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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 29, 1996
COMMISSION FILE NUMBER 0000912842
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APPLIED SCIENCE AND TECHNOLOGY, INC.
(Name of Issuer in its Charter)
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DELAWARE 04-2962110
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
35 CABOT ROAD, WOBURN, MASSACHUSETTS 01801-1053
(Address of Principal Executive Offices) (Zip Code)
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(617) 933-5560
(Registrant's Telephone Number, Including Area Code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Title of Class
COMMON STOCK, $0.1 PAR VALUE
REDEEMABLE COMMON STOCK PURCHASE WARRANTS
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CHECK WHETHER THE ISSUER: (1) FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION
13 OR 15(D) OF THE 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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CHECK IF THERE IS NO DISCLOSURE OF DELINQUENT FILERS IN RESPONSE TO ITEM 405 OR
REGISTRATION S-B IF NOT CONTAINED IN THIS FORM, AND NO DISCLOSURE WILL BE
CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR
INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K
OR ANY AMENDMENT TO THIS FORM 10-K. [ ]
The Issuer's total revenues for its most recent fiscal year were $ 39,135,596.
The aggregate market value of the shares of Common stock, held by non
affiliates, based upon the average of the closing bid and asked prices for such
stock on September 20, 1996 was approximately $30,244,018. As of September 20,
1996, 4,448,475 shares of Common Stock, $.01 par value per share, were issued
and outstanding.
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ITEM 1. BUSINESS
INTRODUCTION
Applied Science and Technology, Inc. (the "Company" or "ASTeX") designs,
manufactures and markets proprietary systems and components used in the
production of advanced materials such as semiconductors and synthetic diamond
and in medical applications such as diagnostic imaging and sterilization. The
Company's systems and components are typically used in plasma production
techniques in which gases are heated to form a plasma which chemically interacts
with a substrate material. Based on its estimates of the market, management
believes that the Company is the leading worldwide supplier of microwave plasma
equipment to its markets.
The Company provides patented and proprietary components and subsystems, as well
as engineering and scientific expertise, to semiconductor capital equipment
manufacturers ("SCEMs") for semiconductor production. This equipment performs
essential process steps and includes microwave and radio frequency ("RF") power
generators and microwave plasma sources for photoresist stripping, passivation,
etching, thin film deposition and surface cleaning; and ozone generators and
subsystems for low-temperature deposition of insulating layers in integrated
circuits. ASTeX's major customers include Applied Materials, Inc. ("Applied
Materials"), GaSonics International, Inc. ("GaSonics") and Lam Research
Corporation ("Lam Research"). Their customers (IBM, Intel, Motorola, et al.) use
ASTeX equipment to manufacture the latest generation of advanced memory devices
and microprocessors such as Pentium and PowerPC chips.
The Company supplies critical RF power subsystems to medical capital equipment
manufacturers ("MCEMs") for use in magnetic resonance imaging ("MRI") and
medical equipment sterilization. Based on its estimates, management believes the
Company is a leading supplier of RF linear amplifiers to the MRI equipment
market. The Company provides RF power subsystems exclusively to a manufacturer
of medical equipment sterilization systems. These systems use RF-excited plasma
to remove contaminants and sterilize medical instruments and material.
Customers use the Company's patented, patent pending, and proprietary synthetic
diamond production systems in the development and manufacture of tool coatings,
optics and optical coatings, thermal management substrates for laser diodes used
in telecommunications, and high performance electronics. Diamond is an ideal
material for a wide variety of uses because of its extreme hardness, excellent
thermal conductivity, and other unique properties. The Company is
commercializing an innovative way to produce synthetic diamond using a chemical
vapor deposition ("CVD") process. The Company's strategy is to commercialize the
use of CVD diamond by enabling new applications for diamond and by developing
systems to manufacture CVD diamond at higher production rates, resulting in
lower costs per carat. Based on its estimates, management believes that the
Company continues to be the leading commercial equipment supplier to this
market.
An M.I.T. spin-off founded in January 1987, the Company has achieved
profitability in eight of the last ten years and year-to-year revenue growth in
nine of the last ten years. The Company completed an initial public offering in
November 1993 which raised net proceeds of approximately $15.9 million to fund
R&D activities, expand manufacturing facilities, fund increased sales and
marketing efforts, fund increased inventory and accounts receivable, fund the
acquisition of complementary businesses and provide general working capital. The
Company's balance sheet at June 29, 1996 includes $7.2 million of cash and
investments, $19.2 million of working capital, tangible net worth of $21.1
million, a current ratio of 3.8 to 1 and long term debt of $6.2 million,
excluding current maturities.
For the fiscal year ending June 29, 1996 ("Fiscal 1996"), the Company achieved
revenues for the year of $39.1 million, a 96% increase over the $20.0 million
reported in the prior fiscal year ending July 1, 1995 ("Fiscal 1995"). Net loss
for the year was $7.3 million, or $1.74 loss per share including
acquisition-related expenses and the one-time write-off of goodwill associated
with Ehrhorn
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Technological Operations, Inc. ("ETO") totaling $9.7 million. Excluding
acquisition-related expenses and the one-time goodwill write-off, net earnings
for the year would have been $2.4 million, a 113% increase over the $1.1 million
reported in Fiscal 1995 while earnings per share would have been $0.57 on the
same weighted outstanding shares, an increase of 104% over the $0.28 per share
reported in Fiscal 1995.
Fiscal 1996 was a year of growth and change for the Company. The doubling of
revenues over Fiscal 1995 was accomplished primarily through internal growth and
secondarily through acquisition.
Internal growth was responsible for 55%, or $10.6 million, of the Company's
total revenue growth over Fiscal 1995. This growth was driven by the success of
the Company's ozone generators and ozone systems. A completely new product line
introduced in Fiscal 1995, revenues from ozone generators and systems tripled to
$10.8 million in Fiscal 1996 in comparison to $3.5 million in Fiscal 1995. This
increase of $7.3 million was responsible for 69% of the Company's internal
growth during Fiscal 1996. This success is indicative of the quality of the
Company's ozone products, of the Company's ability to execute a rapid ramp up of
production to meet its customer's requirements and of the Company's ability to
grow through new product introductions.
Acquisition was responsible for 45%, or $8.5 million, of the Company's total
revenue growth over Fiscal 1995. In November 1995, the Company acquired Newton
Engineering Service, Inc. ("NES"), a manufacturer of high-performance
transformers and inductors used across the Company's product lines. In January
1996, the Company acquired ETO, a manufacturer of RF generators used in
semiconductor, medical diagnostic imaging and medical sterilization
applications.
In connection with the acquisition of ETO, the Company recorded as goodwill
$7,048,512, which represented the excess of the purchase price over the fair
value of ETO's net assets acquired and in-process research and development. This
goodwill was to be amortized over fifteen years. During the fourth quarter, the
Company experienced a precipitous decline in sales to one of ETO's major SCEM
customers. As a result, ETO is not expected to contribute significantly to
operating results and, in management's judgment, this decline in revenues is a
permanent impairment of ETO's prospects. The valuation model used in connection
with the acquisition is no longer considered valid because the lost product
sales represented what had been considered a significant growth opportunity for
ETO. Based on this significant change, the Company reassessed its remaining
goodwill and recorded an impairment of goodwill in the amount of $6,813,562,
which represented the goodwill balance at the date of reassessment.
Notwithstanding the loss of business at ETO, management believes that
acquisitions and strategic alliances allow the Company to leverage its financial
base, technology depth, applications expertise and industry knowledge of markets
served while providing significantly greater opportunities to develop
cost-effective solutions to meet customers' future process requirements.
Consistent with the Company's growth strategy, it plans to continue to
aggressively develop and introduce new products and seek to acquire
complementary product lines and operations in the future.
MARKETS
The Company's primary market consists of SCEMs. The Company also markets its
products to MCEMs for diagnostic imaging and medical equipment sterilization,
and to CVD diamond producers and industrial, university and government
laboratory researchers worldwide.
SEMICONDUCTOR EQUIPMENT
The Company's plasma and ozone production technologies are used in semiconductor
manufacturing equipment. According to Dataquest, Inc. ("Dataquest"), a market
research and consulting firm, the world market for silicon wafer processing
equipment increased at rates up to 60% over the period from
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1993 to 1995. Dataquest has recently revised its projections for 1996 growth in
the market to 17%, leading to a predicted level of $22.3 billion this year.
However, Dataquest predicts a decline of around 16% in 1997, to $18.8 billion.
The component segment of this market, which is available to ASTeX, is estimated
by management to be approximately $600 million per year and projected to grow to
more than $1 billion over the next five years. These estimates are based on the
products currently offered by the Company. The total available market for ASTeX
in this industry can be expanded significantly through the development or
acquisition of complementary product lines.
Segments of the market, particularly the plasma etch and deposition segments
currently served by the Company, are expected to grow at a rate faster than the
overall market. According to Dataquest, critical market needs include
high-density plasmas for dry-etch processes for fabricating dynamic random
access memory ("DRAM") and logic devices, as well as plasma deposition sources
for intermetal dielectric and metallization for fabricating advanced
microprocessors. The fabrication of these newer, more complex devices employs
the microwave and RF plasma and ozone production technologies offered by the
Company.
Management believes these increases in plasma-related segments represent a
significant opportunity for the Company. Much of this increase is due to more
complex semiconductor products that are required for use in lap-top and other
personal computers, portable communications and application-specific consumer
electronics. The extension of the market for these devices beyond the
traditional personal computer market is also considered by many to imply
longer-term stability and less volatility in the growth of the market, as the
products in which the devices are used become more diverse and targeted at a
larger segment of the population.
Another factor affecting the Company's growth has been the structural changes in
the SCEM market. As this industry grows and matures, many of the large SCEMs are
working more directly with companies such as ASTeX in order to take advantage of
their own growth opportunities. The need to partner with advanced suppliers in
order to succeed was recognized and promoted by SEMATECH. The emergence of a new
industry segment, the component suppliers to the SCEMs, has been compared to the
development of the automotive industry. ASTeX has been able to take advantage of
this emerging market by working with its customers to develop and deliver
advanced technology solutions and through this process to establish its
strategic position as a leading supplier of advanced technologies to the
semiconductor capital equipment industry.
MEDICAL EQUIPMENT
The acquisition of ETO has diversified the Company into the medical capital
equipment market. ETO supplies critical RF power subsystems for diagnostic
imaging and medical equipment sterilization applications.
MRI is a diagnostic imaging modality which uses RF energy to excite the body's
hydrogen molecules in a strong magnetic field. The excited molecules produce a
radio signal that can be translated into images. MRI competes with x-ray and CT
(Computed Tomography) imaging systems. MRI is especially effective in imaging
soft tissue (brain) and tissue surrounded by bone (spinal cord).
The MRI market experienced significant growth in the late eighties due to the
rapid expansion of the installed base in the US. Currently, the worldwide growth
rate is between 5 and 10% annually. ETO is a leading supplier of RF linear
amplifiers to the MRI equipment market. Management estimates that the total
available MRI market for products currently offered by the Company is
approximately $25 million.
ETO provides RF power subsystems to a manufacturer of a medical equipment
sterilization system which received FDA approval in late 1993. This system uses
an RF-excited plasma to remove contaminants and sterilize medical instruments
and material without leaving toxic residue.
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This sterilization system has been well received in the market worldwide. The
plasma-based method competes with high temperature steam autoclaves and low
temperature chemical baths. The plasma-based method significantly reduces
instrument wear caused by the steam autoclave and eliminates the handling of
toxic chemicals inherent with the chemical baths. Management estimates that
sales of these systems will grow 30% to 50% per year over the next several
years.
CVD DIAMOND EQUIPMENT
Diamond has a unique combination of physical characteristics that are not found
in other materials. Diamond is the hardest readily available material, can be
highly transparent, and at room temperature is the best thermal conductor
(conducting heat five times better than copper). In addition, diamond is an
excellent electrical insulator and, conversely, when controlled quantities of
impurities are introduced, becomes a semiconductor. Diamond is also resistant to
most chemicals and to radiation and, when polished, is almost frictionless.
Because of its outstanding properties, CVD diamond has potential uses in a broad
range of commercial applications, including wear coatings to greatly extend the
lives of cutting tools and machine components; electronic packaging materials to
reduce the operating temperature and thereby improve the output, reliability,
and lifetime of electronic components; transparent optical coatings to protect
sensitive lenses with a scratch-resistant surface; and advanced electronic
devices capable of operating in high temperature and corrosive environments.
CVD diamond is superior in many respects to currently used materials including
tungsten carbide and polycrystalline diamond ("PCD"). CVD diamond is a much
harder material than tungsten carbide and, although it currently costs more than
PCD, it can be used in a variety of tooling applications where PCD cannot.
Industry analysts project the global CVD diamond industry to grow to revenues of
$800 million by the year 2000, a significant increase from its current estimated
base of less than $100 million in estimated revenues in 1996. While the Company
believes it will take longer for the industry to expand to this level, perhaps
until 2010, the annual equipment market available to ASTeX at that time is
estimated by management at between $100 and $200 million.
The CVD diamond industry's growth rate is controlled to a large extent by two
key factors: (1) CVD diamond's cost per carat, and (2) the rate of new product
development incorporating CVD diamond. As the leading commercial supplier to the
CVD diamond market, one of ASTeX's key goals is to drive down the cost of CVD
diamond, in order to enable a wider range of cost effective applications, and
thus expand the market for ASTeX deposition systems. In addition, ASTeX partners
with its customers in the product development process in an effort to reduce the
time to market for new CVD diamond applications.
EMERGING MARKETS
In addition to the SCEMs, MCEMs and CVD diamond producers, the Company sells
many of its microwave and RF power generators and waveguide components,
microwave plasma sources, and turnkey laboratory systems to research scientists
who are developing processes for applications of interest to their
organizations, or conducting fundamental research. This provides a cost
effective way for the Company to explore other applications and new business
opportunities for its core technology. In addition, the Company sells its
products for use on industrial applications requiring the precision and
reliability of the Company's products.
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CURRENT PRODUCTS
Virtually all of the Company's products including its ozone generators and
systems are based on either RF, microwave or plasma technologies. These
technologies represent the confluence of the Company's core technical
competencies in plasma physics and chemistry, high-voltage switching power
supplies, RF and microwave engineering, and integrated systems engineering. The
Company's products range from fully-integrated turnkey systems for CVD diamond
production or ozone delivery to RF, microwave, plasma and ozone components
designed for high-volume original equipment manufacturer ("OEM") and research
applications.
