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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended January 1, 2000
Commission File Number 23103
APPLIED FILMS CORPORATION
(Exact Name of Registrant as Specified in its Charter)
COLORADO 84-1311581
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
9586 I-25 FRONTAGE RD., LONGMONT, COLORADO 80504
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (303) 774-3200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
3,502,136 shares of Common Stock were outstanding as of December 31, 1999.
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------
<S> <C> <C>
Item 1. Financial Statements:
Consolidated Balance Sheets as of January 1, 2000 and 3
July 3, 1999
Consolidated Statements of Operations for the Three and Six Months 5
Ended January 1, 2000 and January 2, 1999
Consolidated Statements of Cash Flows for the Six Months 7
Ended January 1, 2000 and January 2, 1999
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial 13
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 19
Market Risk
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders 20
Item 6. Exhibits and Reports on Form 8-K. 20
</TABLE>
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APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,426 $ 1,163
Accounts receivable, net
of allowance of $62 and $73 5,635 5,501
Income earned, not billed -- 1,560
Inventories, net 9,530 8,152
Prepaid expenses and other 333 675
Income tax receivable 523 711
Deferred tax asset, net 322 169
---------- ---------
Total current assets 17,769 17,931
---------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land 270 270
Building 226 226
Machinery and equipment 15,344 15,491
Office furniture and equipment 323 444
Leasehold improvements 1,441 1,340
---------- ---------
Total property plant and equipment 17,604 17,771
Accumulated depreciation (9,772) (9,144)
---------- ----------
Total property plant and equipment, net 7,832 8,627
---------- ----------
Deferred tax, net 139 --
Investment in affiliate 4,354 3,637
---------- ----------
Total Assets $ 30,094 $ 30,195
========== ==========
</TABLE>
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APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- ------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 5,992 $ 3,950
Accrued expenses 1,365 1,656
Current portion of:
Deferred revenue 236 236
Deferred gain 56 56
Long-term debt 104 221
---------- ----------
Total current liabilities 7,753 6,119
---------- ----------
NON-CURRENT LIABILITIES:
Long-term debt, net of current portion 4,819 7,180
Deferred revenue, net of current portion 1,238 1,356
Deferred gain, net of current portion 672 700
Deferred tax liability -- 182
---------- ----------
Total liabilities 14,482 15,537
---------- ----------
STOCKHOLDERS' EQUITY:
Common stock, no par value, 10,000,000
shares authorized, 3,503,564 and 3,487,058
shares issued and outstanding, respectively 9,525 9,473
Deferred compensation -- --
Other cumulative comprehensive income 118 --
Retained earnings 5,969 5,185
---------- ----------
Total stockholders' equity 15,612 14,658
---------- ----------
Total liabilities & stockholders' equity $ 30,094 $ 30,195
========== ==========
</TABLE>
4
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APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 1, 2000 January 2, 1999 January 1, 2000 January 2, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net Sales $ 8,308 $ 6,176 $ 15,696 $ 15,527
Cost of Goods Sold 7,042 5,493 13,518 13,650
--------- --------- --------- ---------
Gross Profit 1,266 683 2,178 1,877
Operating Expenses:
Selling, General and Administrative 902 794 1,710 2,099
Research and Development 315 212 664 472
--------- --------- --------- ---------
Income (Loss) from Operations 49 (323) (196) (694)
Other (Expense) Income:
Interest Expense (101) (140) (240) (251)
Other Income (Expense), Net 14 (135) 193 --
Equity Earnings in Affiliate 369 -- 818 --
--------- --------- --------- ---------
Income (Loss) before income taxes and
cumulative effect of change in accounting
principle 331 (598) 575 (945)
Income Tax Benefit 343 286 260 416
--------- --------- --------- ---------
Income (Loss) before cumulative effect of
change in accounting principle 674 (312) 835 (529)
Cumulative effect of change in accounting
principle -- -- 50 --
--------- --------- --------- ---------
Net Income (Loss) $ 674 $ (312) $ 785 $ (529)
========= ========= ========= ========
