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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended June 26, 1999
Commission file number 0-22646
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Applied Science and Technology, Inc.
(Name of Issuer in its Charter)
Delaware 04-2962110
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
35 Cabot Road, Woburn, Massachusetts 01801-1053
(Address of Principal Executive (Zip Code)
Offices)
(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, $0.01 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 Registration 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 22, 1999 was approximately $195,290,000. As of September 22,
1999, 11,454,477 shares of Common Stock, $.01 par value per share, were issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement for our Annual Meeting of
Stockholders to be held on November 18, 1999 are incorporated by reference into
Part III of this Form 10-K.
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Item 1. Business
Introduction
We supply 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.
The electronics revolution could not have taken place without the advent of
reactive gas processing methods for production of semiconductors. A reactive
gas, created when energy breaks apart the molecules in a stable gas, allows
rapid chemical reactions to occur at relatively low temperatures, essential for
manufacturing advanced electronic devices. The semiconductor industry is the
largest user of precision reactive gas processing because of its extraordinary
demands for ultra-pure, high-yield and fine-geometry processes.
We sell an extensive line of integrated subsystems and components to leading
semiconductor equipment manufacturers, such as Applied Materials, who
incorporate our products into the equipment they sell to semiconductor
manufacturers. Semiconductor technology advances, particularly shrinking line
widths, are driving the need for more sophisticated manufacturing processes
which increasingly involve the use of reactive gases. Many essential steps in
the manufacture of semiconductors use reactive gas processes including
photoresist stripping, etching, thin-film deposition, surface and chamber
cleaning and abatement of toxic exhaust gases. As equipment companies seek to
improve the efficiency of their development and manufacturing processes, they
are working more closely with critical suppliers who can provide integrated
subsystems. We deliver fully-integrated reactive gas solutions that address
this opportunity.
Precision reactive gas technologies are increasingly being used in other
sectors of electronics including magnetic disk heads and advanced electronics
packaging. For these applications, we sell complete process systems which
incorporate our reactive gas solutions combined with a fully-integrated
platform that includes substrate handling and a production process.
We sell power source and reactive gas products for medical equipment and a
variety of industrial applications. Our power sources are used in magnetic
resonance imaging (MRI), medical lasers and medical apparatus sterilization.
Industrial applications include power sources for laser markers and high
intensity lamps and reactive gas sources for thin-film optical coating, polymer
surface modification and removal of trace carcinogens from groundwater.
Precision Reactive Gas Processing
A reactive gas is created by adding energy to a stable gas to break apart
its molecules. The resulting dissociated gas produces rapid chemical reactions
when it comes into contact with other matter.
Reactive gas processes have important advantages relative to other types of
chemical processes. Relative to wet chemical processes, which typically involve
acids, reactive gas processes do not have acid disposal costs. In contrast to
many other types of chemical processes, which often require high temperatures
to sustain reactions, reactive gas processes take place at relatively low
temperatures. Low temperatures avoid heat damage to materials involved in the
process. Furthermore, reactions that take place in a gaseous state can be
applied to precision processing for ultra-fine geometries. Thus for many
applications in semiconductor processing and other precise chemical processing,
dry processes using reactive gases are increasingly displacing other types of
chemical processes.
In the semiconductor industry, reactive gas processes are used in process
steps that remove material (etch, strip or clean) or deposit material
(deposition). Reactive gases that are frequently used in the semiconductor
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industry to remove material or perform cleaning operations include oxygen,
fluorine, fluorocarbons, chlorine and ozone. Precision reactive gas etch and
deposition processes are emerging in other sectors of electronics such as
magnetic disk heads and advanced electronics packaging.
Precision reactive gases are used in a wide variety of industrial processes
that require high purity or very precise specifications for the end product.
Reactive gas sources are used in deposition for many applications such as
ultra-thin, precise optical films and diamond-like coatings for precision wear
surfaces. Ozone, or reactive oxygen, is used to modify surfaces of polymers, to
destroy carcinogens found in groundwater and to destroy bacteria and viruses
such as in the medical and pharmaceutical industry where sterilization is
critical.
Designing equipment for producing high-purity reactive gases presents
formidable engineering challenges requiring comprehensive mastery of a range of
complex technologies. In making a reactive gas, a large amount of power,
typically thousands of watts, must be delivered to the gas without damaging the
chamber walls. Reactive gases are so highly corrosive that it is extremely
difficult to contain these gases at high purity without contamination from
corrosion of chamber walls. Thermal management of the chamber materials and
temperature variations within the gas chamber is vital. Pressure management is
also critical and must be integrated with power source characteristics and gas
composition. As can be seen from the foregoing, successful design of reliable
reactive gas source equipment involves a complex set of variables with many
critical interactions and trade-offs.
ASTeX's Reactive Gas Solutions
We have continually provided innovative solutions that address the need for
purity, precision, uniformity, reliability and efficiency in reactive gas
processes. Our engineers are experienced in addressing the difficult challenges
associated with designing reactive gas equipment and have developed a breadth
of solutions that meet our customers' exacting requirements. Drawing on our
backgrounds in fusion energy research--which deals with the controlled heating
of gases to ultra-high temperatures, demanding materials issues, high-energy
power sources and reactive gas chemistry--and combined with our engineering
talent from the semiconductor industry, we have a unique capability to deliver
superior reactive gas solutions to all of our customers.
To our customers in the semiconductor equipment market, we sell reactive gas
subsystems that may be incorporated with their process chambers to add, for
example, photoresist strip capability to a dry etch chamber or chamber clean
capability to a deposition chamber. We sell our reactive gas sources (such as
ozone) to suppliers of deposition and wet bench cleaning equipment. Our most
integrated products provide magnetic disk head and electronics packaging
manufacturers with complete process solutions. We also sell specialty power
sources for medical and industrial applications. Every one of these solutions
leverages our core competencies in reactive gas and power source engineering
and addresses our customers' specific integration requirements.
Strategy
Our objective is to expand our leadership position in advanced reactive gas
processing solutions. Key elements of our strategy include:
. Leverage Core Technologies in the Semiconductor Processing Market. We
seek to increase our penetration of the semiconductor market by
expanding our customer base and by using our core technologies to
introduce new integrated reactive gas subsystems and innovative power
sources. Over the past two years, we have introduced five new integrated
subsystem products that provide significant benefits to our customers.
Such benefits include greater efficiency, reduced cost, increased
integration for lean manufacturing and improved environmental
performance.