The Company produces more than twenty five (25) models of microwave plasma
sources, RF and microwave power generators, and ozone generators that are sold
to SCEMs, MCEMs and end-users along with the Company's engineering and technical
support. In addition, the Company sells a large selection of auxiliary
components and spare parts often combining or integrating these components to
meet a customer's specific configuration requirements.
The RF and microwave generators range in price from $7,500 to $30,000 and are
used to provide precise stable energy to plasma sources utilized for etch, strip
and CVD applications. Microwave plasma sources generally range in price from
$17,500 to $125,000 and are used for the same applications but are typically
fully integrated onto the customer's machines by ASTeX. Ozone generators and
turnkey ozone systems generally range in price from $12,500 to $140,000 and are
used to deliver high-purity ozone for film-deposition and wafer cleaning
applications. Typical products manufactured with all of these devices include
DRAMs and advanced microprocessors. Each of these products can be used to
perform several steps of the manufacturing processes for these devices.
RF amplifiers used in magnetic resonance imaging ("MRI") systems range in price
from $18,600 to $36,000. RF generators used in medical equipment sterilization
systems are priced between $2,900 and $3,500.
According to a 1993 report by Decisions Resources, an industry analyst, the
Company "is the largest manufacturer of microwave plasma CVD components for
diamond deposition." The Company's diamond deposition products include such
standard plasma deposition systems as the AX6300 through the AX6560. These
diamond reactors are primarily used in the production of bulk diamond for
thermal management applications and in research and development for coating
tools and for electronics applications. The base price of the AX6300 is
approximately $240,000 and the base price of the AX6350 is approximately
$275,000. In addition, the Company was granted in April 1995 a U.S. patent
covering key process technology in depositing high quality diamond at an
extremely high rate, which is used in virtually all of the Company's diamond
deposition products. Management believes that this high growth rate process
permits production of diamond films at lower cost than ever before possible.
Further anticipated enhancements in the process, coupled with commercialization
of higher power reactors, are expected to lower these costs further.
The Company's 8 kW AX6500 series deposition systems are capable of an enhanced
diamond mass deposition rate and are used for commercial production of CVD
diamond products. The Company believes that the AX6500 design, for which it has
filed patent applications, can be used in a number of different CVD diamond
manufacturing processes, including thin films required for tool coatings and
thick films for thermal management. The base price of the AX6500 system is
approximately $420,000.
The Company manufactures electron cyclotron resonance ("ECR") sources used to
provide high quality thin films without the high temperatures required in
conventional CVD processing. Low temperature operation expands the range of
materials for which the Company's components can be used. Typical materials
include temperature sensitive indium phosphide laser diodes and gallium arsenide
semiconductor devices. ECR plasma sources can be used in a variety of
applications such as plasma
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etching, low temperature plasma enhanced deposition, and surface cleaning.
Prices for these products currently range from approximately $30,000 to $60,000.
PRODUCTS UNDER DEVELOPMENT
The Company is developing a number of microwave, RF, ozone and plasma processing
systems and components.
SEMICONDUCTOR
The Company has continued development of multiple models of a turnkey ozone
delivery system which incorporates the Company's plasma, power supply and
systems engineering expertise. These products are based on the ASTeX modular
platform which is then customized to meet a particular customer's requirements.
These systems are now in volume production for the Company's SCEM customers.
The Company has completed the development of a new microwave plasma source for
downstream etch applications, and is now in the process of qualifying with the
Company's SCEM customers production versions of this source for a wide variety
of semiconductor applications requiring difficult chemistries and higher powers.
Sources have been delivered to several customers and evaluation laboratories
with performance results meeting or exceeding program goals.
The Company has completed development of a new "intelligent" microwave matching
unit, the SmartMatchTM, the purpose of which is to quickly and seamlessly
monitor and match microwave output from its microwave generators to plasma
sources. Over 100 units have now been shipped. The SmartMatch is now being used
by some of the Company's SCEM customers on their production tools and management
expects usage to increase.
Development of RF products include high power (greater than 2.5 kW) generators
for high density and increased wafer size applications in the semiconductor and
flat panel display fabrication markets.
MEDICAL
The Company is developing high performance RF linear amplifiers for advanced MRI
applications. In addition, new RF generator technology is being developed for
use in medical equipment sterilization systems.
CVD DIAMOND
The Company announced the availability of the 75 kW AX6600 production diamond
deposition system in Fiscal 1995. This system can be used to develop thin films
for tools and other uses and for removing heat from semiconductors. The
prototype 75 kW system is currently operating in the Company's laboratory. The
Company is working to increase the power level to 100 kW and improve the reactor
design to enhance throughput. Management anticipates that this system, and the
processes associated with it, will be capable of depositing diamond at increased
production rates at a total cost of less than $5 per carat. Management
anticipates that these and other systems under development will have the
capability to manufacture CVD diamond at a cost per carat competitive with
currently used PCD. CVD diamond film has the capability to be used in certain
thin film and thermal applications as well as a replacement for many
applications currently using PCD. The Company is now looking to place early
production units of this product with key CVD diamond customers.
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RESEARCH AND DEVELOPMENT
The Company's research and development strategy is focused on deep involvement
in understanding the unique technical problems faced by those in the industries
it serves and, in particular, its current customer base.
The Company has received development contracts directly from its SCEM customers
for products specific to their applications, but which also have other market
potential. These include agreements for the development of next-generation
microwave generators and advanced plasma sources. ASTeX uses such funding as a
means of accelerating its product development and is generally not restricted
from selling developed products widely in the SCEM marketplace.
During Fiscal 1996, 1995 and the fiscal year ending July 2, 1994 ("Fiscal
1994"), total research and development expenses (including expenses attributable
to certain research contracts which are expensed as incurred and included in
cost of revenue) were approximately $6.4 million, $4.1 million and $3.1 million,
or 16%, 20% and 23% of the Company's revenues, respectively. The Company also
receives funding for certain research and development costs which is used to
offset these research and development expenses. Internally funded research and
development expenditures, net of funding received, were approximately $4.6
million, $2.8 million and $2.4 million during Fiscal 1996, 1995 and 1994,
respectively. Due to the highly technical nature of the Company's business,
rapidly expanding markets, and new technologies under development, management
expects to continue to expend significant funds in future years on research and
development activities. Management expects that it will continue to fund a
significant portion of its research and development expenses through customer
development contracts, government funded research, and cash flow from
operations. The Company intends to supplement these available cash resources by
using possible future joint ventures or collaborative research with other
manufacturers and government laboratories to develop new products and processes.
Since 1990 the Company has received several development contracts from SEMATECH,
the consortium of semiconductor manufacturers which is partly funded by the
Advanced Research Projects Agency (ARPA, formerly DARPA), including a joint
development agreement for $200,000 for a chemical downstream etch source which
has been completed. In addition the Company has received development contracts
directly from its SCEM customers for products specific to their applications,
but which also have other market potential. These include agreements for the
development of next-generation RF and microwave generators and advanced plasma
sources. ASTeX uses such funding as a means of accelerating its product
development and is generally not restricted from selling developed products
widely in the SCEM marketplace.
In any particular case, exclusivity is negotiated based on the scope of the
required development program, the technical risk, and the overall market
potential. Frequently, the Company funds the entire development program
internally and exclusivity is not an issue. In some cases, the product may be
needed by a particular customer which might fund the development simply to
ensure its availability in the marketplace. In other cases, the development
program may entail a high degree of technical risk, may require a significant
investment beyond what the Company would fund on its own, and may require the
participation of ASTeX's customer's customer through the need to process device
wafers. In this case, the Company may grant exclusivity to its customer for its
specific market in exchange for program funding, with the goal of manufacturing
the new product in the event the development program is successful.
In conjunction with CVD diamond equipment development, the Company is working to
develop diamond growth processes which will allow its production equipment to
produce diamond at reduced cost and thereby expand its commercial applications.
The Company has developed modeling codes and process technologies for thick
diamond substrates and tool coatings. Researchers are examining additional
applications using microwaves and plasmas for other manufacturing processes.
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During Fiscal 1995, the Company completed a $1.5 million contract with ARPA to
develop CVD diamond substrates for thermal management applications in multi-chip
modules. The success of this contract resulted in a continuation of funding in
Fiscal 1996 by ARPA in the amount of $900,000. In addition, the Company
completed a $250,000 Phase II SBIR contract with the National Science Foundation
to develop a better understanding of the process chemistry of high growth rate
processes and its effect on CVD diamond morphology. Recently, the Company
completed another Phase II SBIR program from ARPA for the development of diamond
deposition at low temperatures.
The Company is also involved as a consortium member with 3M for the development
of RF-based diamond deposition technologies for low cost diamond. The consortium
is being funded by ARPA with matching funds from some of the consortium members.
The development of this technology may provide yet another technique for
cost-effective diamond deposition.
The Company is currently collaborating with several major firms and anticipates
submitting proposals with a number of partners for additional government funding
for diamond development.
Supporting the Company's research and development group are 14 Ph.D.s as well as
13 engineers and scientists holding masters degrees. A number of other
electrical, mechanical and process engineers as well as external consultants and
designers support the Company's research and development programs. Management
believes that these individuals constitute one of the largest groups of
engineers and scientists assembled in these fields in a commercial enterprise.
SIGNIFICANT CUSTOMERS AND CONTRACTS
During Fiscal 1996, 1995, and 1994, Applied Materials accounted for
approximately 45%, 41% and 25% of the Company's consolidated total revenue.
GaSonics and Phillips Medical Systems accounted for approximately 8% and 6%
respectively of the Company's total revenue in Fiscal 1996. The loss of Applied
Materials, GaSonics, or Phillips Medical Systems would have a materially adverse
effect on the Company.
The increase in revenues from Applied Materials in Fiscal 1996 is primarily due
to the following three factors: increased deliveries of ozone generators,
increased deliveries of microwave plasma sources under the long term supply
agreement and sales to Applied Materials from ETO since January 1, 1996. While
sales to Applied Materials represents a large fraction of the Company's total
revenues, Applied Materials is the world's leading SCEM and it typically
dominates the market areas it serves. Therefore, the Company's sales to Applied
Materials are consistent with Applied Materials' market share. The Company's
strategy for reducing the total percentage of revenues due to Applied Materials
is to increase product revenues from other major SCEMs by increasing the range
of products offered by the Company and by expanding the range of semiconductor
process applications for which the Company's products can be used. The Company
is also exploring the opportunity of acquiring complementary businesses with
established sales organizations and complementary product lines and customers,
although the Company has no material commitments at this time and no assurance
can be given that the Company will make any such acquisition in the future.
In the semiconductor market, the Company sells microwave and RF generators,
microwave plasma sources, microwave components and ozone generators and
subsystems to Applied Materials, GaSonics, Lam Research, Quester Technology,
Ulvac, Watkins-Johnson and a number of others. The Company entered into a three
(3) year supply agreement with Applied Materials in July 1993 to supply its
requirements of microwave plasma sources for certain Applied Materials' systems.
The agreement has been extended while renewal negotiations are in process.
In 1996, the Company entered into a one year supply agreement with Quester
Technology valued by management at $1.2 million for delivery of ozone systems.
In August, 1995, the Company entered into
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a $2.5 million technology development agreement with Applied Materials to
develop next generation semiconductor fabrication equipment, which would be sold
exclusively to Applied Materials. Funding under this agreement is used to offset
research and development expenses incurred under the agreement.
The Company is the leading worldwide supplier of diamond deposition systems and
components to companies producing CVD diamond and products incorporating CVD
diamond, and to researchers exploring the use of CVD diamond. The Company
estimates they have an installed base of reactors and systems for diamond
production and development of approximately 200 units worldwide. Customers in
Fiscal 1996 include a major U.S.-based electronics conglomerate, a
development-stage public CVD diamond company, 3M, GEC-Marconi, a number of
Korean organizations and many others worldwide. During Fiscal 1996, the Company
continued its penetration of the Japanese market with sales of several of its
diamond deposition sources and systems. Customers in Japan include major
industrial companies as well as universities and research institutions.
The Company also sells systems and components to a number of researchers in
industrial, university, and government laboratories for a wide variety of
applications, including the Naval Research Laboratory, duPont, NASA, and many
others.
MARKETING
The Company markets its products through various channels, including its
management and research personnel as well as a direct sales and marketing group
of 27 persons. The Company maintains direct sales and marketing activities
through its Woburn, Massachusetts headquarters as well as its Santa Clara, CA
Technical Sales and Support office and its Colorado Springs, Colorado site. The
Company also employs 28 independent sales representatives and distributors in
the U.S., Europe, and the Far East. The Company has historically generated a
significant level of its total revenue from sales in the Far East and Europe,
which the Company expects to continue. The Company is exploring the possibility
of establishing separate ventures in the Far East and Europe with organizations
which have established sales groups in these territories.
The Company is participating in a wide range of collaborative efforts to create
new, more cost-effective uses of diamond and semiconductor films and processes.
In certain instances, the Company may sell any products developed in these
collaborative efforts directly to end users and in other cases, may sell the
products to the collaborative partner. In addition, the Company actively markets
its products to end-users in the semiconductor market as a means of creating
pull demand through its SCEM customers. The Company is also exploring the
opportunity of acquiring complementary businesses with established sales
organizations and complementary product lines and customers, although the
Company has no commitments at this time and no assurance can be given that the
Company will make any such acquisition in the future.
MANUFACTURING AND SUPPLIES
The Company's products are manufactured in facilities at Newton and Woburn,
Massachusetts, Colorado Springs, Colorado and Modesto, California. Many of the
components for the Company's products are manufactured by a number of suppliers,
and final assembly, integration, testing, and quality assurance are then
performed by Company personnel at the Company's facilities. The Company
typically provides one year warranties for its products. The Company obtains
many components and ships many of its products under "just-in-time"
arrangements. The Company relies on certain (fewer than 5) foreign manufacturers
for certain components but believes that these components could be obtained
elsewhere if needed or that the Company's products could be redesigned to use
alternative suppliers' products. However, no assurance can be given that other
supply sources would be available without significant delay or increased cost.
