<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__________________________________
(Mark One)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIRS EXCHANGE ACT OF 1934
For the quarterly period ended December 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 8,649,732
----------------------------- ----------------------------------
Class Outstanding as of February 6, 1999
================================================================================
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
TITLE PAGE
----- ----
<S> <C>
PART I. Financial Information
Item 1 Financial Statements
Consolidated Statements of Operations for the Three Months and
Six Months Ended December 26, 1998, and December 27, 1997 2
Consolidated Balance Sheets
December 26, 1998, and June 27, 1998 3
Consolidated Statements of Cash Flows for the Six Months Ended
December 26, 1998, and December 27, 1997 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Item 3 Quantitative and Qualitative Disclosure about Market Risk 13
PART II. OTHER INFORMATION
Items 1-6 None
SIGNATURES 14
Appendix 15
</TABLE>
<PAGE>
ITEM 1 FINANCIAL STATEMENTS
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- --------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Product sales, net $ 15,725,887 $ 21,145,162 $ 26,573,440 $ 37,310,447
Research contract revenue 115,963 200,380 235,896 400,420
Other revenue 1,012,510 1,094,252 2,144,567 2,150,230
-------------- -------------- -------------- --------------
Total revenue 16,854,360 22,439,794 28,953,903 39,861,097
-------------- -------------- -------------- --------------
Cost of sales and revenue:
Product sales and other revenue 12,301,587 14,155,232 23,145,470 25,034,648
Research contracts 54,053 54,744 134,643 122,614
-------------- -------------- -------------- --------------
Total cost of sales and revenue 12,355,640 14,209,976 23,280,113 25,157,262
-------------- -------------- -------------- --------------
Gross profit 4,498,720 8,229,818 5,673,790 14,703,835
-------------- -------------- -------------- --------------
Operating expenses:
Selling expenses 1,173,326 1,181,740 2,374,687 2,016,799
General and administrative expenses 1,807,634 1,886,416 3,672,521 3,287,321
Research and development expenses (note 5) 2,244,229 2,850,252 4,568,505 5,411,257
Restructuring charge (note 8) 0 0 1,497,292 0
Acquisition-related expenses (note 10) 0 212,423 0 212,423
-------------- -------------- -------------- --------------
Total operating expenses 5,225,189 6,130,181 12,113,005 10,927,800
-------------- -------------- -------------- --------------
Earnings (loss) from operations (726,469) 2,098,987 (6,439,215) 3,776,035
-------------- -------------- -------------- --------------
Other expense (income):
Interest expense 8,348 35,321 20,353 196,032
Interest income (63,402) (143,369) (187,022) (223,425)
Other expense (income) (77,053) 21,200 (69,094) (215,357)
-------------- -------------- -------------- --------------
Total other income (132,107) (86,848) (235,763) (242,750)
-------------- -------------- -------------- --------------
Earnings (loss) before income taxes (594,362) 2,185,835 (6,203,452) 4,018,785
Income tax expense (benefit) (158,000) 911,000 (2,286,000) 1,589,000
-------------- -------------- -------------- --------------
Net earnings (loss) $ (436,362) $ 1,274,835 $ (3,917,452) $ 2,429,785
============== ============== ============== ==============
Basic earnings (loss) per share $ (0.05) $ 0.15 $ (0.46) $ 0.32
============== ============== ============== ==============
Diluted earnings (loss) per share $ (0.05) $ 0.15 $ (0.46) $ 0.30
============== ============== ============== ==============
Weighted average common shares outstanding
used to calculate basic earnings (loss) per share 8,603,163 8,310,436 8,593,863 7,570,134
============== ============== ============== ==============
Weighted average common shares outstanding
used to calculate diluted earnings (loss) per share 8,603,163 8,779,355 8,593,863 8,002,489
============== ============== ============== ==============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27,
1998 1998
------------------ ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,170,573 $ 7,686,805
Trade receivables, net (note 3) 13,063,389 12,734,381
Other receivables 906,163 --
Inventories (note 4) 12,732,899 13,737,212
Prepaid expenses and other assets 583,237 548,709
Deferred income taxes 1,514,044 1,356,044
------------------ ----------------
Total current assets 30,970,305 36,063,151
------------------ ----------------
Property, plant and equipment:
Land 473,000 473,000
Building 1,643,072 1,643,072
Equipment 11,803,724 11,107,731
Furniture and fixtures 1,054,984 1,032,497
Leasehold improvements 1,807,531 2,228,246
------------------ ----------------
16,782,311 16,484,546