. Extend Technology Leadership into New Market Segments. We intend to use
our technology to address reactive gas and power source applications in
new market segments. Exhaust gas abatement, manufacture of magnetic disk
heads and advanced electronics packaging and groundwater remediation are
among the new opportunities that we are addressing.
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. Expand Global Sales and Service. We are strengthening our global sales
and service through increased staffing and an expanding infrastructure.
We intend to expand our sales and service activities in Asia and Europe
by adding direct personnel, independent representatives and joint
ventures. In addition, we plan to develop end-user sales for existing
products.
. Accelerate Growth through Strategic Acquisitions. Over the past three
years, we have acquired four companies, extending our technology and
broadening our markets. We intend to continue to evaluate strategic
acquisitions of companies and/or product lines, particularly those with
closely-related technologies that serve applications beyond the
semiconductor industry.
. Continue to Build Collaborative Development Relationships with Key
Customers. We work closely with our customers to anticipate and provide
solutions that meet specific performance, reliability, cost, and
integration requirements. By working closely with us, customers can
outsource key subsystems and concentrate on their core competencies
while adopting lean organizational practices.
Markets and Applications
Our core competencies enable us to deliver precision reactive gas solutions
that serve a variety of applications within the electronics, medical and
industrial markets.
Electronics
Semiconductor Processing. Our reactive gas systems, subsystems and
components are used in semiconductor manufacturing equipment. The world market
for silicon wafer processing equipment was $17 billion in 1998. We estimate the
component and subsystem segments of this market, which are available to us, to
be approximately $500 million per year. We believe that the total available
market for us in this industry can be expanded significantly both through
anticipated growth in the overall semiconductor equipment manufacturing market
and the development or acquisition of complementary product lines.
A number of factors are driving demand for more advanced semiconductor
manufacturing equipment. A primary factor is the increased demand for
semiconductors in a number of consumer (e.g., portable telecommunications,
paging and computing devices), automotive, medical and industrial markets.
Also, new semiconductor capabilities have resulted in increasingly
sophisticated semiconductors manufactured in increasingly complex processes.
Semiconductor manufacturers have also developed new manufacturing processes
that improve yields in a more automated environment, thereby reducing costs.
Many essential process steps in the manufacture of semiconductors use
reactive gas processes including photoresist stripping, etching, thin film
deposition, surface and chamber cleaning and abatement of toxic exhaust gases.
Semiconductor technology advances, particularly shrinking line widths, are
driving the need for more sophisticated semiconductor manufacturing processes
which increasingly involve the use of reactive gases.
Technology advances within the industry, such as the transition to finer
line widths, provide new opportunities for us. As geometries continue to
shrink, next generation devices require new dielectric materials that must be
created with advanced processes requiring new reactive gas solutions. The finer
line widths are also driving a shift to copper interconnect for high speed
logic devices. Copper damascene technology necessitates changes in the etch and
deposition processes of both insulating and metal layers, creating new
opportunities for reactive gas applications.
As the semiconductor manufacturing industry grows and matures, many of the
large semiconductor equipment manufacturers are working more directly with
companies like us 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. We have been able to take
advantage of this transition by working with our customers to develop and
deliver integrated solutions.
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We also have the opportunity to sell retrofittable subsystems, both to
semiconductor equipment manufacturers and directly to semiconductor
fabricators. This may provide for a further expansion of our existing product
revenues. Semiconductor fabricators have demonstrated interest in upgrading
older equipment to improve performance, reduce costs and reduce greenhouse gas
emissions, without bearing the cost of a complete new system. Upgrades are
possible for a variety of components and subsystems such as ozone delivery and
other reactive gas sources, exhaust gas abatement systems and more efficient
chamber clean systems.
Data Storage. We have entered the magnetic disk head production equipment
market through the acquisition of PlasmaQuest, Inc. in November 1998 and the
subsequent acquisition of the ShamrockTM product line assets from Sputtered
Films, Inc. in August 1999. Magnetic disk heads record and read data on the
magnetic disk. Shrinking feature sizes on magnetic disk heads allow higher
capacity on data storage devices.
The magnetic disk head market is driven by the reduction of cost per bit.
New magnetic sensor technologies, magneto-resistive (MR) and giant magneto-
resistive (GMR) heads, enable disk drive manufacturers to offer increasingly
higher storage capacity. MR heads are predicted to offer storage of up to
5 gigabytes per square inch while GMR heads are expected to offer up to 50
gigabytes per square inch by 2005. Low temperature etch and CVD equipment that
incorporates new technology is required for the production of GMR heads.
The transition to GMR head technology is expected to drive the expansion of
the GMR head market from 1999 through 2001. GMR head production is projected to
increase to nearly 100 million units in 1999 and to over 775 million units in
2001 while the MR market is expected to remain relatively unchanged. Total
magnetic head production is expected to increase from an estimated 955 million
units in 1998 to an estimated 1.7 billion units in 2001. We intend to expand
the number of magnetic disk head processes available to our customers.
Advanced Electronics Packaging. We have entered the advanced electronics
packaging market with the acquisition of PlasmaQuest, Inc. in November 1998 and
expanded our product offerings with the acquisition of Klee Corporation in
April 1999. We currently sell a physical vapor deposition (PVD) system for
under-bump metallurgy (UBM) and a reactive gas cleaning system for oxide
removal in the production of ball grid array and flip chip circuit assemblies.
We are evaluating further applications for emerging advanced electronics
packaging and may develop further products for this market that could be sold
to OEMs as subsystems or directly to end users as complete systems.
We are a leading supplier of systems that produce diamond substrates using a
reactive gas CVD process. CVD diamond is used as an electronic packaging
material for laser diodes and filters for very high frequency telecommunication
applications. Diamond is used in these applications because it is the best
thermal conductor and is also an excellent electrical insulator. However,
because of its high cost, CVD diamond has been confined to specialized high-
value markets. We believe that the development of a larger market in CVD
diamond depends on future cost reductions of the process and the development of
new applications.
Medical and Industrial
We sell our products for a variety of applications in advanced medical and
industrial processes.
Medical Equipment Power Sources. We supply RF power sources for magnetic
resonance imaging (MRI) and medical equipment sterilization applications, and
DC power sources for medical lasers. We are a leading supplier of RF power
sources to the MRI equipment market. MRI is a diagnostic imaging instrument
that 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 is especially effective in imaging soft tissue and
tissue surrounded by bone.