Income (Loss) per share before cumulative
effect of change in accounting principle:
Basic $ 0.19 $ (0.09) $ 0.24 $ (0.15)
========= ========= ========= ========
Diluted $ 0.18 $ (0.09) $ 0.23 $ (0.15)
========= ========= ========= ========
</TABLE>
5
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<TABLE>
<S> <C> <C> <C> <C>
Cumulative effect of change in accounting $ 0.00 $ 0.00 $ 0.01 $ 0.00
Principle net of taxes ========= ========= ========= =========
Net Income (Loss) Per Share:
Basic $ 0.19 $ (0.09) $ 0.23 $ (0.15)
========= ======== ========= =========
Diluted $ 0.18 $ (0.09) $ 0.22 $ (0.15)
========= ======== ========= =========
Weighted Average Common Shares Outstanding:
Basic 3,491 3,477 3,490 3,476
========= ========= ========= =========
Diluted 3,741 3,477 3,670 3,476
========= ========= ========= =========
</TABLE>
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APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Six Months Ended
January 1, 2000 January 2, 1999
----------------------- -----------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 785 $ (529)
Depreciation and amortization 847 861
Amortization of deferred gain on lease and joint venture (146) (28)
Amortization and write-off of joint venture
organizational costs 102 --
Undistributed earnings in affiliate (701) --
Other (2) 1
Changes in --
Accounts receivable, net 1,426 2,545
Inventories (1,378) 535
Prepaid expenses and other 342 (159)
Accounts payable and accrued expenses 1,751 (2,749)
Income taxes receivable (payable) 188 (363)
Deferred income taxes (474) 44
------------ ------------
Net cash flows from operating activities $ 2,740 $ 158
============ ============
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant & equipment (53) $ (415)
Costs incurred for completed machinery construction -- (1,644)
Change in notes receivable from employees -- (10)
Investment in Joint Venture -- (522)
------------ ------------
Net cash used in investing activities $ (53) $ (2,591)
============ ============
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Long Term Debt $ 1,016 $ 7,508
Repayment of Long Term Debt (3,494) (4,217)
Stock issuance on stock purchase plan, and stock options 54 32
------------ ------------
Net cash (used in) provided by financing activities $ (2,424) $ 3,323
============ ============
Net increase in cash 263 890
Cash and cash equivalents, beginning of period 1,163 81
------------ ------------
Cash and cash equivalents, end of period $ 1,426 $ 971
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized $ 228 $ 282
============ ============
Cash paid (received) for income taxes net of
amounts refunded $ -- $ (100)
============ ============
</TABLE>
7
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APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation, (the "Company"), was originally incorporated in 1992
as a Michigan corporation. In June 1995, the Company reincorporated in Colorado.
The Company's principal line of business is the manufacture and sale of thin
film coated glass for use in flat panel and liquid crystal displays. During
fiscal 1997, the Company began selling its thin film coated glass manufacturing
equipment to flat panel display manufacturers. The Company experiences risks
common to technology companies, including highly competitive and evolving
markets for its products.
The Company was formed in May 1992 as the result of a merger between Applied
Films, Inc. ("AFI") and a wholly owned subsidiary of Donnelly Corporation
("Donnelly"), Donnelly Coated Corporation ("DCC"). As a result of the merger,
Donnelly owned 50% of the outstanding common stock of the Company, with the
remaining 50% owned by the former shareholders of AFI. On November 26, 1997,
Donnelly sold all of its shares of Applied Films stock during the Company's
initial public offering. In June of 1998, the Company formed a 50/50 Joint
Venture (the "Joint Venture") in China with Nippon Sheet Glass Co., Ltd.
("NSG"), to process, sell and export certain types of thin film coated glass.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the Company's wholly
owned subsidiary, DAF Export Corporation, which is treated as a Foreign Sales
Corporation for federal income tax purposes. The accounts of the subsidiary have
been consolidated with the accounts of the Company in the accompanying financial
statements. All intercompany accounts and transactions have been eliminated in
the consolidation.
