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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended: October 31, 1998 Commission File Number 0-26714
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ADE CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2441829
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
80 Wilson Way, Westwood, Massachusetts 02090
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(Address of principal executive offices, including area code)
(781) 467-3500
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(Registrant's telephone number, including area code)
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
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, par value $.01 per share 13,183,140 shares
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Class Outstanding at December 8, 1998
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ADE CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
Part I. - Financial Information
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheet-
October 31, 1998 and April 30, 1998 3
Condensed Consolidated Statement of Operations-
Three and Six Months Ended October 31, 1998 and 1997 4
Condensed Consolidated Statement of Cash Flows -
Six Months Ended October 31, 1998 and 1997 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
Part II. - Other Information 15
Signatures 16
Exhibit Index 17
</TABLE>
2
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ADE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
October 31, April 30,
1998 1998
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(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 69,806 $ 72,711
Accounts receivable, net 10,130 16,938
Inventories 28,191 28,792
Prepaid expenses and other current assets 5,678 6,573
Deferred income taxes 7,670 7,670
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Total current assets 121,475 132,684
Fixed assets, net 25,076 26,058
Deferred income taxes 1,905 1,905
Investments 4,152 3,892
Intangible assets, net 4,358 4,996
Restricted cash 3,633 3,808
Other assets 299 300
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$ 160,898 $ 173,643
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Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt $ 442 $ 434
Accounts payable 3,491 5,694
Accrued expenses and other current liabilities 10,667 12,205
Deferred income on sales to affiliates 1,899 2,511
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Total current liabilities 16,499 20,844
Long-term debt 8,390 8,613
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Stockholders' equity:
Common stock 131 131
Capital in excess of par value 99,549 99,045
Retained earnings 36,441 45,153
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136,121 144,329
Deferred compensation (112) (143)
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136,009 144,186
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$ 160,898 $ 173,643
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</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
3
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ADE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three months Six months
ended October 31, ended October 31,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 12,239 $ 37,335 $ 36,267 $ 71,516
Cost of revenue 12,799 15,557 26,256 30,829
-------- -------- -------- --------
Gross profit (loss) (560) 21,778 10,011 40,687
-------- -------- -------- --------
Operating expenses:
Research and development 6,463 6,343 13,115 12,052
Purchased in-process research and development -- 6,100 -- 6,100
Marketing and sales 3,240 4,625 6,361 8,437
General and administrative 2,213 3,066 5,092 6,028
-------- -------- -------- --------
Total operating expenses 11,916 20,134 24,568 32,617
-------- -------- -------- --------
Income (loss) from operations (12,476) 1,644 (14,557) 8,070
Interest income, net 701 625 1,461 814
-------- -------- -------- --------
Income (loss) before provision for (benefit from) income taxes
and equity in net income (loss) of affiliated companies (11,775) 2,269 (13,096) 8,884
Provision for (benefit from) income taxes (4,201) 848 (4,715) 3,190
-------- -------- -------- --------
Income (loss) before equity in net income (loss) of
affiliated companies (7,574) 1,421 (8,381) 5,694
Equity in net income (loss) of affiliated companies (324) 58 (331) 92
-------- -------- -------- --------
Net income (loss) $ (7,898) $ 1,479 $ (8,712) $ 5,786
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per share $ (0.61) $ 0.12 $ (0.67) $ 0.50
Diluted earnings (loss) per share $ (0.61) $ 0.11 $ (0.67) $ 0.47
Weighted average shares outstanding - basic 12,965 12,638 12,944 11,527
Weighted average shares outstanding - diluted 12,965 13,316 12,944 12,220
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
4
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ADE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Six months ended
October 31,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (8,712) $ 5,786
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 2,911 1,187
Equity in net (income) loss of affiiated companies,
net of dividends received 440 (36)
In-process research and development from business acquisition -- 6,100
Deferred income taxes -- (3,425)
Changes in assets and liabilities:
Accounts receivable, net 6,808 (987)
Inventories 601 (7,096)
Prepaid expenses and other current assets 895 (1,562)
Accounts payable (2,203) 197
Accrued expenses and other current liabilities (1,538) (803)
Deferred income on sales to affiliate (612) (1,242)
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Net cash used in operating activities (1,410) (1,881)
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Cash flows from investing activities:
Purchases of fixed assets (1,260) (5,835)
Change in restricted cash 175 --
Advances to affiliated company (700) (150)
Acquisition of business -- (10,000)
Decrease (increase) in other assets 1 (33)
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Net cash used in investing activities (1,784) (16,018)
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Cash flows from financing activities:
Repayment of long-term debt (215) (780)
Proceeds from issuance of common stock 479 68,808
Tax benefit related to the exercise of common stock options 25 1,373
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Net cash provided by financing activities 289 69,401
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Net increase (decrease) in cash and cash equivalents (2,905) 51,502
Cash and cash equivalents, beginning of period 72,711 22,485
-------- --------
Cash and cash equivalents, end of period $ 69,806 $ 73,987
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
5
<PAGE>
ADE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
1. Basis of Preparation
The accompanying unaudited condensed consolidated financial statements of
ADE Corporation (the "Company") include, in the opinion of management, all
adjustments (consisting only of normal and recurring adjustments) necessary for
a fair statement of the Company's financial position, results of operations and
cash flows at the dates and for the periods indicated. Results of operations for
interim periods are not necessarily indicative of those to be achieved for full
fiscal years.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to Quarterly Reports on Form 10-Q, the accompanying
unaudited condensed consolidated financial statements and these notes do not
include all disclosures required by generally accepted accounting principles for
complete financial statements. Accordingly, these statements should be read in
conjunction with the financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended April 30, 1998.
