000 7,401,000
Less-current portion........................................ (77,000) (221,000)
---------- ----------
Total long-term debt........................................ $4,175,000 $7,180,000
========== ==========
</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 $11.5 million, due on
June 30, 2000. Effective July 1999, the maturity date
F-15
<PAGE> 69
of the Agreement was extended to September 17, 2002. 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
("EBITDA"); a ratio of total liabilities to tangible net worth and maintain a
certain amount of tangible net worth, all as defined in the Agreement. At
yearend, the Company was not in compliance with the ratio of debt to EBITDA.
However, the Company obtained a waiver on the covenant from the bank extending
the deadline for compliance to September 30, 2000. At January 1, 2000 the
Company was in compliance with its covenants. An amendment fee of $5,000 was
paid for the waiver. As such, as of July 3, 1999, 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 July 3, 1999, all of the borrowings on the revolving
credit facility are held at the Eurodollar rate.
Maturities of debt at July 3, 1999, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Fiscal Year --
2000.............................................. $ 221,000
2001.............................................. 7,092,000*
2002.............................................. 88,000
----------
Total........................................ $7,401,000
==========
</TABLE>
* Effective July 1999, the maturity of the $7 million was extended to
fiscal year 2003.
(4) INVESTMENT IN JOINT VENTURE
In June 1998, the Company formed a 50/50 Joint Venture with NSG in China to
manufacture, process, sell and export certain types of thin film coated glass.
Each party contributed $3.2 million in cash for our equity interest to the Joint
Venture. During the third quarter of fiscal 1999, 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, is payable in February,
June and August 1999. The company received the first two payments in February
and June of 1999. The balance sheet reflects a receivable of $1.5 million from
the Joint Venture for the final payment due in August. As this was a sale of
refurbished equipment, revenue for this transaction was recognized upon transfer
of title.
The Joint Venture began operations during the fourth quarter of fiscal
1999. The Company recorded 50% of income or loss 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 fourth quarter, the Company purchased coated glass totaling
$847,000 from the Joint Venture, of which $398,000 remained in inventory at
yearend. During the first six months of fiscal 2000, the company purchased glass
totaling $3.8 million, of which $441,000 remained in inventory at January 1,
2000. In addition, the Company received royalties totaling $44,000 for the year
ended July 3, 1999, and $143,000 for the six months ended January 1, 2000. In
December 1999, the Company guaranteed debt of $1.7 million of the Joint Venture.
F-16
<PAGE> 70
Summarized income statement information for the Joint Venture for the year
ended July 3, 1999 and the six months ended January 1, 2000 is presented below
(000's):
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
JULY 3, 1999 JANUARY 1, 2000
------------ ---------------
(UNAUDITED)
<S> <C> <C>
Joint Venture:
Operating revenues................................ $ 4,139 $11,463
======= =======
Net income........................................ $ 661 $ 1,401
======= =======
AFCO's equity in earnings:
Equity in earnings of Joint Venture............... $ 330 $ 701
======= =======
</TABLE>
Summarized balance sheet information for the Joint Venture as of July 3,
1999 and January 1, 2000 is presented below (000's):
<TABLE>
<CAPTION>
JULY 3, 1999 JANUARY 1, 2000
------------ ---------------
(UNAUDITED)
<S> <C> <C>
Assets:
Current assets.................................... $ 5,411 $ 7,833
Property, plant and equipment..................... 10,414 9,930
------- -------
$15,825 $17,763
======= =======
Capitalization and Liabilities:
Current liabilities............................... $ 7,125 $ 6,121
Long-term debt.................................... 1,596 3,138
Common shareholders' equity....................... 7,104 8,504
------- -------
$15,825 $17,763
======= =======
</TABLE>
(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. As of July 3, 1999, all
of the compensation has been expensed.
In April 1997, the Company adopted the 1997 Stock Option Plan (the "1997
Plan") covering 272,500 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.
In October 1999 the Company adopted the Outside Director Stock Option Plan
covering 24,000 shares of common stock. The exercise price of the options under
this plan is determined based upon the estimated fair market value.
F-17
<PAGE> 71
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 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 No. 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 No. 123 had been applied. The Company has elected to account for its
stock-based compensation plans for employees and directors under APB 25.
