<PAGE>
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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: JANUARY 31, 1999 Commission File Number 0-26714
---------------- -------
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
--- ---
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 13,260,949 shares
- --------------------------------------- ----------------------------
Class Outstanding at March 8, 1999
Page 1 of 19
<PAGE>
ADE CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (unaudited)
Condensed Consolidated Balance Sheet-
January 31, 1999 and April 30, 1998 3
Condensed Consolidated Statement of Operations-
Three and Nine Months Ended January 31, 1999 and 1998 4
Condensed Consolidated Statement of Cash Flows -
Nine Months Ended January 31, 1999 and 1998 5
Notes to Unaudited Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
PART II. - OTHER INFORMATION 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE>
ADE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
January 31, April 30,
1999 1998
--------- ---------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 61,628 $ 72,711
Accounts receivable, net 10,838 16,938
Inventories 26,057 28,792
Prepaid expenses and other current assets 7,721 6,573
Deferred income taxes 7,753 7,670
--------- ---------
Total current assets 113,997 132,684
Fixed assets, net 24,693 26,058
Deferred income taxes 3,210 1,905
Investments 3,930 3,892
Intangible assets, net 4,014 4,996
Restricted cash 3,583 3,808
Other assets 416 300
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$ 153,843 $ 173,643
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 444 $ 434
Accounts payable 2,675 5,694
Accrued expenses and other current liabilities 11,507 12,205
Deferred income on sales to affiliates 1,077 2,511
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Total current liabilities 15,703 20,844
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Long-term debt 8,278 8,613
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Stockholders' equity:
Common stock 132 131
Capital in excess of par value 99,985 99,045
Retained earnings 29,842 45,153
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129,959 144,329
Deferred compensation (97) (143)
--------- ---------
129,862 144,186
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$ 153,843 $ 173,643
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
3
<PAGE>
ADE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share data, unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended January 31, ended January 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue $ 12,432 $ 36,269 $ 48,699 $107,785
Cost of revenue 10,209 17,033 36,465 47,862
-------- -------- -------- --------
Gross profit 2,223 19,236 12,234 59,923
-------- -------- -------- --------
Operating expenses:
Research and development 5,084 7,059 18,199 19,111
Purchased in-process research and development -- -- -- 6,100
Marketing and sales 2,707 3,283 9,069 11,720
General and administrative 2,463 3,348 7,555 9,376
Restructuring charges 2,318 -- 2,318 --
-------- -------- -------- --------
Total operating expenses 12,572 13,690 37,141 46,307
-------- -------- -------- --------
Income (loss) from operations (10,349) 5,546 (24,907) 13,616
Interest income, net 653 711 2,115 1,525
-------- -------- -------- --------
Income (loss) before provision for (benefit from) income taxes
and equity in net income (loss) of affiliated companies (9,696) 6,257 (22,792) 15,141
Provision for (benefit from) income taxes (3,519) 2,106 (8,235) 5,297
-------- -------- -------- --------
Income (loss) before equity in net income (loss) of
affiliated companies (6,177) 4,151 (14,557) 9,844
Equity in net income (loss) of affiliated companies (422) 216 (754) 308
-------- -------- -------- --------
Net income (loss) $ (6,599) $ 4,367 $(15,311) $ 10,152
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per share $ (0.51) $ 0.34 $ (1.18) $ 0.85
Diluted earnings (loss) per share $ (0.51) $ 0.32 $ (1.18) $ 0.80
Weighted average shares outstanding - basic 13,001 12,896 12,963 11,984
Weighted average shares outstanding - diluted 13,001 13,447 12,963 12,629
</TABLE>
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements
4
<PAGE>
ADE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands, unaudited)
<TABLE>
<CAPTION>
Nine months ended
January 31,
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(15,311) $ 10,152
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Depreciation and amortization 4,371 2,359
Equity in net (income) loss of affiiated companies,
net of dividends received 862 (252)
In-process research and development from business acquisition -- 6,100
Restructuring charges 931 --
Deferred income taxes (1,387) (3,425)
Changes in assets and liabilities:
Accounts receivable, net 6,100 (3,567)