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We also provide RF power sources used in medical equipment sterilization
systems. Reactive gas removes contaminants and sterilizes medical instruments
and material without leaving toxic residue. This method, which competes with
high-temperature steam sterilization and low-temperature chemical baths,
significantly reduces instrument wear caused by the steam process and toxic
chemicals used in chemical baths.
We provide a broad line of DC power sources for medical lasers and
endoscopic systems. These power sources feature compact size and low noise, and
meet the challenging requirements of laser systems. In the medical laser
market, growth is being driven by increasing demand for laser-based non-
invasive medical devices for surgery and for a variety of cosmetic and
dermatological procedures including treatment of varicose veins and other
benign vascular lesions, hair removal, skin rejuvenation and skin cancer
treatment. Another growing application is laser vision correction. Surgical
laser systems also are used in a wide variety of other applications.
Industrial Applications. We are a leader in DC power sources for lasers used
in an increasing number of industrial marking applications. Date or product
code marking of food and pharmaceutical packaging with a laser has replaced ink
for many products. Automotive parts are marked to reduce auto theft. In
addition, metal, plastic, and paper products use marking lasers for serial
numbers to reduce cost and increase throughput.
Our reliable, high-pressure ozone generators have been incorporated in a
pilot program for a new process technology that removes MTBE and other
carcinogens from groundwater. MTBE, a gasoline additive, has contaminated many
of the aquifers in the Los Angeles basin. This pilot program has been
implemented by Applied Process Technology and has been successfully used for
the past two years, meeting initial performance specifications. We believe this
application could turn into a larger market opportunity if groundwater
remediation to remove MTBE becomes mandated and this technology is selected.
We also provide our power sources and reactive gas sources to a number of
leading chemical and materials companies. Typical applications include electro-
optics, polymer processing, optical thin-film coating and industrial CVD
processes.
Products
We supply a broad range of components, integrated subsystems and complete
process systems for precision reactive gas processing applications. The
broadest group of applications is in electronics, primarily the semiconductor
industry. In addition, our products are used in medical equipment and a variety
of industrial applications. All of our power source, reactive gas source, and
integrated subsystem products sold to the electronics market are used in the
semiconductor industry. Our complete process systems are used in either
magnetic disk head manufacturing or advanced electronics packaging.
In electronics applications, the selling prices of our products have wide
ranges depending on the level of integration (sources, integrated subsystems or
complete process systems), the quantity ordered, the extent of customized
features and the application served. Typical selling prices range from $1,000
to $25,000 for our power sources and from $15,000 to $50,000 for our reactive
gas sources. Our integrated subsystems typically range in price from $18,000 to
as much as $175,000. The highest priced subsystems are those that combine
multiple reactive gas sources in one integrated subsystem. Our complete process
systems typically range in price from $100,000 for laboratory systems up to
$2.5 million for production systems.
We began selling reactive gas sources and microwave power sources in volume
to the semiconductor equipment market in 1993. Over the past three years, all
of our products introduced for the semiconductor equipment market have been
more fully-integrated subsystems. As semiconductor equipment manufacturers
implement lean manufacturing practices and move towards the outsourcing of more
fully-integrated subsystems, we have an opportunity to further extend our
subsystems product lines sold to these customers.
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Power Sources, Reactive Gas Sources and Integrated Subsystems for
Semiconductor Processing
Power Sources. We are a leading supplier of microwave power sources used for
semiconductor etch and strip applications. We first introduced this product
family into the semiconductor equipment market in 1993. We introduced
SmartPower microwave power sources in 1998. SmartPower sources offer lower cost
of ownership and are designed for maximum up-time and process consistency. We
began shipping SmartPower in volume in January 1999.
Reactive Gas Sources. We supply a series of configurations of component
microwave power sources combined with a reactive gas source but without
integrated gas handling or controls. The SmartSet series provides flexibility
of configuration and integration for semiconductor equipment customers who buy
their reactive gas solutions as components.
Integrated Subsystems. Our Semozon product series consists of both component
and integrated ozone sources used in semiconductor deposition and wet bench
wafer cleaning applications. Our subsystems incorporate our reactive gas
sources and power sources integrated with controls and gas handling. The ozone
cleaning method substantially reduces chemical consumption relative to
traditional cleaning methods. Patented high-efficiency ozone generation
technology, acquired as part of ASTeX Sorbios, is also used in our ultra-pure
ozone source subsystems.
In 1998, we introduced ASTRON, an atomic fluorine source for chamber clean
and exhaust gas abatement applications. A complete solution, ASTRON integrates
a reactive gas source, a power source and controls into a compact subsystem.
ASTRON produces a high flow rate of atomic fluorine which supports rapid
processing, while its compact design permits easy integration with
semiconductor production tools. For chamber clean of deposition tools, ASTRON
generates atomic fluorine that reacts with waste deposits in the chamber,
generating gases that are easily scrubbed to form benign salts for disposal. In
oxide etch tools, ASTRON is used to abate hazardous exhaust creating substances
which are easily scrubbed from the exhaust. ASTRON addresses the need to reduce
greenhouse gases while, simultaneously, significantly lowers the cost of
cleaning semiconductor process modules. ASTRON has been shipped to beta
customers and volume production shipments began in 1999.
In 1997, we introduced our CPS integrated general reactive gas sources for
photoresist strip and other applications that reduce time-to-market for
advanced etch systems. CPS has been accepted under a volume supply agreement
for integration into a new generation of etch equipment.
In 1997, we also introduced our Gladiator family of three-channel and four-
channel combined RF and microwave power sources, integrated with control
systems, for oxide etch and insulator deposition applications. This product
family reduces costs by integrating all power requirements for advanced process
chambers in a single subsystem. We began selling these products in volume in
1997 and they have been accepted under a volume supply agreement.
In 1998, we introduced Liquozon, an integrated subsystem that dissolves
ozone into de-ionized water for direct injection onto wafers being cleaned at
multiple production stages. Liquozon provides high concentrations of ozone in
de-ionized water, providing an efficient cleaning method, eliminating the use
of acids and associated handling costs. We expect Liquozon to become widely
adopted in the wet bench cleaning market because it provides an integrated
ozone solution which can be rapidly and easily implemented by our customers.
Many leading wet bench companies are either already shipping our ozone
solutions to customers or are in various stages of introducing wet ozone into
their manufacturing process.