JOINT VENTURE INCOME TAXES
During fiscal year 2000, the Company determined that the earnings from the Joint
Venture would not be distributed to the Company for the foreseeable future,
therefore a provision for U.S. income taxes need not be provided on the earnings
from the Joint Venture. During fiscal year 1999, the Company accrued for income
taxes to be paid on the earnings in the Joint Venture at a rate of 34%. Based on
the fiscal year 2000 determination, the taxes originally provided during fiscal
year 1999, as well as 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 second quarter of fiscal
year 2000 of $343,000.
UNAUDITED FINANCIAL INFORMATION
The accompanying interim financial information as of January 1, 2000 and for the
three and six month periods ended January 2, 1999 and January 1, 2000 are
unaudited. In the opinion of management, all
8
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adjustments (consisting of normal recurring adjustments) have been included that
are necessary to provide a fair statement of the results of those interim
periods presented. The results of operations for the quarter ended January 1,
2000 are not necessarily indicative of the results to be expected for the entire
year.
CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the SEC issued SOP 98-5 "Reporting on the Costs of Start-up
Activities." SOP 98-5 provides guidance on the financial reporting of start-up
costs and organization costs and requires such costs to be expensed as incurred.
Generally, initial application of SOP 98-5 should be reported as the cumulative
effect of a change in accounting principle. SOP 98-5 is effective for financial
statements for fiscal years beginning after December 15, 1998. The Company
adopted the application of SOP 98-5 in the first quarter of fiscal 2000 and
wrote off certain start-up costs related to the Joint Venture in China. The
effect of that change is $50,000 net of tax. This item has been recorded as a
change in accounting principle at the time of adoption.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 ("SAB 101") "Views on Selected Revenue
Recognition Issues" which provides the staff's views in applying generally
accepted accounting principles to selected revenue recognition issues. The
Company has evaluated SAB 101 and believes that there is no effect on the
revenue recognition policies currently in place.
FISCAL YEAR
The Company has adopted a fiscal year ending on the Saturday nearest June 30,
which will result in fiscal years composed of 52 or 53 weeks. Fiscal years 1999
and 2000 include 53 and 52 weeks respectively.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories at January 1, 2000 and July 3, 1999 consist of the following:
<TABLE>
<CAPTION>
January 1, 2000 July 3, 1999
--------------- ------------
<S> <C> <C>
Raw materials, net ................ $4,282,000 $4,195,000
Work-in-process ................... 24,000 23,000
Materials for manufacturing systems 152,000 192,000
Finished goods .................... 5,072,000 3,742,000
---------- ----------
$9,530,000 $8,152,000
========== ==========
</TABLE>
THIN FILM COATED GLASS REVENUE RECOGNITION
Thin film coated glass revenues are recognized upon shipment to the customer. A
provision for estimated sales returns and allowances is recognized in the period
of the sale.
THIN FILM EQUIPMENT SALES REVENUE RECOGNITION
Revenues relating to the sales of thin film coating equipment are recognized on
the percentage-of completion method, measured by the percentage of the total
costs incurred and applied to date in relation to the estimated total costs to
be incurred for each contract. Management considers costs incurred and applied
to be the best available measure of progress on these contracts. Contract costs
include all direct
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material and labor costs and those indirect costs related to contract
performance. General and administrative costs are charged to expense as
incurred. Changes in performance, contract conditions and estimated
profitability, including those arising from contract penalty provisions, and
final contract settlements may result in revisions to costs and income and are
recognized in the period in which the revisions are determined. The Company
typically offers warranty coverage for equipment sales for a period of 12 months
after final acceptance. The Company estimates the anticipated costs to be
incurred during the warranty period and accrues a reserve as a percentage of
revenue as revenue is recognized. These reserves are evaluated periodically
based on actual experience and anticipated activity. Provisions for anticipated
losses on contracts, if any, will be made in the period they become evident.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and consist primarily of
salaries and supplies. The Company incurred approximately $315,000 and $212,000
of research and development costs for the second quarter of fiscal year 2000 and
1999, respectively.