On June 11, 1998, pursuant to an Agreement and Plan of Merger (the "PST
Agreement"), the Company, through a wholly owned subsidiary, merged with Phase
Shift Technology, Inc. ("PST"), an Arizona corporation. PST designs,
manufactures, markets and services high-performance, non-contact surface
metrology equipment using advanced optical interferometric technology that
provides enhanced yield management for computer hard disk, semiconductor and
optics manufacturers. Pursuant to the PST Agreement, each outstanding share of
PST common stock was exchanged for two shares of the Company's common stock. A
total of 2,000,000 shares of the Company's common stock were issued in this
transaction. This transaction has been accounted for as a pooling-of-interests.
Accordingly, all financial statements presented have been restated as if the
merger took place at the beginning of such periods. There were no material
transactions between the Company and PST prior to the PST Agreement.
2. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
(in thousands)
October 31, April 30,
1998 1998
(unaudited)
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<S> <C> <C>
Raw materials and purchased parts $16,785 $15,817
Work-in-process 9,904 11,053
Finished goods 1,502 1,922
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$28,191 $28,792
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</TABLE>
3. Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings (loss) per share is computed using the weighted
average number of common shares outstanding and gives effect to all dilutive
potential common shares outstanding during the period. Potential common shares
outstanding include shares issuable upon the assumed exercise of dilutive stock
options reflected under the treasury stock method and shares issued in the PST
merger (Note 1) held in escrow.
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ADE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3. Earnings (Loss) Per Share (continued)
The following is a reconciliation of the shares used in calculating basic
and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
(in thousands) (in thousands)
Three months ended Six months ended
October 31, October 31,
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares used in computation:
a. Weighted average common stock outstanding used
in computation of basic earnings (loss) per share 12,965 12,638 12,944 11,527
b. Dilutive effect of stock options outstanding -- 478 -- 493
c. Dilutive effect of shares held in escrow -- 200 -- 200
------ ------ ------ ------
d. Shares used in computation of diluted earnings (loss) per share 12,965 13,316 12,944 12,220
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
4. Stock Option Repricing
In September 1998, the Compensation Committee of the Board of Directors of
the Company (the "Committee") determined that, because certain stock options
held by employees of the Company had an exercise price significantly higher than
the then current fair market value of the Company's common stock, such stock
options were not providing the desired incentive and retentive effect for
employees. Accordingly, the Company granted employees with outstanding stock
options the opportunity to cancel their existing options and receive new options
on a one for one basis with a new five year vesting schedule commencing on the
new date of grant. On October 2, 1998, 298,850 options with exercise prices
between $12.94 and $41.25 per share and an average exercise price of $17.72 per
share were cancelled and 298,850 new options were granted with an exercise price
of $8.66 per share, the fair market value of the Company's common stock on
October 2, 1998. No executive officer of the Company participated in the stock
option repricing.
5. Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 130, " Reporting Comprehensive
Income" ("SFAS 130") and Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("SFAS
131"). The Company adopted SFAS 130 and 131 on May 1, 1998. SFAS 130 establishes
standards for reporting comprehensive income and its components in the
consolidated financial statements. There were no material differences between
net income and comprehensive income for the three and six month periods ended
October 31, 1998. SFAS 131 establishes standards for reporting information on
operating segments and will first be applicable to the Company's April 30, 1999
year-end financial statements.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). This statement establishes new standards for the recognition of gains and
losses on derivative instruments and provides guidance as to whether a
derivative may be accounted for as a hedging instrument. SFAS 133 will be
effective for the Company beginning in fiscal 2001. The Company currently does
not utilize derivative instruments or hedging activities and, therefore, the
adoption of SFAS 133 is not expected to have a material impact on the Company's
financial position or its results of operations.
7
<PAGE>
ADE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Introduction
ADE Corporation (the "Company") designs, manufactures, markets and services
highly precise, automated measurement, defect detection and handling equipment
with current applications in the production of semiconductor wafers,
semiconductor devices and computer disks.