Complete Process Systems
Our reactive gas solutions are incorporated into complete process systems on
fully-integrated platforms that include substrate handling and a production
process. Expanding beyond our CVD diamond processing
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systems, we have targeted two high growth areas for supplying complete systems
that do not compete with our semiconductor equipment customers. The two
applications are the manufacture of magnetic disk heads and advanced
electronics packaging, which we now serve with three recently-acquired product
lines.
Our Nimbus 300 product is a complete PVD production tool for a segment of
advanced electronic packaging known as under-bump metallurgy for flip chip
packaging. The average selling price for these systems is approximately $1.5
million.
We sell batch etch systems for cleaning during the manufacture of ball grid
arrays and flip chip circuits. The average selling price for these systems is
approximately $200,000.
Our recently-acquired Shamrock product is a multi-source, application-
specific PVD production system for depositing the high quality thin layers of
magnetic materials in MR and GMR heads and sensors. These systems range in
price from $1.75 million to $2.5 million, depending on configuration.
We supply single chamber etch systems for magnetic disk head fabrication.
These systems are also under evaluation for other fabrication steps. The
average selling price for these systems is approximately $800,000.
Our PQ Series III systems for magnetic disk head and advanced packaging
applications use a patented new design for large-area, scalable, microwave-
driven reactive gas sources. These systems are currently used in high-rate etch
processes and are now being extended into low temperature deposition processes.
We intend to expand the number of magnetic disk head and advanced packaging
processes offered by these systems.
Our Series V diamond deposition products serve both the laboratory and
production markets. We have been a leader in the commercialization of this
technology over the past decade, and have a leading share of this market.
Prices of the products range from approximately $100,000 for research systems
to $1.0 million for a high volume production system.
Medical and Industrial Applications
We use our power source and reactive gas source capabilities to provide a
broad range of specialized products, primarily for medical equipment and
medical lasers, as well as for industrial lasers and industrial CVD.
In medical and industrial applications, the selling prices of our products
have wide ranges depending on the amount of reactive gas or power delivered,
the level of integration (sources or integrated subsystems), the quantity
ordered and the application served. Our power sources typically range in price
from $1,500 to $36,000. Our reactive gas sources typically range in price from
$15,000 to $50,000. Our integrated subsystems typically range in price from
$18,000 to $175,000.
Medical Equipment Power Sources. We supply RF power sources used in MRI
systems and in medical equipment sterilization systems. In addition, in 1997,
we introduced DC switching power sources that offer excellent price/performance
for medical applications. These products were widely offered internationally to
customers beginning in 1999.
Industrial Power Sources and Reactive Gas Sources. We supply power sources
for industrial lasers and electro-optic applications. For the emerging water
remediation market, we supply ozone source components and subsystems integrated
with gas handling and controls. These subsystems can be configured to provide
sufficient high-pressured ozone to process up to 2,000 gallons of water per
minute.
Research and Development
Our research and development activities emphasize process and application
development in collaboration with key customers, supported by engineering teams
with electrical, mechanical and software expertise. We
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have two applications development laboratories in the United States and an
applications development group in Germany. The senior engineering staff with
advanced degrees spend a substantial fraction of their time visiting customers
and exploring new applications requiring solutions. Our research and
development staff totals 89 people, of whom 24 have advanced degrees including
14 Ph.D.s.
Total research and development expenses (including expenses attributable to
certain research contracts which are expensed as incurred and included in cost
of sales and revenue and funded joint development) were approximately $10.2
million in Fiscal 1999, $12.0 million in Fiscal 1998, and $8.7 million in
Fiscal 1997, or 13% of revenue in Fiscal 1999, 14% of revenues in Fiscal 1998,
and 18% of revenues in Fiscal 1997. We also receive funding which is used to
partially offset these research and development expenses. Internally funded
research and development expenditures, net of funding received, were
approximately $9.7 million during Fiscal 1999, $11.3 million during Fiscal
1998, and $7.3 million during Fiscal 1997.
Because of the highly technical nature of our business, our rapidly
expanding markets, and new technologies we are developing, we expect to
continue to spend heavily in future years on research and development
activities. We have received development contracts directly from our
semiconductor equipment customers for products specific to their applications,
but which also have other market potential. We use such funding as a means of
accelerating our product development and are generally not restricted from
selling developed products widely.
Significant Customers and Contracts
During Fiscal 1999, 1998, and 1997, Applied Materials accounted for
approximately 45%, 40%, and 38% of our consolidated total revenue. Philips
Medical Systems accounted for approximately 8% of our total revenue in Fiscal
1999, 6% in Fiscal 1998 and 10% in Fiscal 1997. If we lose Applied Materials or
Philips Medical Systems or if they significantly reduce orders, our revenues,
operating results and financial condition will be hurt. No other customer
accounted for more than 5% of total revenue in Fiscal 1999. While sales to
Applied Materials represent a large portion of our total revenue, Applied
Materials is the world's largest semiconductor equipment manufacturer.
In the semiconductor equipment market, our customers include Applied
Materials, GaSonics, Lam Research, Quester Technology, Ulvac, Varian, Watkins-
Johnson, and others. We have signed multi-year supply contracts with some of
these customers which typically provide for cancellation or modification with
little or no penalty. During Fiscal 1999 we signed a three-year supply
agreement with Applied Materials. The agreement covers a broad range of ASTeX
semiconductor sub-systems and reflects estimates of up to $142 million in
business over the three-year term. In addition, we have multi-year supply
agreements with medical customers on substantially similar terms. Generally,
customers may push out deliveries, put firm orders on hold, or cancel existing
firm orders with little or no penalty.
Marketing, Sales and Services
In order to sell and service our products more aggressively in the global
market, we formed a Global Customer Operations organization in the last quarter
of Fiscal 1998. This organization presents one face to the customer worldwide
and comprises our entire marketing, sales, service, and product management
group. The organization is structured around regional offices worldwide,
supporting direct marketing, sales, and service activities, and provides more
control over independent sales and distribution representatives. During 1998,
the Global Customer Operations organization established regional headquarters
for the western U.S. (Santa Clara, CA), central U.S. (Austin, TX), eastern U.S.
(Woburn, MA), and Europe (Berlin, Germany).
We have entered into a strategic alliance in Taiwan, with Power Alliance
Taiwan, and are negotiating other strategic alliances in other parts of Asia.