FOREIGN CURRENCY TRANSACTIONS
The Company generated approximately 91% and 83% of its revenues in the first six
months of fiscal 2000 and for fiscal year 1999, respectively, from sales to
foreign corporations. In addition, many of its raw materials are purchased from
foreign corporations. The majority of the Company's sales and purchases are
denominated in U.S. dollars, with the remainder denominated in Japanese yen. For
those transactions denominated in Japanese yen, the Company records the sale or
purchase at the spot exchange rate in effect on the date of sale. Receivables
from such sales or payables for such purchases are translated to U.S. dollars
using the end of period spot exchange rate. Transaction gains or losses are
charged or credited to income during the period.
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 the
six months ended January 1, 2000, the Company had approximately $111,000 in
sales to a company of which a member of the board of directors is the president.
(3) SALES BY GEOGRAPHIC REGION
The breakdown of total sales by geographic region is as follows:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
January 1, 2000 January 2, 1999 January 1, 2000 January 2, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Asia (other than Japan)........ $ 4,204,000 $ 2,819,000 $ 9,501,000 $ 8,749,000
Japan.......................... 3,423,000 1,792,000 5,037,000 4,021,000
United States.................. 781,000 1,441,000 1,424,000 2,711,000
Europe and Other............... 131,000 372,000 282,000 696,000
---------------- ----------------- ----------------- -----------------
Gross sales.................... 8,539,000 6,424,000 16,244,000 16,177,000
Less: sales returns and
allowances..................... (231,000) (248,000) (548,000) (650,000)
---------------- ----------------- ----------------- -----------------
Net sales...................... $ 8,308,000 $ 6,176,000 $ 15,696,000 $ 15,527,000
================ ================= ================= =================
</TABLE>
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(4) SEGMENT INFORMATION
The Company manages its business and has segregated its activities into two
business segments, the sale of "Thin Film Coated Glass" for use primarily in
liquid crystal displays ("LCDs"), and the sales of "Thin Film Coating Equipment"
to Flat Panel Display ("FPD") manufacturers. Certain financial information for
each segment is provided below:
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended Six Months Ended Six Months Ended
January 1, 2000 January 2, 1999 January 1, 2000 January 2, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Net sales:
Thin film coated glass $ 8,109 $ 5,635 $ 15,268 $ 13,827
Thin film coating equipment 199 541 428 1,700
------------- ------------- ------------- -------------
Total net sales: 8,308 6,176 15,696 15,527
============= ============= ============= =============
Operating income (loss):
Thin film coated glass $ 774 $ 53 $ 1,170 $ 123
Thin film coating equipment (725) (376) (1,366) (817)
------------- ------------- ------------- -------------
Total operating income (loss) $ 49 $ (323) $ (196) $ (694)
============= ============= ============= =============
Identifiable assets:
Thin film coated glass $ 5,819 $ 8,495 $ 5,819 $ 8,495
Thin film coating equipment 1,496 256 1,496 256
Corporate and other 517 672 517 672
------------- ------------- ------------- -------------
Total identifiable assets $ 7,832 $ 9,423 $ 7,832 $ 9,423
============= ============= ============= =============
</TABLE>
(5) INVESTMENT IN AND TRANSACTIONS WITH JOINT VENTURE
In June 1998, the Company formed a 50/50 joint venture (the "Joint Venture")
with Nippon Sheet Glass Co., Ltd. ("NSG") in China to manufacture, process, sell
and export certain types of thin film coated glass. Each party contributed $3.2
million in cash to the Joint Venture. During the fiscal 1999 third quarter, the
Company sold refurbished equipment to the Joint Venture for use in the process
of thin film coating of glass. The sales price of approximately $5.1 million,
was payable in February, June and August 1999. The Company received the first
two payments in February and June and the final payment in early September 1999.