On June 11, 1998, pursuant to an Agreement and Plan of Merger (the "PST
Agreement"), the Company, through a wholly owned subsidiary, merged with Phase
Shift Technology, Inc. ("PST"), an Arizona corporation. PST designs,
manufactures markets and services high-performance, non-contact surface
metrology equipment using advanced optical interferometric technology that
provides enhanced yield management for computer hard disk, semiconductor and
optics manufacturers. Pursuant to the PST Agreement, each outstanding share of
PST common stock was exchanged for two shares of the Company's common stock. A
total of 2,000,000 shares of the Company's common stock were issued in this
transaction. This transaction has been accounted for as a pooling-of-interests.
Accordingly, all financial statements presented have been restated as if the
acquisition took place at the beginning of such periods. There were no material
transactions between the Company and PST prior to the PST Agreement.
The following information should be read in conjunction with the unaudited
condensed consolidated financial statements and notes thereto included in this
Quarterly Report and the audited consolidated financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in the Company's Annual Report on Form 10-K for the fiscal
year ended April 30, 1998.
Results of Operations
Restructuring of Operations
In September 1998, the Company recorded a charge of approximately $148,000
related to a reduction in work force. This amount represents severance benefits
paid to terminated employees. The Company continues to evaluate its cost
structure relative to expected revenue and will continue to implement aggressive
cost containment measures.
Three Months Ended October 31, 1998 compared to Three Months Ended October 31,
1997
Revenue. Revenue decreased 67.2% to $12.2 million in the second quarter of
fiscal 1999 from $37.3 million in the second quarter of 1998. Decreased sales of
the Company's products were primarily due to reduced demand for capital
equipment in the semiconductor wafer and device industries as well as the
computer hard disk industry. Reduced demand in the semiconductor market resulted
from excess manufacturing capacity for 200mm wafers, continued delays in
large-scale production of 300mm wafers and an overall uncertainty about
short-term chip demand as well as from the weakness of the economies of certain
Asian countries. For the three months ended October 31, 1998, 69.5% of the
Company's revenue was derived from the semiconductor industry compared to 81.0%
for the year earlier period. Similarly, the computer hard disk industry is in a
period of excess supply, which has resulted in reduced production and capital
equipment purchases. The Company has experienced reduced revenue in each of its
metrology product lines that are marketed to the computer hard disk industry.
Disk industry revenue comprised 30.5% of total revenue for the three months
ended October 31, 1998, compared to 19.0% for the year earlier period.
Gross Margin. Gross margin decreased to (4.6)% in the second quarter of
fiscal 1999 from 58.3% in the second quarter of 1998. This decrease resulted
primarily from a $3.2 million charge due to increased inventory obsolescence
reserves, lower absorption of overhead expenses due to significantly reduced
manufacturing activity,
8
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pricing pressure from customers and costs associated with maintaining the
Company's expanded worldwide customer service organization. The increased
inventory obsolescence reserves, lower absorption of overhead expenses and
pricing pressure from customers impacted both the semiconductor and computer
disk drive product lines, while costs associated with the customer service
organization were primarily incurred in the semiconductor industry.
Additionally, there was a significant decrease in sales made through external
sales representatives in certain foreign markets, primarily in Asia. These sales
typically carry a higher unit selling price than domestic sales or sales through
distributors. This decrease in selling price was partially offset by lower
commissions paid to sales representatives that resulted in reduced sales and
marketing expense.
Research and Development. Research and development expense increased
$120,000 or 1.9% to $6.5 million in the second quarter of fiscal 1999 from $6.4
million in the second quarter of 1998 and increased as a percentage of revenue
to 52.8% from 17.0% in the second quarter of 1998. Continued expenditures on the
Company's 300mm surface inspection and wafer thickness products have resulted
from the continued delay in expected volume sales of 300mm equipment and the
Company's belief that a second generation of 300mm products will become
available by the time volume sales begin. Additionally, the Company has
increased development efforts to enhance its existing 200mm and advanced 200mm
wafer systems as its semiconductor industry customers seek to improve their
yields on 200mm wafers. Research and development expense in absolute dollars
remained fairly consistent with the year earlier period, but increased as a
percentage of revenue primarily due to the significant decrease in revenue
during the second quarter of fiscal 1999 discussed above. The Company is
committed to continuing its investment in research and development to maintain
its position as a technological leader, which may necessitate continued research
and development spending at or above current levels.