These alliances contemplate the sharing of office and infrastructure support
and providing sales and support for a combined suite of products in a given
area. We intend to establish other direct sales and service offices in Asia and
Europe during Fiscal 2000.
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Manufacturing and Suppliers
Our products are manufactured in facilities at Woburn and Newton,
Massachusetts; Colorado Springs, Colorado; Dallas, Texas; and Berlin, Germany.
During Fiscal 1999, we consolidated our Beverly, Massachusetts and Modesto,
California facilities, primarily into the Woburn facility and secondarily into
the Colorado facility. We have signed a lease on new space in Wilmington,
Massachusetts which is twice the size of our Woburn facility. We will
consolidate our systems activities in this new space in the second quarter of
Fiscal 2000, and then consolidate all of our Massachusetts activities into
Wilmington when our Woburn lease expires at the end of Fiscal 2000.
We perform final assembly, integration, testing, and quality assurance at
our facilities. We obtain many components and ship many of our products under
"just-in-time" arrangements.
Most of the components for our products are manufactured by a number of
suppliers. However, we have several significant sole source suppliers. We
believe that these components could be obtained elsewhere if needed or that
our products could be redesigned to use alternative suppliers' products.
However, other supply sources might not be available without significant delay
or increased cost.
Competition
We compete on the basis of our technical expertise, core competencies,
manufacturing capabilities, high quality and reliability, performance, cost of
ownership, established reputation, and customer relationships. Many of our
technical personnel have recognized experience in the fields of power and
reactive gas source technology, systems integration and advanced process
technology. We compete in a number of markets by providing a broad array of
products, engineering and service support. We believe that this range of
products and capabilities provide us with a significant competitive advantage.
No other company competes across all of these markets and product lines.
We believe that we are the largest provider of microwave power sources and
microwave-powered reactive gas sources in the world, facing competition
primarily from Muegge in Germany and Daihen in Japan. In the ozone source
market, we compete primarily with Sumitomo Precision Products and Ebara. We
believe our major competitors for RF power sources and amplifiers are ENI, a
subsidiary of Astec (BSR) Plc; Advanced Energy Industries; Comdel; and
Analogic. We believe our major competitors for DC power sources are ALE
Systems, Analog Modules, and Kaiser Systems for laser applications, and Buhl,
Tectrol, and Walker Power for electro-optics. Our competition for complete
process systems includes Veeco Instruments, Inc., CVC, Inc., Sputtered Films,
Inc., Balzers Process Systems, Nordiko, Plasma-Therm, Inc., Surface Technology
Systems, and Oxford Plasma Technology, Inc.
Many of our customers have large in-house equipment development programs.
These in-house programs often attempt to develop equipment which may compete
with or replace the products purchased from us. We typically have been able to
meet the purity, controllability and reliability requirements of our customers
in a cost effective and timely manner. However, many of these companies have
substantial financial and technical resources and our customers could cease or
reduce their purchases of our products if they develop competitive equipment
internally. These customers or other firms could develop new or enhanced
products which are more effective than those offered by us.
We believe that many factors will affect our competitive position in the
future, including our ability to:
. develop and manufacture new products that meet the needs of our markets
. respond to competitive developments and technological changes
. manufacture our products at competitive cost
. retain a highly qualified scientific and engineering staff
. provide sales and service to a worldwide customer base
9
<PAGE>
We must continue to develop and enhance our technology and products to keep
pace with technological changes in production equipment and advanced materials
processes.
Patents and Proprietary Information
We currently own 19 U.S. patents, one Canadian patent, and one British
patent. We also currently own seven pending U.S. utility and provisional patent
applications and six pending foreign patent applications in various stages of
prosecution. All issued patents and pending patent applications pertain to
methods and apparatus for materials processing including reactive gas sources
and microwave-powered reactive gas sources and processes. The earliest date
that one of our issued patents considered material to our business expires is
in 2007. As a qualifying small business, we have retained commercial ownership
rights to proprietary technology developed under various U.S. and government
contracts and grants, including SBIR contracts. We also have joint development
agreements with industrial and commercial partners, which may result in sole or
joint ownership rights to proprietary technology developed under those
agreements.
There is no single patent which we believe is critical to our business. Our
success depends principally on the technical expertise and product development
capabilities of our engineering and manufacturing teams and the sales and
marketing skills of our Global Customer Operations group.
We currently own four U.S. trademark registrations and one German
registration. We also own three pending U.S. trademark applications and eleven
pending foreign applications. We will continue to evaluate the registration of
additional trademarks as appropriate.
In addition to our patent rights, we rely upon trade secrets and
confidentiality agreements, which all employees are required to execute,
assigning all patent rights and technical or other information developed by
employees during their employment to us. Our employees, consultants, customers,
and potential customers have agreed not to disclose any trade secret or
confidential information without prior written consent. Notwithstanding these
confidentiality agreements, other companies could acquire information which we
consider proprietary. Moreover, while we have successfully enforced one of our
patents and intend to continue to vigorously enforce our patents against
infringement by third parties, we might not be able to enforce our patents or
obtain meaningful protection from competitors, or receive patents from our
pending patent applications. Even if a competitor's products were to infringe
our patents, enforcing our rights would be very expensive and would divert
funds and resources which otherwise could be used in our operations. We might
not be successful in enforcing our rights and a court could find that our
products infringe a third party's rights. If we are not successful in a suit
involving patents or other intellectual property rights of a third party, a
license might not be available on commercially reasonable terms.
Backlog
Our backlog consists of purchase orders for standard products and contracts
for research and development. At June 26, 1999, our backlog was approximately
$24.8 million of which $24.4 million was for standard products and $396,000 was
for research contracts. The backlog at June 27, 1998 was approximately
$11.8 million of which $11.2 million was for standard products and $516,000 was
for research contracts. We expect to complete all standard backlog during the
next six months and all research contracts during the next 12 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 our deliveries, put firm orders on hold, or cancel existing
firm orders with little or no penalty.
10
<PAGE>
Employees
As of June 26, 1999, we employed 464 persons on a regular full-time basis
including 87 temporary employees. We employ 58 people in administration, 42 in
sales and marketing, 89 in research and development, and 275 in manufacturing.
We believe that our relations with our employees are satisfactory.
