<PAGE> 1
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM 10-Q/A
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 26, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 0-22646
-------
APPLIED SCIENCE AND TECHNOLOGY, INC.
(Name of Issuer in its Charter)
----------
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)
----------
(781) 933-5560
(Registrant's Telephone Number, Including Area Code)
----------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
--- ---
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
COMMON STOCK, $0.01 PAR VALUE 8,584,823
----------------------------- ----------------------------------
Class Outstanding as of November 4, 1998
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APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
TITLE PAGE
----- ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Statements of Operations for the Three Months Ended
September 26, 1998 and September 27, 1997 2
Consolidated Balance Sheets as of
September 26, 1998 and June 27, 1998 3
Consolidated Statements of Cash Flows for the Three Months Ended
September 26, 1998 and September 27, 1997 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition 9
PART II. OTHER INFORMATION
Items 1-6 None
SIGNATURES 14
Appendix 15
</TABLE>
1
<PAGE> 3
ITEM 1 FINANCIAL STATEMENTS
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Product sales, net $ 10,847,553 $ 16,165,284
Research contract revenue 119,933 200,040
Other revenue 1,132,057 1,055,978
------------ ------------
Total revenue 12,099,543 17,421,302
Cost of sales and revenue:
Product sales and other revenues 10,843,883 10,879,415
Research contracts 80,590 67,870
------------ ------------
Total cost of sales and revenue 10,924,473 10,947,285
------------ ------------
Gross profit 1,175,070 6,474,017
------------ ------------
Operating expenses:
Research and development expenses (note 5) 2,324,276 2,561,006
Selling expenses 1,201,361 835,059
General and administrative expenses 1,864,887 1,400,904
Restructuring charge (note 7) 1,497,292 0
------------ ------------
Total operating expenses 6,887,816 4,796,969
------------ ------------
Earnings (loss) from operations (5,712,746) 1,677,048
------------ ------------
Other expense (income):
Interest expense 12,005 160,711
Interest income (123,620) (80,056)
Other expense (income) 7,960 (236,557)
------------ ------------
Total other income (103,655) (155,902)
------------ ------------
Earnings (loss) before income taxes (5,609,091) 1,832,950
Income tax expense (benefit) (2,128,000) 678,000
------------ ------------
Net earnings (loss) $ (3,481,091) $ 1,154,950
============ ============
Basic net earnings (loss) per share $ (0.41) $ 0.17
============ ============
Diluted net earnings (loss) per share $ (0.41) $ 0.14
============ ============
Weighted average common shares used to
calculate basic earnings (loss) per share 8,584,563 6,827,600
============ ============
Weighted average common shares used to
calculate diluted earnings (loss) per share 8,584,563 7,970,669
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements
2
<PAGE> 4
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 26, JUNE 27,
Assets 1998 1998
------ ------------ ------------
(unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,573,321 $ 7,686,805
Accounts receivable, trade, net (note 3) 9,595,296 12,734,381
Inventories (note 4) 14,007,028 13,737,212
Prepaid expenses and other assets 515,224 548,709
Deferred income taxes 1,356,044 1,356,044
------------ ------------
Total current assets 30,046,913 36,063,151
------------ ------------
Property, plant and equipment:
Land 473,000 473,000
Building and improvements 1,643,072 1,643,072
Equipment 10,599,550 11,107,731
Furniture and fixtures 968,737 1,032,497
Leasehold improvements 1,559,329 2,228,246
------------ ------------
15,243,688 16,484,546
Less accumulated depreciation and amortization (7,541,913) (7,960,282)
------------ ------------
Net property, plant and equipment 7,701,775 8,524,264
------------ ------------
Other assets:
Patents, net 1,059,759 1,095,090
Goodwill, net of accumulated amortization 3,931,015 4,042,031
Notes receivable, less current maturities 966,748 468,772
Deferred income taxes 3,227,998 1,099,998
------------ ------------
Total other assets 9,185,520 6,705,891
------------ ------------
$ 46,934,208 $ 51,293,306
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,463,367 $ 3,011,798
Accrued expenses 2,457,736 1,935,229