Marketing and Sales. Marketing and sales expense decreased 29.9% to $3.2
million in the second quarter of fiscal 1999 from $4.6 million in the second
quarter of 1998 and increased as a percentage of revenue to 26.5% from 12.4% in
the second quarter of 1998. The reduced expense resulted primarily from reduced
commissions expense related to a lower volume of sales and related sales
commissions made through external sales representatives in certain foreign
markets, primarily in Asia. The mix of sales channels through which the
Company's products are sold may have a significant impact on the Company's
marketing and sales expense and the results in any period may not be indicative
of marketing and sales expense for future periods. The increase in marketing and
sales expense as a percentage of revenue despite the decrease in absolute dollar
expense resulted from the significant decrease in revenue during the second
quarter of fiscal 1999.
General and Administrative. General and administrative expenses decreased
27.8% to $2.2 million in the second quarter of fiscal 1999 from $3.0 million in
the second quarter of 1998 and increased as a percentage of revenue to 18.1%
from 8.2% in the second quarter of 1998. Expenses decreased primarily as a
result of the Company's cost reduction strategy implemented during the fourth
quarter of fiscal 1998 and throughout fiscal 1999 which included strict controls
over discretionary spending and the reduction in workforce described above. The
increase in general and administrative expense as a percentage of revenue
despite the decrease in absolute dollar expense resulted from the significant
decrease in revenue during the second quarter of fiscal 1999.
Interest Income, Net. Net interest income was $701,000 in the second
quarter of fiscal 1999 compared to $625,000 in the second quarter of 1998. The
increase in income resulted primarily from interest earned on the proceeds of a
public offering of the Company's common stock completed in August 1997 that
raised approximately $67.8 million in cash, and was partially offset by interest
expense related to separate $4 million and $5.5 million Industrial Development
Bonds ("IDB") issued in December 1997 and June 1996, respectively, through the
Massachusetts Industrial Finance Agency.
Income Taxes. The benefit from income taxes was $4.2 million in the second
quarter of fiscal 1999 compared to the provision for income taxes of $848,000 in
the second quarter of 1998 and resulted from the Company's loss before taxes in
the current quarter compared to the Company's income before taxes in the year
earlier period. The benefit from income taxes recognized in the second quarter
of fiscal 1999 reflects the Company's estimated annual effective tax rate of
36%, which is consistent with the estimated effective tax rate for the year
earlier period. The benefit from income taxes will primarily be obtained through
income tax refunds resulting from net operating loss
9
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carry-backs and from certain research and development credits. The Company
continues to monitor the realizability of its current and long term deferred tax
assets and provides for valuation allowances against these assets as
appropriate. The Company has not adjusted its valuation allowances during the
three months ended October 31, 1998.
Equity in Net Income (Loss) of Affiliated Companies. Equity in net loss of
affiliated companies was $324,000 in the second quarter of fiscal 1999 compared
to equity in net income of affiliated companies of $58,000 in the second quarter
of 1998. The Company's affiliates sell primarily to the semiconductor industry
and the loss reflects the overall downturn in the semiconductor industry as well
as the current financial uncertainty within the economies of certain Asian
countries. The Company remains cautious about when growth in the semiconductor
industry will return. Furthermore, there can be no assurance that overall growth
in these industries will result in increased profitability for the affiliates of
the Company.
Six Months Ended October 31, 1998 compared to Six Months Ended October 31, 1997
Revenue. Revenue decreased 49.3% to $36.3 million in the six months ended
October 31, 1998 from $71.5 million in the year earlier period. Decreased sales
of the Company's products were primarily due to reduced demand for capital
equipment in the semiconductor wafer and device industries as well as the
computer hard disk industry. Reduced demand in the semiconductor market resulted
from excess manufacturing capacity for 200mm wafers, continued delays in
large-scale production of 300mm wafers and an overall uncertainty about
short-term chip demand. For the six months ended October 31, 1998, 74.7% of the
Company's revenue was derived from sales to the semiconductor industry compared
to 80.0% for the year earlier period. The computer hard disk industry is also in
a period of excess supply, which has resulted in reduced production and capital
equipment purchases. Disk industry revenue comprised 25.3% of total revenue for
the six months ended October 31, 1998, compared to 20.0% for the year earlier
period.
Gross Margin. Gross margin decreased to 28% for the six months ended
October 31,1998 from 56.9% in the year earlier period. This decrease resulted
primarily from a $3.2 million charge in October due to increased inventory
obsolescence reserves, lower absorption of overhead expenses due to
significantly reduced manufacturing activity, pricing pressure from customers
and costs associated with maintaining the Company's expanded worldwide customer
service organization. The increased inventory obsolescence reserves, lower
absorption of overhead expenses and pricing pressure from customers impacted
both the semiconductor and computer disk drive product lines, while costs
associated with the customer service organization were primarily incurred in the
semiconductor industry. Additionally, there was a significant decrease in sales
made through external sales representatives in certain foreign markets,
primarily in Asia. These sales typically carry a higher unit selling price than
domestic sales or sales through distributors. This decrease in selling price was
partially offset by lower commissions paid to sales representatives that
resulted in reduced sales and marketing expense.
