UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarter ended September 30, 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 ____
6,077,735 shares of Common Stock were outstanding as of November 9, 2000.
1
<PAGE>
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2000
and July 1, 2000 ................................................ 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 2000 and October 2, 1999..................... 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 2000 and October 2, 1999..................... 5
Notes to Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 14
PART II. OTHER INFORMATION
Item 4. Exhibits and Reports on Form 8-K................................. 15
2
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(In thousands except share data)
(unaudited)
<TABLE>
ASSETS September 30, 2000 July 1, 2000
------ ------------------ ------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................................. $ 27,232 $ 32,058
Marketable securities..................................................... 21,256 20,167
Accounts and trade notes receivable, net of allowance of $250 and $188....
Coated glass and other ................................................ 11,426 6,273
Costs and profit in excess of billings................................. 8,067 4,571
Due from Joint Venture................................................. -- 219
Inventories, net ......................................................... 9,855 10,006
Assets held for sale...................................................... -- 2,251
Prepaid expenses and other................................................ 381 187
Deferred tax asset, net................................................... 480 480
--------- ---------
Total current assets........................................... 78,697 76,212
Property, plant and equipment:
Land...................................................................... 270 270
Building.................................................................. 226 226
Machinery and equipment................................................... 11,681 11,443
Office furniture and equipment............................................ 356 356
Leasehold improvements.................................................... 1,508 1,504
--------- ---------
14,041 13,799
Accumulated depreciation.................................................. (8,756) (8,479)
--------- ---------
Total property, plant and equipment.................................... 5,285 5,320
--------- ---------
Investment in Joint Venture................................................. 7,229 5,746
Deferred tax asset, net..................................................... 136 136
Other assets................................................................ 145 64
--------- ---------
Total assets................................................... $ 91,492 $ 87,478
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable.................................................... $ 9,386 $ 9,971
Accrued expenses.......................................................... 3,157 2,138
Income taxes payable...................................................... 234 98
Billings in excess of revenue............................................. 71 --
Current portion of-
Deferred revenue....................................................... 279 164
Deferred gain.......................................................... 56 56
Long-term debt......................................................... -- --
--------- ---------
Total current liabilities...................................... 13,183 12,427
--------- ---------
Long-term debt, net of current portion...................................... -- --
Deferred revenue, net of current portion.................................... 2,201 1,210
Deferred gain, net of current portion....................................... 630 644
Deferred tax liability, net................................................. -- --
--------- ---------
Total liabilities.............................................. 16,014 14,281
--------- ---------
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,
6,041,986 and 6,040,856 shares issued and outstanding at
September 30, 2000 and July 1, 2000 respectively......................... 64,958 64,959
Other cumulative comprehensive income (loss).............................. 9 (20)
Retained earnings......................................................... 10,511 8,258
--------- ---------
Total stockholders' equity.................................... 75,478 73,197
--------- ---------
$ 91,492 $ 87,478
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
3
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands except per share data)
(unaudited)
<TABLE>
For The Three Months Ended
--------------------------
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Net Sales:
Non-affiliated......................................................... $ 14,542 $ 7,388
Joint Venture.......................................................... 2,328 --
-------- --------
Total sales................................................................ 16,870 7,388
Cost of goods sold......................................................... 14,322 6,475
-------- --------
Gross profit............................................................... 2,548 913
Selling, general and administrative expenses............................... 1,689 809
Research and development expenses.......................................... 413 349
-------- --------
Income (loss) from operations.............................................. 446 (245)
Interest income (expense).................................................. 536 (139)