Accrued compensation expense and related costs 1,377,634 1,993,027
Accrued income tax expense 72,445 293,444
Commissions payable and customer advances 293,153 259,154
------------ ------------
Total current liabilities 6,664,335 7,492,652
------------ ------------
Commitments (note 10)
Stockholders' equity (note 6):
Common stock (note 9) 85,848 86,065
Additional paid-in capital 43,999,511 44,193,116
Accumulated deficit (3,728,186) (247,095)
Less: Notes receivable for common stock purchases (148,326) (148,326)
Other accumulative comprehensive income (loss)
(note 7) 61,026 (83,106)
------------ ------------
Total stockholders' equity 40,269,873 43,800,654
------------ ------------
$ 46,934,208 $ 51,293,306
============ ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE> 5
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
------------- ------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $(3,481,091) $ 1,154,950
Adjustments to reconcile net (loss) earnings to net cash
(used for) provided by operating activities:
Depreciation 764,890 519,287
Amortization 149,947 89,770
Gain on sale of investment 0 (250,000)
Deferred income taxes (2,128,000) 0
Loss on disposal of property plant and equipment 624,691 0
Changes in assets and liabilities:
Accounts receivable 3,139,085 1,799,805
Inventories (269,816) (853,546)
Prepaid expenses and other assets 33,485 27,615
Notes receivable (497,976) 1,008
Accounts payable (548,431) (301,145)
Accrued expenses (509,082) (476,385)
Commissions payable and customer advances 33,999 38,077
----------- -----------
Net cash provided by (used for)
operating activities (2,688,299) 1,749,436
----------- -----------
Cash flows from investing activities:
Acquisition related expenses 0 (50,521)
Additions to property and equipment and investments (567,092) (240,795)
Patents and other assets (3,6000) (21,412)
Proceeds from sale of investment 0 500,000
----------- -----------
Net cash provided by (used for)
operating activities (570,692) 187,272
----------- -----------
Cash flows from financing activities:
Repayments of notes payable 0 (459,247)
Net proceeds from issuance of common stock 1,375 4,569,628
----------- -----------
Net cash provided by financing activities 1,375 4,110,381
----------- -----------
Effect of exchange rate changes on cash 144,132 0
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,113,484) 6,047,089
Cash and cash equivalents at beginning of period 7,686,805 3,246,337
----------- -----------
Cash and cash equivalents at end of period $ 4,573,321 $ 9,293,426
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the periodfor:
Interest $ 12,005 $ 165,362
=========== ===========
Income taxes $ 221,000 620,654
=========== ===========
</TABLE>
4
<PAGE> 6
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The unaudited financial statements as of September 26, 1998 and September
27, 1997, and for the three month periods then ended, have been prepared in
accordance with generally accepted accounting principles and include all
adjustments, which in the opinion of management, are necessary to present
fairly the results of operations for the periods then ended. All such
adjustments are of a normal recurring nature. These financial statements
should be read in conjunction with the financial statements for the year
ended June 27, 1998 and the notes thereto included in the Company's Form
10-K filed with the Securities and Exchange Commission.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for a
full fiscal year.
2) EARNINGS (LOSS) PER SHARE
The Company adopted Financial Accounting Standards Board Statement No. 128,
Earnings Per Share ("SFAS 128") in the quarter ending December 27, 1997.
All previously reported earnings per share have been restated to reflect
the provisions of SFAS 128. The weighted average number of shares used to
compute diluted earnings (loss) per share consisted of the following:
THREE MONTHS ENDED
---------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
---------------------------
Weighted average common
shares outstanding 8,584,563 6,827,600
Weighted average common
equivalent shares due to stock options
and warrants - 1,143,069
---------------------------
8,584,563 7,970,669
===========================
Weighted average common equivalent shares relating to stock options and
warrants were not included in the weighted average shares used to compute
diluted loss per share for the three months ended September 26, 1998, as
they had an antidilutive effect.