Research and Development. Research and development expense increased $1.1
million or 8.8% to $13.1 million in the six months ended October 31, 1998 from
$12.0 million in the year earlier period and increased as a percentage of
revenue to 36.2% from 16.9% in the year earlier period. The Company has
continued to commit significant expenditures on the Company's 300mm surface
inspection and wafer thickness products as well as increased development efforts
on advanced 200mm wafer systems as its semiconductor industry customers seek to
improve their yields on 200mm wafers. Research and development expense increased
as a percentage of revenue primarily due to the significant decrease in revenue
discussed above, particularly in the three month period ended October 31, 1998.
The Company is committed to continuing its investment in research and
development to maintain its position as a technological leader, which may
necessitate continued research and development spending at or above current
levels.
Marketing and Sales. Marketing and sales expense decreased 24.6% to $6.4
million in the six months ended October 31, 1998 from $8.4 million during the
year earlier period and increased as a percentage of revenue to 17.5% from 11.8%
in the year earlier period. The reduced expense resulted primarily from lower
commissions expense related to a lower volume of sales and related sales
commissions made through external sales
10
<PAGE>
representatives in certain foreign markets, primarily in Asia. The mix of sales
channels through which the Company's products are sold may have a significant
impact on the Company's marketing and sales expense and the results in any
period may not be indicative of marketing and sales expense for future periods.
The increase in marketing and sales expense as a percentage of revenue despite
the decrease in absolute dollar expense resulted from the significant decrease
in revenue discussed above, particularly in the three month period ended October
31, 1998.
General and Administrative. General and administrative expenses decreased
15.5% to $5.1 million for the six months ended October 31, 1998 from $6.0
million for the year earlier period and increased as a percentage of revenue to
14.0% from 8.4% in the year earlier period. Expenses decreased primarily as a
result of the Company's cost reduction strategy implemented during the fourth
quarter of fiscal 1998 and throughout fiscal 1999 which included strict controls
over discretionary spending and the September 1998 reduction in workforce
described above. The increase in general and administrative expense as a
percentage of revenue despite the decrease in absolute dollar expense resulted
from the significant decrease in revenue discussed above, particularly in the
three month period ended October 31, 1998.
Interest Income, Net. Net interest income was $1.5 million in the six
months ended October 31, 1998 compared to $814,000 in the year earlier period.
The increase in income resulted primarily from interest earned on the proceeds
of a public offering of the Company's common stock completed in August 1997 that
raised approximately $67.8 million in cash, and was partially offset by interest
expense related to separate $4 million and $5.5 million Industrial Development
Bonds ("IDB") issued in December 1997 and June 1996, respectively, through the
Massachusetts Industrial Finance Agency.
Income Taxes. The benefit from income taxes was $4.7 million in the six
months ended October 31, 1998 compared to the provision for income taxes of $3.2
million in the year earlier period and resulted from the Company's loss before
taxes in the current period compared to the Company's income before taxes in the
year earlier period. The benefit from income taxes recognized in fiscal 1999
reflects the Company's estimated annual effective tax rate of 36%, which is
consistent with the estimated effective tax rate for the year earlier period.
The benefit from income taxes will primarily be obtained through income tax
refunds resulting from net operating loss carry-backs and from certain research
and development credits. The Company continues to monitor the realizability of
its current and long term deferred tax assets and provides for valuation
allowances against these assets as appropriate. The Company has not adjusted its
valuation allowances in the six months ended October 31, 1998.
Equity in Net Income (Loss) of Affiliated Companies. Equity in net loss of
affiliated companies was $331,000 in the six months ended October 31, 1998
compared to equity in net income of affiliated companies of $92,000 in the year
earlier period. The Company's affiliates sell primarily to the semiconductor
industry and the loss reflects the overall downturn in the semiconductor
industry as well as the current financial uncertainty within the economies of
certain Asian countries. The Company remains cautious about when growth in the
semiconductor industry will return. Furthermore, there can be no assurance that
overall growth in these industries will result in increased profitability for
the affiliates of the Company.
Liquidity and Capital Resources
At October 31, 1998, the Company had $69.8 million in cash and cash
equivalents and $105.0 million in working capital. In addition, the Company had
$3.6 million in restricted cash used as security for a tax-exempt Industrial
Development Bond issued through the Massachusetts Industrial Finance Agency in
December 1997. Under the terms of the bond agreement, the Company may substitute
a letter of credit in an amount equal to approximately 105% of the outstanding
principal balance as collateral for the Company's obligations under the IDB,
allowing the restricted cash balance to be used for general corporate purposes.