Less accumulated depreciation and amortization (8,359,145) (7,960,282)
------------------ ----------------
Net property, plant and equipment 8,423,166 8,524,264
------------------ ----------------
Other assets:
Patents, net 1,027,728 1,095,090
Other assets 12,972 --
Goodwill, net of accumulated amortization 4,206,783 4,042,031
Deferred income taxes 3,227,998 1,099,998
Notes receivable, less current maturities 137,717 468,772
------------------ ----------------
Total other assets 8,616,198 6,705,891
------------------ ----------------
Total assets $ 48,006,669 $ 51,293,306
================== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Note payable to bank (note 6) $ 646,548 $ --
Accounts payable 1,929,391 3,011,798
Accrued expenses 3,098,792 1,935,229
Accrued compensation expense and related costs 1,643,869 1,993,027
Accrued income taxes 57,445 293,444
Commissions payable and customer advances 599,628 259,154
------------------ ----------------
Total current liabilities 7,975,663 7,492,652
------------------ ----------------
Stockholders' equity (note 7)
Common stock (note 10) 86,497 86,065
Additional paid-in capital 44,199,468 44,193,116
Accumulated deficit (4,164,550) (247,095)
Accumulated other comprehensive income (loss) 57,917 (83,106)
Less: Notes receivable for common stock purchases (148,326) (148,326)
------------------ ----------------
Total stockholders' equity 40,031,006 43,800,654
------------------ ----------------
$ 48,006,669 $ 51,293,306
================== ================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
3
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
--------------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (3,917,452) $ 2,429,785
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation 1,412,081 1,043,749
Amortization 306,133 247,209
Acquisition-related expense -- 212,423
Deferred income taxes (2,286,000) --
(Gain) loss on disposal of property, plant and equipment 624,691 (250,000)
Gain on investment
Accounts receivable 684,512 726,471
Inventories 1,302,390 (2,352,629)
Prepaid expenses and other assets 27,615 30,948
Notes receivable 232,773 8,102
Accounts payable (1,599,621) 177,528
Accrued expenses (44,491) 2,052,288
Accrued income taxes 235,999 --
------------------ ------------------
Net cash provided by (used for) operating
activities (3,021,549) 4,325,874
------------------ ------------------
Cash flows from investing activities:
Acquisition of subsidiaries, less cash acquired (22,656) (3,652,639)
Investments in other assets 40,350 (226)
Acquisition-related receivable (806,163) --
Advances to subsidiary prior to acquisition (800,000) --
Additions to property and equipment (1,010,269) (741,203)
Patents and other assets (10,185) (23,309)
Proceeds from sale of investment -- 500,000
------------------ ------------------
Net cash used for investing activities (2,608,923) (3,917,377)
------------------ ------------------
Cash flows from financing activities:
Net borrowing under notes payable bank 172,673 --
Repayments of notes payable (206,153) (9,173,208)
Net proceeds from issuance of common stock 6,697 15,351,067
------------------ ------------------
Net cash provided by (used for) financing activities (26,783) 6,177,859
------------------ ------------------
Effect of exchange rate changes on cash 141,023 (48,716)
------------------ ------------------
Net increase (decrease) in cash and cash equivalents (5,516,232) 6,537,640
Cash and cash equivalents at beginning of period 7,686,805 3,246,337
------------------ ------------------
Cash and cash equivalents at end of period $ 2,170,573 $ 9,783,977
================== ==================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 20,353 $ 249,044
================== ==================
Income taxes $ 236,000 $ 620,654
================== ==================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The unaudited financial statements as of December 26, 1998 and December 27,
1997, and for the three month and six 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 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 weighted average number of shares used to compute diluted earnings
(loss) per share consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
----------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
Weighted average common shares 8,603,163 8,310,436 8,593,863 7,570,134
outstanding
Weighted average common equivalent
shares due to stock options and warrants - 468,919 - 432,355
----------------- -------------- -------------- -------------
8,603,163 8,779,355 8,593,863 8,002,489
================= ============== ============== =============
</TABLE>
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 and six months ended December 26,
1998, as they had an antidilutive effect.
3) ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27,
1998 1998
-----------------------------------------
<S> <C> <C>
Accounts receivable, trade $ 13,317,345 $ 13,044,466
Notes receivable, current portion 232,017 67,354
Allowance for doubtful accounts (485,973) (377,439)
------------------- ----------------
$ 13,063,389 $ 12,734,381
=================== ================
</TABLE>
5
<PAGE>
4) INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 27,
1998 1998
-----------------------------------------
<S> <C> <C>
Raw materials $ 7,766,444 $ 8,990,201
Work in process 3,791,024 3,210,131
Finished goods 1,175,431 1,536,880
------------------- ------------------
$ 12,732,899 $ 13,737,212
=================== ==================
</TABLE>
5) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expenses 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>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- ------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
--------------- ---------------- -------------- --------------
<S> <C> <C> <C> <C>
Research and development costs $ 2,300,529 $ 2,966,689 $ 4,646,345 $ 5,629,144
Less funding 56,300 116,437 77,840 217,887
--------------- ---------------- -------------- --------------
$ 2,244,229 $ 2,850,252 $ 4,568,505 $ 5,411,257
=============== ================ ============== ==============
</TABLE>
6) COMMITMENTS
The Company may borrow up to $8,000,000 from a bank under an usecured
demand line of credit with interest at bank's prime rate (7.5% at December
26, 1998). Borrowing under the line are limited to 100% of the Company's
cash balance plus 80% of domestic accounts receivable under 90 days
outstanding. As of December 26 1998 there were borrowings against the line
of credit of $646,548.
7) STOCKHOLDERS' EQUITY
Capital stock consists of the following:
<TABLE>
<CAPTION>
NUMBER OF SHARES
----------------------------------------------------
AUTHORIZED ISSUED AND OUTSTANDING
-----------------------------------
DECEMBER 26, DECEMBER 27,
1998 1997
---------------- ----------------
<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 8,649,732 8,458,615
----------------------------------------------------
Total common stock 30,000,000 8,649,732 8,458,615
----------------------------------------------------
Total capital stock 31,000,000 8,649,732 8,458,615
----------------------------------------------------
</TABLE>
6
<PAGE>
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.
8) 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 non-owner sources. It includes all changes
in equity during a period except those resulting form 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 of total comprehensive income (loss) were as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------- -------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
--------------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
Net income (loss) $ (436,362) $ 1,274,835 $ (3,917,452) $ 2,429,785
Comprehensive income (loss) (3,109) (48,716) 141,023 (48,716)
--------------- ---------------- --------------- ------------
$ (439,471) $ 1,226,119 $ (3,776,429) $ 2,381,069
=============== ================ =============== ============
</TABLE>
9) 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 was completed by the end of the second quarter.
These consolidations resulted in a restructuring charge of $1,497,000, most
of which has been expended. The restructuring charge consisted of severance
relating to the termination of seventy employees, abandonment of leasehold
improvements and fixed assets, and facility costs, primarily future lease
payments relating to abandoned facilities. Accrued expenses at December
26, 1998 included approximately $331,000 relating to restructuring accruals
for severance and facility costs expected to be paid over the next fifteen
months.
In addition, the Company wrote down inventory totaling $1,090,000 during
the first 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
$393,000 of other transition costs related to the consolidations for moving
assets and training personnel. The total expense related to restructuring,
inventory write-down, and transitional costs was $2,980,000.
7
<PAGE>
10) NONCASH TRANSACTION
During the quarter ended September 26, 1998, 21,940 shares of common stock
were returned to the Company in lieu of a cash reimbursement for warranty
costs incurred related to products shipped by CPI, Inc. prior to their
acquisition by ASTeX.
11) ACQUISITIONS
On November 4, 1998 the Company completed the acquisition of PlasmaQuest,
Inc., a manufacturer of ECR systems for R&D, magnetic disk head processing,
and electronic packaging applications. The acquired company was renamed
ASTeX PlasmaQuest, Inc.
The Company acquired all the stock of PlasmaQuest for a total purchase
price of $22,656. The purchase price was paid in cash from the Company's
cash reserves.
On October 1, 1997 the Company completed the acquisition of Sorbios GmbH,
renamed ASTeX Sorbios GmbH, a manufacturer of ozone generators and air
ionizes for semiconductor production.
The Company acquired all the stock of Sorbios GmbH for a total purchase
price of $3,699,413. The purchase price was paid in cash from the
Company's cash reserves.
Acquisition costs of $212,423 related to in-process research and
development were charged to operating expense.