Inventories 2,735 (6,749)
Prepaid expenses and other current assets (1,148) (1,239)
Accounts payable (3,019) (534)
Accrued expenses and other current liabilities (698) (2,398)
Deferred income on sales to affiliate (1,434) (114)
-------- --------
Net cash provided by (used in) operating activities (7,998) 333
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of fixed assets (2,910) (8,545)
Change in restricted cash 225 (3,914)
Advances to affiliated company (900) (190)
Acquisition of business -- (10,048)
Increase in other assets (116) (60)
-------- --------
Net cash used in investing activities (3,701) (22,757)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt (325) (836)
Proceeds from long-term debt -- 4,000
Proceeds from issuance of common stock 829 68,973
Tax benefit related to the exercise of common stock options 112 1,379
-------- --------
Net cash provided by financing activities 616 73,516
-------- --------
Net increase (decrease) in cash and cash equivalents (11,083) 51,092
Cash and cash equivalents, beginning of period 72,711 22,485
-------- --------
Cash and cash equivalents, end of period $ 61,628 $ 73,577
-------- --------
-------- --------
</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)
January 31, April 30,
1999 1998
------- -------
(unaudited)
<S> <C> <C>
Raw materials $15,443 $15,817
Work-in-process 9,487 11,053
Finished goods 1,127 1,922
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$26,057 $28,792
------- -------
------- -------
</TABLE>
6
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ADE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following:
<TABLE>
<CAPTION>
(in thousands)
January 31, April 30,
1999 1998
------------- -----------
(unaudited)
<S> <C> <C>
Accrued salaries, wages, vacation pay and bonuses $ 1,628 $ 2,262
Accrued commissions 1,781 1,392
Accrued warranty costs 1,447 2,306
Accrued severance 1,261 209
Deferred revenue 2,645 2,649
Other 2,745 3,387
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------------- -----------
$ 11,507 $ 12,205
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------------- -----------
</TABLE>
4. 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.
The following is a reconciliation of the shares used in calculating basic
and diluted earnings (loss) per share:
<TABLE>
<CAPTION>
(in thousands)
Three months ended Nine months ended
January 31, January 31,
1999 1998 1999 1998
------ ------ ------ ------
<S> <C> <C> <C> <C>
Shares used in computation:
a. Weighted average common stock outstanding used
in computation of basic earnings (loss) per share 13,001 12,896 12,963 11,984
b. Dilutive effect of stock options outstanding -- 351 -- 445
c. Dilutive effect of shares held in escrow -- 200 -- 200
------ ------ ------ ------
d. Shares used in computation of diluted earnings (loss) per share 13,001 13,447 12,963 12,629
------ ------ ------ ------
------ ------ ------ ------
</TABLE>
7
<PAGE>
ADE CORPORATION
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
5. STOCK OPTION REPRICING
In September 1998, the Compensation Committee of the Board of Directors of
the Company 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.
6. RESTRUCTURING CHARGES
In January 1999, the Company implemented a restructuring of operations plan
designed to better align the Company's cost structure with its revenue
reductions resulting from the decline in capital equipment expenditures in the
semiconductor and computer hard disk industries. The plan includes workforce
reductions as well as the consolidation of manufacturing and other operational
facilities. The Company recorded restructuring charges of $2,318,000 in the
period ended January 31, 1999, comprised of the following: severance charges of
$1,202,000 related to the termination of 76 employees in general and
administrative, marketing and sales, manufacturing, and engineering functions;
$185,000 in lease termination penalties and $931,000 in non-cash fixed asset
impairments related to furniture, fixtures and building improvements on the
terminated leased facilities. The fair value of the impaired assets was
determined as their estimated salvage value at the time of their eventual
disposition increased by their estimated utility during their related service
period through disposition. The Company anticipates these impaired assets will
be removed from service in October 1999. As of January 31, 1999, the Company has
made lease termination payments of $185,000. The full $1,202,000 in severance
costs remained in accrued expenses as of January 31, 1999 and is expected to be
paid out through October 1999, when substantially all of the consolidation
efforts are expected to be complete.
7. 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 nine month periods ended
January 31, 1999. 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.