The Company also has an unsecured revolving line of credit facility (the "Credit
Facility") with a bank, with a maximum borrowing amount of $8 million. The
Credit Facility provides the Company the option of borrowing at either the
bank's prime rate or the bank's LIBOR rate plus 2%. The Credit Facility expires
and all outstanding amounts thereunder are due December
11
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21, 1999. There were no borrowings outstanding under the Credit Facility at
October 31, 1998. At October 31, 1998, the Company was in violation of certain
financial covenants related to the Credit Facility, which provides the bank with
the right to withhold future advances under the Credit Facility, to require cash
deposits as security for any future advances or to offset any and all of the
Company's cash deposits with the bank against any outstanding borrowings under
the Credit Facility. The Company is in the process of seeking a waiver for this
default in the event that it seeks to obtain funds under the Credit Facility.
Cash used in operating activities for the six months ended October 31, 1998
was $1.4 million. This amount resulted from a net loss of $8.7 million, adjusted
for non-cash charges and changes in working capital. Non-cash items consisted of
$2.9 million of depreciation and amortization for the period and $439,000 of the
Company's share of the net loss of affiliated companies, net of cash dividends
received from the affiliates. The net decrease in working capital totaled $4.0
million and was primarily comprised of decreased accounts receivable,
inventories and prepaid expenses and other current assets of $6.8 million,
$601,000 and $895,000, respectively, partially offset by an aggregate decrease
of accounts payable, accrued expenses and other current liabilities of
approximately $3.7 million and deferred income on sales to Japan ADE Ltd., the
Company's 50% owned Japanese distributor, of $612,000. The decrease in accounts
receivable resulted primarily from significantly decreased billings and revenue
in the three months ended October 31, 1998 and collections of outstanding
receivable balances. The decrease in inventory resulted primarily from a $3.2
million increase in the Company's reserve for excess and obsolete inventory,
partially offset by gross inventory increases of $2.6 million due to the timing
of additional inventory purchases and reduced product sales. The decrease in
prepaid expenses and other current assets resulted primarily from a net decrease
in income taxes receivable due to an income tax refund received during the
current period partially offset by additional income tax refund receivables
generated by the Company's losses. The decrease in accounts payable, accrued
expenses and other current liabilities resulted primarily from the timing of
purchases and the related payments and reduced salary and other
personnel-related costs due to the Company's September 1998 reduction in
workforce and other cost containment measures.
Cash used in investing activities was $1.8 million, and consisted of $1.3
million for purchases of fixed assets and $700,000 in advances to affiliated
companies, partially offset by aggregate reductions of $177,000 in restricted
cash and other assets. During fiscal 1999, the Company anticipates investing
between $6.5 million and $7 million in a new facility for PST in Tucson, Arizona
to provide additional manufacturing capacity as PST's products and technology
are integrated with those of the Company. Construction of this facility
commenced in October 1998 and is expected to be substantially completed by May
1999.
Cash provided by financing activities was $289,000, which consisted of
$504,000 of aggregate proceeds from the issuance of common stock and tax
benefits from the exercise of stock options, partially offset by $215,000 in
repayments of long-term debt.
The Company expects to meet its near-term working capital needs and capital
expenditures primarily through cash generated from operations, its available
cash and cash equivalents and the above-referenced Credit Facility.
Year 2000
The Company has formed a Task Force to assess the nature, extent and cost
of remediation of any Year 2000 ("Y2K") readiness issues confronting the Company
and its suppliers, customers and other critical third parties. The project
encompasses reviewing the Company's products and internal systems, both
information technology ("IT") and non-information technology ("non-IT") as well
as the Year 2000 readiness of companies with which the Company has a material
relationship, including customers, suppliers, creditors, financial
organizations, utility providers and governmental agencies. This assessment has
begun at each of its operating units and the Company has identified certain
requisite corrective actions.
Products. The Company has completed or is in the process of completing Y2K
readiness testing utilizing testing guidelines prepared by a consortium of
semiconductor manufacturers. Corrective actions for software included in the
Company's products have included formulating software patches that provide
proper system
12
<PAGE>
operation or a combination of software patches and upgrades that provide proper
system operation and the reporting of the year 2000. These patches and upgrades
have been or will be provided to customers. The Company also sells software
products that are bundled with or sold separately from the Company's capital
equipment products. The ability of a majority of these products to function as a
Year 2000 ready product is dependent upon the Year 2000 readiness of the user's
operating system. The readiness status of specific Company products is posted on
the Company's website located at www.ade.com. The Company anticipates all
testing and corrective actions related to Year 2000 issues in its products will
be completed in fiscal 1999. However, notwithstanding such efforts, any failure
of the Company's products to perform, including system malfunctions due to the
onset of the Year 2000, could result in claims against the Company, which could
have a material adverse effect on the Company's business, results of operations
or financial condition. Furthermore, the Company's customers could choose to
convert to other Y2K compliant products in order to avoid such malfunctions,
which could have a material adverse effect on the Company's business, financial
condition or results of operations.