5
<PAGE> 7
3) ACCOUNTS RECEIVABLE
SEPTEMBER 26, JUNE 27,
1998 1998
--------------------------------
Accounts receivable, trade $ 9,941,821 $ 13,044,466
Notes receivable, current portion 67,509 67,354
Allowance for doubtful accounts (414,034) (377,439)
--------------------------------
$ 9,595,296 $ 12,734,381
================================
4) INVENTORIES
SEPTEMBER 26, JUNE 27,
1998 1998
---------------------------------
Raw materials $ 9,194,303 $ 8,990,201
Work in process 3,035,744 3,210,131
Finished goods 1,776,981 1,536,880
---------------------------------
$14,007,028 $13,737,212
=================================
5) 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:
THREE MONTHS ENDED
----------------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1997
----------------------------------
Research and development costs $2,345,816 $2,673,392
Less funding 21,540 112,386
----------------------------------
$2,324,276 $2,561,006
==================================
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<PAGE> 8
6) STOCKHOLDERS' EQUITY
Capital stock consists of the following:
<TABLE>
<CAPTION>
NUMBER OF SHARES
------------------------------------------
AUTHORIZED ISSUED AND OUTSTANDING
------------------------------------------
SEPTEMBER 26, JUNE 27,
1998 1998
-------------------------
<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 30,000,000 8,584,563 8,606,463
------------------------------------------
Total common stock 30,000,000 8,584,563 8,606,463
------------------------------------------
Total capital stock 31,000,000 8,584,563 8,606,463
==========================================
</TABLE>
On November 26, 1997, the Company announced a 3 for 2 stock split of its
common stock, which was distributed to stockholders in the form of a stock
dividend on December 12, 1997. All prior-year stock amounts have been
adjusted to reflect the stock split.
Effective August 26, 1998, the Company repriced all of its stock options
which had been granted since June 29, 1997 to the closing price on that
date which was $6.00 per share, except for those options which had been
granted to directors of the Company. Options for directors were not
repriced. This is inconsistent with, and supercedes, information contained
in the Company's Proxy Statement dated October 19, 1998 regarding repricing
of stock options for directors of the Company.
7) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income during the quarter ended
September 26, 1998. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from nonowner sources. It includes all changes inequity
during a period except those resulting from investments by owners and
distributions to owners. This pronouncement requires that the accumulated
total of other comprehensive income be shown as a separate component of
stockholders' equity with additional disclosure of accumulated balances for
each classification within other comprehensive income in addition to the
reporting of total comprehensive income. Accumulated other comprehensive
income, a component of stockholders' equity previously titled "cumulative
translation adjustment", consists solely of foreign currency translation.
The components to total comprehensive loss for the three months ended
September 26, 1998 as follows. There were no items of comprehensive net
income for the three months ended September 27, 1997.
Net loss $(3,481,091)
Other comprehensive income 144,132
===========
Comprehensive loss $(3,336,959)
===========
7
<PAGE> 9
8) RESTRUCTURING CHARGE AND OTHER RELATED EXPENSES
During the first quarter of Fiscal 1998, the Company announced its
intention to consolidate its Modesto, California operations into its
Woburn, Massachusetts and Colorado Springs, Colorado sites. The Company
also initiated a plan to consolidate its Beverly, Massachusetts operation
into Woburn, which is expected to be completed by the end of the calendar
year.
These consolidations resulted in a non-recurring restructuring charge of
$1,497,000, most of which has been expended. The restructuring charge
consisted of severance relating to the termination of seventy full-time
employees, abandonment of leasehold improvements and fixed assets, and
facility costs, primarily future lease payments relating to abandoned
facilities. Accrued expenses at September 26, 1998 included approximately
$626,000 relating to restructuring accruals for severance and facility
costs expected to be paid over the next six and eighteen months,
respectively.
In addition, the Company wrote down inventory totaling $1,090,000 during
the quarter. The write down was due to excess inventory resulting from the
unexpected severity of the downturn in the semiconductor equipment
industry, excess and obsolete customer-specific inventory, and the
abandonment of certain marginal product lines. The Company also incurred
$180,000 of other one-time transition costs related to the consolidations
for moving assets and training personnel. The total expense in the quarter
related to restructuring, inventory write-down, and transitional costs was
$2,767,000, including the restructuring charge.
9) NONCASH TRANSACTION
During the quarter ended September 26, 1998, 21,940 shares of common stock
with a value of $325,000 were returned to the Company and cancelled. These
shares had previously been provisionally issued in connection with the
acquisition of ASTeX CPI, Inc.