The Joint Venture began operations during the fourth quarter of fiscal 1999. The
Company records 50% of income from operations of the Joint Venture after
elimination of the impact of interentity transactions. The functional currency
for the Joint Venture is the applicable local currency. The earnings recorded by
the Company from the Joint Venture are translated at average rates prevailing
during the period.
Fiscal year to date, the Company purchased coated glass totaling $2.3 million
from the Joint Venture, of which $441,000 remained in inventory at quarter end.
In addition, the Company received a royalty payment of $96,000 from the Joint
Venture during the quarter, and the Company accrued additional royalties
receivable totaling $101,000 for the quarter ended January 1, 2000. In December
1999, the Company guaranteed approximately $1.7 million of Joint Venture debt.
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Summarized income information for the three months ended January 1, 2000 and
for the six months ended January 1, 2000, is presented below (000's):
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Three Months Six Months
Ended Ended
January 1, 2000 January 1, 2000
<S> <C> <C>
STEC
Operating revenues..................................... $ 5,169 $ 11,463
----------- ----------
Net income (loss)...................................... $ 630 $ 1401
=========== ==========
AFCO's equity in earnings:
Equity in earnings of STEC............................. $ 315 $ 701
=========== ==========
Summarized balance sheet information for STEC as of
January 1, 2000 and July 3, 1999 is presented below (000's):
January 1, 2000 July 3, 1999
Assets:
Current assets......................................... $ 7,833 $ 5,411
Property, plant and equipment.......................... 9,930 10,414
----------- ----------
$ 17,763 $ 15,825
=========== ==========
Capitalization and Liabilities:
Current liabilities.................................... $ 6,121 $ 7,125
Long-term debt......................................... 3,138 1,596
Common shareholders' equity............................ 8,504 7,104
----------- ----------
$ 17,763 $ 15,825
=========== ==========
</TABLE>
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APPLIED FILMS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of the Company's financial
condition and results of operations should be read in conjunction with the
Company's consolidated financial statements and notes thereto included in this
report and the consolidated financial statements and notes included in the
Company's fiscal year 1999 Report on Form 10-K. This report contains certain
forward-looking statements (within the meaning of the Private Securities
Litigation Reform Act of 1995) that involve substantial risks and uncertainties,
including those described below, the effect of changing worldwide economic
conditions, such as those in Asia, the effect of overall market conditions,
product demand and market acceptance risk, risks associated with dependencies on
suppliers, the impact of competitive products and pricing, technological and
product development risks, and other risk factors. For a discussion of these and
other risks and uncertainties, see the Company's Annual Report on Form 10-K for
the fiscal year ended July 3, 1999, Part I, "Certain Factors." When used herein,
the terms "believe," "anticipate," "intend," "goal," "expect," and similar
expressions may identify forward-looking statements. The Company's actual
results, performance or achievements may differ materially from those expressed
or implied by such forward-looking statements.
OVERVIEW
The majority of our sales are derived from the sale of thin film coated
glass to manufacturers of liquid crystal displays ("LCDs"). Most of our LCD
manufacturing customers are located in Asia. Sales to international customers
represented approximately 91% of our total gross sales and 92% of thin film
coated glass sales in the first six months of fiscal 2000. We expect
international sales will continue to represent a significant portion of its net
sales. During fiscal 1997, we began selling thin film coating equipment to flat
panel display ("FPD") and other manufacturers. Sales of thin film coating
equipment totaled $4.6 million for fiscal year 1999, and $428,000 for the first
six months of fiscal 2000. In June of 1998, the Company formed a 50/50 joint
venture in China with Nippon Sheet Glass Co. ("NSG"), to process, sell and
export certain types of thin film coated glass.
Sales and related costs of coated glass sales are recognized when
products are shipped to the customer. Historically, sales have varied
substantially from quarter to quarter, and we expect such variations to
continue. We are typically able to ship our thin film coated glass within 30
days of receipt of the order and, therefore, do not customarily have a
significant long-term backlog for coated glass sales. Historically, we have
experienced significant price pressure from time to time in its thin film coated
glass business. We expect continued downward pressure on our selling prices in
the future.