Accordingly, for purposes of the pro forma disclosures presented below, the
Company has computed the fair values of all options granted during fiscal 1999
and 1998 using the Black-Scholes pricing model and the following weighted
average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 6.32% 5.66% 5.21%
Expected lives....................................... 5 years 5 years 7 years
Expected volatility.................................. 51% 64% 77%
Expected dividend yield.............................. 0% 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. Because of the exercise trend related to
both the 1993 and 1995 option grants, the expected life of the options has been
extended to seven years in 1999. 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.
The total fair value of options granted was computed to be approximately
$230,000, $147,000 and $51,000 for the years ended June 28, 1997, June 27, 1998
and July 3, 1999, 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 $5,000, $82,000 and $88,000 for the fiscal years
ended June 28, 1997, June 27, 1998 and July 3, 1999, 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>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Net income (loss):
As reported...................................... $1,621 $2,857 $ (224)
====== ====== ======
Pro forma........................................ $1,616 $2,768 $ (313)
====== ====== ======
Basic earnings (loss) per share:
As reported...................................... $ 0.58 $ 0.90 $(0.06)
====== ====== ======
Pro forma........................................ $ 0.58 $ 0.87 $(0.09)
====== ====== ======
</TABLE>
F-18
<PAGE> 72
A summary of the 1993 and 1997 Plans is as follows:
<TABLE>
<CAPTION>
FOR THE FISCAL YEARS ENDED
------------------------------------------------------------
JUNE 28, 1997 JUNE 27, 1998 JULY 3, 1999
------------------ ------------------ ------------------
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... 260,183 $2.83 345,100 $3.43 379,645 $ 3.77
Granted.......................... 84,917 5.26 34,545 7.20 25,000 2.75
Forfeited........................ -- -- -- -- (23,746) (6.61)
Exercised........................ -- -- -- -- (3,806) (2.87)
------- ----- ------- ----- ------- ------
Outstanding at end of year......... 345,100 $3.43 379,645 $3.77 377,093 $ 3.53
======= ===== ======= ===== ======= ======
Exercisable at end of year......... 200,111 $2.78 255,695 $3.05 306,756 $ 3.29
======= ===== ======= ===== ======= ======
Weighted average fair value of
options granted.................. $2.71 $4.26 $ 2.05
===== ===== ======
</TABLE>
The following table summarizes information about employee stock options
outstanding and exercisable at July 3, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- -------------------------
NUMBER OF WEIGHTED
OPTIONS AVERAGE WEIGHTED NUMBER WEIGHTED
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF JULY 3, CONTRACTUAL EXERCISE JULY 3, EXERCISE
EXERCISE PRICES 1999 LIFE IN YEARS PRICE 1999 PRICE
- --------------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C>
$2.32...................... 121,107 3.90 $2.32 121,107 $2.32
$3.29...................... 134,554 6.60 3.29 134,554 3.29
$5.26...................... 79,160 8.90 5.26 42,459 5.26
$7.20...................... 17,272 8.25 7.20 8,636 7.20
$2.75...................... 25,000 9.90 2.75 -- --
------- ----- ------- -----
377,093 $3.53 306,756 $3.29
======= ===== ======= =====
</TABLE>
Subsequent to yearend, an additional 17,273 options were granted to the new
Chief Financial Officer of the Company at an exercise price of $3.50 per share.
The options vest 25% per year beginning July 12, 2000 for the next four years.
EMPLOYEE STOCK PURCHASE PLAN
On September 5, 1997, the board of directors of the Company adopted, and
the shareholders subsequently approved, the Applied Films Corporation Employee
Stock Purchase Plan (the "Purchase Plan"). The Purchase Plan will permit
eligible employees of the Company to purchase shares of common stock through
payroll deductions. Shares are 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
F-19
<PAGE> 73
be administered in accordance with the limitations set forth in Section 423 and
the rules and regulations thereunder.