Information Technology. The Company has substantially completed its review
of its internal software applications and has determined that all network
systems and server architect are Year 2000-ready. The Company utilizes standard,
vendor supplied software for its electronic mail, corporate communications,
engineering design, manufacturing and materials purchasing/planning, accounting,
desktop and database systems. The Company has contacted these vendors to obtain
assurances that these IT systems are or will be Y2K compliant. Some software at
the individual user level remains to be tested and the Company anticipates this
testing will be completed in fiscal 1999. To the extent that some older versions
of these software systems may not be Y2K compliant and are currently being
utilized by employees, the Company intends to upgrade such systems to achieve
Y2K readiness. The failure of any such IT system to be Y2K compliant could have
a material adverse effect on the Company and no assurance can be provided that
all such programs will be implemented on a timely basis.
Non-Information Technology. The Company is aware of potential non-IT system
(building security, voice mail, telecommunications, utility and water systems,
etc.) risk associated with the Y2K issue and is currently evaluating its
potential exposure at each of its facilities. The Company anticipates the
renovation of any of its non-IT systems as well as the validation of any repairs
will be substantially completed in fiscal 1999. Formal queries to landords,
water, utility and telecommunications providers for the Company's domestic and
international locations have been sent to these vendors to assess the systems
Y2K readiness.
Third Party Suppliers, Vendors and Customers. The Company is in the process
of inquiring of its significant suppliers and customers the status of their Y2K
readiness through completion of a Year 2000 Readiness Supplier Questionnaire
that has been developed by a consortium of semiconductor manufacturers. The
Company anticipates all such requests will have been sent by January 31, 1999.
However, the Company has no means of assuring that third parties will achieve
Y2K readiness. Furthermore, there can be no assurance that IT, non-IT and other
suppliers who have provided Y2K readiness documentation will be Y2K compliant or
that such documentation accurately and fully reflects the Y2K readiness of their
systems. The Company's assessments of the effects of Y2K on the Company are
based, in part, upon information received from third parties and the Company's
reliance on that information. The failure of any such supplier's systems to be
Y2K compliant may have a material adverse effect on the Company's business,
results of operations or financial condition.
Year 2000 Costs and Expenses. The Company has used both internal and
external resources to address Y2K readiness and to program, test and implement
software for Y2K modifications. The Company specifically tracks the costs
associated with Task Force meetings (including related travel expenditures), Y2K
educational seminars, product software testing and patch development costs
(consulting and internal payroll costs), internal payroll costs related to the
contacting of third parties to determine Y2K status, and postage and related
costs associated with providing patches and upgrades to customers for software
utilized in the Company's products. The Company has not separately tracked the
costs of utilizing its internal information systems personnel in addressing its
Y2K readiness, with these costs principally relating to payroll and related
benefits. Total costs for Y2K readiness are currently estimated to be
approximately $120,000, of which approximately $54,000 have been incurred (and
expensed) throughout all phases of the Y2K project. Costs incurred to date have
been and anticipated future costs
13
<PAGE>
are expected to be funded through operations. As the Company continues to
complete its Y2K readiness plan, actual costs may exceed the current estimate.
The Company has not completed its evaluation of its non-IT systems and its
third party relationships. If unforeseen readiness efforts are required or if
the cost of any updating, modification or replacement of the Company's systems
or products exceeds the Company's estimates, the Y2K issue could result in
material costs and have a material adverse effect on the business, results of
operations or financial condition of the Company. There can be no assurance that
the Company will be successful in addressing Y2K problems as they relate to its
products and internal systems. In addition, there can be no assurance that the
systems of third parties with which the Company interacts will not suffer from
Y2K problems. Furthermore, Y2K problems that have been or may in the future be
identified with respect to the IT and non-IT systems of third parties having
widespread national and international interactions with persons and entities
generally (for example, certain systems of governmental agencies, utilities and
information and financial networks) could have a major impact on the Company's
financial condition or results of operations. The Company is in the process of
analyzing and quantifying material adverse effects any or all of the above
factors could have on the Company's financial condition or results of operations
in a worst-case scenario.
Contingency Plans. The Company has not yet developed contingency plans with
respect to the Y2K issue. The Company is currently in the process of reviewing
its Y2K readiness plans to determine what contingency plans, if any, are
appropriate.
Other Risk Factors
Capital expenditures by semiconductor wafer and device manufacturers
historically have been cyclical as they in turn depend upon the current and
anticipated demand for integrated circuits. Currently, there is industry-wide
uncertainty about short-term chip demand, which has resulted in lower capital
equipment expenditures by silicon wafer and semiconductor device manufacturers.