9
COMPETITION
The Company believes that it is the largest provider of microwave plasma sources
and microwave power supplies in the world. The Company also believes that it
possesses a significant share of the SCEM ozone generator market. The Company
competes in a number of markets with companies which provide competition in
certain market niches. In the ozone generator market the Company competes with
companies such as Sumitomo Precision Products, Sorbios, and Ebara. In addition
the Company also competes with others who supply various stand-alone components
in the semiconductor equipment market (e.g. power supplies or plasma sources)
such as Daihen in Japan. Many SCEM customers develop equipment similar to the
equipment ASTeX provides through their proprietary in-house equipment
development programs. No assurance can be given that these or other firms will
not develop new or enhanced products which are more effective than those offered
by the Company.
The Company's strategy is to compete on the basis of its technical expertise,
core competencies, established reputation and customer relationships, its
sponsor base which provides funding for research and development of products,
and its key personnel, many of whom are recognized experts in the field of
microwave plasma technology, diamond production and semiconductor processing
technology. The advanced materials field, and particularly the semiconductor and
CVD diamond fields, are undergoing significant technological change. The Company
expects plasma processing and CVD diamond technology to continue to develop. The
Company's success will depend upon its ability to maintain a competitive
position for its products in the marketplace. To do so, the Company must develop
and enhance its technology and products to keep pace with technological changes
in production equipment and advanced materials processes.
The loss of any of its key employees to a competitor could adversely affect the
Company's competitive position. The Company believes that a number of factors
will affect its competitive position in the future, including its ability to
develop and manufacture new products that meet the needs of its markets and
respond to competitive developments and technological changes; its ability to
manufacture its products on a cost effective basis; continued market acceptance;
its ability to retain a highly qualified scientific and engineering staff; and
general domestic and international economic conditions and exchange rates.
The Company believes its major competitors for RF generators and amplifiers to
be ENI, a subsidiary of Astec (BSR) P.L.C., Advanced Energy Industries, Inc., RF
Power Products, Inc., Comdel, Erbtec Engineering and Analogic.
The Company believes that it is the leading worldwide supplier of CVD diamond
production systems and sources. Nonetheless, many companies and academic
institutions have developed and are capable of developing competing products
based on technologies similar to the Company's or on other technologies. A
number of organizations, including Crystalline Materials, Crystallume, DeBeers,
Diamonex, Inc. (a division of Monsanto Corporation), General Electric and Norton
Corporation are developing new diamond coating technologies, although most are
not currently involved in the sales of diamond production equipment. Several
companies make CVD diamond equipment for internal use only and not for sale. No
assurance can be given that these companies will not sell CVD diamond equipment
to outside customers. Existing customers may also seek to develop proprietary
equipment and processes, which could adversely impact the Company's business.
Several companies, including SI Diamond, are seeking to develop new methods for
manufacturing diamond, utilizing different techniques, which may become
competitive with the Company's equipment. The Company anticipates, based on
public announcements, that Westinghouse may offer direct competition in CVD
diamond equipment. There are additional competitors in the diamond market in
Europe and Japan, several of which are seeking to sell their products in other
countries. Many of these potential competitors are well established, and several
have substantially greater financial resources than the Company and have
established success in the development, sale and service of competitive
products. No assurance can be
10
given that these or other firms will not develop new or enhanced products which
are more effective than any that have been developed by the Company.
PATENTS AND PROPRIETARY INFORMATION
The Company currently owns 11 U.S. patents and one Canadian patent, has three
applications in various stages of preparation and filing. All pertain to
microwave plasma processes and devices or reactive gas generation devices. The
earliest of the issued patents considered material to the Company's business
expires in 2004. As a qualifying small business, the Company has retained
commercial ownership rights to proprietary technology developed under various
U.S. and government contracts and grants, including SBIR contracts. The Company
also has joint development agreements with industrial and commercial partners
which may result in sole or joint ownership rights to proprietary technology
developed under those agreements. The Company has three U.S. registered
trademarks: (1) ASTeX(R) (stylized letters), (2) Plasma Dome(R) and (3) Applied
Science and Technology, Inc.(R)
During Fiscal 1996 ASTeX received two new patents bearing directly on its
current diamond and plasma products, and allowed one non-essential patent to
lapse. In May of 1996 ASTeX received a successor patent on its diamond process
technology, for a process and method for depositing high-quality diamond films
at an extremely high rate of speed on substrates place near or in a plasma. In
September of 1996 ASTeX obtained a patent on the design of its AX6500 Diamond
Reactor which is particularly adapted to form an enlarged symmetric plasma for
uniformly processing large substrates.
In addition to its patent rights and with regard to its trade secrets, the
Company relies upon trade secrets and confidentiality agreements, which all of
its employees are required to execute, assigning to the Company all patent
rights and technical or other information developed by the employees during
their employment with the Company. The Company's employees, consultants,
customers, and potential customers have agreed not to disclose any trade secret
or confidential information without the prior written consent of the Company.
Notwithstanding these confidentiality agreements, no assurance can be given that
other companies will not acquire information which the Company considers to be
proprietary. Moreover, while the Company has successfully enforced one of its
patents and intends to continue to vigorously enforce its patents against
infringement by third parties, no assurance can be given that the Company's
patents will be enforceable or provide the Company with meaningful protection
from competitors, or that patent applications will be allowed. Even if a
competitor's products were to infringe patents owned by the Company, it would be
very costly for the Company to enforce its rights in an enforcement action,
which would also divert funds and resources which otherwise could be used in the
Company's operations. No assurance can be given that the Company would be
successful in enforcing such rights, that the Company's products or processes do
not infringe the patent or intellectual property rights of a third party, or if
the Company is not successful in a suit involving patents or other intellectual
property rights of a third party, that a license for such technology would be
available, if at all, on commercially reasonable terms.
GOVERNMENT REGULATION
The Company has entered into certain U.S. government contracts which require
compliance with applicable government regulations. The Company's contracts with
the U.S. government consist primarily of research and development contracts,
many of which are awarded under the SBIR program or through ARPA. Research and
development contracts are generally subject to competitive bidding and extensive
regulation and are generally subject to cancellation at the U.S. government's
sole discretion. The Company is required to obtain approval from the Department
of Commerce for the export of certain equipment.
11
BACKLOG
The Company backlog primarily consists of purchase orders for standard products
and research and development contracts. At June 29, 1996 the Company's backlog
was approximately $7,870,000 of which $7,103,000 is for standard products and
$767,000 is for research contract work. Of this backlog, $4,255,000 is for ETO
standard products. The backlog at July 1, 1995 was $2,809,000 of which
$2,283,000 was for standard products and $526,000 was for research contract
work. None of this backlog is for ETO, as they were acquired half-way through
the fiscal year. The Company expects to complete all standard product backlog
during the next six months and all of the research contact backlog during the
next twelve months. The backlog figure excludes orders under two OEM supply
agreements with Applied Materials, one with ETO and one with ASTeX. The ETO
contract was originally signed in June 1993 and was recently extended in
February, 1996. The contract value estimated by Applied Materials was $5,800,000
over the three year extension. In early May, Applied Materials informed ETO that
certain products anticipated under the supply agreement would not be required.
This caused a precipitous loss of anticipated revenue at ETO, leading the
Company to reassess and write off its remaining goodwill associated with the ETO
acquisition. The ASTeX supply agreement with Applied Materials, signed in July,
1993, has been extended while renewal negotiations are in process. The Company
anticipates successful completion of these negotiations within the next several
months. In July, 1996 a technology development agreement previously signed by
ASTeX with Applied Materials was extended for six months with an estimated value
of $300,000. Funding under the agreement will be used to offset R&D expenses
incurred under the agreement. The supply agreements, as well as certain
government contracts, typically provide for cancellation or modification with
little or no penalty. In addition, customers may push out deliveries, put firm
orders on hold, or cancel existing firm orders with little or no penalty.
EMPLOYEES
As of July 1, 1996, the Company employed 253 persons on a full-time basis, 17
persons on a part-time basis and four as consultants with whom the Company has
executed consulting agreements. The Company employs 27 persons in
administration, 27 in sales and marketing, 58 in research and development and
141 in manufacturing. The Company believes that its relations with its employees
are satisfactory.
ITEM 2. FACILITIES
The Company occupies approximately 49,000 square feet of leased space in Woburn,
Massachusetts for its principal executive offices, research and development
center and manufacturing activities. This lease, amended to terminate on June
30, 2000, provides an additional 11,000 square feet in Fiscal 1997. The lease
contains further extension provisions after January 1, 1997 allowing expansion
up to 120,000 square feet in the Woburn area during the term of the lease. The
current rent for this facility is $39,312 per month, subject to increase as
space is added at the then current lease rate for the existing space and also
subject to annual adjustment for certain increases in the Consumer Price Index
(CPI). The Company owns the 25,000 square feet of office, lab and manufacturing
space of its ETO subsidiary located in Colorado Springs, Colorado. The Company
maintains office and manufacturing facilities in Newton, Massachusetts in
approximately 3,500 square feet of leased space. This lease expires on June 30,
1997, with an option to renew for an additional year. The rent for this facility
is $3,580 per month. The Company maintains office and manufacturing facilities
in Modesto, California in approximately 11,500 square feet of leased space. This
lease expires on February 28, 2000. The rent for this facility is approximately
$5,831 per month. The Company also maintains a sales and service office in 2,600
square feet of leased space in Santa Clara, California. The rent for this space
is $1,840 per month and the lease expires on June 30, 1997.
12
ITEM 3. LITIGATION
The Company is not involved in any litigation of a material nature.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1996 through the solicitation of proxies of otherwise.
13
PART II
ITEM 5. MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock and Redeemable Warrants have been traded on the
National Association of Securities Dealers Automated Quotation System - National
Market System ("NASDAQ/NMS") under the symbols "ASTX" and "ASTXW," respectively.
On September 20, 1996, the closing bid and ask prices for the Corporation's
Common Stock as reported by NASDAQ/NMS were $8 3/4 and 9 1/4, respectively, and
for the Redeemable Warrants were $11/16 and $13/16, respectively. As of
September 20, 1996, the Corporation had 165 holders of record of its Common
Stock. Management believes that there are approximately 1800 beneficial owners
of its Common Stock.
For the periods indicated, the following table sets forth the high and low
closing sale prices for the Common Stock as reported by NASDAQ/NMS for July 3,
1994 through September 20, 1996. Such quotations represent interdealer
quotations without adjustment for retail markups, markdowns, or commissions and
may not represent actual transactions.
<TABLE>
<CAPTION>
Sale
----
1995 High Low
- ---- ---- ---
<S> <C> <C>
First Quarter $ 7 1/8 $5 3/4
Second Quarter $ 7 1/2 $5 1/2
Third Quarter $ 8 3/4 $5 1/2
Fourth Quarter $12 5/8 $7 3/8
1996
- ----
First Quarter $18 1/4 $10 3/4
Second Quarter $16 3/4 $15 1/2
Third Quarter $17 $12 5/8
Fourth Quarter $23 1/2 $ 9
1997
- ----
First Quarter (June 30, 1996 through September 20, 1996) $9 1/2 $8 7/8
</TABLE>
14
ITEM 6. SELECTED FINANCIAL DATA
The following table summarizes selected historical consolidated financial data,
which should be read in conjunction with the Company's consolidated financial
statements and related notes included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------------------------------------------------------------
JUNE 29, JULY 1, JULY 2, JUNE 30, JUNE 30,
1996 1995 1994 1993 1992
---------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
OPERATIONS:
Total revenue $ 39,135,596 $ 20,004,853 $ 13,357,471 $ 8,444,426 $ 5,629,011
Gross profit 15,281,798 8,191,621 6,109,033 4,041,407 2,706,967
Acquisition related expenses 2,887,647 0 0 0 0
Write-off of goodwill 6,813,562 0 0 0 0
Operating income (loss) (6,077,763) 798,955 358,110 215,691 (546,577)
Net income (loss) (7,296,775) 1,127,748 518,041 149,292 (403,256)
Earnings (loss) per share $ (1.74) $ 0.28 $ 0.15 $ 0.06 $ (0.17)
Weighted average common
shares outstanding 4,204,764 3,992,100 3,433,800 2,403,700 2,377,700
BALANCE SHEET:
Working capital $ 19,216,542 $ 17,671,056 $ 19,697,944 $ 4,186,165 $ 2,450,283
Total assets 34,361,426 25,077,534 24,569,572 7,554,492 5,314,688
Total long-term debt 6,169,517 0 0 75,437 429,016
Total liabilities 13,065,618 3,183,770 2,465,829 1,921,692 2,334,033
Stockholders' equity $ 21,295,808 $ 21,893,764 $ 22,103,743 $ 5,632,800 $ 2,980,655
1ST 2ND 3RD 4TH
---------------- ----------------- ---------------- ----------------
QUARTERLY 1996:
Total revenue $ 5,639,415 $ 6,858,967 $ 12,681,488 $ 13,955,726
Gross profit 2,049,672 2,817,319 4,847,426 5,567,381
Acquisition related expenses 0 2,953,000 0 (65,353)
Write-off of goodwill 0 0 0 6,813,562
Operating income (loss) 232,292 (2,357,507) 1,183,271 (5,135,819)
Net income (loss) 298,520 (2,394,113) 724,997 (5,926,179)
Earnings (loss) per share $ 0.07 $ (0.57) $ 0.16 $ (1.34)
QUARTERLY 1995:
Total revenue $ 3,418,584 $ 4,841,870 $ 5,235,909 $ 6,508,490
Gross profit 1,475,348 2,179,243 2,205,755 2,331,275
Operating income 39,040 253,367 330,949 175,599
Net income 126,618 273,657 342,671 384,802
Earnings per share $ 0.03 $ 0.07 $ 0.09 $ 0.10
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company (including the Notes thereto).
GENERAL
The Company was formed in January 1987. The Company's initial activities
consisted of selling microwave components and power supplies, and conducting
funded and nonfunded research and development activities. This research led to
the Company's development of proprietary plasma deposition
15
systems used in commercial applications. Although the Company has supplied
products to end-users, SCEMs, and researchers since inception, it did not
commence the marketing of deposition systems for CVD diamond until Fiscal 1990.