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We sell most of our thin film coated glass to foreign customers in U.S.
dollars except for sales to certain Japanese customers which are denominated in
Japanese yen. Gross sales in Japanese yen were approximately $6.7 million for
fiscal 1999, and $4.5 million for the first six months of fiscal 2000.
Currently, we do not engage in international currency hedging transactions to
mitigate our foreign exchange exposure, however, we purchase raw glass from
certain Japanese suppliers in transactions denominated in yen, which partially
offsets foreign currency risks on thin film coated glass sales. Our purchases of
raw material denominated in Japanese yen were approximately $5.8 million in
fiscal 1999 and $3.6 million for the first six months of fiscal 2000. As of
January 1, 2000, accounts receivable denominated in Japanese yen were
approximately $1.7 million or approximately 31% of total accounts receivable. As
of January 1, 2000, accounts payable denominated in yen were approximately $2.5
million or 41% of total accounts payable. We are generally paid by customers for
Japanese yen denominated sales within approximately 15 to 45 days following the
date of sale.
Net sales of thin film coating equipment are recognized on the
percentage-of-completion method, measured by the percentage of the total costs
incurred and applied to date in relation to the estimated total costs to be
incurred for each contract. The lead time for completion of the thin film
coating equipment is generally ten to fourteen months. To date, the Company has
priced its thin film coating equipment in U.S. dollars. Coating equipment
backlog at the end of the second quarter of fiscal 2000 was $6.1 million versus
$423,000 at fiscal year end 1999 and $2.5 million as of the end of the second
quarter of fiscal 1999.
As of January 1, 2000 we had reduced the borrowings on our line of
credit to $4.6 million as of January 1, 2000 from $7.0 million at the end of
fiscal 1999. This reduction allowed us to improve our liquidity ratios which
positively affected its borrowing rate. We will continue to emphasize increased
working capital and reduction of debt.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JANUARY 1, 2000 COMPARED WITH THREE MONTHS ENDED
JANUARY 2, 1999
Net Sales. Net sales increased 34% to $8.3 million in the second
quarter of fiscal 2000 from $6.2 million in the second quarter of fiscal 1999.
The increase reflected stronger demand for coated glass as well as a shift to a
higher concentration of STN glass. Net sales for thin film coated glass
increased approximately 44% for the second quarter of fiscal 2000 compared to
the second quarter of fiscal 2000. Equipment sales decreased approximately 63%
for the second quarter of fiscal 2000 compared to the second quarter of fiscal
1999.
Gross Profit. Gross profit increased 86% to $1.3 million in the second
quarter of fiscal 2000 from $0.7 million in the second quarter of fiscal 1999.
As a percentage of net sales, gross profit margins were 15% in the second
quarter of fiscal 2000 compared with 11% in the second quarter of fiscal 1999.
Gross
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profit margins for thin film coated glass for the second quarter of fiscal 2000
were positively affected by the increase of STN glass sales. Gross profit
margins for coating equipment for the first quarter of fiscal 2000 were
favorably affected by the sale of spare parts as well as warranty reserves that
were reduced by $300,000 due to better than expected warranty claims experience.
Selling, General and Administrative. Selling, general and
administrative expenses increased 14% to $902,000 in the second quarter of
fiscal 2000 from $794,000 in the second quarter of fiscal 1999 due primarily to
increased salary costs, sales expenses and facility expenses. As a percentage of
net sales, selling, general and administrative costs were 11% for the second
quarter of fiscal 2000 compared to 13% for the second quarter of fiscal 1999.
Research and Development. Research and development expenses rose 49% to
$315,000 in the second quarter of fiscal 2000 from $212,000 in the second
quarter of fiscal 1999. This was due to increased salary and depreciation
expenses from equipment used in process development. As a percentage of net
sales, research and development expenses were 4% in the second quarter of fiscal
2000 and 3% in the second quarter of fiscal 1999.
