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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM 10-K ON FORM 10-K/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 27, 1998
COMMISSION FILE NUMBER 0-22646
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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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(781) 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
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT: (1) HAS 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
--- ---
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT 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 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 18, 1998 was approximately $32,360,000. As of September 18,
1998, 8,606,763 shares of Common Stock, $.01 par value per share, were issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on November 19, 1998, are incorporated by reference into
Part III of this Form 10-K.
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PART 1
ITEM 1. BUSINESS
INTRODUCTION
Applied Science and Technology, Inc. (the "Company" or "ASTeX") is a leading
provider of innovative production technology for the manufacture of advanced
semiconductor devices. The Company's products are typically used in plasma
production techniques in which gases are heated to form a plasma which
chemically interacts with a substrate material, as well as in microwave, radio
frequency ("RF"), and direct current ("DC") power generation techniques. Based
on its estimates of the market, management believes that the Company is the
leading worldwide supplier of 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, as well as to advanced
medical capital equipment manufacturers ("MCEMs"). The SCEM equipment performs
essential process steps and includes plasma sources and subsystems and specialty
power sources and subsystems 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"), Lam Research Corporation ("Lam
Research"), and Watkins-Johnson Company ("Watkins-Johnson"). 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.
ASTeX markets the same underlying core technology for medical, electro-optic,
and synthetic diamond applications. Products include specialty power sources
covering the power delivery spectrum including DC, RF, and microwave generators.
Medical applications include magnetic resonance imaging ("MRI"), medical
equipment sterilization, and medical lasers for dermatology. The Company also
provides specialty DC power supplies for digital projection applications in the
electro-optics market, and for laser marking.
Outside of the semiconductor market, the Company's plasma processing equipment
is used to produce synthetic diamond using a chemical vapor deposition ("CVD")
process. Diamond is an ideal material for a wide variety of uses because of its
extreme hardness, excellent thermal conductivity, and other unique properties.
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 10 of the last 12 years and year-to-year revenue growth in 11
of the last 12 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 27, 1998 includes $7.7 million of cash and
investments, $28.6 million of working capital, tangible net worth of $38.7
million, a current ratio of 4.8 to 1 and no long-term debt.
For the fiscal year ending June 27, 1998 ("Fiscal 1998"), the Company achieved
record revenues for the year of $83 million, a 74% increase over the $48 million
reported in the prior fiscal year ending June 28, 1997 ("Fiscal 1997"). Net
earnings for the year were $4.0 million, or $0.47 per share diluted, including
an in-process research and development ("R&D") write-off of $212,000 associated
with the acquisition of ASTeX Sorbios GmbH in the second quarter. This
performance occurred during a severe downturn in the semiconductor capital
equipment industry during the last half of Fiscal 1998.
The Company continued to invest heavily in R&D during Fiscal 1998, leading to a
series of new product introductions and design wins. During the year, the
Company continued to strengthen its overall capability both through additions to
the senior management team and through the acquisition of ASTeX
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Sorbios. Management believes that ASTeX is well positioned as an enabling
supplier of advanced technology solutions.
MARKETS
The Company's primary market consists of subsystems for semiconductor
processing, sold to SCEMs. The Company markets its specialty power supplies to
MCEMs for diagnostic imaging, medical equipment sterilization, and dermatology,
and to other OEMs for industrial lasers and electro-optic applications. The
Company markets its plasma equipment outside the semiconductor industry to end
users for producing CVD diamond and for other industrial applications.
SUBSYSTEMS FOR SEMICONDUCTOR PROCESSING
The Company's power supply, 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 is expected to increase from $22 billion in
1996 to $38 billion in the year 2000. However, DataQuest predicts a decline of
at least 15% in 1998, to $18 billion. The component and subsystem segments of
this market, which are available to ASTeX, are estimated by management to be
approximately $500 million per year and projected to grow to more than $1
billion over the next five years. Management believes that 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 high-density plasma
deposition sources for premetal and intermetal dielectric, as well as
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. Moreover, with the ongoing trend
of reduced cost of ownership of manufacturing tools, more efficient cleaning
processes, such as the fluorine process that is offered by the Company, become
more crucial.
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.