In February 1992, the Company, through its wholly-owned subsidiary,
ASTeX/Gerling Laboratories, Inc. ("AGL"), acquired substantially all of the
assets of Jova Enterprises, Inc., which conducted business under the trade name
of "Gerling Laboratories" ("Gerling Labs"). In November 1995 the Company
acquired all the outstanding shares of Newton Engineering Service, Inc. ("NES"),
a manufacturer of high performance transformers used across the Company's
product lines. In January 1996 the Company acquired all the shares of Ehrhorn
Technological Operations, Inc. a manufacturer of radio frequency ("RF")
generators used in semiconductor, medical diagnostic imaging, and medical
sterilization applications. At the acquisition date the name was changed to ETO,
Inc. As set forth in the Company's Consolidated Financial Statements, total
revenue consists of product sales, research contract revenue and other revenue.
Other revenue includes service, repair, spare parts and consulting services.
Applied Science and Technology, GmbH, a German wholly-owned subsidiary of the
Company, has been inactive since its inception. The Company may use this
subsidiary for future activities in Europe.
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 29, 1996 COMPARED TO THE FISCAL YEAR ENDED JULY 1, 1995
The following table compares the consolidated statements of operations for
Fiscal 1996 and 1995:
16
<TABLE>
<CAPTION>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENTS OF OPERATIONS
JUNE 29, 1996 JULY 1, 1995 CHANGE CHANGE
(000) % (000) % (000) %
<S> <C> <C> <C> <C> <C> <C>
Product sales, net $ 36,175 93% $ 17,158 86% $ 19,017 111%
Research contract revenue 895 2% 2,138 11% (1,243) (58%)
Other revenue 2,066 5% 709 3% 1,357 191%
--------------------- -------------------- ----------------------
Total revenue 39,136 100% 20,005 100% 19,131 96%
Cost of sales and revenue:
Product sales and other revenues 23,414 60% 10,868 54% 12,546 115%
Research contracts 440 1% 945 5% (505) (53%)
--------------------- -------------------- ----------------------
Total cost of sales and revenue 23,854 61% 11,813 59% 12,041 102%
--------------------- -------------------- ----------------------
Gross profit 15,282 39% 8,192 41% 7,090 87%
--------------------- -------------------- ----------------------
Operating expenses:
Selling expenses 3,298 9% 1,992 10% 1,306 66%
General and administrative expenses 3,807 10% 2,561 13% 1,246 49%
Research and development expenses, net 4,553 12% 2,840 14% 1,713 60%
Acquisition-related expenses 2,888 7% 0 0% 2,888 -
Write-off of goodwill 6,814 17% 0 0% 6,814 -
--------------------- -------------------- ----------------------
Total operating expenses 21,360 55% 7,393 37% 13,967 189%
--------------------- -------------------- ----------------------
Earnings (loss) from operations (6,078) (16%) 799 4% (6,877) (861%)
--------------------- -------------------- ----------------------
Other expense (income):
Interest expense 323 1% 1 0% 322 32200%
Interest income (659) (2%) (745) (4%) 86 (12%)
Other expense 14 0% 14 0% 0 -
--------------------- -------------------- ----------------------
Total other income (322) (1%) (730) (4%) 408 (56%)
--------------------- -------------------- ----------------------
Earnings (loss) before income taxes (5,756) (15%) 1,529 8% (7,285) (476%)
Income tax expense 1,541 4% 401 2% 1,140 284%
--------------------- -------------------- ----------------------
Net earnings (loss) $ (7,297) (19%) $ 1,128 6% $ (8,425) (747%)
--------------------- -------------------- ----------------------
</TABLE>
Total revenue increased for Fiscal 1996 by 96% to $39,136,000 compared to Fiscal
1995. Product sales increased by 111% to $36,175,000. Sales to semiconductor
OEMs (SCEMs) accounted for most of the growth. Ozone product revenue increased
by 209% from Fiscal 1995 to $10,800,000 from $3,500,000 and accounted for 28% of
total Fiscal 1996 revenue. Microwave generators, components and plasma products
revenue increased by 50% to 32% of total revenue. The acquisition of ETO at the
beginning of January 1996 added $8,533,000 in total revenue of which RF
generators sold to SCEMs was 51% of ETO total revenue, with medical applications
accounting for 42% of total revenue and communications (amateur ham radio)
accounting for the rest. Revenue from end users for other applications of ASTeX
standard products increased by 34% to 5% of total revenue. CVD diamond product
revenues were flat in Fiscal 1996 compared to Fiscal 1995.
The Company experienced a precipitous loss of business at ETO and a general
slowdown in the semiconductor industry which will negatively impact the
Company's revenues and earnings in Fiscal 1997. As a result, the Company may not
achieve historical levels of year-to-year revenue growth. In addition, the
general slowdown in the semiconductor industry may lead to an unpredictability
of quarter to quarter operating results, which could cause increased volatility
in the price of the Company's stock and redeemable warrants.
17
Although the current semiconductor equipment market environment remains
difficult, there is continued demand for new product development in the
marketplace. It is anticipated that the semiconductor manufacturers will embrace
new capital equipment technologies to enhance the efficiency and productivity of
the manufacturing processes for producing semiconductor wafers. ASTeX is
prepared to meet the needs of its customers through the introduction of new
products, which are expected to add to revenues going forward and continue to
strengthen our position as a leading manufacturer of systems and components for
the semiconductor, medical and CVD diamond markets.
Research contract revenue decreased in Fiscal 1996 by 58% or $1,243,000 compared
to Fiscal 1995 primarily due to decreased government funded CVD diamond
research. Funded research performed for semiconductor customers has increased by
24% from $1,120,000 in Fiscal 1995 to $1,386,000 in Fiscal 1996. In Fiscal 1996
funded customer research considered to be joint development was accounted for as
a reduction in research and development expenses, whereas in Fiscal 1995 funded
customer research was accounted for as revenue in the amount of $810,000 and
research expense reduction in the amount of $310,000.
Other revenue of service, spare parts and repair business has increased by 191%
in Fiscal 1996 compared to Fiscal 1995 primarily due to the acquisition of ETO
which obtains a larger fraction of its total revenue from this category. Without
ETO the revenue growth would have been 114%, which is consistent with growth of
total revenues.
Gross profits increased by $7,090,000 or 87% compared to Fiscal 1995. Gross
margin as a percent of total revenue decreased from 41% in Fiscal 1995 to 39% in
Fiscal 1996 primarily due to the acquisition of ETO. ETO's gross margin
historically has been lower than ASTeX primarily due to lower prices in a more
competitive market. ETO's gross margin was also impacted by an inventory
write-off due to a precipitous decline in sales to one of ETO's major customers.
Without acquisitions the overall gross margin would have increased to 42%.
The Company's gross margin improved in the semiconductor segment due to improved
manufacturing efficiencies, design improvements, controlling of fixed
manufacturing overhead and increased volume. The Company completed construction
of a 7,000 square foot advanced state-of-the-art clean room manufacturing
facility which enabled the Company to successfully ramp up production of ozone
generators and systems, and improve the manufacturing efficiencies on these
products. The semiconductor segment is a highly competitive market that will
require continued cost improvement in order to maintain existing margins. The
Company anticipates that downward price pressure due to an anticipated downturn
in the SCEM market could impact future gross margins. The gross margin of CVD
diamond products declined in Fiscal 1996 compared to Fiscal 1995 primarily due
to product and customer mix.
Research contract gross margin declined in Fiscal 1996 compared to Fiscal 1995
primarily in the government funded CVD diamond contracts due to increased
overhead cost sharing.
Selling expenses decreased to 9% of sales in Fiscal 1996 from 10% in Fiscal
1995. Gross spending increased by 66% due to the acquisition of ETO, increased
personnel in the direct sales and sales support functions, increased costs of
consulting and travel and increased promotional expenses. The Company
anticipates comparable expense spending as a percent of sales in Fiscal 1997.
General and administrative expenses decreased to 10% of sales in Fiscal 1996
compared to 13% of sales in Fiscal 1995. Gross spending increased by 49% due to
the acquisition of ETO, six months of goodwill amortization due to the
acquisition of ETO, additional personnel in financial and human resource
functions, increased cost of consulting and travel associated with potential
acquisitions, increased cost of investor relations, higher cost of audit and tax
fees due to the increased size and complexity of the Company and increased cost
of legal expenses associated with patent and intellectual property issues. The
Company anticipates comparable expense spending as a percent of sales in Fiscal
1997.
18
Net research and development expenses declined to 12% of sales in Fiscal 1996
compared to 14% in Fiscal 1995. Gross spending (total research and development
spending including funded joint development and the direct cost of research
contracts) was $6,379,000 in Fiscal 1996 compared to $4,095,000 in Fiscal 1995
for a 56% increase. The increased gross spending is primarily due to a
technology development agreement with Applied Materials, new product development
including process and hardware development of the Company's new generation of
plasma sources, ozone systems, diamond deposition systems, microwave generators
and components, medical sterilization and magnetic resonance imaging ("MRI")
components, and the next generation of radio frequency power supplies. The
Company operates in highly competitive and technical markets where continued
investments in research and development are necessary to maintain market and
technological leadership.
In Fiscal 1996, in order to establish the fair values of the ETO assets acquired
and liabilities assumed, a valuation process was performed. As part of this, the
Company incurred $2,888,000 of in process research and development expense and
acquisition related costs. There were no comparable expenses for Fiscal 1995.
These costs will not recur in future periods, unless associated with another
acquisition.
In connection with its acquisition of ETO, the Company recorded as goodwill
$7,048,512 which represented the excess of the purchase price over the fair
value of ETO's net assets acquired and in process research and development. The
goodwill was to be amortized over 15 years. Since the time of the acquisition
there has been a precipitous decline in sales to one of ETO's major customers.
In management's judgment, this decline in revenues is a permanent impairment of
ETO's prospects. Based on this significant change, which occurred during the
Company's fourth quarter, management made a reassessment of its remaining
goodwill and recorded an impairment of goodwill in the amount of $6,813,562,
which represented the goodwill balance at the reassessment date.
In determining the impairment, management estimated ETO's cash flows over 14-1/2
years which represented the remaining business life cycle of ETO's existing
technology. The cash flow analysis included an estimate of ETO's terminal value
at the end of this period. The operating cash flow projections were based on
ETO's estimated after-tax operating results less estimated capital expenditures.
The undiscounted cash flows were assumed to be realized in installments over the
14-1/2 years. Because the undiscounted cash flow was less than the Company's
carrying value of ETO, a charge for impairment of goodwill was recorded to the
extent unamortized book value exceeded the related discounted cash flow. The
cash flow was discounted using a weighted average borrowing cost of 7.7% which
is comparable to rates available as of the reassessment date.
The Company incurred an operating loss of $6,078,000 in Fiscal 1996 compared to
an operating profit of $799,000 in Fiscal 1995. Excluding one time charges
associated with the ETO acquisition (acquisition- related costs and
non-recurring goodwill write-off) operating income would have been a record
profit of $3,624,000 (9% of sales) or an increase of 354% compared to Fiscal
1995. The Company anticipates that a slow down in the semiconductor market will
have a negative impact on Fiscal 1997 operating profits as a percent of sales.
Interest expense was $323,000 in Fiscal 1996 compared to $1,000 in Fiscal 1995.
The increase in interest expense is due to two bank notes incurred as part of
the financing of the ETO acquisition. Interest income was $659,000 in Fiscal
1996 compared to $745,000 in Fiscal 1995. The decrease of $86,000 in interest
income is primarily due to less cash investments than in the prior fiscal year
due to cash used for the ETO acquisition.
Income tax expense was $1,541,000 in Fiscal 1996 compared to $401,000 in Fiscal
1995. In Fiscal 1996 the "expected" tax (computed by applying the U.S. federal
corporate income tax rate of 34% to loss before income taxes) was increased by
$3,378,000 due to charges related to the write-off of goodwill, goodwill
amortization and acquisition related expenses, all of which are not tax
deductible. There were no comparable costs in Fiscal 1995.
19
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JULY 1, 1995 COMPARED TO THE FISCAL YEAR ENDED JULY 2, 1994
The following table compares the consolidated statements of operations for
Fiscal 1995 and 1994:
<TABLE>
<CAPTION>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
COMPARATIVE CONSOLIDATED STATEMENTS OF OPERATIONS
JULY 1, 1995 JULY 2, 1994 CHANGE CHANGE
(000) % (000) % (000) %
<S> <C> <C> <C> <C> <C> <C>
Product sales, net $ 17,158 86% $ 11,485 86% $ 5,673 49%
Research contract revenue 2,138 11% 1,181 9% 957 81%
Other revenue 709 3% 691 5% 18 3%
--------------------- -------------------- ----------------------
Total revenue 20,005 100% 13,357 100% 6,648 50%
Cost of sales and revenue:
Product sales and other revenues 10,868 54% 6,598 49% 4,270 65%
Research contracts 945 5% 650 5% 295 45%
--------------------- -------------------- ----------------------
Total cost of sales and revenue 11,813 59% 7,248 54% 4,565 63%
--------------------- -------------------- ----------------------
Gross profit 8,192 41% 6,109 46% 2,083 34%
--------------------- -------------------- ----------------------
Operating expenses:
Selling expenses 1,992 10% 1,569 12% 423 27%
General and administrative expenses 2,561 13% 1,748 13% 813 47%
Research and development expenses, net 2,840 14% 2,434 18% 406 17%
--------------------- -------------------- ----------------------
Total operating expenses 7,393 37% 5,751 43% 1,642 29%
--------------------- -------------------- ----------------------
Earnings from operations 799 4% 358 3% 441 123%
--------------------- -------------------- ----------------------
Other expense (income):
Interest expense 1 0% 16 0% (15) (94%)
Interest income (745) (4%) (345) (2%) (400) 116%
Other expense 14 0% 12 0% 2 17%
--------------------- -------------------- ----------------------
Total other income (730) (4%) (317) (2%) (413) 130%
--------------------- -------------------- ----------------------
Earnings before income taxes 1,529 8% 675 5% 854 127%
Income tax expense 401 2% 157 1% 244 155%
--------------------- -------------------- ----------------------
Net earnings $ 1,128 6% $ 518 4% $ 610 118%
--------------------- -------------------- ----------------------
</TABLE>
Total revenue increased for Fiscal 1995 by 50% to $20,005,000 compared to Fiscal
1994. Product sales increased by 49% to $17,158,000 primarily due to increased
shipments of plasma sources, microwave generators, components, ozone generators
and ozone subsystems to SCEMs. Ozone generators and subsystems, introduced in
Fiscal 1995, accounted for 17% of total Fiscal 1995 revenues. Diamond system
sales declined slightly for Fiscal 1995 compared to Fiscal 1994 primarily due to
a near-term slowdown as the end user market transitions from being driven by
government funding to being driven by anticipated commercial product needs.