Equity Earnings in Affiliate. Equity Earnings in affiliate were
$369,000 for the second quarter of fiscal 2000. The joint venture was not
operating for the comparable period in fiscal 1999.
Interest Expense. Interest expense decreased to $101,000 in the second
quarter of fiscal 2000 from $140,000 in the second quarter of fiscal 1999.
Average debt levels were lower during the second quarter of fiscal 2000 compared
to the second quarter 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 (expense) was approximately
$14,000 for the second quarter of fiscal 2000 versus ($135,000) during the
second quarter of fiscal 1999. The decrease is primarily the result of the
Company's loss on foreign currency largely offsetting the royalty income from
the Joint Venture during the second quarter of fiscal 2000.
Income Tax Benefit (Provision). We had an income tax benefit of
$343,000 in the second quarter of fiscal 2000 compared to an expense of
($286,000) in the second quarter of 1999. The effective tax rate was not
meaningful during the second quarter of fiscal 2000, as noted below, and was 34%
during the second quarter of fiscal 1999.
During fiscal year 2000, we determined that the earnings from
the joint venture would not be distributed to us for the foreseeable
future, therefore a provision for U.S. income taxes need not be provided on the
earnings from the joint venture. During fiscal year 1999, we accrued
for income taxes to be paid on the earnings in the joint venture at a rate of
34%. Based on the fiscal year 2000 determination, the taxes originally provided
during fiscal year 1999, as well as those provided through the first quarter of
fiscal year 2000 on the earnings from the joint venture, were reversed in the
second quarter of fiscal year 2000, resulting in a tax benefit of $343,000 for
the second quarter of fiscal 2000.
SIX MONTHS ENDED JANUARY 1, 2000 COMPARED WITH SIX MONTHS ENDED JANUARY 2, 1999
15
<PAGE> 16
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 increasing 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, warranty
reserves that were reduced 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 effected
by one-time charges for severance and facility moving costs of $316,000. As a
percentage of net sales, selling, general and administrative costs were 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 was not
meaningful during the second quarter of fiscal 2000, as noted below, and was 34%
during the second quarter of fiscal 1999.
16
<PAGE> 17
During fiscal year 2000, we determined that the earnings from the joint
venture would not be distributed to us for the foreseeable future, therefore a
provision for U.S. income taxes need not be provided on the earnings from the
joint venture. During fiscal year 1999, we accrued for income taxes to be paid
on the earnings in the joint venture at a rate of 34%. Based on the fiscal year
2000 determination, the taxes originally provided during fiscal year 1999, as
well as those provided through the first quarter of fiscal year 2000 on the
earnings from the joint venture, were reversed in the second quarter of fiscal
year 2000, resulting in a tax benefit of $260,000 for the first six months of
fiscal 2000.
Cumulative effect of change in accounting principle. During the first
six months of fiscal 2000 we wrote off organizational costs associated
with its 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.
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 the first six months of
fiscal 2000 was $2.7 million compared to $158,000 for the corresponding period
in fiscal 1999 due primarily to changes in accounts receivable/payables, accrued
expenses, and depreciation expense, offset partially by an increase in inventory
during the first six months of fiscal 2000. In early September 1999, we received
approximately $1.6 million as the final payment for the sale of coating
equipment to the joint venture. As of January 1, 2000, we had cash and cash
equivalents of approximately $1.4 million and working capital of $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 compared with $7.0 million outstanding on
July 3, 1999. Approximately $6.9 million of this facility was available to us on
January 1, 2000. The interest rate under the credit facility was 8.5% at January
1, 2000.
Cash used by investing activities for the first six months of fiscal
2000 was $53,000 compared to $6.0 million for the first six months of fiscal
1999. Capital expenditures for the six months ended January 1, 2000 were
approximately $53,000, compared to $2.9 million for the six month period ended
January 2, 1999. We anticipate capital expenditures of approximately $1.0
million in the remainder of fiscal 2000.
We believe that our working capital and capital resource needs will
continue to be met by operations, borrowings under the existing credit facility
and the proceeds from the pending offering.