Other income............................................................... 107 180
Equity earnings in Joint Venture........................................... 1,285 449
-------- --------
Income before income taxes and
cumulative effect of change in accounting principle................... 2,374 245
Income tax provision....................................................... (120) (83)
-------- --------
Income before cumulative effect of
change in accounting principle......................................... 2,254 162
Cumulative effect of change in accounting principle........................ -- (50)
-------- --------
Net Income ................................................................ $ 2,254 $ 112
======== ========
Income per share before cumulative effect of change in accounting principle:
Basic................................................................. $ 0.37 $ 0.05
======== ========
Diluted............................................................... $ 0.36 $ 0.05
======== ========
Cumulative effect of change in accounting
principle net of taxes................................................. $ 0.00 $ 0.02
======== ========
Net income per share:
Basic................................................................... $ 0.37 $ 0.03
======== ========
Diluted................................................................. $ 0.36 $ 0.03
======== ========
Weighted Average Common Shares Outstanding:
Basic................................................................... 6,041 3,489
======== ========
Diluted................................................................. 6,279 3,489
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
4
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(unaudited)
<TABLE>
For The Three Months Ended
----------------------------------------
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................... $ 2,254 $ 112
Adjustments to reconcile net income to net cash flows from
operating activities-
Depreciation....................................................... 278 426
Amortization of deferred gain on lease and Joint Venture........... (54) (73)
Reduction of Joint Venture organizational cost..................... -- 102
Equity in earnings of affiliate.................................... (1,306) (390)
Deferred gain on equipment sale to Joint Venture 1,146 --
Cost of equipment sale to Joint Venture............................ 2,362 --
Changes in -
Accounts and trade notes receivable, net....................... (4,934) 1,996
Costs and profits in excess of billings........................ (3,496) --
Inventories.................................................... 3 (113)
Prepaid expenses and other..................................... (194) 254
Accounts payable............................................... 433 (510)
Deferred revenue............................................... 71 --
Income taxes payable (receivable)............................. 136 56
-------- -------
Net cash flows from operating activities..................................... (3,301) 1,860
-------- -------
Cash Flows from Investing Activities:
Purchases of property, plant & equipment................................. $ (355) $ (18)
Other assets............................................................. (81) --
Marketable securities.................................................... (1,089) --
-------- -------
Net cash flows from investing activities..................................... (1,525) (18)
-------- -------
Cash flows from Financing Activities:
Proceeds from borrowings of long-term debt............................... 6,829 50
Repayment of long-term debt.............................................. 6,829 (2,607)
Stock issuance on stock purchase plan, and stock options................. -- 18
-------- -------
Net cash flows from financing activities..................................... -- (2,539)
-------- -------
Net increase (decrease) in cash.............................................. (4,826) (697)
Cash and cash equivalents, beginning of period............................... 32,058 1,163
-------- -------
Cash and cash equivalents, end of period..................................... $ 27,232 $ 466
======== =======
Supplemental cash flow information:
Cash paid for interest, net of amounts capitalized....................... $ 61 $ 148
======== =======
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
5
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) COMPANY ORGANIZATION AND OPERATIONS
Applied Films Corporation, (the "Company"), was originally incorporated in
1992 as a Michigan corporation. In June 1995, the Company reincorporated in
Colorado. The Company's principal line of business is the manufacture and sale
of thin film coated glass for use in flat panel and liquid crystal displays.
During fiscal 1997, the Company began selling its thin film coated glass
manufacturing equipment to flat panel display manufacturers. The Company
experiences risks common to technology companies, including highly competitive
and evolving markets for its products.
The Company was formed in May 1992 as the result of a merger between
Applied Films, Inc. ("AFI") and a wholly owned subsidiary of Donnelly
Corporation ("Donnelly"), Donnelly Coated Corporation ("DCC"). As a result of
the merger, Donnelly owned 50% of the outstanding common stock of the Company,
with the remaining 50% owned by the former shareholders of AFI. On November 26,
1997, Donnelly sold all of its shares of Applied Films stock during the
Company's initial public offering. In June of 1998, the Company formed a 50/50
Joint Venture (the "Joint Venture") in China with Nippon Sheet Glass Co., Ltd.
("NSG"), to process, sell and export certain types of thin film coated glass.