8
<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
In January 1999, the Company commenced efforts to consolidate its
Charlotte, North Carolina operations and certain of its Milpitas, California
operations into its Massachusetts facilities to better align the Company's cost
structure with prevailing semiconductor and computer disk drive market
conditions and to position the Company with more efficient operations for
expected industry recoveries. Expenses associated with these consolidations
incurred in the current period totaled $2,569,000, including a restructuring
charge of $2,318,000 and $251,000 in other non-recurring expenses. The
restructuring charges include severance costs of $1,202,000 related to the
termination of 76 employees in general and administrative, marketing and sales,
manufacturing, and engineering functions; $185,000 in lease termination
penalties and $931,000 in non-cash fixed asset impairments related to furniture,
fixtures and building improvements on the terminated leased facilities. Other
non-recurring expenses included travel, consulting, and employee retention
bonuses and have been included in general and administrative expenses. Retention
bonus expense relates to payments to employees who have been notified of their
termination dates but whose services are required through specified dates during
the consolidation process. This expense is recorded ratably over the respective
estimated service periods. The Company anticipates costs in future periods
associated with replacing certain personnel who have elected not to relocate to
the Company's Massachusetts operations.
THREE MONTHS ENDED JANUARY 31, 1999 COMPARED TO THREE MONTHS ENDED JANUARY 31,
1998
REVENUE. Revenue decreased 65.7% to $12.4 million in the third quarter of
fiscal 1999 from $36.3 million in the third 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,
9
<PAGE>
continued delays in large-scale production of 300mm wafers and an overall
uncertainty about chip demand. For the three months ended January 31, 1999,
75.4% of the Company's revenue was derived from the semiconductor industry
compared to 78.2% for the year earlier period. The Company remains cautious
about when growth in the semiconductor industry will return. Similarly, the
computer hard disk industry has been in a period of excess supply, which has
resulted in lower production and reduced capital equipment purchases.
Consequently, revenue from the Company's metrology product lines that are
marketed to the computer hard disk industry decreased. Disk industry revenue
comprised 24.6% of total revenue for the three months ended January 31, 1999,
compared to 21.8% for the year earlier period.
GROSS MARGIN. Gross margin decreased to 17.9% in the third quarter of
fiscal 1999 from 53.0% in the third quarter of 1998. This decrease resulted
primarily from lower absorption of overhead expenses due to significantly
reduced manufacturing activity and costs associated with maintaining the
Company's worldwide customer service organization. The lower absorption of
overhead expenses impacted both the semiconductor and computer disk drive
product lines and resulted from fixed manufacturing costs that could not be
reduced proportionally with the decline in production sales volume, 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 per 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 decreased 28.0%
to $5.1 million in the third quarter of fiscal 1999 from $7.1 million in the
third quarter of 1998 and increased as a percentage of revenue to 40.9% from
19.5% in the third quarter of 1998. The decrease in expense resulted primarily
from decreased project materials and consulting expenditures related to the
Company's first generation surface inspection and wafer thickness 300mm tools
and other cost containment measures. The increase in expense as a percentage of
sales results from the significant decrease in revenue during the third quarter
of fiscal 1999 discussed above. 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 as well as
efforts to develop and enhance bridge tools, which can be used with either 200mm
or 300mm wafers. The Company also continues to develop new products for the
computer disk industry, including those which measure the magnetic properties of
materials used in manufacturing disk drives. 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 17.5% to $2.7
million in the third quarter of fiscal 1999 from $3.3 million in the third
quarter of 1998 and increased as a percentage of revenue to 21.8% from 9.1% in
the third quarter of 1998. The reduced expense resulted primarily from reduced
commissions expense related to a lower volume of sales 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 third quarter of fiscal 1999 discussed above.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
27.8% to $2.5 million in the third quarter of fiscal 1999 from $3.4 million in
the third quarter of 1998 and increased as a percentage of revenue to 19.8% from
9.2% in the third 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 reductions in workforce. These cost reductions were
partially offset by $251,000 in non-recurring expenses resulting from the
consolidation of operations discussed 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 third quarter of fiscal 1999 discussed above.
10
<PAGE>
INTEREST INCOME, NET. Net interest income was $653,000 in the third quarter
of fiscal 1999 compared to $711,000 in the third quarter of 1998. The decrease
in income resulted primarily from lower interest returns on reduced cash
principal balances during the current period compared to the three months ended
January 31, 1998. Interest income was partially offset by interest expense
related to the Company's obligations under 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 $3.5 million in the third
quarter of fiscal 1999 compared to the provision for income taxes of $2.1
million in the third 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 third
quarter of fiscal 1999 reflects the Company's estimated annual effective tax
rate of 36%, compared to an estimated effective tax rate for the year earlier
period of 35%. The benefit from income taxes will primarily be obtained through
income tax refunds resulting from net operating loss carry-backs, future use of
net operating loss carry-forwards 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 January 31, 1999.
EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES. Equity in net loss of
affiliated companies was $422,000 in the third quarter of fiscal 1999 compared
to equity in net income of affiliated companies of $216,000 in the third quarter
of 1998. The Company's affiliates sell primarily to the semiconductor industry
and the current period 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 may occur. Furthermore, there can be no assurance that
any overall growth in these industries will result in increased profitability
for the affiliates of the Company.
NINE MONTHS ENDED JANUARY 31, 1999 COMPARED TO NINE MONTHS ENDED
JANUARY 31, 1998
REVENUE. Revenue decreased 54.8% to $48.7 million in the nine months ended
January 31, 1999 from $107.8 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 chip
demand. For the nine months ended January 31, 1999, 77.3% of the Company's
revenue was derived from sales to the semiconductor industry compared to 79.4%
for the year earlier period. The Company remains cautious about when growth in
the semiconductor industry will return. The computer hard disk industry is also
in a period of excess supply, which has resulted in lower production and reduced
capital equipment purchases. Disk industry revenue comprised 22.7% of total
revenue for the nine months ended January 31, 1999, compared to 20.6% for the
year earlier period.
GROSS MARGIN. Gross margin decreased to 25.1% for the nine months ended
January 31, 1999 from 55.6% in the year earlier period. This decrease resulted
primarily from $3.9 million in increased excess and obsolete inventory reserves,
lower absorption of overhead expenses due to significantly reduced manufacturing
activity, pricing pressure from customers and costs associated with maintaining
the Company's 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. The lower absorption of
overhead expenses resulted from fixed manufacturing costs that could not be
reduced proportionally with the decline in production sales volume.
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.
11
<PAGE>
RESEARCH AND DEVELOPMENT. Research and development expense decreased 4.8%
to $18.2 million in the nine months ended January 31, 1999 from $19.1 million in
the year earlier period and increased as a percentage of revenue to 37.4% from
17.7% in the year earlier period. The decrease in expense resulted primarily
from decreased project materials and consulting expenditures related to the
Company's first generation surface inspection and wafer thickness 300mm tools
and other cost containment measures. These decreases were primarily realized
during the three months ended January 31, 1999. The increase in expense as a
percentage of sales results from the significant decrease in revenue during
fiscal 1999 discussed above. 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 as well as
efforts to develop and enhance bridge tools, which can be used with either 200mm
or 300mm wafers. The Company also continues to develop new products for the
computer disk industry, including products that measure the magnetic properties
of materials used in manufacturing disk drives. 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 22.6% to $9.1
million in the nine months ended January 31, 1999 from $11.7 million during the
year earlier period and increased as a percentage of revenue to 18.6% from 10.9%
in the year earlier period. The reduced expense resulted primarily from lower
commissions expense related to a lower volume of sales 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 current period revenue discussed above.
GENERAL AND ADMINISTRATIVE. General and administrative expenses decreased
19.4% to $7.6 million for the nine months ended January 31, 1999 from $9.4
million for the year earlier period and increased as a percentage of revenue to
15.5% from 8.7% 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 reductions in workforce. 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.
INTEREST INCOME, NET. Net interest income was $2.1 million in the nine
months ended January 31, 1999 compared to $1.5 million 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 the Company's obligations under 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 $8.2 million in the nine
months ended January 31, 1999 compared to the provision for income taxes of $5.3
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%, compared to
the estimated effective tax rate of 35% 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, future use of net operating loss
carry-forwards 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 nine
months ended January 31, 1999.