Item 2. Facilities
We occupy approximately 60,000 square feet of leased space in Woburn,
Massachusetts for our principal executive offices, research and development
center and manufacturing activities. This lease was amended to terminate on
June 30, 2000. The current rent for this facility is $46,851 per month, subject
to annual adjustment for certain increases in the Consumer Price Index. We will
lease approximately 118,000 square feet of space in Wilmington, Massachusetts
for our principal executive offices, research and development center and
manufacturing activities. The initial rent for this facility is $86,042 per
month for the first two years, $95,875 for years 3 to 6, and $105,708 for years
7 to 10. The lease commences on July 1, 2000 and is active for 10 years with
two potential extension terms of five years each. We own 25,000 square feet of
office, lab and manufacturing space of our ETO subsidiary located in Colorado
Springs, Colorado. We sublease approximately 16,600 square feet of office and
lab space in Colorado Springs, Colorado. The current rent for this facility is
$16,600 per month. This lease will terminate on September 1, 2000, unless we
exercise an option for an additional 18 months. We maintain office and
manufacturing facilities in Newton, Massachusetts in approximately 3,500 square
feet of leased space. This lease expires on June 30, 2000. The rent for this
facility is $4,442 per month.
We maintain a sales and service office in 6,400 square feet of leased space
in Santa Clara, California. The rent for this space is $11,308 per month and
the lease expires on December 1, 2000. We were able to terminate this lease in
August 1999. We began maintaining a sales and service office in approximately
12,439 square feet of leased space in Santa Clara, California on August 9,
1999. The rent for this space is $22,390 per month in year one, $23,012 per
month in year two and $24,256 per month in year three. The lease expires on
August 8, 2002. We maintain a sales and service office in approximately 1,484
square feet of leased space in Austin, Texas. The rent for this space is $1,700
per month and the lease expires on November 30, 2000. We also lease
approximately 9,700 square feet of manufacturing and office space in Berlin,
Germany. The current rent for this facility is $7,013 per month. The office
space portion of the lease terminates on March 31, 2001 and will automatically
renew for twelve months unless cancelled six months in advance. The
manufacturing space portion of the lease terminates on June 30, 2001 and will
automatically renew for twelve months unless cancelled six months in advance.
ASTeX CPI occupied approximately 31,000 square feet of leased space in
Beverly, Massachusetts. We have a five-year lease on this facility which
expires in September 2001. The current rent for this facility is $18,324 per
month. We are currently attempting to sublease this space. We occupied
approximately 11,500 square feet of office and manufacturing space in Modesto,
California. This lease was terminated effective November 9, 1998. During Fiscal
1999, our Beverly, Massachusetts and Modesto California facilities were
consolidated, primarily into the Woburn, Massachusetts facility and secondarily
into the Colorado facility.
ASTeX PlasmaQuest occupies approximately 11,700 square feet of leased space
in Dallas, Texas. The lease on this facility expires in July 2004. The current
rent for this facility is $13,352 per month. During Fiscal 2000, our Dallas,
Texas facility will be consolidated into the Woburn, Massachusetts facility,
and we will attempt to sublease this space.
Item 3. Litigation
We are not involved in any litigation of a material nature.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of Fiscal 1999 through the solicitation of proxies of otherwise.
11
<PAGE>
PART II
Item 5. Markets for Common Equity and Related Stockholder Matters
Our 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, we announced a 3-for-2 split of our 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, 1999, the closing bid and ask prices for our
common stock as reported by NASDAQ/NMS were $19.50 and $19.5625, respectively.
As of September 22, 1999, we had 303 holders of record of our common stock. We
believe that there are approximately 2,100 beneficial owners of our common
stock.
For the periods indicated, the following table sets forth the high and low
closing sale prices for our common stock as reported by NASDAQ/NMS for June 30,
1997 through September 22, 1999. Such quotations represent interdealer
quotations without adjustment for retail markups, markdowns, or commissions and
may not represent actual transactions.
<TABLE>
<CAPTION>
Sale
---------------
High Low
------- -------
<S> <C> <C>
Fiscal Year ended June 27, 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
Fiscal Year ended June 26, 1999
First Quarter............................................. $ 8.125 $ 3.875
Second Quarter............................................ 11.000 3.125
Third Quarter............................................. 14.500 9.875
Fourth Quarter............................................ 21.375 12.500
Fiscal Year ending July 1, 2000
First Quarter (through September 22, 1999)................ $23.125 $16.688
</TABLE>
12
<PAGE>
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Fiscal Year(/1/)
-------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Operations:
Total revenue...................... $78,209,713 $83,436,135 $47,967,138 $39,135,596 $20,004,853
Gross profit....................... 22,654,316 28,449,528 17,409,904 15,771,626 8,191,621
Earnings (loss) from operations.... (2,573,939) 5,909,039 1,658,805 (6,077,763) 798,955
Net earnings (loss)................ (1,250,922) 4,020,604 937,759 (7,296,775) 1,127,748
Diluted earnings (loss) per share.. $ (0.13) $ 0.47 $ 0.14 $ (1.16) $ 0.19
Weighted average common shares
outstanding....................... 9,398,289 8,528,947 6,777,440 6,307,146 5,988,150
Balance Sheet:
Working capital.................... $52,278,245 $28,570,499 $16,956,302 $19,216,542 $17,671,056
Total assets....................... 80,535,374 51,293,306 39,327,211 34,361,426 25,077,534
Total long-term debt............... -- -- 6,368,913 6,169,517 --
Total liabilities.................. 12,814,654 7,492,652 15,838,211 13,065,618 3,183,770
Stockholders' equity............... $67,720,720 $43,800,654 $23,489,010 $21,295,808 $21,893,764
</TABLE>
<TABLE>
<CAPTION>
1st 2nd 3rd 4th
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Quarterly 1999:
Total revenue............. $12,099,543 $16,854,360 $20,941,694 $28,314,116
Gross profit.............. 1,175,070 4,498,720 7,074,892 9,905,634
Restructuring charge...... 1,497,292 -- -- 763,089
Earnings (loss) from
operations............... (5,712,746) (726,469) 1,438,011 2,427,265
Net earnings (loss)....... (3,481,091) (436,362) 784,238 1,882,293
Diluted earnings (loss)
per share................ $ (0.41) $ (0.05) $ 0.08 $ 0.16
Quarterly 1998:
Total revenue............. $17,421,302 $22,439,794 $23,461,836 $20,113,203
Gross profit.............. 6,474,017 8,229,818 8,207,417 5,538,276
Acquisition-related
expenses................. -- 212,423 -- --
Earnings (loss) from
operations............... 1,677,048 2,098,987 2,251,572 (118,568)
Net earnings.............. 1,154,950 1,274,835 1,577,521 13,298
Diluted earnings per
share.................... $ 0.14 $ 0.15 $ 0.18 $ --
</TABLE>
- --------
(/1/The)fiscal year ends for the periods presented are: June 26, 1999; June 27,
1998; June 28, 1997; June 29, 1996; and July 1, 1995.