(2) SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the Company's
wholly owned subsidiary, DAF Export Corporation, which is treated as a Foreign
Sales Corporation for federal income tax purposes. The accounts of the
subsidiary have been consolidated with the accounts of the Company in the
accompanying financial statements. All intercompany accounts and transactions
have been eliminated in the consolidation.
JOINT VENTURE INCOME TAXES
During fiscal year 2000, the Company determined that the earnings from the
Joint Venture would not be distributed to the Company for the foreseeable
future, therefore a provision for U.S. income taxes need not be provided on the
earnings from the Joint Venture. During fiscal year 1999, the Company accrued
for income taxes to be paid on the earnings in the Joint Venture at a rate of
34%. Based on the fiscal year 2000 determination, the taxes originally provided
during fiscal year 1999, as well as 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 September 30, 2000 and
for the three month periods ended October 2, 1999 and September 30, 2000 are
unaudited. In the opinion of management, all adjustments (consisting of normal
recurring adjustments) have been included that are necessary to provide a fair
statement of the results of those interim periods presented. The results of
operations for the quarter ended September 30, 2000 are not necessarily
indicative of the results to be expected for the entire year.
6
<PAGE>
ADOPTION OF NEW ACCOUNTING STANDARDS
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). A charge for the application
of SOP 98-5 was recorded as a change in accounting principle during fiscal 2000.
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 and SFAS No. 138, is effective for all fiscal quarters of all fiscal
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,
based upon a preliminary assessment, management does not believe SFAS No. 133 as
amended by SFAS No. 137 and SFAS No. 138, will have a material impact on the
Company's financial statements.
In December 1999, the staff of the Securities and exchange Commission (the
"Staff") 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.
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
2000 and 2001 each include 52 weeks.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
Inventories at September 30, 2000 and July 1, 2000 consist of the following
(000's):
<TABLE>
September 30, 2000 July 1, 2000
------------------ ------------
<S> <C> <C>
Raw materials, net.............................................................. $ 3,587 $ 4,003
Work-in-process................................................................. 0 0
Materials for manufacturing systems............................................. 201 195
Finished goods.................................................................. 6,067 5,808
---------- -----------
$ 9,855 $ 10,006
========== ===========
</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.
7
<PAGE>
THIN FILM EQUIPMENT SALES REVENUE RECOGNITION
Revenues relating to the sales of thin film coating equipment are
recognized on the percentage-of-completion method, measured by the percentage of
the total costs incurred and applied to date in relation to the estimated total
costs to be incurred for each contract. Management considers costs incurred and
applied to be the best available measure of progress on these contracts.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance. General and administrative costs are
charged to expense as incurred. Changes in performance, contract conditions and
estimated profitability, including those arising from contract penalty
provisions, and final contract settlements may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
The Company typically offers warranty coverage for equipment sales for a period
of 12 months once installation is complete. The Company estimates the
anticipated costs to be incurred during the warranty period and accrues a
reserve as a percentage of revenue as revenue is recognized. These reserves are
evaluated periodically based on actual experience and anticipated activity.
Provisions for anticipated losses on contracts, if any, will be made in the
period they become evident.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred and consist
primarily of salaries, depreciation, development materials and supplies. The
Company incurred approximately $413,000 and $349,000 of research and development
costs for the first quarter of fiscal years 2001 and 2000, respectively.
FOREIGN CURRENCY TRANSACTIONS
The Company generated approximately 94% and 93% of its revenues in the
first three months of fiscal year 2001 and for fiscal year 2000, 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 transaction. During the
three months ended September 30, 2000, the Company had approximately $322,000 in
sales to a company of which a member of the board of directors is an officer,
and the Company had $50,000 of purchases from a company of which a member of the
board of directors is an officer.