Technology shifts within the industry also provide significant new opportunities
for the Company. In particular, the transition to finer line widths (e.g., 0.25
micron and below) provide opportunity for customers to adopt the Company's
products which enable these transitions to take place.
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 implement the
concept of lean manufacturing. Under this concept, suppliers provide a more
fully integrated, complete subsystem solution rather than supplying individual
components. This approach offers advantages of reduced cycle times, reduced
fixed costs, and a reduced number of suppliers with the overall result of
improved efficiency for the SCEM. ASTeX has been able to take advantage of this
transition by working with its customers to develop and deliver integrated
solutions and through this process to establish its strategic position as a
leading supplier of advanced technologies to the semiconductor capital equipment
industry.
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ASTeX also has the opportunity to sell retrofittable subsystems, both to the
SCEMs and directly to the semiconductor fabricators. This may provide for a
further expansion of the Company's existing product revenues.
SPECIALTY POWER SUPPLIES
The Company supplies critical RF power subsystems for diagnostic imaging and
medical equipment sterilization applications, and DC switching power supplies
for medical and industrial lasers and electro-optics.
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 1980s due to the rapid
expansion of the installed base in the U.S. Currently, the worldwide growth rate
is estimated between 5 and 10% annually. ASTeX 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.
ASTeX 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. The 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 anticipates that sales of these systems could grow significantly over
the next several years.
The Company provides a complete line of DC switching power supplies to a number
of medical manufacturers. These supplies feature outstanding quality and exhibit
excellent field operation characteristics, in particular, mean time between
failure ("MTBF") numbers in excess of 100,000 hours. In the medical laser
market, strong growth is being driven by increasing demand following FDA
approval for dermatology procedures, including hair and wrinkle removal. Use in
urology and arthroscopic applications is growing at a moderate pace.
Use of continuous wave ("CW") YAG lasers for marking is a rapidly growing market
with many new applications. Date or product code marking of food and medical
packaging with a laser has replaced ink in many products. Metal, plastic and
paper products use marking lasers for serial numbers to reduce cost and increase
throughput.
In the electro-optics market, the Company provides DC switching power supplies
for digital projection applications and medical endoscopy.
The Company's focus on specialty power supplies is driven by the technological
synergies with, and need for, these types of products in the semiconductor and
medical markets, and by the desire to balance the cyclical nature of the
semiconductor industry by commercializing this common technology in areas
outside of semiconductor processing.
PLASMA PROCESSING
The largest opportunity for the Company's plasma processing equipment outside of
the semiconductor industry is currently microwave plasma CVD of diamond and
diamond-like carbon ("DLC") films. Diamond has a unique combination of physical
characteristics that are not found in other materials. Diamond is the hardest
material available, 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
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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 found commercial use in a
broad range of 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 windows for infrared sensors
in aggressive chemical environments, microelectro-mechanical devices for
electrodes and detectors, and as field emitters for next-generation flat panel
display devices.
As the leading equipment supplier to the CVD diamond market, one of ASTeX's key
goals is to drive down the cost of CVD diamond deposition, 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.
The Company also sells its plasma processing products for advanced industrial
processes for a variety of applications.
CURRENT PRODUCTS
Virtually all of the Company's products including its ozone generators and
systems are based on DC, 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 ozone
delivery or CVD diamond production to DC, RF, microwave, plasma and ozone
components designed for high-volume original equipment manufacturers.
The Company produces a broad range of products: plasma systems for chamber clean
and photoresist strip, combined RF/microwave power and control systems,
microwave plasma sources, DC, RF and microwave power generators, turnkey ozone
supply systems for deposition and wet bench applications, and ozone generators
that are sold to OEMs 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 $40,000 and are
used to provide precise stable energy to plasma sources utilized for etch, strip
and CVD applications. Plasma systems and combined RF/microwave power and control
systems offer integrated solutions to etch, strip and CVD applications that
provide the Company's technology expertise and support, reduced cost and
improved time to market for SCEMs. The Company's systems range in price from
$20,000 to $75,000. 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
advanced microprocessors and DRAMs. Each of these products can be used to
perform several steps of the manufacturing processes for these devices. Ozone
generators and delivery systems are also widely sold for "wet phase"
applications, in which ozone is mixed into water systems used by SCEMs to
achieve improved cleaning performance.