13
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
The following table contains income and expenses from the consolidated
statements of operations for Fiscal 1999, 1998, and 1997 expressed as a
percentage of total revenue.
<TABLE>
<CAPTION>
Fiscal Year
--------------------
1999 1998 1997
----- ----- -----
<S> <C> <C> <C>
Total revenue............................................. 100.0 % 100.0% 100.0%
Total cost of sales and revenue........................... 71.0 65.9 63.7
----- ----- -----
Gross profit margin....................................... 29.0 34.1 36.3
----- ----- -----
Selling expenses.......................................... 6.6 5.3 6.2
General and administrative expenses....................... 10.3 8.0 8.2
Research and development expenses, net.................... 12.5 13.5 15.3
Acquisition-related expenses.............................. 0.0 0.2 3.1
Restructuring charge...................................... 2.9 0.0 0.0
----- ----- -----
Total operating expenses.................................. 32.3 27.0 32.8
----- ----- -----
Earnings (loss) from operations........................... (3.3) 7.1 3.5
----- ----- -----
Total other (expense) income.............................. 0.9 0.7 (0.4)
----- ----- -----
Earnings (loss) before income taxes....................... (2.4) 7.8 3.1
Income tax expense (benefit).............................. (0.8) 3.0 1.1
----- ----- -----
Net earnings (loss)....................................... (1.6)% 4.8% 2.0%
===== ===== =====
</TABLE>
Fiscal Year 1999 Compared to Fiscal Year 1998
Revenue
Total revenue declined 6% to $78.2 million in Fiscal 1999 compared to $83.4
million in Fiscal 1998. This decline is due to the severe downturn in the
semiconductor capital equipment industry as a result of over-capacity, coupled
with a financial crisis in Asia that occurred in the first half of Fiscal 1999.
These factors led to a 40% sequential decline in revenues in the first quarter
of Fiscal 1999, in comparison to the fourth quarter of Fiscal 1998. With a
strong recovery in our semiconductor equipment business in the second half of
Fiscal 1999, this segment of our business declined by only 3% to $51.3 million
in Fiscal 1999 compared to $52.8 million in Fiscal 1998. This strong recovery
was due to the strength of our customers' business and the success of our new
products for this segment. The medical and industrial segment declined by 18%
to $22.6 million in Fiscal 1999 compared to $27.7 million in Fiscal 1998 due to
the impact of the financial crisis in Asia. The systems segment of the business
increased 46% primarily due to the acquisition of ASTeX PlasmaQuest. Research
contract revenue was flat at approximately 1% of total sales in Fiscal 1999 and
Fiscal 1998.
Gross Profit
Gross profit declined by 20% to $22.7 million or 29% of sales in Fiscal 1999
compared to $28.5 million or 34% of sales in Fiscal 1998. The decline is a
result of reduced manufacturing volumes and underutilization of capacity
manufacturing in the first half of Fiscal 1999, and an inventory write-down of
$1.2 million, primarily due to the unexpected severity of the downturn in the
semiconductor equipment business.
We continue to seek to develop and introduce products having higher gross
profit margins. In addition, in the first six months of Fiscal 1999 we
consolidated our Modesto, California facility into our Woburn Massachusetts and
Colorado Springs, Colorado sites and our Beverly, Massachusetts facility into
Woburn in order to reduce our fixed costs and improve gross margins.
14
<PAGE>
Gross profit as a percent of sales improved in our fourth quarter of Fiscal
1999 to 35% compared to 28% in the fourth quarter of Fiscal 1998 primarily as a
result of the cost reduction activities, improved utilization of manufacturing
capacity, and the success of new product introductions.
Selling, General and Administrative Expenses
Selling expenses increased 17% to $5.2 million in Fiscal 1999 compared to
$4.4 million in Fiscal 1998. The increase is a result of the establishment of
the Global Customer Operations organization and increased staffing to
strengthen our global marketing, sales, service and product management
infrastructure. General and administrative expenses increased by 21% to $8.1
million compared to $6.6 million in Fiscal 1998 due to higher information
systems costs from implementation of a new company-wide Enterprise Resource
Planning (ERP) system, increased goodwill amortization, administrative expenses
associated with new acquisitions, and management changes including expanding
the senior management team.
As a result of consolidation of two facilities in the first six months of
Fiscal 1999 and the consolidation of the PlasmaQuest facility in Dallas, Texas
to our Woburn, Massachusetts facility, announced in the fourth quarter, we
recorded a $2.3 million restructuring charge in Fiscal 1999. The restructuring
charge for the consolidation of Modesto, California and Beverly, Massachusetts
consisted of severance related to the termination of 70 full-time employees,
abandonment of leasehold improvements and fixed assets, and facility costs,
primarily future lease payments relating to abandoned facilities. At June 26,
1999 all restructuring costs for these two facilities have been paid out with
the exception of approximately $174,000 for abandoned facility costs expected
to be paid our over the next 9 months. In the fourth quarter of Fiscal 1999, we
adjusted the restructuring accrual for the Modesto, California and the Beverly,
Massachusetts facilities and took back into income approximately $30,000
accrued as an estimate in our first quarter. The restructuring costs of
$763,000 for the Dallas facility are for the severance of 16 full-time
employees, abandonment of leasehold and fixed assets, and future lease payments
relating to abandoned facilities. These costs are expected to be paid out over
the next 18 months. In addition to the $2.3 million restructuring costs, we
incurred $393,000 of other transition costs in Fiscal 1999 for moving inventory
and equipment and training personnel. We expect additional transition costs in
the first and second quarter of Fiscal 2000 for the Dallas facility of
approximately $250,000 primarily for the relocation of inventory and equipment
and three key employees. The total Fiscal 1999 expense relating to
restructuring, inventory write-down, and transition costs was $3.7 million.
These consolidations are expected to reduce our fixed and administrative costs
by $2.5 million per year.