(3) SALES BY GEOGRAPHIC REGION
The breakdown of net sales by geographic region is as follows (000's):
<TABLE>
Three Months Ended Three Months Ended
September 30, 2000 October 2, 1999
-------------------- -------------------
<S> <C> <C>
Asia (other than Japan)............................................ $ 11,161 $ 4,980
Japan.............................................................. 4,436 1,614
United States...................................................... 1,099 643
Europe and Other................................................... 174 151
----- --------
Net sales.......................................................... $ 16,870 $ 7,388
======== ========
</TABLE>
8
<PAGE>
(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 sale of "Thin Film Coating Equipment"
to Flat Panel Display ("FPD") manufacturers. Certain financial information for
each segment is provided below (000's):
<TABLE>
Three Months Ended Three Months Ended
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Net sales:
Thin film coated glass.............................................. $10,405 $ 7,159
Thin film coating equipment......................................... 6,465 229
----- -------
Total net sales:......................................................... 16,870 7,388
====== =======
Operating income (loss):
Thin film coated glass.............................................. $ 57 $ 396
Thin film coating equipment......................................... 389 (641)
----- --------
Total operating income (loss)............................................ $ 446 $ (245)
====== ========
Identifiable assets:
Thin film coated glass.............................................. $3,543 $ 6,407
Thin film coating equipment......................................... 1,341 37
Corporate and other................................................. 401 1,775
----- -------
Total identifiable assets................................................ $5,285 $ 8,219
====== =======
</TABLE>
(5) INVESTMENT IN AND TRANSACTIONS WITH JOINT VENTURE
In June 1998, the Company formed a 50/50 joint venture (the "Joint
Venture") with Nippon Sheet Glass Co., Ltd. ("NSG") in China to manufacture,
process, sell and export certain types of thin film coated glass.
The Joint Venture began operations during the fourth quarter of fiscal year
1999. The Company does not consolidate revenues and earnings from the Joint
Venture. The Company records 50% of the net income from operations of the Joint
Venture after elimination of the impact of interentity transactions. The
functional currency for the Joint Venture is the applicable local currency. The
earnings recorded by the Company from the Joint Venture are translated at
average rates prevailing during the period.
All of our transactions with the Joint Venture are at "arms length" and are
transacted in U.S. dollars. During the quarter ended September 30, 2000, the
Company purchased coated glass totaling $2.7 million from the Joint Venture,
compared to $1.3 million for the quarter ended October 2, 1999. At September 30,
2000, and October 2, 1999, the amount of coated glass purchased from the Joint
Venture remaining in inventory was $2.2 million and $454,000, respectively. In
addition, the Company received a royalty payment of approximately $79,500 from
the Joint Venture during the quarter, and the Company accrued additional
royalties receivable totaling $104,000 for the quarter ended September 30, 2000,
and $43,000 for the quarter ended October 2, 1999. As of September 30, 2000, the
Company was the Guarantor on the Joint Venture debt of approximately $2.5
million. Also, during the first quarter of 2001, 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 $4.7 million is payable in July 2000,
and January 2001. The Company received the first payment in July 2000. The
balance sheet reflects a receivable of $2.3 million from the Joint Venture for
the final payment due in January 2001. One-half of the anticipated gain on the
sale to the Joint Venture will be deferred and amortized into income over the
remaining estimated useful life of the system.
9
<PAGE>
Summarized income information for the Joint Venture for the three months
ended September 30, 2000 and October 2, 1999, and for comparative Balance Sheets
for September 30, 2000 and July 1, 2000 is presented in US$ below (000's):
<TABLE>
Three Months Ended Three Months Ended
September 30, 2000 October 2, 1999
------------------ ---------------
<S> <C> <C>
Joint Venture
Operating revenues................................................. $ 10,044 $ 5,169
======== ========
Net income (loss).................................................. $ 2,899 $ 630
======== ========
AFCO's equity in earnings:
Equity in earnings of Joint Venture................................ $ 1,285 $ 450
======== ========
September 30, 2000 July 1, 2000
------------------ ------------
Assets:
Current assets..................................................... $ 13,522 $ 9,956
Property, plant and equipment...................................... 15,277 9,921
-------- --------
$ 28,799 $ 19,877
======== ========
Capitalization and Liabilities:
Current liabilities................................................ $ 9,662 $ 5,397
Long-term debt..................................................... 4,487 2,800
Common shareholders' equity........................................ 14,650 11,680
--------- --------
$ 28,799 $ 19,877
======== ========
</TABLE>
(6) SUBSEQUENT EVENTS
On October 18, 2000, the Company entered into and announced an agreement to
acquire the Large Area Coating ("LAC") Division of Unaxis Holding Ltd. of
Zurich, Switzerland ("Unaxis"). Pursuant to the terms of the agreement, Unaxis
will receive a purchase price of $60.0 million in cash, subject to certain
adjustments, and 673,353 shares of the Company's common stock. The acquisition
is expected to be completed in the fourth calendar quarter of 2000. Closing of
the acquisition is subject to numerous conditions and there is no assurance that
it will be completed. The Company is in the process of obtaining financing to be
used in connection with the acquisition.