Analytical instruments, which the Company distributes for a foreign
manufacturer, decreased by 6% in Fiscal 1995 compared to Fiscal 1994. Subsequent
to the end of Fiscal 1995, the Company canceled the distribution agreement for
analytical instruments to more fully concentrate sales and marketing efforts on
its own products. Research contract revenue increased by 81% to $2,138,000 in
Fiscal 1995. This increase resulted from significantly increased industry funded
research.
20
Government funded research decreased slightly. Other revenue consisting of
service, repair, spare parts and consulting was relatively flat in Fiscal 1995
compared to Fiscal 1994.
Gross profit increased by $2,083,000 compared to Fiscal 1995. Gross margin, as a
percent of total revenue, decreased to 41% in Fiscal 1996 from 46% in Fiscal
1995 primarily due to new product introductions; increased sales to SCEMs, which
have a lower margin on long term supplier agreements; manufacturing support
costs increasing faster than sales due to increased customer support required
for sales to SCEMs; and lower margins at AGL as a result of an inventory write
down associated with an obsolete product line and increasing sales to SCEMs with
lower gross margin.
Selling expenses decreased to 10% of sales from 12% in Fiscal 1995. Gross
spending increased by 27% primarily due to increased direct sales personnel to
manage SCEMs and research institute accounts; commissions paid to European sales
representatives; and expanded marketing efforts in North America, Europe and
Asia.
General and administrative expenses were flat at 13% of sales in Fiscal 1995
compared to Fiscal 1994. Gross spending increased by 47% primarily due to
additional personal in financial functions and the addition of a corporate
information systems manager; increased consulting and travel expenses associated
with evaluation of potential acquisitions; legal expenses associated with patent
work; increased cost of investor relations; and expenses associated with a new
information system at AGL.
Net research and development spending declined to 14% of sales in Fiscal 1995
compared to 18% in Fiscal 1994. Gross spending (total research and development
spending including funded joint development and the direct cost of research
contracts) increased to $4,095,000 in Fiscal 1995 from $3,085,000 in Fiscal 1994
for a 33% increase. Research and development spending was for the development of
ozone systems, process and hardware development of a new generation of diamond
deposition systems, and new plasma sources and components for the semiconductor
industry.
Total operating expenses decreased as a percent of total revenue to 37% for
Fiscal 1995 compared to 43% for Fiscal 1994.
Earnings from operations increased by 123% for Fiscal 1995 compared to Fiscal
1994 and increased as a percent of total revenue to 4% in Fiscal 1995 from 3% in
Fiscal 1994. The increase in operating income is primarily due to increased
revenue and reduction of operating expenses as a percent of total revenue.
Total other income increased by 130% in Fiscal 1995 compared to Fiscal 1994. The
increase is primarily due to increased interest income on the Company's cash and
investments and interest income earned on a note receivable from a customer.
The Company incurred income tax expense of $401,000 in Fiscal 1995 compared to
$157,000 in Fiscal 1994. The effective tax rate increased from 23% in Fiscal
1994 to 26% in Fiscal 1995 primarily due to increased state taxes.
LIQUIDITY AND CAPITAL RESOURCES
At Fiscal 1996 year end the Company had cash and short term investments of
$7,173,000 with working capital of $19,217,000 compared to Fiscal 1995 when the
Company had cash, short term and long term investments of $12,530,300, and
working capital of $17,771,000.
In January 1996 the Company purchased all of the outstanding shares of ETO for
cash and stock. The Company borrowed $8,000,000 from State Street Bank and Trust
Company to complete the acquisition, under two unsecured notes. No security
pledges of assets can be granted nor dividends paid without the approval of the
bank. Certain financial covenants must be tested quarterly in connection with
these notes.
21
The Company is in compliance with all covenants at June 29, 1996, and expects to
remain in compliance over the next 12 months. See footnotes 9 and 10 of the
Notes to Consolidated Financial Statements.
In November 1995 the Company purchased all of the outstanding shares of Newton
Engineering Service, Inc. ("NES") for 11,372 shares of the Company's common
stock. NES is a strong technical designer and manufacturer of specialty
transformers and inductors which are essential to the advanced technology used
in ASTeX's power supplies and ozone generators.
In October 1995 the Company purchased $250,000 of Series A Convertible Preferred
Stock of Low Entropy Systems, Inc. ("LES"). The preferred stock is convertible
into common stock commencing January 1, 1998 for a minimum of 15% of the
outstanding fully-diluted shares of LES at the time of conversion. LES is a
manufacturer of imaging interferometers used in measuring thin film etching or
deposition rate and rate uniformity in the semiconductor wafer manufacturing
process.
In November of 1993, the Company completed an IPO and received net proceeds of
$15,920,000 through the sale of 1,700,000 shares of common stock and 1,955,000
redeemable warrants at prices of $10.75 per share and $0.10 per warrant. The
common stock and redeemable warrants are traded on NASDAQ/NMS under the symbols
ASTX and ASTXW, respectively. Two redeemable warrants entitle the holder to
purchase one share of common stock at a price of $15.05 per share until November
9, 1998, subject to adjustment in accordance with anti-dilution provisions. The
redeemable warrants are subject to redemption at $0.10 per warrant on 30 days
prior written notice, provided that the average closing price of the Company's
common stock equals or exceeds $19.35 for 20 consecutive trading days. If all
the redeemable warrants are exercised, this would provide additional equity
financing of approximately $14 million net for the Company.
The Company also issued to the underwriter of the IPO, for nominal
consideration, warrants to purchase 170,000 shares of common stock and 170,000
redeemable warrants (the "representative's warrants"). The representative's
warrants are initially exercisable at $15.59 per share of common stock and
$0.145 per redeemable warrant through November 9, 1997.
In August and September 1992, the Company conducted a private placement and
received net proceeds of $2,426,341 in exchange for the issuance of 347,500
shares of Series C preferred stock and investor warrants to purchase an
aggregate of 193,363 shares of common stock. The investor warrants are
exercisable at a price of $9.60 per share through November 10, 1996. The
investor warrants are redeemable by the Company at any time after November 10,
1994 provided the average closing price of the common stock exceeds $12.00 per
share for 20 consecutive days. As of June 29, 1996, 159,237 warrants have been
exercised for $1,529,000.
During Fiscal 1996, the Company generated $719,000 in net cash flows from
operating activities. In Fiscal 1996 the Company used a net $7,228,000 for
investing activities. Cash used for investing activities consisted of
$12,318,000 for acquisition of ETO less cash acquired with the acquisitions of
ETO and NES, $2,895,000 for additions to property, equipment, and patents,
$250,000 for an equity investment in Low Entropy Systems, Inc., and $3,006,000
for purchase of investments, offset by sales of $11,242,000 in investments.
Investments are primarily commercial paper and government treasury bills. The
Company's cash flows from financing activities consisted primarily of proceeds
of two notes payable for $8,000,000 used in the acquisition of ETO offset by
$689,000 of note repayments, and $1,999,000 from issuance of common stock which
was primarily due to exercise of investor warrants and exercise of employee
stock options.
During Fiscal 1995 the Company generated $524,000 in net cash flows from
operating activities. The Company used $10,849,000 for investing activities,
primarily for purchase of $14,230,000 in investments and $1,484,000 in additions
to property, equipment and patents, offset by sales of $4,758,000 in
investments. The Company used $1,338,000 for financing activities, primarily for
a stock repurchase program under which 220,538 shares were repurchased for
$1,413,000 at an average price of $6.41 per
22
share. The stock repurchase program objective was to support the stock price in
the open market. All treasury stock held was retired on July 3, 1995. The Board
of Directors has not terminated the stock repurchase program, but no shares have
been purchased since March 30, 1995.
During Fiscal 1994, the Company used $690,000 in net cash for operating
activities, and used $2,258,000 for investing activities primarily for additions
to property and equipment and investments in government treasury bills and
commercial paper. The Company generated $15,953,000 through the sale of common
stock, offset by debt repayment of $429,000.
The Company has a credit facility with State Street Bank and Trust Company which
consists of a $2 million unsecured demand line of credit for working capital
purposes. There were no outstanding borrowings under the credit facility at June
29, 1996. The credit facility expires November 30, 1996. The Company has two
unsecured promissory note agreements with State Street Bank and Trust Company,
as described in footnote 9 of the Notes to Consolidated Financial Statements.
The Company continues to use its cash resources for development of new products,
expanding sales and marketing, performing collaborative product development
projects, and for general working capital. The Company continues to seek joint
ventures and/or acquisitions that will enhance the Company's position in the
market while increasing revenue growth and profitability. However, the Company
has made no material commitments to acquire other businesses at this time and no
assurance can be given that the Company will make any such acquisitions in the
future.
Management believes that existing cash resources, investments, anticipated cash
flows from operations and its credit facility will be sufficient to meet planned
operating expenses and working capital requirements for a period of at least the
next 12 months. Management may seek to raise additional capital to complete an
acquisition or for other corporate purposes, although no specific acquisition is
planned at this time.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement No. 123,
Accounting for Stock-Based Compensation ("Statement 123") in October 1995. Under
Statement 123, the Company is required to choose either the new fair value
method or the current intrinsic value method of accounting for its stock-based
compensation arrangements. Using the fair value method, the Company would
measure the compensation cost recognized in the financial statements based upon
the estimated fair value of the stock-based compensation arrangements as of the
date they are granted. The intrinsic value method, under APB Opinion No. 25,
Accounting for Stock Issued to Employees, requires the recognition of
compensation cost only if the exercise price of the stock-based compensation
arrangement does not exceed the market value of the underlying stock on the
measurement date. The Company will continue to account for all employee
stock-based compensation plans under Opinion No. 25 and adopt the provisions of
Statement 123, as required, for all stock-based arrangements issued to
non-employees. The accounting requirements of Statement 123 are effective for
transactions entered into in fiscal years beginning after December 15, 1995 and
the disclosure, including pro forma, requirements are effective for financial
statements for fiscal years beginning after December 15, 1995. Even though the
Company has opted not to change its method of accounting, Statement 123 requires
pro forma disclosure of net income and earnings per share computed as if the
fair value method has been applied. Statement 123 will be implemented in Fiscal
1997.
In March 1995, the FASB issued Statement No. 121, Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. Statement No.
121, which must be adopted by fiscal years beginning after December 15, 1995,
establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to (1) those assets to be
held and used in the business, and (2) for assets to be disposed of. The Company
does not anticipate a material effect on the financial statements from this new
accounting standard.
23
EFFECTS OF INFLATION
The Company believes that, over the past three years, inflation has not had a
significant impact on the Company's revenues or operating results.
24
ITEM 8. FINANCIAL STATEMENTS
The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 29, 1996 and
July 1, 1995 F-3
Consolidated Statements of Operations for the Years Ended
June 29, 1996, July 1, 1995 and July 2, 1994 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 29, 1996, July 1, 1995 and July 2, 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 29, 1996, July 1, 1995 and July 2, 1994 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
Not Applicable
PART III
Items 10 to 13 are incorporated by reference to the Company's
definitive Proxy Statement to be filed with the Securities and Exchange
Commission.
ITEM 14. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
(A) EXHIBITS
(1) The following exhibits are filed herewith:
Exhibit
No. Title
- ------ -----
11 Statement Re: Computation of Per Share Earnings
21 List of Subsidiaries
27 Financial Data Schedule
(2) The following exhibits were filed as part of the Company's
Current Report on Form 8-K filed with the Commission on December 29, 1995, and
are incorporated herein by reference:
Exhibit
No. Title
- ------ -----
2 Agreement and Plan of Merger by and among Applied Science and
Technology, Inc., ASTeX/ETO Acquisition Corp., and Ehrhorn
Technological Operations, Inc., dated December 29, 1995.
+10a Escrow Agreement among Richard W. Ehrhorn, Tony Christianson,
James L. Marvin, Applied Science and Technology, Inc., and
State Street Bank and Trust Company, dated December 29, 1995.
10b Registration Rights Agreement by Applied Science and
Technology, Inc. for the benefit of the Stockholders of
Ehrhorn Technological Operations, Inc., dated December 29,
1995.
10c Supplemental Indemnification Agreement by and among Applied
Science and Technology, Inc. and Certain Principal
Stockholders of Ehrhorn Technological Operations, Inc., dated
December 29, 1995.
10d Term Loan Agreement by and between Applied Science and
Technology, Inc. and State Street Bank and Trust Company,
dated December 21, 1995.
10e $4,000,000 Term Promissory Note (Prime Rate) from Applied
Science and Technology, Inc. to State Street Bank and Trust
Company, dated December 21, 1995.
10f $4,000,000 Term Promissory Note (Market Rate) from Applied
Science and Technology, Inc. to State Street Bank and Trust
Company, dated December 21, 1995.
(3) The following exhibits were filed as part of the Company's
Annual Report on Form 10-K for the year ended July 1, 1995, filed with the
Securities and Exchange Commission (the "Commission") on September 28, 1995 and
are incorporated herein by reference:
Exhibit
No. Title
- ------ -----
10j(6) Agreement to renew the line of credit as a $2,000,000
unsecured demand line of credit, dated December 15, 1994.
10l(3) Extension to the Massachusetts lease, dated June 23, 1995.
(4) The following exhibits were filed as part of the Company's
Form SB-2 Registration Statement (Number 33-69098-B) declared effective by the
Commission on November 9, 1993 and are incorporated by reference herein:
Exhibit
No. Title
- ------ -----
3a Certificate of Incorporation, as amended, dated July 1, 1992
3b Certificate of Amendment of Certificate of Incorporation,
dated September 1, 1993.
3c Bylaws, as amended.
4a Specimen Common Stock Certificate.
4b Form of Warrant Agreement, including Form of Warrant
Certificate.
4c Form of Representative's Warrant Agreement, including Form of
Representative's Warrant Certificate.
+10a Master Purchase Order and Sales Agreement between the Company
and Applied Materials, Inc., dated May 28, 1993 (the "Applied
Agreement"). Attached as Appendix A to the Applied Agreement
is an Intellectual Property Agreement by and between the
Company and Applied Materials, Inc.