During 1999, the Company issued shares to employees under this plan at a
grant price ranging from $2.42 to $4.84 per share. A total of 10,564 shares have
been issued under the plan. Subsequent to year-end 1999 an additional 1,818
shares were granted, at a price of $3.13 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 (liability) asset is comprised of the following:
<TABLE>
<CAPTION>
JUNE 27, JULY 3,
1998 1999
--------- ---------
<S> <C> <C>
Inventories................................................. $ 118,000 $ 54,000
Accrued expenses............................................ 771,000 281,000
Equity earnings in affiliate................................ (24,000) (135,000)
Foreign currency............................................ (28,000) (31,000)
--------- ---------
Total current deferred tax asset, net.................. 837,000 169,000
--------- ---------
Property, plant and equipment............................... (670,000) (748,000)
Deferred compensation....................................... 216,000 219,000
Deferred gain............................................... 303,000 261,000
Deferred revenue............................................ -- 86,000
Other....................................................... (169,000) --
--------- ---------
Total non-current deferred tax liability, net.......... (320,000) (182,000)
--------- ---------
Total deferred tax (liability) asset, net.............. $ 517,000 $ (13,000)
========= =========
</TABLE>
Income tax (benefit) provision for the years ended June 28, 1997, June 27,
1998 and July 3, 1999 consist of the following:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED
----------------------------------
JUNE 28, JUNE 27, JULY 3,
1997 1998 1999
--------- ---------- ---------
<S> <C> <C> <C>
Taxes currently payable/(receivable):
Federal............................................. $ 695,000 $1,858,000 $(718,000)
State............................................... 22,000 180,000 (70,000)
--------- ---------- ---------
Total current (benefit) provision.............. 717,000 2,038,000 (788,000)
Taxes deferred:
Federal............................................. (143,000) (509,000) 483,000
State............................................... 31,000 (49,000) 47,000
--------- ---------- ---------
Total deferred provision (benefit)............. (112,000) (558,000) 530,000
--------- ---------- ---------
Total tax (benefit) provision.................. $ 605,000 $1,480,000 $(258,000)
========= ========== =========
</TABLE>
F-20
<PAGE> 74
Reconciliations between the effective statutory federal income tax
(benefit) expense rate and the Company's effective income tax (benefit)
provision rate as a percentage of net (loss) income before taxes were as
follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS
------------------------------ ENDED
JUNE 28, JUNE 27, JULY 3, JANUARY 1,
1997 1998 1999 2000
-------- -------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Statutory federal income tax (benefit) provision
rate............................................. 34.0% 34.0% (34.0)% 34.0%
State income taxes................................. 3.3 3.3 (3.3) 3.3
Decrease in valuation allowance.................... (0.5) (1.1) -- --
Effect of FSC...................................... (5.8) (4.4) (18.1) --
Effect of reversal of provision on earnings of
Joint Venture (Note 2)........................... -- -- -- (90.5)
Other.............................................. (3.8) 2.3 2.0 8.0
------ ------ ------ ------
27.2% 34.1% (53.4)% (45.2)%
====== ====== ====== ======
</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 $247,000,
$482,000 and $0 in fiscal years 1997, 1998 and 1999, respectively, related to
this plan.
(8) SIGNIFICANT CUSTOMERS
During fiscal years 1997, 1998, 1999, and the six months ended January 2,
1999 and January 1, 2000, approximately 83%, 78%, 85%, 83% and 91%,
respectively, of the Company's gross sales were to overseas customers. The
Company's ten largest customers accounted for in the aggregate, approximately
59%, 78% and 62% of the Company's gross sales in fiscal 1997, 1998 and 1999,
respectively. In addition, two individual customers represented 33% and 15% of
sales, respectively, in 1998, and 15% and 11% of sales, respectively, in 1999.
These customers were not individually significant in 1997. The loss of, or a
significant reduction of purchases by, one or more of these customers would have
a material adverse effect on the Company's operating results.
F-21
<PAGE> 75
The breakdown of sales by geographic region is as follows:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SIX MONTHS ENDED
--------------------------------------- -------------------------
JUNE 28, JUNE 27, JULY 3, JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Asia (other than Japan)...... $19,534,000 $32,800,000 $18,900,000 $ 8,479,000 $ 9,501,000
Japan........................ 6,611,000 7,824,000 7,645,000 4,021,000 5,037,000
United States................ 5,997,000 12,224,000 4,924,000 2,711,000 1,424,000
Europe and Other............. 2,941,000 2,304,000 1,263,000 696,000 282,000
----------- ----------- ----------- ----------- -----------
Gross sales.................. 35,083,000 55,152,000 32,732,000 16,177,000 16,244,000
Less: sales returns and
allowances................. (1,033,000) (2,111,000) (1,209,000) (650,000) (548,000)
----------- ----------- ----------- ----------- -----------
Net sales.................... $34,050,000 $53,041,000 $31,523,000 $15,527,000 $15,696,000
=========== =========== =========== =========== ===========
</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 $96,000, $174,000 and $24,000 of foreign
currency exchange rate (loss) gain on foreign currency exchange rate
fluctuations for the fiscal years ended June 28, 1997, June 27, 1998 and July 3,
1999, respectively. The Company currently has approximately $605,000 of its
accounts receivable and $1.0 million of its accounts payable denominated in
Japanese Yen as of July 3, 1999.