LAC, which includes the former Display Coatings Division of Balzers Process
Systems GmbH and the Web Coating, Architectural and Container Barrier Coatings
groups of Leybold GmbH, is located in Alzenau, Germany and will be operated as a
wholly-owned subsidiary of the Company.
10
<PAGE>
APPLIED FILMS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and notes thereto included in this report and the
consolidated financial statements and notes included in the Company's fiscal
year 2000 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 our Annual Report on Form 10-K for the fiscal year
ended July 1, 2000, Part I, "Certain Factors." When used herein, the terms
"believe," "anticipate," "intend," "goal," "expect," and similar expressions may
identify forward-looking statements. Our actual results, performance or
achievements may differ materially from those expressed or implied by such
forward-looking statements.
Overview
In March 1999, we completed the development of our latest coating platform,
the ATX-700. Beginning the second half of fiscal 2000 and continuing through the
quarter, we experienced a shift in revenue with increasing revenues from the
equipment side of the business due to the order volume of ATX-700's. Net sales
of coating systems are recognized on the percentage-of-completion method,
measured by the percentage of the total costs to be incurred each contract. The
manufacturing lead time for the sale of thin film coating equipment is generally
six to nine months. To date, we have priced our coating equipment in U.S.
dollars. Net sales of thin film coating equipment in fiscal year 2000 were $7.1
million and $6.5 million for the first three months of fiscal 2001. Coating
equipment backlog as of September 30, 2000 was $5.1 million, compared to
$358,000 as of October 2, 1999.
The majority of our net sales to date have been from the sale of thin film
coated glass to manufacturers of liquid crystal displays. 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.
The principal demand for our thin film coated glass is by LCD
manufacturers, most of which are located in Asia. Total net sales to
international customers represented approximately 93% and 94% of our net sales
in fiscal 2000 and in the first three months of fiscal 2001, 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, which are
denominated in Japanese yen. Gross sales in Japanese yen were approximately
$12.7 million for fiscal 2000, and $3.3 million for the first three months of
fiscal 2001. 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 $9.7
million in fiscal 2000 and $1.6 million for the first three months of fiscal
2001. As of September 30, 2000, accounts receivable denominated in Japanese yen
were approximately $2.0 million or approximately 17% of total accounts
receivable. As of September 30, 2000, accounts payable denominated in yen were
approximately $1.5 million or 16% 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.
As of September 30, 2000, and as of the end of fiscal 2000, we had no
outstanding balance against our line of credit.
11
<PAGE>
China Joint Venture. In April 1999, we entered into our STEC joint venture
with NSG to produce coated glass in Suzhou China for resale through our company,
NSG, and others. 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
have sold one additional production coater to the Joint Venture, a Venture
series system that was in operation in our Longmont, Colorado facility. We
believe sales to the joint venture are on arms-length terms. One-half of the
anticipated gain on sale to the Joint Venture will be deferred and amortized
into income over the remaining estimated useful life of the system.