EQUITY IN NET INCOME (LOSS) OF AFFILIATED COMPANIES. Equity in net loss of
affiliated companies was $754,000 in the nine months ended January 31, 1999
compared to equity in net income of affiliated companies of $308,000 in
12
<PAGE>
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 may occur. Furthermore, there can be no
assurance that any overall growth in these industries will result in increased
profitability for the affiliates of the Company.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company had $61.6 million in cash and cash
equivalents and $98.3 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,
assuming the Company has the ability to borrow under the Credit Facility
described below or another facility. Such actions would allow 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 21, 1999. There were no borrowings outstanding under
the Credit Facility at January 31, 1999. At January 31, 1999, 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 has applied for a
waiver of this default to enable future borrowing, in the event that it seeks to
obtain funds under the Credit Facility.
Cash used in operating activities for the nine months ended January 31,
1999 was $8.0 million. This amount resulted from a net loss of $15.3 million,
adjusted for net non-cash charges of $4.8 million and a $2.5 million net
decrease in working capital accounts. Non-cash items consisted of $4.4 million
of depreciation and amortization, $931,000 in non-cash restructuring charges and
$862,000 of the Company's share of the net loss of affiliated companies, net of
cash dividends received from the affiliates, partially offset by a $1.4 million
increase in deferred tax assets. The non-cash restructuring charge related to a
$931,000 write-down of fixed assets. The increase in deferred tax assets
resulted primarily from the asset write-down, increased accrued severance
liabilities discussed below and net operating loss carry-forwards generated by
fiscal 1999 pre-tax operating losses.
The net decrease in working capital total of $2.5 million was comprised of
decreased accounts receivable and inventories of $6.1 million and $2.7 million,
respectively, partially offset by increased prepaid expenses and other current
assets of $1.1 million, aggregate decreased accounts payable and accrued
expenses and other current liabilities of approximately $3.7 million, and
decreased deferred income on sales to Japan ADE Ltd., the Company's 50% owned
Japanese distributor, of $1.4 million. The decrease in accounts receivable
resulted primarily from significantly decreased billings and revenue in the
three months ended January 31, 1999 compared to the three months ended April 30,
1998 and collections of outstanding receivable balances. The decrease in
inventory resulted primarily from a $3.9 million increase in the Company's
reserve for excess and obsolete inventory, partially offset by gross inventory
increases of $1.2 million due to the timing of additional inventory purchases
and reduced product sales. The increase in prepaid expenses and other current
assets resulted primarily from increased income tax refund receivables generated
by fiscal 1999 pre-tax operating losses. The decrease in accounts payable,
accrued expenses and other current liabilities resulted primarily from reduced
inventory and other materials purchase commitments, the timing of related
payments and reduced salary and other personnel-related costs due to the
Company's fiscal 1999 reductions in workforce and other cost containment
measures. These decreases were partially offset by increased severance accruals
of $1.2 million related to the Company's restructuring plan implemented in
January 1999.
13
<PAGE>
Cash used in investing activities was $3.7 million, and consisted of $2.9
million for purchases of fixed assets and $900,000 in advances to affiliated
companies, partially offset by aggregate reductions of $109,000 in restricted
cash and other assets. During fiscal 1999, the Company anticipates investing
between $6.5 million and $7 million in a new manufacturing 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. Approximately $956,000 of the total estimated capitalized costs
related to the PST facility had been incurred as of January 31, 1999. The
Company also anticipates investing approximately $2,000,000 in renovating its
Westwood, Massachusetts facility to accommodate the consolidation of its
semiconductor surface inspection operations from Charlotte, North Carolina.
Cash provided by financing activities was $616,000, which consisted of
$941,000 of aggregate proceeds from the issuance of common stock and tax
benefits from the exercise of stock options, partially offset by $325,000 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, the above-referenced Credit Facility assuming waiver
of the existing default, and a proposed industrial revenue bond to finance a
portion of the above referenced Tucson 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 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
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 software products to
function as a Year 2000 ready product is dependent upon the Year 2000 readiness
of the user's operating system and any other software with which the Company's
products will interact. 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 by August 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.
INFORMATION TECHNOLOGY. The Company has substantially completed its review
of its internal software applications and has determined that all network
systems and server architecture 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
14
<PAGE>
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 that any
necessary renovation of its non-IT systems as well as the validation of any
repairs will be substantially completed by August 1999. Formal queries to
landlords, water, utility and telecommunications providers for the Company's
domestic and international locations , and other third parties with whom the
Company has material relationships have been sent to these suppliers to assess
the systems' Y2K readiness.