10) SUBSEQUENT EVENTS
The Company has signed an agreement to acquire PlasmaQuest Inc., a
privately-held company manufacturing ECR systems for R&D, magnetic disk
head processing, and electronic packaging applications for approximately
$1,800,000, subject to adjustment. The merger will be accounted for by the
purchase method of accounting, and closed on November 4, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
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
8
<PAGE> 10
interacts with a substrate material. ASTeX markets its plasma sources and
subsystems, ozone generators and subsystems and specialty power sources to
the worlds leading semiconductor capital equipment manufacturers. ASTeX
markets the same underlying core technology for medical, electro-optic and
synthetic diamond applications.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 26, 1998 AND
SEPTEMBER 27, 1997
The following table compares the consolidated statements of operations for
the three-month periods ended September 26, 1998 and September 27, 1997,
expressed as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------
SEPTEMBER 26, SEPTEMBER 27,
1998 1998
----------------------------
<S> <C> <C>
Product sales, net 89.6% 92.8%
Research contract revenue 1.0% 1.1%
Other revenue 9.4% 6.1%
----------------------------
Total revenue 100.0% 100.0%
Cost of sales and revenue:
Product sales and other revenues 89.6% 62.4%
Research contracts 0.7% 0.4%
----------------------------
Total cost of sales and revenue 90.3% 62.8%
----------------------------
Gross profit 9.7% 37.2%
----------------------------
Operating expenses:
Research and development expenses 19.2% 14.7%
Selling expenses 9.9% 4.8%
General and administrative expenses 15.4% 8.1%
Restructuring charge 12.4% 0.0%
----------------------------
Total operating expenses 56.9% 27.6%
----------------------------
Earnings (loss) from operations (47.2%) 9.6%
----------------------------
Other expense (income):
Interest expense 0.1% 0.9%
Interest income (1.0%) (0.5%)
Other expense (income) 0.1% (1.3%)
----------------------------
Total other income (0.8%) (0.9%)
----------------------------
Earnings (loss) before income taxes (46.4%) 10.5%
Income tax expense (benefit) (17.6%) 3.9%
----------------------------
Net earnings (loss) (28.8%) 6.6%
============================
</TABLE>
9
<PAGE> 11
Total revenue decreased in the first quarter of Fiscal 1999 by 31% to
$12,100,000 compared to the first quarter of Fiscal 1998. The decrease in
total revenues was due primarily to the Company's semiconductor-related
business which declined 43% in the first quarter of Fiscal 1999 compared to
Fiscal 1998 due to the downturn in the world wide semiconductor capital
equipment industry. The semiconductor-related revenue decline was offset by
adding the revenues from ASTeX Sorbios GmbH, acquired in October 1997, and
by ASTeX ETO which had semiconductor-related revenues increase by 53% in
the first quarter of Fiscal 1999 compared to Fiscal 1998. The ASTeX ETO
comparative increase was a result of the successful introduction in Fiscal
1997 of a combined RF and microwave product for HDP-CVD, which began to
ramp early in Fiscal 1998. Revenues from the specialty power supply
segment increased by 2% in the first quarter of Fiscal 1999 compared to
Fiscal 1998. Other revenue, consisting of spare parts, service and repair
revenue increased by 7% in the first quarter of Fiscal 1999 compared to
Fiscal 1998 primarily due to ASTeX ETO. Contract revenue was 1% of revenue
in both years.
Gross margin decreased to 10% of revenues in the first quarter of Fiscal
1999 compared to 37% in Fiscal 1998. The decline in gross margin as a
percent of revenue is primarily due to underabsorbed manufacturing costs,
product mix, and an inventory write-down of $1,090,000. See Footnote 8 of
the Notes to Consolidated Financial Statements.
The Company completed its previously announced consolidation of ASTeX AGL
into its Woburn, Massachusetts and Colorado Springs, Colorado facilities in
the first quarter of Fiscal 1999 and initiated plans to consolidate its
Beverly, Massachusetts facility into its Woburn facility. This
consolidation is expected to be completed at the end of the calendar year.
These consolidations resulted in restructuring costs of $1,497,000 in the
first quarter of Fiscal 1999, which were primarily for severance associated
with termination of seventy full-time employees, abandonment of leasehold
improvements and fixed assets, and accrued facilities costs primarily
relating to future lease payments on abandoned facilities. The Company also
incurred $180,000 in other one-time transition costs for moving assets and
personnel training associated with the consolidation of the ASTeX AGL
facility.