We 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. 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 has determined that it will utilize available cash flows
for operating purposes, to fund expansion and to repay debt. Accordingly, we do
not expect to receive dividends from the joint venture in the foreseeable
future. See "Results of Operations -- Three Months Ended September 30, 2000
Compared With Three Months Ended October 2, 1999 -- Income Tax Benefit
(Provision)." The only cash flow we will receive from the joint venture will be
50% of the 2% royalty on all joint venture sales, payable quarterly. We expect
that the joint venture will not materially affect our revenues, operating income
or cash flows from operating activities, but will increase our net income.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 Compared With Three Months Ended
October 2, 1999
Net Sales. Net sales increased 128% to $16.9 million in the first quarter
of fiscal 2001 from $7.4 million in the first quarter of fiscal 2000. The
increase reflected continued strong demand for STN coated glass, the sale of a
refurbished Venture Series production coater to the Joint Venture and revenue
recognized from the ongoing production of three ATX-700 systems. Net sales for
thin film coated glass increased approximately 45% for the first quarter of
fiscal 2001 compared to the first quarter of fiscal 2000. Equipment sales
increased approximately 272% for the first quarter of fiscal 2001 compared to
the first quarter of fiscal 2000.
Gross Profit. Gross profit increased 179% to $2.5 million in the first
quarter of fiscal 2001 from $913,000 in the first quarter of fiscal 2000. As a
percentage of net sales, gross profit margins were 15.1% in the first quarter of
fiscal 2001 compared with 12.4% in the first quarter of fiscal 2000. Gross
profit margins for thin film coated glass for the first quarter of fiscal 2001
were positively affected by the sales of STN glass. Gross profit margins for
coating equipment for the first quarter of fiscal 2001 were favorably affected
by the sale of a production coater to the Joint Venture as well as revenue
recognized from the ongoing production of three ATX-700 Systems.
Selling, General and Administrative. Selling, general and administrative
expenses increased 109% to $1.7 million in the first quarter of fiscal 2001 from
$809,000 in the first quarter of fiscal 2000 due primarily to increased wages
and fringes, sales commissions, sales expenses and facility expenses. As a
percentage of net sales, selling, general and administrative costs were 10% for
the first quarter of fiscal 2001 compared to 11% for the first quarter of fiscal
2000.
Research and Development. Research and development expenses rose 18% to
$413,000 in the first quarter of fiscal 2001 from $349,000 in the first quarter
of fiscal 2000. This increase was due to increased salary, development materials
and depreciation expenses from equipment used in process development. As a
percentage of net sales, research and development expenses were 2% in the first
quarter of fiscal 2001 and 5% for the first quarter of fiscal 2000.
Equity Earnings in Affiliate. Equity earnings in affiliate were $1.3
million for the first quarter of fiscal 2001 compared with $449,000 for the
first quarter of fiscal 2000 representing an increase of 186%. This increase was
the result of continued strong demand for STN Glass produced by the Joint
Venture. In July 2000, we sold an additional
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Venture Series production coater to the Joint Venture. This system was installed
during the quarter and began producing product following the end of the first
quarter of fiscal 2001. Therefore, there was no measurable contribution to
equity earnings from this coater during the quarter.
Interest Income (Expense). Interest income was $536,000 in the first
quarter of fiscal 2001 compared to an expense of ($139,000) in the first quarter
of fiscal 2000. Our bank debt was reduced to zero in the third quarter of fiscal
2000 following the secondary offering and the interest expense has been replaced
with income on the investments of cash from the offering.
Other Income. Other income was approximately $107,000 for the first quarter
of fiscal 2001 versus $180,000 for the first quarter of fiscal 2000. The Other
income is due to a gain on foreign currency exchange and the accrued royalty
income from the Joint Venture during the first quarter of fiscal 2001. Gain on
foreign currency exchange was larger for the first quarter of fiscal 2000.
Income Tax Provision. We had an income tax provision of $120,000 in the
first quarter of fiscal 2001 compared to a provision of $83,000 in the first
quarter of 2000. The effective tax rate was 34% of U.S. earnings minus interest
income, on tax-free investments, during the first quarter of fiscal 2001, and
was 34% on total earnings during the first quarter of fiscal 2000.