The current period of oversupply within the semiconductor industry has and could
continue to adversely affect the performance of the Company. These effects have
included and could continue to include delay or cancellation of orders,
postponement of product delivery dates, price concessions and extended payment
terms on product sales. The computer disk drive industry is also in a period of
oversupply and excess manufacturing capacity and this has also had an adverse
impact on the Company. Additionally, the Company anticipates that its revenue
for the current fiscal year will be adversely affected by the economic
conditions in the Asian region, which has historically accounted for a
significant portion of the Company's revenue base. At October 31, 1998, the
Company's backlog was $17.4 million, which represents a 54.1% reduction from
fiscal year end 1998. The Company remains cautious about when growth in these
industries will return. Furthermore, there can be no assurance that overall
growth in these industries will result in increased revenue for the Company. The
Company continues to evaluate its cost structure relative to expected revenue
and will continue to implement aggressive cost containment measures.
The Company sells its semiconductor products to both wafer and device
manufacturers. Historically, the Company's semiconductor revenue has been
derived to a greater extent from wafer manufacturers compared to device
manufacturers. The Company also believes that any increase in short-term chip
demand or increases in semiconductor market capital expenditures is expected to
impact device manufacturers prior to wafer manufacturers as wafer manufacturers
are further down on the overall semiconductor industry supply chain. Capital
expenditures within the semiconductor industry are increasingly focused on yield
improvement rather than increased capacity. Certain customers of the Company
have experienced excess manufacturing capacity and are consolidating some of
their manufacturing facilities. Additionally, the Company believes that its
customer's capital equipment expenditures related to increased capacity will be
focused on replicating processes at multiple production locations, which has
increased the importance of the Company maintaining its position as a
technological leader. Furthermore, the Company's success is dependent upon
supplying technologically superior products to the marketplace at appropriate
times to satisfy customer needs. Product development requires substantial
investment and is subject to technological risks. Delays or difficulties in
product development or market acceptance of newly developed products could
adversely affect the future performance of the Company.
14
<PAGE>
PART II.
OTHER INFORMATION
Item 1. Legal Proceedings:
None
Item 2. Changes in Securities:
. None
Item 3. Defaults Upon Senior Securities:
None
Item 4. Submission of Matters to a Vote of Security Holders:
The Annual Meeting of Stockholders was held on September 17, 1998. The
stockholders voted on the following matters:
1. Election of Directors
<TABLE>
<CAPTION>
Nominee For Against
------- --- -------
<S> <C> <C>
Robert C. Abbe 11,049,659 18,793
Harris Clay 11,049,659 18,793
Landon T. Clay 11,049,659 18,793
H. Kimball Faulkner 11,049,659 18,793
Chis L. Koliopoulos 11,049,659 18,793
Francis B. Lothrop, Jr 10,938,353 130,099
Kendall Wright 11,049,059 19,393
</TABLE>
There were no abstentions and 477,596 broker non-votes with respect to this
matter.
2. Appointment of PricewaterhouseCoopers LLP as the Company's independent
public accountants for the fiscal year ending April 30, 1999
For Against Abstain
11,061,882 2,469 4,200
There were 477,596 broker non-votes with respect to this matter
Item 5. Other Information:
None
Item 6. Exhibits and Reports on Form 8-K:
a. See Exhibit Index, Page 17
b. Reports on Form 8-K, None
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ADE CORPORATION
Date: December 15, 1998 /s/ Mark D. Shooman
-------------------
Mark D. Shooman
Vice President and Chief Financial Officer
Date: December 15, 1998 /s/ Robert C. Abbe
------------------
Robert C. Abbe
President and Chief Executive Officer
16
<PAGE>
ADE CORPORATION
EXHIBIT INDEX
Exhibit
- -------
27 Financial Data Schedule
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Unaudited Consolidated Financial Statements of ADE Corporation for the six
months ended October 31, 1998 and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 69,806
<SECURITIES> 0
<RECEIVABLES> 10,130
<ALLOWANCES> 0
<INVENTORY> 28,191
<CURRENT-ASSETS> 121,475
<PP&E> 25,076
<DEPRECIATION> 0
<TOTAL-ASSETS> 160,898
<CURRENT-LIABILITIES> 16,499
<BONDS> 8,832
0
0
<COMMON> 131
<OTHER-SE> 135,878
<TOTAL-LIABILITY-AND-EQUITY> 160,898
<SALES> 36,267
<TOTAL-REVENUES> 36,267
<CGS> 26,256
<TOTAL-COSTS> 26,256
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,461)
<INCOME-PRETAX> (13,096)
<INCOME-TAX> (4,715)
<INCOME-CONTINUING> (8,381)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,712)
<EPS-PRIMARY> (0.67)
<EPS-DILUTED> (0.67)
</TABLE>