(9) COMMITMENTS
The Company is obligated under certain noncancelable operating leases for
office, manufacturing and warehouse facilities. During June 1997, 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 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 straight lined for the annual contractual
increase of 1.5% 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.
The future minimum rental payments under the leases are as follows:
<TABLE>
<S> <C>
Fiscal year --
2000................................................... $ 861,000
2001................................................... 873,000
2002................................................... 886,000
2003................................................... 899,000
2004................................................... 882,000
Thereafter............................................. 8,039,000
-----------
$12,440,000
===========
</TABLE>
F-22
<PAGE> 76
(10) 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>
<CAPTION>
SIX MONTHS ENDED
-----------------------
JANUARY 2, JANUARY 1,
1997 1998 1999 1999 2000
------- ------- ------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales:
Thin film coated glass......................... $31,266 $39,133 $26,906 $13,827 $15,268
Thin film coating equipment.................... 2,784 13,908 4,617 1,700 428
------- ------- ------- ------- -------
Total net sales........................... $34,050 $53,041 $31,523 $15,527 $15,696
======= ======= ======= ======= =======
Operating (loss) income:
Thin film coated glass......................... $ 4,325 $ 3,657 $ (148) $ 123 $ 1,170
Thin film coating equipment.................... (1,372) 924 (203) (817) (1,366)
------- ------- ------- ------- -------
Total operating (loss) income............. $ 2,953 $ 4,581 $ (351) $ (694) $ (196)
======= ======= ======= ======= =======
Identifiable fixed assets:
Thin film coated glass......................... $ 5,777 $ 7,927 $ 6,634 $ 8,495 $ 5,819
Thin film coating equipment.................... 432 28 38 256 1,496
Corporate and other............................ 1,614 1,304 1,955 672 517
------- ------- ------- ------- -------
Total identifiable fixed assets........... $ 7,823 $ 9,259 $ 8,627 $ 9,423 $ 7,832
======= ======= ======= ======= =======
</TABLE>
(11) 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.
F-23
<PAGE> 77
[PHOTO]
[PHOTO]
[PHOTO]
[APPLIED FILMS CORPORATION LOGO]
ATX-700
The ATX-700 is modular and can be configured to meet multiple thin film
coating requirements for the high-end FPD market, including plasma displays and
active matrix LCDs. The ATX-700 is particularly well suited for the high growth
plasma display market where we can offer our unique patent-pending magnesium
oxide sputtering process. We believe this process allows MgO to be applied with
greater uniformity than the current vacuum evaporation method. We believe the
process also results in increased yields, increased throughput and reduced
costs. The ATX-700 platform is designed to apply other critical coatings in the
plasma display fabrication facility, including ITO and CrCuCr. This capability
allows the display manufacturer to use a common platform in multiple locations
in the manufacturing line, creating operational efficiencies. The ATX-700 can
also be configured for the low temperature ITO and chrome black matrix processes
used to produce active matrix LCDs.
<PAGE> 78
- ------------------------------------------------------
- ------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. THE INFORMATION IN THIS
DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF THIS DOCUMENT.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 7
Special Note Regarding Forward-
Looking Statements.................. 14
Use of Proceeds....................... 15
Dividend Policy....................... 15
Capitalization........................ 16
Price Range of Common Stock........... 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operation........................ 19
Business.............................. 27
Management............................ 40
Executive Compensation................ 43
Certain Transactions.................. 46
Principal and Selling Shareholders.... 46
Description of Capital Stock.......... 48
Underwriting.......................... 50
Legal Matters......................... 52
Experts............................... 52
Additional Information................ 52
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
3,066,500 SHARES
APPLIED FILMS CO. LOGO
COMMON STOCK
------------------------
Prospectus
------------------------
NEEDHAM & COMPANY, INC.