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations with cash generated from operations, proceeds
from an initial public offering, proceeds from a secondary offering and with
borrowings. Cash used by operating activities for the first three months of
fiscal 2001 was $3.3 million compared to $1.9 million of cash provided by
operating activities for the corresponding period in fiscal 2000 due primarily
to changes in accounts payable, and costs in excess of billings, offset
partially by net income and the cost of equipment and deferred gain on equipment
sold to the Joint Venture. In March 2000, we completed the secondary offering of
common stock selling 2.5 million additional shares, and we received net proceeds
from the offering of $55.3 million. As of September 30, 2000, we had cash and
marketable securities of approximately $48.5 million and working capital of
$65.5 million. As of September 30, 2000, accounts receivable were approximately
$19.5 million.
Cash used by investing activities for the first three months of fiscal 2001
was $1.5 million compared to $18,000 for the first three months of fiscal 2000.
Capital expenditures for the first three months ended September 30, 2000 were
approximately $355,000 compared to $18,000 for the three-month period ended
October 2, 1999. We anticipate capital expenditures of approximately $4.8
million in the remainder of fiscal 2001.
Our $11.5 million credit facility with a commercial bank will expire on
September 17, 2002. As of September 30, 2000, as well as at July 1, 2000, there
was no outstanding balance on our credit facility. $11.5 million of this
facility was available to us on September 30, 2000, at an interest rate of
9.25%.
We believe that our working capital and capital resource needs will
continue to be met by operations, borrowings under the existing credit facility
and the proceeds from the sale of stock that was completed in the third quarter
of fiscal 2000. See "Subsequent Event."
SUBSEQUENT EVENT
On October 18, 2000, the Company entered into and announced an agreement to
acquire the Large Area Coating ("LAC") Division of Unaxis Holding Ltd. of
Zurich, Switzerland ("Unaxis"). Pursuant to the terms of the agreement, Unaxis
will receive a purchase price of $60.0 million in cash, subject to certain
adjustments, and 673,353 shares of the Company's common stock. The acquisition
is expected to be completed in the fourth calendar quarter of 2000. Closing of
the acquisition is subject to numerous conditions and there is no assurance that
it will be completed. The Company is in the process of obtaining financing to be
used in connection with the acquisition.
LAC, which includes the former Display Coatings Division of Balzers Process
Systems GmbH and the Web Coating, Architectural and Container Barrier Coatings
groups of Leybold GmbH, is located in Alzenau, Germany and will be operated as a
wholly-owned subsidiary of the Company.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK EXPOSURE
Market risk represents the risk of loss that may impact the financial
position, results of operations, or cash flows of the Company due to adverse
changes in financial market prices. The Company is exposed to market risk
through interest rates. This exposure is directly related to its normal funding
and investing activities.
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 September 30, 2000, the Company had approximately $2.0 million
of its accounts receivable and $1.5 million of its accounts payable denominated
in Japanese yen. At July 1, 2000, the Company had approximately $2.0 million of
its accounts receivable and $2.4 million of its accounts payable denominated in
Japanese yen. A one percent change in exchange rates would result in an
approximate $5,000 net impact on pre-tax income based on the quarter end foreign
currency denominated accounts receivable and accounts payable balances.
Notwithstanding the above, actual changes in interest rates and foreign
exchange rates could adversely affect the Company's operating results or
financial condition. The potential impact depends upon the magnitude of the rate
change.
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PART II. OTHER INFORMATION
ITEM 4 - EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. Description
27 - Financial Data Schedule (EDGAR filing only)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on behalf of the undersigned
thereunto duly authorized.
APPLIED FILMS CORPORATION
Date: November 13, 2000 /s/ Thomas T. Edman
Thomas T. Edman
President and Chief Executive Officer
Date: November 13, 2000 /s/ Lawrence D. Firestone
Lawrence D. Firestone
Chief Financial Officer
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Exhibit Index
Exhibit No. Description
27 Financial Data Schedule