Research and development expenses declined by $237,000 or 9% to $2,324,000
in the first quarter of Fiscal 1999 compared to Fiscal 1998. The decrease
was primarily due to headcount reductions and a decrease in overall
spending as a result of the semiconductor equipment downturn.
Selling expenses increased by $366,000 to $1,201,000 in the first quarter
of Fiscal 1999 compared to Fiscal 1998 primarily due to the acquisition of
ASTeX Sorbios GmbH, and increased headcount in sales and marketing. General
and administrative expenses increased by $464,000 to $1,865,000 in the
first quarter of Fiscal 1999 compared to Fiscal 1998 primarily due to the
acquisition of ASTeX Sorbios GmbH which incurred a one-time expense
associated with a management change in Europe, increased goodwill
10
<PAGE> 12
amortization and higher information systems costs due to implementation of
a new company-wide Enterprise Resource Planning (ERP) system.
The Company reported an operating loss of $5,713,000 in the first quarter
of Fiscal 1999 compared with operating income of $1,677,000 in Fiscal 1998.
The operating loss was caused by the significant decline in revenues due to
the downturn in the semiconductor equipment business and the consequent
one-time charges associated with consolidation expenses and inventory
write-downs.
Interest expense declined by $149,000 in the first quarter of Fiscal 1999
compared to Fiscal 1998 due to reduction of long term debt in the second
quarter of Fiscal 1998. Interest income increased by $44,000 due to higher
cash balances. In the first quarter of Fiscal 1998 there was a one-time
$250,000 gain on the sale of the Company's investment in Low Entropy
Systems, which resulted in the comparative decrease in other income.
Income tax expense was $678,000 in the first quarter of Fiscal 1998
compared to a tax benefit of $2,128,000 due to the losses in Fiscal 1999.
The Company's backlog consists of purchase orders for products and research
and development contracts. At September 26, 1998 the Company's backlog was
$12,316,000 consisting of $12,025,000 for products and $291,000 for
research contracts, compared to a backlog at September 27, 1998 of
$18,767,000 consisting of $18,137,000 for products and $630,000 for
research contracts. The Company expects to complete all product backlog
during the next six to twelve months. The backlog excludes supply
agreements with certain semiconductor capital equipment manufacturers. The
supply agreements, as well as certain government contracts, typically
provide for modification or cancellation with little or no penalty.
The Company does not expect inflation to have a material effect on its
operations. The Company does not know of any environmental issues that
would have a material effect on its operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1998 the Company had cash and cash equivalents and
short-term marketable investments of $4,573,000 with working capital of
$23,383,000 compared to June 27, 1998 when the Company had cash of
$7,687,000 and working capital of $28,570,000.
For the three months ending September 26, 1998 the Company used cash of
$2,688,000 for operating activities due to the losses from operations,
increases in inventories and notes receivable, and decreases in accounts
payable and accrued expenses offset by decreases in accounts receivable.
The Company used cash of $571,000 for investing activities primarily due to
additions to fixed assets.
11
<PAGE> 13
The Company has a credit facility with State Street Bank and Trust Company
which consists of an $8,000,000 unsecured demand line of credit with
interest at the Bank's prime rate. This facility is subject to the Company
meeting certain financial covenants which are tested quarterly. The Company
is currently in compliance with all of its covenants. There were no
borrowings under this line at September 26, 1998.
The Company aquired PlasmaQuest, Inc. during November, 1998. The Company
will use approximately $1,800,000 for this acquisition out of its current
cash resources.
Management believes that the 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 at least the next twelve months.
YEAR 2000 DISCLOSURE
The Company believes that its financial reporting and enterprise resource
planning systems will be Year 2000 compliant by March, 1999. The Company is
currently updating its financial reporting and ERP systems with SAP R/3,
which has been represented as being Year 2000 compliant by its producer.
ASTeX is currently using this system at its Woburn facility. The Company
expects to complete the conversion of its Beverly operation's financial
reporting data systems to SAP R/3 by March, 1999. The Company's Colorado
operation uses financial software which are represented as being Year 2000
compliant. The Company intends to upgrade the software used by ASTeX
Sorbios to a Year 2000 compliant version before January, 1999. Other
software used by the Company is generally certified as being Year 2000
compliant by the vendor or is not considered critical to the operations of
the Company.