The acquisitions were accounted for by the purchase method of accounting
and accordingly, the purchase prices were allocated to the assets acquired
and the liabilities assumed based on their fair market value at the dates
of acquisition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Applied Science and Technology, Inc. (the "Company" or "ASTeX")
provides precision reactive gas processing solutions and specialty power
sources to the semiconductor, electronics, medical, and industrial
markets. Our broad product line is based on one or more of our core
technologies including reactive gas processing, power sources, and system
integration. Depending on our customers' needs, we provide varying levels
of integration from components to integrated subsystems to complete
process systems. Our reactive gas solutions give our customers a
competitive advantage by improving their time to market with lower costs
and less complexity.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 26,
1998 AND DECEMBER 27, 1997
The following table compares the consolidated statements of operations
for the three-month and six-month periods ended December 26, 1998 and
December 27, 1997, expressed as a percentage of total revenue.
8
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- ------------------------------
DECEMBER 26, DECEMBER 27, DECEMBER 26, DECEMBER 27,
1998 1997 1998 1997
-------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Product sales, net 93.3% 94.2% 91.8% 93.6%
Research contract revenue 0.7% 0.9% 0.8% 1.0%
Other revenue 6.0% 4.9% 7.4% 5.4%
-------------- ------------ -------------- ------------
Total revenue 100.0% 100.0% 100.0% 100.0%
-------------- ------------ -------------- ------------
Cost of sales and revenue:
Product sales and other revenue 73.0% 63.1% 79.9% 62.8%
Research contracts 0.3% 0.2% 0.5% 0.3%
-------------- ------------ -------------- ------------
Total cost of sales and revenue 73.3% 63.3% 80.4% 63.1%
-------------- ------------ -------------- ------------
Gross profit 26.7% 36.7% 19.6% 36.9%
-------------- ------------ -------------- ------------
Operating expenses:
Selling expenses 7.0% 5.3% 8.2% 5.1%
General and administrative expenses 10.7% 8.4% 12.7% 8.2%
Research and development expenses 13.3% 12.7% 15.8% 13.6%
Restructuring charge 0.0% 0.0% 5.1% 0.0%
Acquisition-related expenses 0.0% 0.9% 0.0% 0.5%
-------------- ------------ -------------- ------------
Total operating expenses 31.0% 27.3% 41.8% 27.4%
-------------- ------------ -------------- ------------
Earnings (loss) from operations (4.3%) 9.4% (22.2%) 9.5%
-------------- ------------ -------------- ------------
Other expense (income):
Interest expense 0.0% 0.2% 0.0% 0.5%
Interest income (0.4%) (0.6%) (0.6%) (0.6%)
Other expense (income) (0.4%) 0.1% (0.2%) (0.5%)
-------------- ------------ -------------- ------------
Total other income (0.8%) (0.3%) (0.8%) (0.6%)
-------------- ------------ -------------- ------------
Earnings (loss) before income taxes (3.5%) 9.7% (21.4%) 10.1%
Income tax expense (benefit)
(0.9%) 4.1% (7.9%) 4.0%
-------------- ------------ -------------- ------------
Net earnings (loss)
(2.6%) 5.6% (13.5%) 6.1%
============== ============ ============== ============
</TABLE>
REVENUE
Total revenue declined 25% to $16,854,000 in the second quarter and
declined 27% to $28,954,000 for the six months of the 1999 Period compared
to $22,440,000 and $39,891,000 for the 1998 Periods. This decline was
primarily the result of the severe downturn in the semiconductor capital
equipment industry, leading to a 33% decline in sales to semiconductor
capital equipment customers in the 1999 Periods compared to the 1998
Periods. Other revenue consisting of service, spare parts and repairs was
flat at approximately $1,000,000 for the second quarters and $2,000,000 for
the six months in both periods.
9
<PAGE>
GROSS PROFIT
Gross profit decreased 45% to $4,499,000 in the second quarter and
decreased 61% to $5,674,000 for the six months of the 1999 Period compared
to the 1998 Period. Gross profit as a percent of total revenue decreased
to 27% for the second quarter and decreased to 20% for the six months of
the 1999 Period compared to 37% for the second quarter and the six months
in the 1998 Period. These declines resulted from reduced manufacturing
volumes, a less favorable product mix and an inventory write down of
$1,090,000 primarily due to the unexpected severity of the downturn in the
semiconductor equipment industry and customer-specific product
terminations.
The Company continues to seek to develop and introduce products having
higher gross margins and to focus on improving manufacturing efficiencies
and methods in order to improve gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE
Selling expenses were approximately flat in the second quarter of the 1999
Period at $1.2 million and increased 18% to $2,375,000 for the six months
of the 1999 Period as a result of the establishment of the Global Customer
Operations organization and increased staffing to strengthen the Company's
global marketing, sales, service and product management infrastructure.