10b** Form of Amended and Restated Employment Agreement between the
Company and Dr. Richard S. Post, dated as of July 1, 1993.
10c** Form of Amended and Restated Employment Agreement between the
Company and John M. Tarrh, dated as of July 1, 1993.
10d** Form of Amended and Restated Employment Agreement between the
Company and Dr. Donald K. Smith, dated as July 1, 1993.
10e Form of Redeemable Common Stock Purchase Warrant (Regulation S
Investor Warrant).
10f Form of Consulting Agreement between the Company and Outside
Consultants.
10g Form of Employee Agreement between the Company and
Non-executive Employees.
10h Form of Employment Agreement between ASTeX/Gerling and
Non-executive Employees.
10i Agreement for the Purchase and Sale of Assets by and among
ASTeX/Gerling Laboratories, Inc., and Jova Enterprises, Inc.,
and John E. Gerling, dated January 31, 1992.
10j(1) Revolving Credit and Term Loan Agreement between the Company
and State Street Bank and Trust Company (the "bank"), dated
July 12, 1990.
10j(2) Revolving Demand Promissory Note between the Company and the
Bank, dated July 12, 1990.
10j(3) Security Agreement between the Company and the Bank, dated
July 12, 1990.
10j(4) First Amendment to the Revolving Credit and Term Loan
Agreement, dated August 14, 1991.
10j(5) Agreement to renew the line of credit and to increase the
equipment line established in the Revolving Credit and Term
Loan Agreement, dated January 29, 1993.
10k Form of Confidentiality Agreement between the Company and
Customers, Suppliers and Vendors.
101(1) Lease for premises at 35 Cabot Road, Woburn, Massachusetts,
dated February 10, 1989 (the "Massachusetts Lease").
10m Lease for the premises at 1132 Doker Drive, Modesto,
California, dated January 31, 1992.
10n** 1987 Stock Option Plan.
10o** 1993 Stock Option Plan.
+10t Purchase Agreement by and between the Company and GaSonics
Corporation, dated September 24, 1993.
- -----------------------------------
+ Certain information withheld and filed separately with the Commission pursuant
to a request for confidential treatment.
** These exhibits relate to executive compensation plans and arrangements.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on June 5, 1996,
reporting that on May 20, 1996, the Company announced that it would not proceed
at that time with a redemption of its publicly traded redeemable warrants.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
APPLIED SCIENCE AND TECHNOLOGY, INC.
Date: September By: /s/ Richard S. Post
------------------------------
Richard S. Post
President
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
- ---- -------- ----
<S> <C> <C>
/s/ Richard S. Post Chairman of the Board, Chief September 27, 1996
- ------------------------ Executive Officer and President
Richard S. Post (principal executive officer)
/s/ John M. Tarrh Chief Financial Officer, Senior September 27, 1996
- ------------------------ Vice President of Finance
John M. Tarrh (principal financial and accounting
officer) and Director
/s/ Donald K. Smith Director September 27, 1996
- ------------------------
Donald K. Smith
/s/ John R. Bertucci Director September 27, 1996
- ------------------------
John R. Bertucci
/s/ Michel de Beaumont Director September 27, 1996
- ------------------------
Michel de Beaumont
/s/ Robert R. Anderson Director September 27, 1996
- ------------------------
Robert R. Anderson
/s/ Hans-Jochen Kahl Director September 27, 1996
- --------------------
Hans-Jochen Kahl
25
</TABLE>
APPLIED SCIENCE AND TECHNOLOGY, INC.
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
TITLE PAGE
----- ----
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of June 29, 1996 and July 1, 1995 F-3
Consolidated Statements of Operations for the Years Ended
June 29, 1996, July 1, 1995 and July 2, 1994 F-4
Consolidated Statements of Stockholders' Equity for the Years
Ended June 29, 1996, July 1, 1995 and July 2, 1994 F-5
Consolidated Statements of Cash Flows for the Years Ended
June 29, 1996, July 1, 1995 and July 2, 1994 F-6
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
Independent Auditors' Report
----------------------------
The Board of Directors
Applied Science and Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Applied Science
and Technology, Inc. and subsidiaries as of June 29, 1996 and July 1, 1995, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended June 29, 1996.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Applied Science and
Technology, Inc. and subsidiaries as of June 29, 1996 and July 1, 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended June 29, 1996, in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
July 30, 1996
F-2
<TABLE>
<CAPTION>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 29, July 1,
Assets 1996 1995
------ ---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,182,294 2,303,645
Short-term investments 1,990,962 9,253,545
Trade receivables, net (notes 2 and 7) 8,921,890 4,631,789
Inventories (note 3) 8,734,401 4,179,644
Prepaid expenses and other assets 276,848 157,440
Deferred income taxes (note 6) 969,741 327,380
-------------- --------------
Total current assets 26,076,136 20,853,443
-------------- --------------
Property and equipment:
Land 473,000 -
Building 1,606,947 -
Equipment 7,068,802 4,146,421
Furniture and fixtures 543,860 209,029
Leasehold improvements 1,455,977 651,908
-------------- --------------
11,148,586 5,007,358
Less accumulated depreciation and amortization (3,458,407) (2,096,325)
-------------- --------------
Net property and equipment 7,690,179 2,911,033
-------------- --------------
Other assets:
Patents, net 141,525 101,017
Other, net 262,224 51,664
Long-term investments - 973,110
Notes receivable (note 2) 191,362 187,267
-------------- --------------
Total other assets 595,111 1,313,058
-------------- --------------
$ 34,361,426 25,077,534
============== ==============
Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt (note 9) $ 1,624,641 -
Accounts payable 2,564,149 1,687,383
Accrued expenses 820,030 421,799
Accrued compensation expense and related costs 1,428,759 615,027
Accrued income taxes 173,179 228,835
Commissions payable and customer advances 248,836 129,343
-------------- --------------
Total current liabilities 6,859,594 3,082,387
Long-term debt, less current maturities (note 9) 6,169,517 -
Deferred income taxes (note 6) 36,507 101,383
-------------- --------------
Total liabilities 13,065,618 3,183,770
-------------- --------------
Commitments and contingencies (notes 4 and 8 )
Stockholders' equity (notes 5 and 10):
Preferred stock - -
Common stock 44,484 43,637
Additional paid-in capital 26,690,108 21,279,929
Retained earnings (accumulated deficit) (5,205,458) 2,091,317
Less: Treasury stock, at cost - (1,446,619)
Notes receivable for common stock purchases (233,326) (74,500)
-------------- --------------
Total stockholders' equity 21,295,808 21,893,764
-------------- --------------
$ 34,361,426 25,077,534
============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-3
<TABLE>
<CAPTION>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended
-------------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Product sales, net $ 36,175,388 17,157,756 11,485,420
Research contract revenue 894,517 2,138,332 1,180,659
Other revenue 2,065,691 708,765 691,392
-------------- -------------- --------------
Total revenue (note 7) 39,135,596 20,004,853 13,357,471
-------------- -------------- --------------
Cost of sales and revenue:
Product sales and other revenues 23,414,139 10,868,160 6,597,737
Research contracts 439,659 945,072 650,701
-------------- -------------- --------------
Total cost of sales and revenue 23,853,798 11,813,232 7,248,438
-------------- -------------- --------------
Gross profit 15,281,798 8,191,621 6,109,033
-------------- -------------- --------------
Operating expenses:
Selling expenses 3,297,664 1,991,459 1,569,039
General and administrative expenses 3,807,327 2,561,221 1,747,956
Research and development expenses, net (note 1) 4,553,361 2,839,986 2,433,928
Acquisition-related expenses 2,887,647 - -
Write-off of goodwill (note 12) 6,813,562 - -
-------------- -------------- -------------
Total operating expenses 21,359,561 7,392,666 5,750,923
-------------- -------------- --------------
Earnings (loss) from operations (6,077,763) 798,955 358,110
-------------- -------------- --------------
Other expense (income):
Interest expense 323,510 960 15,626
Interest income (659,066) (744,751) (345,050)
Other expense 13,568 13,998 12,493
-------------- -------------- --------------
Total other income (321,988) (729,793) (316,931)
-------------- -------------- --------------
Earnings (loss) before income taxes (5,755,775) 1,528,748 675,041
Income tax expense (note 6) 1,541,000 401,000 157,000
-------------- -------------- --------------
Net earnings (loss) $ (7,296,775) 1,127,748 518,041
============== ============== ==============
Primary earnings (loss) per share $ (1.74) .29 .15
============= ============== ==============
Fully diluted earnings (loss) per share $ (1.74) .28 .15
============= ============== ==============
Weighted average common shares outstanding used to
calculate primary earnings (loss) per share 4,204,764 3,906,800 3,433,800
============== ============== ==============
Weighted average common shares outstanding used to
calculate fully diluted earnings (loss) per share 4,204,764 3,992,100 3,433,800
============== ============== ==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-4
<TABLE>
<CAPTION>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 29, 1996, July 1, 1995 and July 2, 1994
Preferred stock Common stock Additional
---------------------------- -------------------------- paid-in
Shares Amount Shares Amount capital
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 651,690 $ 4,509,152 1,993,302 $ 19,933 $ 778,442
Conversion of preferred stock
to common stock (651,690) (4,509,152) 651,690 6,517 4,502,635
Issuance of common stock,
net of offering costs of
$1,072,721 - - 1,700,050 17,001 15,903,138
Exercise of stock options - - 9,125 91 40,172
Net earnings - - - - -
------------ -------------- ------------ --------- ---------------
Balance at July 2, 1994 - - 4,354,167 43,542 21,224,387
Repurchase of common stock - - - - -
Exercise of stock options - - 9,560 95 55,542
Repayment of notes receivable - - - - -
Net earnings - - - - -
------------ -------------- ------------ --------- ---------------
Balance at July 1, 1995 - - 4,363,727 43,637 21,279,929
Retirement of treasury stock - - (506,973) (5,069) (1,441,550)
Repayment of notes receivable - - - - -
Issuance of notes receivable - - 18,000 180 236,570
Exercise of stock options and
warrants - - 233,587 2,336 1,996,397
Tax benefit of stock options
exercised - - - - 284,101
Stock issued in connection with
acquisitions (note 10) - - 340,034 3,400 4,334,661
Net loss - - - - -
------------ -------------- ------------ --------- ---------------
Balance at June 29, 1996 - $ - 4,448,375 $ 44,484 $ 26,690,108
============ ============== ============ ========= ===============
</TABLE>
<TABLE>
<CAPTION>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity (Continued)
Years ended June 29, 1996, July 1, 1995 and July 2, 1994
Retained Notes receivable
earnings Treasury stock for common Total
(accumulated --------------------------- stock stockholders'
deficit) Shares Amount purchases equity
-------- ------ ------ --------- ------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1993 $ 445,528 286,435 $ (33,255) $ (87,000) $ 5,632,800
Conversion of preferred stock
to common stock - - - - -
Issuance of common stock,
net of offering costs of
$1,072,721 - - - - 15,920,139
Exercise of stock options - - - (7,500) 32,763
Net earnings 518,041 - - - 518,041
------------- ----------- ------------- ------------ --------------
Balance at July 2, 1994 963,569 286,435 (33,255) (94,500) 22,103,743
Repurchase of common stock - 220,538 (1,413,364) - (1,413,364)
Exercise of stock options - - - - 55,637
Repayment of notes receivable - - - 20,000 20,000
Net earnings 1,127,748 - - - 1,127,748
------------- ----------- ------------- ------------ --------------
Balance at July 1, 1995 2,091,317 506,973 (1,446,619) (74,500) 21,893,764
Retirement of treasury stock - (506,973) 1,446,619 - -
Repayment of notes receivable - - - 77,924 77,924
Issuance of notes receivable - - - (236,750) -
Exercise of stock options and
warrants - - - - 1,998,733
Tax benefit of stock options
exercised - - - - 284,101
Stock issued in connection with
acquisitions (note 10) - - - - 4,338,061
Net loss (7,296,775) - - - (7,296,775)
-------------- ----------- ------------- ------------ --------------
Balance at June 29, 1996 $ (5,205,458) - $ - $ (233,326) $ 21,295,808
============= =========== ============= ============ ==============
See accompanying notes to consolidated financial statements.
</TABLE>
F-5
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years ended
---------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (7,296,775) 1,127,748 518,041
Adjustments to reconcile net earnings (loss) to net cash provided by
(used for) operating activities:
Depreciation 1,335,634 715,542 558,032
Amortization and goodwill write-off 7,129,418 87,076 45,378
Acquisition-related expenses 2,203,000 - -
Deferred income taxes (143,000) (68,438) (91,999)
Gain on sale of property and equipment - (12,625) -
Changes in assets and liabilities:
Trade receivables (1,112,739) (1,394,413) (1,099,599)
Inventories (1,117,125) (401,073) (1,545,215)
Prepaid expenses and other assets 474,325 (4,136) (41,829)
Notes receivable 154,524 (187,267) -
Accounts payable (76,810) 302,944 630,835
Accrued expenses (1,060,162) 358,759 333,554
Accrued income taxes 228,445 - 3,240
------------ ------------- ------------
Net cash provided by (used for) operating activities 718,735 524,117 (689,562)
------------ ------------- ------------
Cash flows from investing activities:
Acquisitions of subsidiaries, less cash acquired (12,318,331) - -
Purchases of investments (3,006,211) (14,230,097) (754,778)
Sales of investments 11,241,904 4,758,220 -
Additions to property and equipment (2,812,968) (1,434,125) (1,458,426)
Patents (81,974) (49,412) (44,691)
Proceeds from sale of property and equipment - 106,000 -
Investment in other assets (250,000) - -
------------- ------------- -----------
Net cash used for investing activities (7,227,580) (10,849,414) (2,257,895)
------------- ------------- ------------
Cash flows from financing activities:
Proceeds from notes payable 8,000,000 - -
Repayments of notes payable (689,163) - (429,017)
Repayment of notes receivable for common stock purchases 77,924 20,000 -
Net proceeds from issuance of common stock 1,998,733 55,637 15,952,902
Repurchase of treasury stock - (1,413,364) -
------------ ------------- -----------
Net cash provided by (used for) financing activities 9,387,494 (1,337,727) 15,523,885
------------ ------------- ------------
Net increase (decrease) in cash and cash equivalents 2,878,649 (11,663,024) 12,576,428
Cash and cash equivalents at beginning of year 2,303,645 13,966,669 1,390,241
------------ ------------- ------------
Cash and cash equivalents at end of year $ 5,182,294 2,303,645 13,966,669
============ ============= ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 276,347 960 16,898
============ ============= ============
Income taxes $ 1,470,555 425,154 64,044
============ ============= ============
(Continued)
</TABLE>
F-6
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
<TABLE>
<CAPTION>
Years ended
--------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Acquisitions:
Assets acquired $ 12,145,829 - -
In process research and development 2,203,000 - -
Goodwill and other intangible assets 7,048,512 - -
Liabilities assumed (4,459,280) - -
Common stock issued (4,338,061) - -
------------ ------------ ---------
Cash paid 12,600,000 - -
Less cash acquired (281,669) - -
------------ ------------ ---------
Net cash paid for acquisitions $ 12,318,331 - -
============ ============ =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 29, 1996 and July 1, 1995
(1) NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Nature of Business
Applied Science and Technology, Inc. (the "Company") develops and
manufactures equipment for plasma processing of materials and for
medical applications. The Company commenced operations in January
1987.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries: Applied Science and Technology
("ASTeX"), GmbH, ASTeX/Gerling Laboratories, Inc., ETO, Inc. ("ETO"),
and Newton Engineering Service, Inc. All significant intercompany
balances and transactions have been eliminated in consolidation.