The Company spent approximately $1,059,000 in Fiscal 1998 on SAP R/3
software, hardware, consultants, and internal costs. The Company plans
future SAP R/3 implementation expenditures of approximately $300,000.
Although the Company believes its future SAP R/3 implementation cost
estimates to be accurate, the Company cannot provide any assurance that
these costs will not increase or that the implementations will occur by the
estimated dates. The Company funded its Fiscal 1998 expenditures through
cash generated by operations and the Company expects that future operating
cash flows will fund future expenditures.
The Company has been developing plans to address the Year 2000 preparedness
of its critical suppliers and major customers and related electronic data
interfaces with these third parties. During the next year, the Company will
contact critical suppliers and customers to determine whether they will be
compliant by the Year 2000. Based on the result of this evaluation, the
Company will seek new vendors where necessary and will formulate
contingency plans to resolve customer-related issues. The Company cannot
estimate the impact that noncompliant suppliers and customers may have on
the Company.
12
<PAGE> 14
Although the Company has not made a systematic review of its products in
operation at customer locations, it believes that a number of diamond
deposition systems may not be Year 2000 compliant. Over the coming year,
the Company plans to identify noncompliant products and offer to make all
necessary modifications to make them compliant. Additional noncompliant
products could be identified during this process. Because a formal
identification program has not been completed, the Company is unable to
estimate the cost that will be incurred to remediate Year 2000 problems
related to noncompliant products that are in operation at customer
locations. At this time, the Company does not expect these costs to be
material.
During the current year the Company will also conduct a review of its
manufacturing equipment and facilities to ensure Year 2000 compliance.
Based on its initial assessment, the Company does not anticipate that a
material Year 2000 issue will be discovered in this area.
The Company will also formulate testing and contingency plans that will
enable it to detect and effectively deal with problems that may arise as a
result of Year 2000 noncompliance. Because these reviews and testing have
not been completed, the Company is not able to estimate the total cost
associated with addressing the Year 2000 issue, nor what its liabilities to
third parties may be as a result of Year 2000 issues.
At this time the Company cannot give any assurance that it will be
successful in completing its planned actions to become Year 2000 compliant
on or before the Year 2000. Additionally, no assurance can be given that
instances of noncompliance which could have a material adverse effect on
the Company's operations or financial condition will be identified; that
systems of other companies with which the Company transacts business will
be corrected on a timely basis; that a failure by such entities to correct
a Year 2000 problem or a conversion which is incompatible with the
Company's systems would not have a material adverse effect on the Company's
operations or financial condition; or that even if all planned actions are
completed, the Company will not experience some adverse effects from Year
2000 related issues.
ADDITIONAL RISK FACTORS
In recent months there have been serious economic problems in the Far East.
The Company's business depends in large part upon the capital expenditures
of semiconductor manufacturers, many of whom have operations in the Far
East. At September 26, 1998, the Company's backlog was $12.3 million, which
represents a reduction from levels during most of Fiscal 1998. The Company
anticipates that its revenue for the current fiscal year will be adversely
affected by the conditions in the Asian region, which has historically
accounted for a significant portion of the Company's revenue base.
Additionally, capital expenditures by semiconductor wafer and device
manufacturers historically have been cyclical as they in turn depend upon
the current and anticipated demand for integrated circuits. Sustained
periods of oversupply within the semiconductor industry can also adversely
affect the financial performance of the Company.
13
<PAGE> 15
Furthermore, the Company's success is dependent upon supplying
technologically superior products to the marketplace at appropriate times
to satisfy customer needs. Product development requires substantial
investment and is subject to technological risks. Delays or difficulties
in product development could adversely affect the Company's financial
performance.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Dated: November 10, 1998
APPLIED SCIENCE AND TECHNOLOGY, INC.
(Registrant)
Name Capacity Date
---- -------- ----
/S/ Richard S. Post Chairman of the Board, Chief November 10, 1998
------------------- Executive Officer and President -----------------
Richard S. Post (principal executive officer)
/S/ John M. Tarrh Chief Financial Officer, Senior November 10, 1998
----------------- Vice President of Finance -----------------
John M. Tarrh (principal financial and accounting
officer) and Director
14
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