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. The Company offers a range of DC
switching power supplies for medical and industrial lasers and electro-optic
applications which range in price from $300 to $7,100, with an average selling
price of approximately $3,000.
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The most exciting products are the microwave and fluorine generators and
delivery systems for SCEM processing chamber cleaning, which are installed and
retrofit by both OEMs and end users. In particular, the Company has developed an
atomic fluorine generator, ASTRON(TM), for chamber clean applications. Producing
a high flux of atomic fluorine allows for high-rate processing while a compact,
integrated design allows for easy integration with semiconductor production
tools. The Company offered initial shipments in limited quantities during Fiscal
1998 and is preparing for volume production ramping during Fiscal 1999.
During Fiscal 1997, the Company completed the development of its Chemical Plasma
Source ("CPS") that is an integrated solution for photoresist strip
applications. The product has been accepted under a volume supply agreement for
integration into a new generation of etch equipment. Shipments increased in
Fiscal 1998 and are expected to increase further in Fiscal 1999, as the new
equipment is accepted in the marketplace.
During Fiscal 1997, the Company also completed development and introduction of
three-channel and four-channel combined RF/microwave power and control systems
for oxide etch and insulator deposition. These products were accepted under a
volume supply agreement and production was ramped during the year. Revenues from
these products increased significantly in Fiscal 1998, as the new tool was
accepted in the marketplace, and are expected to increase further during Fiscal
1999 as major semiconductor manufacturers have selected this tool to be the
standard deposition system for their leading-edge devices.
The Company's diamond deposition products serve both the university and
industrial R&D markets as well as industrial manufacturing. Prices on the
products range from under $100,000 for basic research systems to over $500,000
for highly automated production systems.
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, gallium arsenide
semiconductor devices, and DLC films. ECR plasma sources can be used in a
variety of applications such as plasma etching, low temperature plasma enhanced
deposition, and surface cleaning. Prices for these products currently range from
approximately $30,000 to $60,000.
The Company completed the development of high performance RF linear amplifiers
for advanced MRI applications during Fiscal 1998. In addition, new RF generator
technology has been developed for use in medical equipment sterilization
systems. The Company has developed several new DC switching power supplies for
medical applications to offer improved price/performance. These went into
production during Fiscal 1998 and will be widely offered to customers and
installed during Fiscal 1999.
PRODUCTS UNDER DEVELOPMENT
The Company is developing a new line of intelligent microwave power supplies,
SmartPower(TM), primarily for use in the semiconductor industry. These
generators were introduced in July 1998 and offer lower cost of ownership with
the inclusion of advanced self-diagnostics for maximum uptime and precision
power measurement capability for process repeatability. These generators are
expected to go into production during Fiscal 1999.
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 just completed the development and release of a new ozone
generator product, the AX8400 Series. The product is an extension of the
patented, high performance, reliable ASTeX AX8000 ozone generator technology,
offering low-dopant ozone generation and lower cost of ownership. The Company
plans to offer the product to existing customers as well as pursue a new product
application,
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wet bench cleaning, where ozonated fluids [de-ionized ("DI") water, sulfuric
acid and HCl] offer lower cost and/or more environmentally acceptable solutions
for a wide range of cleaning applications.
During Fiscal 1998, the Company initiated the development of a new line of ozone
delivery systems for wet chemistry applications, mainly for injection of ozone
into DI water systems of wet benches. The Company completed the development of
prototypes which have been installed during the last quarter of Fiscal 1998.
This technology will be further developed and widely offered in the marketplace
for use by OEMs as well as end users.
The Company continues to improve the capability and performance of its high
power production diamond deposition system, the AX6600. This system is now being
productized in anticipation of initial orders for this product from key CVD
diamond customers in Fiscal 1999.
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
the Company serves and, in particular, its current customer base and end users
of its products.
During Fiscal 1998, 1997, and 1996, 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 $12.0
million, $8.7 million, and $6.9 million, or 14%, 18%, and 18% 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 $11.3 million, $7.3 million, and $5.0
million during Fiscal 1998, 1997, and 1996, 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 flows 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.
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.
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 who 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 optical,
thermal, and material removal (cutting tool) applications. Researchers are
examining additional applications using microwaves and plasmas for other
manufacturing processes. The Company is currently collaborating with several
major firms and anticipates awards or continuation
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of awards with a number of partners for additional government funding for
diamond and specialty materials development, as well as partnerships with major
diamond growth commercial companies overseas.