YEAR 2000 COMPLIANCE
17
<PAGE> 18
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.
18
<PAGE> 19
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK EXPOSURE
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
Approximately $4.6 million of the Company's borrowed debt is subject to
changes in interest rates; however, the Company does not use derivatives to
manage this risk. This exposure is linked primarily to the Eurodollar rate, and
secondarily to the prime rate. The Company believes that a moderate change in
either the Eurodollar rate or the prime rate would not materially affect
operating results or financial condition of the Company. 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
interfluctuations.
FOREIGN EXCHANGE EXPOSURE
The Company is exposed to foreign exchange risk associated with its
accounts receivable and payable denominated in foreign currencies, primarily in
Japanese yen. At January 1, 2000, the Company had approximately $1.7 million of
its accounts receivable and $2.5 million of its accounts payable denominated in
Japanese yen. At July 3, 1999, the Company had approximately $605,000 of its
accounts receivable and $1.1 million of its accounts payable denominated in
Japanese yen. A one percent change in exchange rates would result in an
approximate $7,500 net impact on pre-tax income based on the quarter end
foreign currency denominated accounts receivable and accounts payable balances.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect the Company's operating results or
financial condition. The potential impact depends upon the magnitude of the rate
change.
19
<PAGE> 20
PART II
OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
(a) The annual meeting of shareholders of the Company was held on October
26, 1999 ("Annual Meeting").
(b) The following director was elected at the Annual Meeting for a term
expiring in 2000: Vincent Sollitto, Jr.; and the following directors were
elected at the Annual Meeting for terms expiring in 2002: Richard P. Beck
and Chad D. Quist. Other directors whose terms continued after the meeting
are as follows: John S. Chapin and Cecil VanAlsburg whose terms expire in
2001; and Thomas T. Edman, whose term expires in 2000.
(c) At the Annual Meeting, one director was elected for a term expiring in
2000, two directors were elected for terms expiring in 2002, and
shareholders approved an amendment to the Applied Films Corporation 1997
Stock Option Plan increasing the maximum number of shares available under
the plan from 172,500 to 272,500. The vote was as follows:
For Withhold
--- --------
Director Nominees
Vincent Sollitto, Jr. 2,977,472 20,199
Richard P. Beck 2,976,154 20,678
Chad D. Quist 2,976,154 20,678
Not
---
For Against Abstain Voted
--- ------- ------- -----
Amendment to Applied Films 2,947,703 37,083 3,335 12,850
1997 Stock Option Plan
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
----------- -----------
27 - Financial Data Schedule (EDGAR filing only)
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on behalf of the
undersigned thereunto duly authorized.
APPLIED FILMS CORPORATION
Date: February 9, 2000 /s/ Thomas T. Edman
----------------- ---------------------------
Thomas T. Edman
President and Chief Executive Officer
Date: February 9, 2000 /s/ Lawrence D. Firestone
----------------- ----------------------------
Lawrence D. Firestone
Chief Financial Officer
21
<PAGE> 22
Exhibit Index
-------------
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-01-2000
<PERIOD-START> OCT-02-1999
<PERIOD-END> JAN-01-2000
<CASH> 1,426
<SECURITIES> 0
<RECEIVABLES> 5,635
<ALLOWANCES> 62
<INVENTORY> 9,530
<CURRENT-ASSETS> 17,769
<PP&E> 17,604
<DEPRECIATION> (9,772)
<TOTAL-ASSETS> 29,976
<CURRENT-LIABILITIES> 7,753
<BONDS> 0
0
0
<COMMON> 9,525
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,094
<SALES> 15,696
<TOTAL-REVENUES> 15,696
<CGS> 13,518
<TOTAL-COSTS> 2,374
<OTHER-EXPENSES> 1,011
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 240
<INCOME-PRETAX> 575
<INCOME-TAX> 260
<INCOME-CONTINUING> 835
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 50
<NET-INCOME> 785
<EPS-BASIC> .24
<EPS-DILUTED> .23
</TABLE>