SUPPLIERS 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. All such requests have
been sent as of January 31, 1999 and the Company has received responses to
approximately 80% of these inquiries. Each of the responses received has
indicated the respective third party is or will be Y2K ready by December 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), network server upgrades, 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 $250,000, of which
approximately $148,000 have been incurred throughout all phases of the Y2K
project. Costs incurred to date have been and anticipated future costs are
expected to be funded through operations. As the Company continues to complete
its Y2K readiness plan, actual costs may exceed the current estimate.
CONTINGENCY PLANS. The Company's contingency plan with respect to the Y2K issue
is currently being developed. The Company is currently in the process of
reviewing the status of all third party suppliers. Replacement suppliers will be
identified for critical suppliers who the Company believes will not be Y2K
ready. The Company is considering contingency plans on a global basis relative
to systematic failure of electricity or telecommunications beyond the control of
the Company. There can be no assurance that any contingency plan measures will
mitigate the impact of Y2k problems.
If unforeseen Y2K 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
15
<PAGE>
condition or results of operations. The most reasonably likely worst case Y2K
scenario, in the event that the Company does not identify or fails to fix
material non-ready IT systems or non-IT systems operated by the Company or third
parties with which it has a material relationship, is the disruption of its own
business operations and/or those of customers, which could have a material
adverse effect on the Company's business and financial condition. Another
reasonably likely worst case scenario is a systematic failure beyond the control
of the Company, including but not limited to prolonged electrical or
telecommunications failures or general disruptions in global business
activities. Risks associated with such disruptions include, but are not limited
to, increased operating costs, disruption in product shipments, loss of customer
orders, and claims of mismanagement, misrepresentation or breach of contract,
any of which could have a material adverse effect on the Company. The Company is
in the process of attempting to quantify the financial impact the occurrence of
any of these worst case scenarios might have on the Company and prepare specific
contingency plans specific to each scenario.
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 has been 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 near term
revenue will continue to be adversely affected by the economic conditions in the
Asia, which has historically accounted for a significant portion of the
Company's revenue base. At January 31, 1999, the Company's backlog was $15.3
million, which represents a 59.6% 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 than 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.
During the third quarter of fiscal 1999 the Company implemented a
restructuring plan to address the current downturn in the semiconductor and
computer hard disk industries which resulted in a pre-tax charge of $2.3
million. This restructuring plan includes a consolidation of facilities, a
write-down of fixed assets and employee severance costs. There can be no
assurance that this plan will be sufficient to address the Company's cost
structure relative to current and expected revenue and current market
conditions. 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. There can be no assurance that the Company
will be able to retain or attract personnel necessary for the continued
development of its business. Delays or difficulties in product development or
market acceptance of newly developed products could adversely affect the future
performance of the Company.
16
<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:
None
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
a. See Exhibit Index, Page 19
b. Reports on Form 8-K, None
17
<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: March 17, 1999 /s/ Mark D. Shooman
-------------------
Mark D. Shooman
Vice President and Chief Financial Officer
Date: March 17, 1999 /s/ Robert C. Abbe
------------------
Robert C. Abbe
President and Chief Executive Officer
18
<PAGE>
ADE CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
- -------
<S> <C>
27 Financial Data Schedule
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEUDLE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONSOLIDATED FINANCIAL STATEMENT OF ADE CORPORATION FOR THE NINE
MONTHS ENDED JANAURY 31, 1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> APR-30-1999
<PERIOD-START> MAY-1-1998
<PERIOD-END> JAN-31-1999
<CASH> 61,628
<SECURITIES> 0
<RECEIVABLES> 10,838
<ALLOWANCES> 0
<INVENTORY> 26,057
<CURRENT-ASSETS> 113,997
<PP&E> 24,693
<DEPRECIATION> 0
<TOTAL-ASSETS> 153,843
<CURRENT-LIABILITIES> 15,703
<BONDS> 8,722
0
0
<COMMON> 132
<OTHER-SE> 129,862
<TOTAL-LIABILITY-AND-EQUITY> 153,843
<SALES> 48,699
<TOTAL-REVENUES> 48,699
<CGS> 36,465
<TOTAL-COSTS> 36,465
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,115)
<INCOME-PRETAX> (22,792)
<INCOME-TAX> (8,235)
<INCOME-CONTINUING> (14,557)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,311)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