Supporting the Company's research and development group are nine Ph.D.s as well
as 22 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 1998, 1997, and 1996, Applied Materials accounted for
approximately 40%, 38%, and 45% of the Company's consolidated total revenue.
Phillips Medical Systems accounted for approximately 6% of the Company's total
revenue in Fiscal 1998 and 10% in Fiscal 1997. The loss of Applied Materials or
Phillips Medical Systems would have a materially adverse effect on the Company.
No other customer accounted for more than 5% of total revenue in Fiscal 1998.
While sales to Applied Materials represent 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.
As part of the SCEM "food chain," the Company is restructuring to be better
positioned in view of the slowdown in this industry, which is projected to
continue through Fiscal 1999. The Company will also explore other new
applications in specific markets that are projected to grow rapidly.
In the semiconductor market, the Company sells DC, RF, microwave, and fluorine
generators and subsystems, microwave plasma sources and subsystems, and ozone
generators and subsystems to Applied Materials, GaSonics, Lam Research,
Novellus, Quester Technology, Ulvac, Varian, Watkins-Johnson, and a number of
others. During Fiscal 1997, the Company received new supply agreements and
additions to existing supply agreements from major semiconductor capital
equipment manufacturers totaling $46,000,000. These multi-year supply agreements
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.
The largest ever contract for the Company's DC power supplies for medical lasers
was signed recently with an overseas customer. This contract anticipates volumes
of as much as 6% of the Company's projected total revenue during Fiscal 1999.
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 it has an installed base of reactors and systems for diamond
production and development in excess of 200 units worldwide. Diamond and ECR
customers in Fiscal 1998 include major U.S.-based industrial and research firms,
European commercial and governmental R&D organizations, and many others
worldwide. During Fiscal 1998, 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.
MARKETING AND SALES
In order to introduce the Company's products aggressively to global markets, a
Global Customer Operations ("GCO") organization was established during the last
quarter of Fiscal 1998. This
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organization, presenting "one face to the customer worldwide," comprises the
entire marketing, sales, service, and product management group of the Company.
The organization is structured around regional offices worldwide, allowing
direct marketing, sales, and service activities, and more controlled activities
of its independent sales and distribution representatives. During Fiscal 1998,
the GCO organization established regional operation headquarters for the western
U.S. region (Santa Clara, CA), central U.S. region (Austin, TX), eastern U.S.
region (Woburn, MA), and Europe (Berlin, Germany). During Fiscal 1999, the GCO
will establish further direct sales and service offices in the Far East (mainly
in Korea, Taiwan, and Japan), and more locations in Europe. The GCO also manages
the functional infrastructure to provide excellence in the main areas of
activity, namely, sales, service, marketing, and product management.
MANUFACTURING AND SUPPLIES
The Company's products are manufactured in facilities at Beverly, 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 five) 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.
During Fiscal 1999, the Company's Beverly, Massachusetts and Modesto, California
facilities will be consolidated, primarily into the Woburn, Massachusetts
facility and secondarily into the Colorado facility.
COMPETITION
The Company believes that it is the largest provider of microwave plasma sources
and microwave power supplies in the world, facing competition from providers
such as Muegge in Germany and Daihen in Japan. 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 and Ebara. With the acquisition of
Sorbios, a major competitor was eliminated. 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 believes its major competitors for RF generators and amplifiers to
be ENI, a subsidiary of Astec (BSR) Plc; Advanced Energy Industries, Inc.; RF
Power Products, Inc.; Comdel, Erbtec Engineering, and Analogic. The Company
believes its major competitors for DC switching power supplies to be ALE
Systems, Analog Modules, and Kaiser Systems for laser applications, and Buhl,
Tectrol, and Walker Power for electro-optics.
The Company's strategy is to compete on the basis of its technical expertise,
core competencies, high quality and reliability, 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 fields of microwave plasma technology, semiconductor processing
technology, and diamond production. The Company expects plasma processing 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. In addition,
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the Company must have world-class manufacturing capabilities in order to meet
the needs of its customers. Moreover, the Company intends to diversify its field
of served industrial customers to leverage more of its capabilities in the
medical equipment industry and in other industrial applications.