General and administrative expenses decreased 4% in the second quarter to
$1,808,000 due to consolidation of facilities and resulting savings and
increased 12% for the six months of the 1999 Period in comparison to the
1998 Period due to costs associated with a management change in Europe,
higher information systems costs due to implementation of a new company-
wide Enterprise Resource Planning ("ERP") system, increased goodwill
amortization, and general and administrative expenses associated with new
acquisitions.
As a result of the consolidation of two facilities in the first half of the
1999 Period, the Company recorded a restructuring charge of $1,497,000.
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 December 26, 1998 included
approximately $331,000 relating to restructuring accruals for severance and
facility costs expected to be paid over the next fifteen months. The
Company also incurred $393,000 of other transition costs related to the
consolidations for moving inventory and equipment and training personnel.
The total expense relating to restructuring, inventory write-down and
transition inventory and equipment costs was $2,980,000. These
consolidations are estimated to reduce the Company's costs by approximately
$2.0 million per year.
RESEARCH AND DEVELOPMENT
Net research and development expenses decreased 21% to $2,244,000 in the
second quarter and decreased 16% to $4,569,000 for the six months of the
1999 Period as the Company reduced its overall level of investment in
response to the decline in revenue levels. Gross spending (total research
and development spending, including funded joint development and the direct
costs of research contracts) decreased 22% in the second quarter and 17% in
the six months of the 1999 Period in comparison to the 1998 Period.
10
<PAGE>
As a part of the acquisition of ASTeX Sorbios in the 1997 Period, the
Company incurred an expense of $212,000 for in-process research and
development. There were no such acquisition-related charges in the 1999
Period.
OPERATING INCOME (LOSS) .
Operating income decreased from $2,099,000 in the second quarter and
$3,776,000 for the six months in the 1998 Period to an operating loss of
$726,000 in the second quarter and $6,439,000 in the six months of the 1999
Period. The operating loss in the 1999 Period resulted from the one-time
charges of $2.8 million relating to restructuring, inventory write-down and
transition costs, the reduced gross margin in comparison to the 1998 Period
and the increased operating expenses as a percentage of total revenue.
During the 1999 Period the Company consolidated its Modesto, California
facility into its Woburn, Massachusetts and Colorado Springs, Colorado
sites and its Beverly, Massachusetts facility into Woburn in order to
reduce its fixed costs and improve gross profit margins. These
consolidations resulted in a restructuring charge of $1,497,000 most of
which has been expended.
OTHER EXPENSES AND INCOME TAXES
Total other income declined $45,000 in the second quarter primarily due to
less interest income on less cash reserves compared to the second quarter
of the 1998 Period and was flat at approximately $240,000 in the six months
of the 1999 Period and the 1998 Period as a decline in interest expense in
the 1999 Period resulting from repayment of bank debt was offset by a
reduction in other income in the 1999 Period due to the sale of an
investment in Low Entropy Systems, Inc. in the 1998 Period which resulted
in a one-time gain of $250,000.
Income tax expense declined from $911,000 expense in the second quarter of
the 1998 Period to a tax benefit of $158,000 in the second quarter of the
1999 Period and income tax expense declined from $1,589,000 in the six
months of the 1998 Period compared to a $2,286,000 tax benefit in the 1999
Period.
LIQUIDITY AND CAPITAL RESOURCES
At December 26, 1998, we had cash and short-term investments of $2.2
million with working capital of $23.0 million compared to December 27,
1997, when we had cash and short-term investments of $11.1 million and
working capital of $26.9 million.
During the six months ended December 26, 1998, our cash position decreased
from $7.7 million to $2.2 million. The $5.5 million decrease resulted from
cash used for operating activities of $3.0 million, cash used for investing
activities of $2.6 million and cash used for financing activities of
$26,000. Cash of $3.0 million used for operating activities consisted of
the $3.9 million net loss and $1.4 million used for net changes in
operating assets, including deferred income taxes. These sums were offset
by noncash depreciation and amortization of $1.7 million and a noncash loss
on disposal of assets of $625,000. Net cash used for investing activities
of $2.6 million was comprised of $1.0 million in additions to property and
equipment and $1.6 million in acquisition-related receivables. Net cash
used for financing activities of $26,000 resulted primarily from repayments
of notes payable of $206,000 offset by net borrowings under the bank line
of credit of $173,000.