D.A. DAVIDSON & CO.
FIRST SECURITY VAN KASPER
, 2000
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 79
PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the common stock being registered, other than
underwriting discounts and commission. All amounts shown are estimates, except
the SEC registration fee and the NASD filing fee, and assume sale of 3,066,500
shares in the offering. All expenses shown will be paid by the Company.
<TABLE>
<S> <C>
SEC registration fee............................. $ 13,937
NASD filing fee.................................. 5,779
Printing and mailing expenses.................... 100,000
Legal fees and expenses.......................... 120,000
Accounting and related expenses.................. 40,000
Blue Sky fees and expenses....................... 2,500
Registrar and Transfer Agent fees................ 2,500
Miscellaneous.................................... 15,284
--------
Total............................................ $300,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 7-109-102 through 7-109-110 of the Colorado Business Corporation
Act (the "CBCA") grant the Registrant broad powers to indemnify any person in
connection with legal proceedings brought against him by reason of his present
or past status as an officer or director of the Registrant, provided with
respect to conduct in an official capacity with the Registrant, the person acted
in good faith and in a manner he reasonably believed to be in the best interests
of the Registrant. With respect to all other conduct, the person believed the
conduct to be in or at least not opposed to the best interests of the
Registrant. With respect to any criminal action or proceeding, the person had no
reasonable cause to believe his conduct was unlawful. Indemnification is limited
to reasonable expenses incurred in connection with the proceeding. No
indemnification may be made in connection with a proceeding by or in the right
of the Registrant in which the person to be indemnified was adjudged liable to
the Registrant or in connection with any other proceedings charging that the
person derived an improper personal benefit. This is the case whether or not the
action was taken in an official capacity when the person was judged liable
because he derived an improper personal benefit, unless the court in which such
action was brought, or another court of competent jurisdiction, determines that,
despite such adjudication, but in view of all relevant circumstances, the person
is fairly and reasonably entitled to indemnity for reasonable expenses provided
that the Articles of Incorporation of the Registrant do not state otherwise. In
addition, to the extent that any such person is successful in the defense of any
such legal proceeding, the Registrant is required by the CBCA to indemnify him
against reasonable expenses.
The Registrant's Amended and Restated Articles of Incorporation contain
provisions which permit the Registrant to indemnify its officers and directors
to the fullest extent permitted by the CBCA. The Registrant has entered into
indemnification agreements with each of its directors and certain of its
officers providing for similar indemnification. See Exhibit 10.4 to this
Registration Statement. In addition to the available indemnification, the
Registrant's Amended and Restated Articles of Incorporation limit the personal
liability of the members of its Board of Directors, subject to certain
exceptions, for monetary damages with respect to claims by the Registrant or its
shareholders.
II-1
<PAGE> 80
The Registrant's Amended and Restated Bylaws provide that the Registrant
may purchase and maintain insurance on behalf of its directors, officers,
employees, fiduciaries and agents against liability asserted against or incurred
by such persons in any such capacity.
The Registrant has agreed to indemnify the Underwriters, and the
Underwriters have agreed to indemnify the Registrant against certain civil
liabilities, including liabilities under the Securities Act, as amended.
Reference is made to the Underwriting Agreement filed as Exhibit 1 herewith.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant has not engaged in any sales of unregistered securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement
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).
5.1** Opinion of Varnum, Riddering, Schmidt & Howlett LLP
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, as amended, is incorporated by
reference to Exhibit 10.2 of Registrant's Registration
Statement on Form S-1, as amended (Reg. No. 333-35331) and
by reference to Exhibit 4.2 of Registrant's Registration
Statement on Form S-8 (Reg. No. 333-47967).
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 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.
10.6 Agreement, dated as of November 18, 1997, between Nippon
Sheet Glass Co., Ltd., NSG Fine Glass Co., Ltd. and
Registrant is incorporated by reference to Exhibit 10.8 of
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 27, 1998.
10.7 Amended and Restated Credit Agreement, dated as of September
17, 1999, between Registrant and Bank One, Michigan is
incorporated by reference to Exhibit 10.7 of Registrant's
Annual Report on Form 10-K for the fiscal year ended July 3,
1999.