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; general domestic and
international economic conditions and exchange rates; its ability to reach out
directly for sales and service to a large customer base worldwide; and its
ability to diversify to other industries.
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 Crystallume, DeBeers, Diamonex, Inc. (a
division of Monsanto Corporation), and Norton Corporation are developing new
diamond coating technologies, although none are currently involved in the sale
of diamond production equipment. No assurance can be given that these or other
companies will not sell CVD diamond equipment. Existing customers may also seek
to develop proprietary equipment and processes, which could adversely impact the
Company's business. 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 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 20 U.S. patents and one Canadian patent, and has two
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 1998, ASTeX registered one new trademark and received four new
patents. In October 1997, the Company acquired ASTeX Sorbios and, as a part of
this acquisition, acquired three U.S. patents. Of these, two are related to
ozone, and one is related to air ionizers. In November 1997, ASTeX obtain a
patent on a microwave plasma sputter source.
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
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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 DARPA. 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.
BACKLOG
The Company's backlog consists of purchase orders for standard products and
contracts for research and development. At June 27, 1998 the Company's backlog
was approximately $11,763,000 of which $11,247,000 was for standard products and
$516,000 was for research contracts. The backlog at June 28, 1997 was
approximately $13,754,000 of which $13,340,000 was for standard products and
$414,000 was for research contracts. The Company expects to complete all
standard product backlog during the next six months and all research contract
backlog during the next twelve months. The backlog figures exclude orders under
three supply agreements with major semiconductor capital equipment
manufacturers. These multi-year 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 June 27, 1998, the Company employed 416 persons on a full-time, permanent
basis, and an additional 60 temporary employees. The Company employs 56 persons
in administration, 28 in sales and marketing, 77 in research and development,
and 255 in manufacturing. The Company believes that its relations with its
employees are satisfactory.
ITEM 2. FACILITIES
The Company occupies approximately 60,000 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, contains further extension provisions 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 $45,279 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. ASTeX CPI
occupies approximately 31,000 square feet of leased space in Beverly,
Massachusetts. The Company has a five year lease on this facility which expires
in September, 2000, and which can be extended for an additional five years. The
current rent for this facility is $18,324 per month. 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, 1999. The rent for this facility is $4,431
per month. The Company maintains office and manufacturing facilities in Modesto,
California in approximately 11,500 square feet of leased space. This lease will
be terminated effective November 9, 1998. The Company maintains a sales and
service office in 6,400 square feet of leased space in Santa Clara, California.
The rent for this space is $10,988 per month and the lease expires on December
1, 2000. The Company also leases approximately 9,700 square feet in Berlin,
Germany for $7,386 per month through March 31, 2001.
During Fiscal 1999, the Company's Beverly, Massachusetts and Modesto, California
facilities will be consolidated, primarily into the Woburn, Massachusetts
facility and secondarily into the Colorado facility.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Corporation's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation System - National Market System
("NASDAQ/NMS") under the symbol "ASTX." On November 26, 1997, the Company
announced a 3-for-2 split of its Common Stock, which was distributed to
shareholders in the form of a stock dividend on December 12, 1997. All prior
period share amounts have been adjusted to reflect the stock split. On
September 22, 1998, the closing bid and ask prices for the Corporation's common
Stock as reported by NASDAQ/NMS were $4 1/2 and $4 5/8, respectively. As of
September 23, 1998, the Corporation had 179 holders of record on its Common
Stock. Management believes that there are approximately 2,100 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 1,
1996 through September 22, 1998. Such quotations represent interdealer
quotations without adjustment for retail markups, markdowns, or commissions and
may not represent actual transactions.
Sale
------------------
High Low
------- -------
1997
First Quarter $ 8.417 $ 5.500
Second Quarter 8.500 4.500
Third Quarter 9.750 5.833
Fourth Quarter 11.333 6.083
1998
First Quarter $15.583 $10.417
Second Quarter 18.333 9.750
Third Quarter 16.000 10.125
Fourth Quarter 17.250 7.625
1999
First Quarter (through September 22, 1998) $ 8.125 $ 3.938
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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: October 19, 1998 By: /s/ Richard S. Post
--------------------------------
Richard S. Post
President
By: /s/ John M. Tarrh
------------------------
John M. Tarrh
Chief Financial Officer
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