11
<PAGE>
We have a credit facility with State Street Bank and Trust Company which
consists of an $8.0 million unsecured demand line of credit with interest
at the bank's prime rate of 7.75% at December 26, 1998. This facility is
subject to our meeting certain financial covenants which are tested
quarterly. We are currently in compliance with all covenants. As of
December 26, 1998, we had borrowings against the line of credit of $647,000
and an additional availability of $7.4 million. The line of credit expires
in May 2000.
We continue to use cash resources for developing new products, expanding
sales and marketing, performing collaborative product development projects,
and for general working capital. We seek joint ventures and/or
acquisitions that will enhance our position in our markets with the
potential to increase revenue and profitability.
In early February, 1999 the Company filed a registration statement to
register up to 2,875,000 of its common stock in a secondary offering.
We believe that existing cash resources and funds from the anticipated
secondary public offering of common stock, anticipated cash flows from
operations and our credit facility will be sufficient to meet planned
operating expenses and working capital requirements for a period of at
least the next 12 months.
EFFECTS OF INFLATION
We believe that inflation has not had a significant impact on our revenues
or operating results.
YEAR 2000 DISCLOSURE
Many currently installed computer systems and software products are
dependent upon internal calendars coded to accept only two digit entries in
the date code field. These date code fields will need to accept four digit
entries to distinguish 21st century dates from 20th century dates. As a
result, computer systems and software used by many companies may need to be
upgraded to comply with Year 2000 requirements.
We believe that our financial reporting and enterprise resource planning
(ERP) systems will be Year 2000 compliant by April 1999 except for the
recently acquired ASTeX PlasmaQuest operation which is not currently a
material component of our business. We are currently in the process of
updating our financial reporting and ERP systems with SAP R/3, which has
been represented as being Year 2000 compliant by its producer. We are
currently using SAP R/3 in our facility in Woburn, Massachusetts. The
current ERP software packages used by ASTeX ETO are represented as being
Year 2000 compliant. The current software package used by ASTeX Sorbios is
not Year 2000 compliant. We intend to purchase an upgrade that is
represented as being Year 2000 compliant and will implement this software
by April 1999. We plan to upgrade the ASTeX PlasmaQuest system to be Year
2000 compliant before October 1999. Our other software is generally
certified by the vendor as Year 2000 compliant or is not considered
critical to our operations.
We have spent approximately $1.5 million through December 26, 1998 on SAP
R/3 software, hardware and consultants. We plan future SAP R/3
implementation expenditures of approximately $300,000. Although we believe
future SAP R/3 implementation cost estimates to be accurate, we can not
provide any assurance that these costs will not increase or that the
12
<PAGE>
implementations will occur by the dates estimated. We have conducted a
review of our manufacturing equipment and facilities to ensure Year 2000
compliance. Based on our assessment, we do not anticipate that a material
Year 2000 issue will be discovered in this area.
We have addressed the Year 2000 preparedness of our critical suppliers and
our major customers and related electronic data interfaces with these third
parties. During the coming year we will contact critical suppliers and
major customers to determine whether they are, or will be, compliant by the
Year 2000. We expect to complete this assessment in the next few months.
Based upon this evaluation, we will seek new vendors where necessary and
formulate contingency plans to resolve customer-related issues that may
arise. At this time we cannot estimate the impact that noncompliant
suppliers and customers may have on our level of operations in the Year
2000. At present, we have not developed contingency plans, but we will
determine whether to develop such plans when our assessment is completed.
Although we have not made a systematic review of our products in operation
at customer locations, we believe that a number of complete process systems
may not be Year 2000 compliant. Over the next several months, we plan to
identify noncompliant products and offer 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, we are unable to estimate the cost that will be incurred to
remediate Year 2000 problems related to noncompliant products that are in
operations at customer locations.
BACKLOG
Our backlog consists of purchase orders for standard products and contracts
for research and development. At December 26, 1998 our backlog was
approximately $12.9 million of which $12.0 million was a standard products
and $907,000 was for research contracts. The backlog at December 27, 1997
was approximately $21.8 million of which $20.9 million was for standard
products and $901,000 was for research contracts. We expect 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 certain just-in-time 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
13
<PAGE>
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: January 29, 1999
APPLIED SCIENCE AND TECHNOLOGY, INC.
(Registrant)
Name Capacity Date
---- -------- ----
/s/ Richard S. Post Chairman of the Board, Chief January 29, 1999
------------------- ----------------
Richard S. Post Executive Officer and President
(principal executive officer)
/s/ John M. Tarrh Chief financial Officer, Senior January 29, 1999
----------------- ----------------
John M. Tarrh Vice President of Finance
(principal financial and accounting
officer) and Director
14
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