(c) Revenue Recognition
The Company recognizes revenue on product sales and other sales when the
related products are shipped or the related services are rendered. The
Company periodically enters into research contracts which generally
provide for nonrefundable payments. Research contract revenue is
recognized based on the proportion of costs incurred to total
estimated costs using the percentage of completion method. At the time
a loss on a contract becomes known, the entire amount of the estimated
loss is recognized.
(d) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of
three months or less to be cash equivalents.
(e) Investments
Cash equivalents, short-term and long-term investments consist of
corporate bonds and notes, government agency bonds, and money market
funds. The Company uses an investment firm to manage its investment
portfolio. All investments mature within a two-year period.
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (Statement 115) at July 1, 1995. Adoption of this
Statement had no impact on the Company's financial position or results
of operations. Under Statement 115, the Company classifies its
securities as held-to-maturity. Held-to-maturity securities are those
investments in which the Company has the ability and intent to hold
the security until maturity. Held-to-maturity securities are recorded
at amortized cost, which approximates market value.
During 1996, the Company sold held-to-maturity securities with an
amortized cost of $3,012,500 prior to their maturity dates. The sale
of these securities prior to their maturities was due to unanticipated
cash requirements resulting from the acquisition of ETO (see note 10).
(Continued)
F-8
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Dividend and interest income is recognized in the period earned. Realized
gains and losses for held-to-maturity securities are included in
earnings and are derived using the specific identification method for
determining the cost of securities sold.
(f) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
(g) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets for
financial statement purposes and accelerated methods for income tax
purposes. The estimated useful lives of the assets are as follows:
Building 25 to 31-1/2 years
Equipment, furniture and fixtures 3-1/2 to 7 years
Leasehold improvements Remaining lease term
(h) Patents
Patent costs are amortized over their estimated useful life of five years.
(i) Goodwill and Other Intangible Assets
Goodwill is amortized over a period of 15 years. The Company continually
evaluates whether events or circumstances have occurred that indicate
that the remaining useful life of goodwill and other intangible assets
may warrant revision or that the remaining balance may not be
recoverable. When factors indicate that an intangible asset should be
evaluated for possible impairment, the company estimates the
undiscounted cash flow of the business segment, net of tax, over the
remaining life of the asset in determining whether the asset is
recoverable. Charges for impairment of goodwill and other intangibles
would be recorded to the extent unamortized book value exceeds the
related future discounted cash flow, net of tax. The discount factor
to be used would be the long-term debt rate currently obtainable by
the Company. During fiscal 1996, $6,813,562 of goodwill was written
off (see note 12).
(j) Research and Development Costs
All research and development costs are expensed as incurred. Research and
development expenses attributable to research contracts are included
in costs of sales and revenue.
The Company also receives funding for certain research and development
costs which is used to offset its research and development expenses.
The Company incurred research and development expenses, net of funding
received, as follows:
<TABLE>
<CAPTION>
Years ended
-------------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Research and development costs $ 5,939,255 3,150,284 2,433,928
Less funding 1,385,894 310,298 -
------------ ------------ -----------
Net research and development costs $ 4,553,361 2,839,986 2,433,928
============ ============ ============
(Continued)
</TABLE>
F-9
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(k) Income Taxes
The Company's income taxes are accounted for under the asset and liability
method. Under this method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(l) Earnings (Loss) Per Share
Net earnings (loss) per share is computed based on the weighted average
number of common shares outstanding during each period, after giving
effect to stock options, warrants and unconverted preferred shares
considered to be dilutive common stock equivalents. These items are
not included when their effect is anti-dilutive.
(m) Use of Estimates
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
The significant estimates included in the consolidated financial
statements relate to the determination of impairment of goodwill and
reserves for excess inventories. Management has determined the
impairment of goodwill based upon the expected future cash flows of
ETO and the terminal value of ETO at the end of the remaining useful
life of the goodwill. Management has estimated expected future cash
flows of ETO through the use of sales projections and estimated
operating and capital expenditures over the remaining useful life of
the goodwill. Management establishes its reserves for excess
inventories based upon expected future usage and sales of inventories
in the normal course of business as adjusted for anticipated changes
in market demand. Certain of the Company's inventories are product
specific and may not be readily salable in the open market. The
possible loss of sales to certain customers could result in the need
for further adjustment to the carrying value of the Company's
inventories.
(n) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosure about Fair
Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in
a current transaction between willing parties.
The carrying amounts of cash and cash equivalents, trade receivables,
prepaid and other assets, accounts payable, and accrued expenses
approximate fair value because of the short maturity of those
instruments.
The carrying amounts of short- and long-term investments approximate fair
value based on quoted market prices.
The carrying amounts of the notes receivable and long-term debt
approximate fair value as the rates of interest on these instruments
approximate current market rates of interest for similar instruments
with comparable maturities.
(Continued)
F-10
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(o) Reclassifications
Certain 1995 accounts have been reclassified to conform to the 1996
presentation.
(2) TRADE RECEIVABLES
Trade receivables consist of the following:
<TABLE>
<CAPTION>
June 29, July 1,
1996 1995
---- ----
<S> <C> <C>
Trade receivables $ 9,115,345 4,642,887
Note receivable, current portion 158,754 139,499
Allowance for doubtful accounts (352,209) (150,597)
------------- ------------
$ 8,921,890 4,631,789
============ ============
</TABLE>
The Company has a trade note receivable due in monthly installments
through 1997. The long-term portion of the note totaling $28,513 and
$187,267 at June 29, 1996 and July 1, 1995 is included in other
assets. The Company has an additional note receivable that was
acquired in the acquisition of ETO on December 30, 1995. The note is
due in monthly installments through 2002. The long-term portion of the
note totaling $162,849 is included in other assets.
(3) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
June 29, July 1,
1996 1995
---- ----
<S> <C> <C>
Raw materials $ 5,630,926 2,561,120
Work in process 2,249,579 961,183
Finished goods 853,896 657,341
------------ ------------
$ 8,734,401 4,179,644
============ ============
</TABLE>
(4) LEASES
The Company leases office, research and manufacturing facilities under
operating leases which expire through June, 2000. Future minimum lease
payments under operating leases are as follows:
<TABLE>
<CAPTION>
Year ending June:
<S> <C>
1997 $ 568,052
1998 575,305
1999 569,465
2000 547,141
------------
$ 2,259,963
============
</TABLE>
Rent expense totaled $548,259, $356,207 and $321,219 for the years ended
June 29, 1996, July 1, 1995 and July 2, 1994, respectively.
(Continued)
F-11
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(5) STOCKHOLDERS' EQUITY
Capital stock consists of the following at June 29, 1996 and July 1, 1995:
<TABLE>
<CAPTION>
Number of shares
issued and outstanding
----------------------
Authorized June 29, 1996 July 1, 1995
---------- ------------- ------------
<S> <C> <C> <C>
Preferred stock:
Preferred stock, $.01 par value 1,000,000 - -
-------------- ------------ -----------
Total preferred stock 1,000,000 - -
-------------- ------------ -----------
Common stock:
Common stock, $.01 par value 10,000,000 4,448,375 4,363,727
Less: treasury stock - - 506,973
-------------- ------------ ------------
Total common stock 10,000,000 4,448,375 3,856,754
-------------- ------------ ------------
Total capital stock 11,000,000 4,448,375 3,856,754
============== ============ ============
</TABLE>
The holders of common stock are entitled to one vote for each share of
record held on each matter submitted to a vote of stockholders. There
is no cumulative voting for election of directors. Subject to the
prior rights of any series of preferred stock which may from time to
time be outstanding, holders of common stock are entitled to receive
ratably such dividends as may be declared by the board of directors
out of funds legally available therefor, and, upon the liquidation,
dissolution or winding up of the Company, are entitled to share
ratably in all assets remaining after payment of liabilities and
payment of accrued dividends and liquidation preference on the
preferred stock, if any. Holders of common stock have no preemptive
rights and have no rights to convert their common stock into any other
securities. The outstanding common stock is validly issued and
nonassessable.
The preferred stock may be issued in one or more series, the terms of
which may be determined at the time of issuance by the board of
directors, without further action by stockholders, and may include
voting rights (including the right to vote as a series on particular
matters), preferences as to dividends and liquidation, conversion,
redemption rights and sinking fund provisions.
The future issuance of preferred stock could reduce the rights, including
voting rights, of the holders of common stock, and, therefore, reduce
the value of the common stock. In particular, specific rights granted
to future holders of preferred stock could be used to restrict the
Company's ability to merge with or sell its assets to a third party,
thereby preserving control of the Company by existing management.
In November 1993, the Company completed an initial public offering (IPO),
whereby the Company issued 1,700,050 shares of common stock at $10.75
per share and 1,955,000 redeemable warrants at $.10 per warrant. Two
redeemable warrants entitle the holder to purchase one share of common
stock at $15.05 through November 9, 1998, subject to adjustment in
accordance with anti-dilution provisions. The redeemable warrants are
subject to redemption at $.10 per warrant on 30 days' prior notice,
provided that the average closing price of the Company's common stock
equals or exceeds $19.35 for 20 consecutive trading days through
November 9, 1998.
(Continued)
F-12
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company also issued to the underwriter of the IPO, for nominal
consideration, warrants to purchase 170,000 shares of common stock and
170,000 redeemable warrants (the "Representative's warrants"). The
Representative's warrants are initially exercisable at $15.59 per
share of common stock and $.145 per redeemable warrant for a period of
four years commencing November 10, 1993.
In connection with the issuance of preferred stock in 1992, the Company
issued warrants to purchase 193,363 shares of common stock. The
warrants are exercisable at $9.60 per share and expire in November
1996. The warrants are redeemable by the Company provided the
Company's average stock closing price exceeds $12.00 per share for 20
consecutive days. During fiscal 1996, 159,237 warrants were exercised.
The Company adopted the 1993 Stock Option Plan in fiscal 1994 and reserved
250,000 shares of common stock for issuance under the Plan. In fiscal
1995, the Company adopted the 1994 Formula Stock Option Plan to award
non-employee directors of the Company stock options and has reserved
100,000 shares for issuance under this plan. During fiscal 1996, the
Company reserved an additional 495,000 shares for the 1993 Stock
Option Plan. The Plan is administered by the Company's board of
directors which has the authority to determine the recipients, number
of shares, and the related terms and provisions of the options which
may be granted. A summary of stock option activity is as follows:
<TABLE>
<CAPTION>
Employee stock options
--------------------------------------------
Option Option
shares Options price
available outstanding per share
--------- ----------- ---------
<S> <C> <C> <C>
Balance at June 30, 1993 177,630 104,875 $ 2.00 - 8.000
Adoption of plan 250,000 - -
Options granted (88,205) 88,205 9.00 - 10.750
Options exercised - (9,125) 2.00 - 9.000
Options expired 2,350 (2,350) 5.00 - 9.000
Options canceled (98,275) - -
------------ ---------- -----------
Balance at July 2, 1994 243,500 181,605 5.00 - 10.750
Adoption of plan 100,000 - -
Options granted (52,150) 52,150 5.75 - 11.125
Options exercised - (9,560) 5.00 - 9.000
Options expired 29,165 (29,165) 5.00 - 9.000
------------ ---------- ----------------
Balance at July 1, 1995 320,515 195,030 5.00 - 11.125
Options added 495,000 - -
Options granted (364,050) 364,050 11.125 - 20.000
Options exercised - (74,350) 5.00 - 11.125
Options expired 7,350 (7,350) 5.00 - 12.625
------------ ---------- ----------------
Balance at June 29, 1996 458,815 477,380 $ 5.00 - 20.000
============ ========== ================
</TABLE>
At June 29, 1996, 139,803 options were exercisable at $5.00 - $11.125 per
share.
(Continued)
F-13
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In March 1993, the Company issued 21,750 shares of common stock in
exchange for notes receivable from employees totaling $87,000. In 1996
and 1995, respectively, $67,000 and $20,000 of these notes were
repaid.
In October 1993, the Company issued 3,750 shares of common stock in
exchange for a note receivable from an employee of $7,500. The note
and related interest are to be repaid upon the earlier of (a) October
31, 1997 or (b) one month from the date of termination of employment
with the Company. Interest accrues at 6% per year.
In July 1995, the Company issued 9,000 shares of common stock in exchange
for notes receivable from employees of $101,250. The notes and related
interest are to be repaid upon the earlier of (a) July 2, 2000 or (b)
one month from the date of termination of employment with the Company.
Interest accrues at 6.28% per year. In 1996, $10,924 of these notes
were repaid.
In August 1995, the Company issued 5,000 shares of common stock in
exchange for a note receivable from an employee of $77,500. The note
and related interest are to be repaid upon the earlier of (a) August
14, 2000 or (b) one month from the date of termination of employment
with the Company. Interest accrues at 6.28% per year.
In October 1995, the Company issued 4,000 shares of common stock in
exchange for notes receivable from employees of $58,000. The notes and
related interest are to be repaid upon the earlier of (a) October 9,
2000 or (b) one month from the date of termination of employment with
the Company. Interest accrues at 6.28% per year.