10.8 Security Agreement dated June 30, 1994, between Registrant
and
Bank One, Michigan, formerly NBD Bank, is incorporated by
reference to Exhibit 10.5 of Registrant's Registration
Statement on Form S-1, as amended (Reg. 333-35331).
10.9 Outside Director Stock Option Plan is incorporated by
reference to Exhibit 4.1 of Registrant's Registration
Statement on Form S-8 (Reg. No. 333-95367).
</TABLE>
II-2
<PAGE> 81
<TABLE>
<S> <C>
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 Varnum, Riddering, Schmidt & Howlett LLP (included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1** Power of Attorney
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
(b) Financial Statement Schedules
None.
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes as follows:
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that, in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) For purposes of
determining any liability under the Act, the information omitted from the form
of prospectus filed as part of this Registration Statement in reliance upon Rule
430A and contained in a form of prospectus filed by the Registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective; and (2) For the
purpose of determining any liability under the Act, each post-effective
amendment that contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
<PAGE> 82
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 2 to Registration Statement No. 333-95389 to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Longmont, State of Colorado, on February 9, 2000.
APPLIED FILMS CORPORATION
By: /s/ THOMAS T. EDMAN
---------------------------------------
Thomas T. Edman
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement No. 333-95389 was signed by the following
persons in the capacities indicated on February 9, 2000.
<TABLE>
<CAPTION>
SIGNATURES TITLE
- ---------- -----
<S> <C>
/s/ THOMAS T. EDMAN President, Chief Executive Officer and
- ------------------------------------------- Director (principal executive officer)
Thomas T. Edman
/s/ LAWRENCE D. FIRESTONE Chief Financial Officer and Treasurer
- ------------------------------------------- (principal financial officer and principal
Lawrence D. Firestone accounting officer)
/s/ RICHARD P. BECK* Director
- -------------------------------------------
Richard P. Beck
/s/ JOHN S. CHAPIN* Vice President -- Research, Secretary and
- ------------------------------------------- Director
John S. Chapin
/s/ VINCENT SOLLITTO, JR.* Director
- -------------------------------------------
Vincent Sollitto, Jr.
/s/ CHAD D. QUIST* Director
- -------------------------------------------
Chad D. Quist
/s/ CECIL VAN ALSBURG* Director
- -------------------------------------------
Cecil Van Alsburg
*By /s/ THOMAS T. EDMAN
---------------------------------------
Thomas T. Edman, Attorney-in-Fact
</TABLE>
II-4
<PAGE> 83
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
1.1* Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of Applied
Films Corporation 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).
5.1** Opinion of Varnum, Riddering, Schmidt & Howlett LLP
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, as amended, is incorporated by
reference to Exhibit 10.2 of Registrant's Registration
Statement on Form S-1, as amended (Reg. No. 333-35331)
and by reference to Exhibit 4.2 of Registrant's Registration
Statement on Form S-8 (Reg.
No. 333-47967).
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 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.
10.6 Agreement, dated as of November 18, 1997, between Nippon
Sheet Glass Co., Ltd., NSG Fine Glass Co., Ltd. and
Registrant is incorporated by reference to Exhibit 10.8 of
Registrant's Annual Report on Form 10-K for the fiscal year
ended June 27, 1998.
10.7 Amended and Restated Credit Agreement, dated as of September
17, 1999, between Registrant and Bank One, Michigan is
incorporated by reference to Exhibit 10.7 of Registrant's
Annual Report on Form 10-K for the fiscal year ended July 3,
1999.
10.8 Security Agreement dated June 30, 1994, between Registrant
and
Bank One, Michigan, formerly NBD Bank, is incorporated by
reference to Exhibit 10.5 of Registrant's Registration
Statement on Form S-1, as amended (Reg. 333-35331).
10.9 Outside Director Stock Option Plan is incorporated by
reference to Exhibit 4.1 of Registrant's Registration
Statement on Form S-8 (Reg. No. 333-95367).
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 Varnum, Riddering, Schmidt & Howlett LLP
(included in Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP
24.1** Power of Attorney
</TABLE>
- -------------------------
* To be filed by amendment.
** Previously filed.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our report dated July 27, 1999 and to all references
to our Firm included in this registration statement.
/s/ ARTHUR ANDERSEN LLP
Denver, Colorado
February 9, 2000