(6) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years ended
------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 1,500,000 369,000 227,000
State 184,000 100,000 22,000
------------- ---------- ----------
Total current 1,684,000 469,000 249,000
------------- ---------- ----------
Deferred:
Federal (123,000) (52,000) (95,000)
State (20,000) (16,000) 3,000
------------- ---------- ----------
Total deferred (143,000) (68,000) (92,000)
------------- ---------- ----------
$ 1,541,000 401,000 157,000
============= ========== ==========
(Continued)
</TABLE>
F-14
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The actual tax expense differs from the "expected" tax expense (benefit)
(computed by applying the U.S. federal corporate income tax rate of 34% to
earnings (loss) before income taxes) as follows:
<TABLE>
<CAPTION>
Years ended
-----------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Computed "expected" tax expense (benefit) $ (1,956,964) 519,774 229,514
Increase (reduction) in income taxes resulting from:
State taxes, net of federal benefit 108,783 66,197 (10,655)
Goodwill amortization and write-off 2,396,649 - -
Acquisition related expenses 981,800 - -
Research and experimentation tax credit (133,000) (111,852) (71,159)
Recognition of tax credits - - (294,826)
Valuation reserve movement - (83,936) 285,900
Other 143,732 10,817 18,226
------------- ----------- -----------
$ 1,541,000 401,000 157,000
============= =========== ===========
Total income tax expense was allocated as follows:
Years ended
-----------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
Income from operations $ 1,541,000 401,000 157,000
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial statement
purposes. (284,101) - -
------------- ----------- -----------
$ 1,256,899 401,000 157,000
============= =========== ===========
(Continued)
</TABLE>
F-15
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are
as follows:
<TABLE>
<CAPTION>
June 29, July 1,
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 772,407 -
Research and experimentation tax credit carryforwards - 165,658
Accrued liabilities 359,906 157,476
Inventory reserves 454,755 137,855
Accounts receivable, principally due to allowance for
doubtful accounts 155,080 73,356
------------- -----------
Total deferred tax assets 1,742,148 534,345
Less: valuation allowance - (201,964)
------------- -----------
Net deferred tax assets $ 1,742,148 332,381
============= ===========
Deferred tax liabilities:
Property and equipment, principally due to differences
in depreciation methods $ 808,914 106,384
============= ===========
</TABLE>
The net change in the total valuation allowance for the year ended June
29, 1996 was $201,964. The valuation allowance is principally
attributable to state loss carryforwards.
At June 29,1996, the Company has net operating loss carryforwards for
federal income tax purposes of $2,271,784 which are available to
offset future taxable income through 2010. Utilization of the net
operating loss carryforwards is subject to an annual limitation of
$1,002,000 under Section 382 of the Internal Revenue Code.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Based upon the level
of historical taxable income and projections for future taxable income
over the periods which deferred tax assets are deductible, management
believes it is more likely than not the Company will realize the
benefits of these deductible differences.
(7) SALES AND REVENUE
Total revenue consists of product sales and other revenue. Other revenue
includes funded contracts for research and development, revenues from
service and repair activities and consulting. Sales and revenue to
government agencies for the years ended June 29, 1996, July 1, 1995
and July 2, 1994 were $662,471, $1,249,498 and $1,058,174,
respectively. At June 29, 1996, July 1, 1995 accounts receivable from
these customers totaled $516,698 and $550,596, respectively.
One commercial customer accounted for 45%, 41% and 25% of total revenue
for the years ended June 29, 1996, July 1, 1995 and July 2, 1994,
respectively. At June 29, 1996, and July 1, 1995, accounts receivable
from this customer was $2,726,198 and $1,687,459, respectively.
(Continued)
F-16
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Sales to customers in foreign countries for the years ended June 29, 1996,
July 1, 1995 and July 2, 1994 were $7,328,015, $3,028,541 and
$1,919,027, respectively. At June 29, 1996, and July 1, 1995, accounts
receivable from these customers totaled $1,776,569 and $608,145,
respectively.
(8) COMMITMENTS
The Company may borrow from a bank up to $2,000,000 under an unsecured
demand line of credit with interest at 8.25% at June 29, 1996. There
were no outstanding borrowings at June 29, 1996 and July 1, 1995. The
line of credit is subject to review by the bank in November, 1996.
(9) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 29, July 1,
1996 1995
---- ----
<S> <C> <C>
Unsecured note payable to bank with interest at the bank's prime rate
(8.25% at June 29, 1996) payable in monthly principal
installments of $67,797, plus interest, due December 31, 2000 $ 3,661,017 -
Unsecured note payable to bank with interest at 7.19%, payable in
monthly principal installments of $67,797, plus interest, due
December 31, 2000. This note is subject to a prepayment penalty
equal to the lender's lost net interest income resulting
from any prepayment as defined in the loan agreement 3,661,017 -
Note payable to bank, payable in monthly installments of $5,415
including interest, with any remaining balance due in July, 1999.
The interest rate is adjusted annually to the bank's prime rate
with a maximum change of 1% annually (8.75% at June 29,
1996). The note is secured by the land and building. 472,124 -
------------- --------
7,794,158 -
Less current maturities 1,624,641 -
------------- --------
Long-term debt, excluding current maturities $ 6,169,517 -
============= ========
The aggregate maturities of long-term debt are as follows:
Year ending June 30:
1997 $ 1,624,641
1998 1,681,143
1999 1,656,463
2000 2,018,389
2001 813,522
-------------
$ 7,794,158
=============
</TABLE>
No security pledges of assets can be granted nor dividends paid without
the approval of the bank that issued the unsecured notes payable.
(Continued)
F-17
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Certain financial covenants must be tested quarterly in connection with
the unsecured notes payable. The Company is in compliance with all
covenants at June 29, 1996.
(10) ACQUISITIONS
On November 21, 1995, the Company completed its acquisition of Newton
Engineering Service, Inc. ("NES") and acquired all of the outstanding
shares of NES. In connection with the acquisition, the Company issued
11,372 shares of common stock valued at $188,703 to the former
shareholders of NES.
As of January 2, 1996 the Company completed its acquisition of Ehrhorn
Technological Operations, Inc., a manufacturer of radio frequency (RF)
generators used in semiconductor, medical imaging, medical
sterilization and amateur ratio communications applications. At the
acquisition date, Ehrhorn Technological Operations, Inc.'s name was
changed to ETO, Inc.
The Company acquired all of the stock of ETO for a total purchase price of
$16,749,358. The purchase price included $12,600,000 in cash, of which
$4,600,000 was provided from the Company's current cash reserves while
the remaining $8,000,000 was provided from two unsecured notes from a
bank (see note 9), and 328,662 shares of common stock valued at
$4,149,358 issued to the former shareholders of ETO. Costs associated
with acquired in-process research and development were charged to
expense.
Both acquisitions have been accounted for by the purchase method of
accounting and, accordingly, the purchase prices have been allocated
to the assets acquired and the liabilities assumed based on their fair
values at the acquisition dates. The consideration paid and the fair
value of the assets acquired and the liabilities assumed at the
acquisition dates are summarized as follows:
Consideration paid:
Cash $ 12,600,000
Common stock (340,034 shares) 4,338,061
--------------
Total consideration paid $ 16,938,061
==============
Allocation of purchase price:
Accounts receivable $ 3,171,403
Inventories 3,437,633
Property, plant, equipment and other assets 5,536,793
Liabilities assumed (4,459,280)
In process research and development 2,203,000
Goodwill 7,048,512
-------------
Total purchase price $ 16,938,061
==============
The following unaudited pro forma results of operations give effect to the
acquisitions as if the transactions had occurred at the beginning of
fiscal 1995. Such pro forma information reflects certain adjustments
including amortization of goodwill, interest expense, interest income,
income tax effect and an increase in the number of weighted average
shares outstanding. This pro forma does not necessarily reflect the
results of operations that would have occurred had the acquisitions
taken place at the beginning of fiscal 1995 and is not necessarily
indicative of results that may be obtained in the future.
(Continued)
F-18
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
(Unaudited)
---------------------------------
Year Year
ended ended
June 29, July 1,
1996 1995
<S> <C> <C>
Pro forma total revenue $ 47,217,628 31,878,730
============== ==============
Pro forma net earnings $ 2,621,527 897,888
============== ==============
Pro forma net primary earnings per share $ 0.58 0.21
============== ==============
Pro forma weighted average common shares outstanding 4,527,197 4,320,762
============== ==============
</TABLE>
(11) NONCASH FINANCING ACTIVITIES
During the years ended June 29, 1996, and July 2, 1994, the Company issued
18,000 and 3,750 shares of common stock in exchange for notes
receivable from employees totaling $236,750 and $7,500, respectively.
During the year ended June 29, 1996, the Company issued 340,034 shares of
common stock valued at $4,338,061 in connection with the acquisitions
of ETO and NES.
In connection with the exercise of stock options, a tax benefit of
$284,101 was recorded additional paid-in capital for the year ended
June 29, 1996.
(12) GOODWILL WRITE-OFF
In connection with its acquisition of ETO, the Company recorded as
goodwill $7,048,512 which represented the excess of the purchase price
over the fair value of ETO's net assets acquired and in process
research and development. The goodwill was to be amortized over 15
years. Since the time of the acquisition there has been a precipitous
decline in sales to one of ETO's major customers. In management's
judgment, this decline in revenues is a permanent impairment of ETO's
prospects. Based on this significant change, which occurred during the
Company's fourth quarter, management made a reassessment of its
remaining goodwill and recorded an impairment of goodwill in the
amount of $6,813,562, which represented the goodwill balance at the
reassessment date.
In determining the impairment, management estimated ETO's cash flows over
14-1/2 years which represented the remaining business life cycle of
ETO's existing technology. The cash flow analysis included an estimate
of ETO's terminal value at the end of this period. The operating cash
flow projections were based on ETO's estimated after-tax operating
results less estimated capital expenditures. The undiscounted cash
flows were assumed to be realized in installments over the 14-1/2
years. Because the undiscounted cash flow was less than the Company's
carrying value of ETO, a charge for impairment of goodwill was
recorded to the extent unamortized book value exceeded the related
discounted cash flow. The cash flow was discounted using a weighted
average borrowing cost of 7.7% which is comparable to rates available
as of the reassessment date.
(Continued)
F-19
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(13) RETIREMENT PLANS
The Company sponsors two defined contribution 401(k) retirement plans (the
"Plans") covering substantially all employees of the Company. The
Company contributes 20% of employee voluntary contributions up to 5%
of eligible wages for the Plan covering employees of ASTeX,
ASTeX/Gerling Laboratories, and Newton Engineering Services, Inc. The
Company contributes 50% of employee voluntary contributions up to 6%
of eligible wages for the Plan covering employees of ETO. The Company
intends to merge both plans in 1997 and contribute 50% of employee
voluntary contributions up to 6% of eligible wages under the merged
plan. Total expense under the Plans amounted to $72,547, $42,673 and
$6,342 for the years ended June 29, 1996, July 1, 1995 and July 2,
1994, respectively.
(14) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(In thousands except per share data)
Net
Earnings Net Earnings
Total Gross (Loss) From Earnings (Loss)
Revenue Profit Operations (Loss) Per Share
------- ------ ---------- ------ ---------
<S> <C> <C> <C> <C> <C>
1996
- ----
First Quarter $ 5,639 2,050 232 299 0.07
Second Quarter 6,859 2,817 (2,358) (2,394) (0.57)
Third Quarter 12,681 4,847 1,183 725 0.16
Fourth Quarter 13,956 5,568 (5,135) (5,927) (1.34)
Year ended June 29 39,135 15,282 (6,078) (7,297) (1.74)
1995
- ----
First Quarter $ 3,419 1,475 39 127 0.03
Second Quarter 4,842 2,179 253 274 0.07
Third Quarter 5,236 2,206 331 343 0.09
Fourth Quarter 6,508 2,332 176 384 0.10
Year ended July 1 20,005 8,192 799 1,128 0.29
F-20
</TABLE>
Exhibit 11
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
Statement Re: Computation of Per Share Earnings
<TABLE>
<CAPTION>
Years ended
-------------------------------------------
June 29, July 1, July 2,
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss) $ (7,296,775) 1,127,748 518,041
============== ============= ============
Primary earnings per share:
Weighted average common shares outstanding 4,204,764 3,889,000 3,425,800
Dilutive stock options and warrants - 17,800 8,000
-------------- ------------- ------------
$ 4,204,764 3,906,800 3,433,800
============== ============= ============
Net earnings (loss) per share $ (1.74) .29 .15
============= ============= ============
Fully diluted earnings per share:
Weighted average common shares outstanding 4,204,764 3,889,000 3,425,800
stock options and warrants - 103,100 8,000
-------------- ------------- ------------
$ 4,204,764 3,992,100 3,433,800
============== ============= ============
Net earnings (loss) per share $ (1.74) .28 .15
============= ============= ============
</TABLE>
Exhibit 21
----------
Subsidiaries of the Registrant
------------------------------
1. ETO, Inc.
2. Newton Engineering Service, Inc.
3. Applied Science and Technology, GmbH
4. ASTeX/Gerling Laboratories, Inc.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-29-1996
<PERIOD-START> JUL-2-1995
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 5,182,294
<SECURITIES> 1,990,962
<RECEIVABLES> 9,314,099
<ALLOWANCES> (352,209)
<INVENTORY> 8,734,401
<CURRENT-ASSETS> 26,076,136
<PP&E> 11,148,586
<DEPRECIATION> (3,458,407)
<TOTAL-ASSETS> 34,361,426
<CURRENT-LIABILITIES> 6,859,594
<BONDS> 6,169,517
0
0
<COMMON> 44,484
<OTHER-SE> 21,251,324
<TOTAL-LIABILITY-AND-EQUITY> 34,361,426
<SALES> 38,241,079
<TOTAL-REVENUES> 39,135,596
<CGS> 23,414,139
<TOTAL-COSTS> 15,281,798
<OTHER-EXPENSES> 21,172,386
<LOSS-PROVISION> 187,175
<INTEREST-EXPENSE> 323,510
<INCOME-PRETAX> (5,755,775)
<INCOME-TAX> 1,541,000
<INCOME-CONTINUING> (7,296,775)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,296,775)
<EPS-PRIMARY> (1.74)
<EPS-DILUTED> (1.74)
</TABLE>