Research and Development Expenses
Net research and development expenses decreased by 13% to $9.7 million in
Fiscal 1999 compared to $11.3 million in Fiscal 1998 as we decreased our
overall level of investment in response to the decline in revenues in the first
half of Fiscal 1999. Gross spending (including funded joint development and the
direct costs of research contracts) decreased 15% to $10.2 million in Fiscal
1999 compared to $12.0 million in Fiscal 1998.
There were no acquisition-related charges in Fiscal 1999. As part of the
acquisition of ASTeX Sorbios in October 1997, we incurred an acquisition-
related expense of $212,000 for the fair value of acquired in-process research
and development projects.
Operating Income
We had an operating loss of $2.6 million in Fiscal 1999 compared to an
operating profit of $5.9 million in Fiscal 1998. The operating loss is a result
of the revenue declines, restructuring, inventory write-downs, and transition
costs and increased operating expenses as a percent of income.
Other Income and Income Taxes
Total other income increased by 17% to $673,000 in Fiscal 1999 compared to
$578,000 in Fiscal 1998. A decline in interest expense and other income in
Fiscal 1999 compared to Fiscal 1998 is a result of repayment of
15
<PAGE>
bank debt and the sale of an investment in another company which resulted in a
one-time gain of $250,000 in Fiscal 1998. Interest income increased in Fiscal
1999 due to the interest earned on the cash from our secondary stock offering
in March 1999.
We had a tax benefit of $650,000 in Fiscal 1999 compared to a tax expense
of $2,466,000 in Fiscal 1998.
Fiscal Year 1998 Compared to Fiscal Year 1997
Revenue
Total revenue increased 74% to $83.4 million in Fiscal 1998 compared to
$48.0 million in Fiscal 1997. This growth was a result of significantly
increased revenues from our semiconductor capital equipment customers and from
the acquisitions of Converter Power, Inc. ("ASTeX CPI") in May 1997 and
Sorbios GmbH ("ASTeX Sorbios") in October 1997. Medical and industrial segment
revenues, including revenues from ASTeX CPI, increased by $12.0 million or 76%
for Fiscal 1998 compared to Fiscal 1997 with most of the growth due to the
revenues from ASTeX CPI. The systems segment revenues were flat in both years
at approximately $2.9 million, declining from 6% of total revenue in Fiscal
1997 to 3% in Fiscal 1998. The ASTeX CPI and ASTeX Sorbios acquisitions added
incremental total revenue of $12.7 million and $3.5 million respectively
compared to Fiscal 1997, or 19% of total revenue. Without these acquisitions,
total revenue increased to $65.0 million from $45.7 million, an increase of
42%. Research contract revenue declined by $197,000 compared to Fiscal 1997.
Gross Profit
Gross profit increased by 63% to $28.5 million in Fiscal 1998 compared to
Fiscal 1997. Gross profit as a percent of total revenue decreased to 34% in
Fiscal 1998 compared to 36% in Fiscal 1997, primarily due to the acquisition
of ASTeX CPI whose products have a lower gross margin than other products sold
by us. In addition, gross profit margins were impacted by volume declines in
the fourth quarter of Fiscal 1998, resulting in unabsorbed manufacturing
costs.
Selling, General and Administrative
Selling expenses increased by 50% to $4.4 million in Fiscal 1998, but
decreased as a percent of revenue to 5% from 6% in Fiscal 1997. Increased
selling expenses were primarily a result of the acquisitions of ASTeX CPI and
ASTeX Sorbios. General and administrative expenses were flat as a percent of
revenue at 8%, although total general and administrative expenses increased by
68% to $6.6 million compared to Fiscal 1997, primarily due to acquisitions.
Research and Development
Net research and development expenses decreased as a percent of sales to
14% in Fiscal 1998 from 15% in Fiscal 1997. Net research and development
expenses increased by 53% to $11.3 million. Gross spending (total research and
development spending including funded joint development and the direct costs
of research contracts) increased by 38% to $12.0 million. We developed and
introduced a number of new technology products including ASTRON for CVD
chamber cleaning, Liquozon for wafer cleaning, RF for HDP-CVD and new laser
power supplies for medical applications. We are committed to continued
investments in research and development in order to advance our position as a
market and technological leader.
As a part of the acquisition of ASTeX Sorbios in Fiscal 1998, a valuation
process was performed to establish the fair values of the assets acquired and
liabilities assumed. As part of this process, we incurred an expense of
$212,000 for in-process research and development. This compares with
acquisition-related expenses of $1,500,000 incurred with the acquisition of
ASTeX CPI in Fiscal 1997.
16
<PAGE>
Operating Income
Operating income increased 256% to $5.9 million or 7% of revenues in Fiscal
1998 compared to Fiscal 1997. Excluding one-time charges for acquisition-
related expenses in both years, operating income increased by $3.0 million or
94%. The increase in operating income is a result of increased sales and lower
expenses as a percent of revenue.
Other Expenses and Income Taxes
Interest expense decreased 66% to $196,000 in Fiscal 1998 compared to Fiscal
1997, while interest income increased by 30% to $514,000 in Fiscal 1998
compared to Fiscal 1997. The decrease in interest expense and the increase in
interest income are a result of conversion of warrants issued in connection
with our IPO in November 1993. See Footnote 6 of the Notes to Consolidated
Financial Statements. Other income increased by $241,000 in Fiscal 1998
compared to Fiscal 1997 due to the sale of an investment in Low Entropy
Systems, Inc., which resulted in a one-time gain of $250,000.
Income tax expense increased to $2.5 million in Fiscal 1998 compared to
$550,000 in Fiscal 1997.
Foreign Currency Fluctuations
Our foreign revenues are generally denominated in U.S. Dollars. The
acquisition of ASTeX Sorbios GmbH increased the risk of foreign currency
fluctuations; however, significant ASTeX Sorbios business is conducted with
U.S. companies in dollars which reduces the foreign exchange fluctuation risk.
Foreign currency fluctuations have not had a significant impact on the
comparison of the results of operations for the periods presented. Over time,
as we expand our operations in Europe and the Far East, more revenues may be
denominated in foreign currencies, increasing the risks associated with foreign
currency fluctuations.
Liquidity and Capital Resources
We had cash and short-term investments of $31.8 million with working capital
of $52.3 million at the end of Fiscal 1999 compared to cash and short-term
investments of $7.7 million and working capital of $28.6 million at the end of
Fiscal 1998.
Footnote 11 of the Notes to Consolidated Financial Statements contains a
summary of recent acquisitions we have completed. These include Klee
Corporation in April 1999; PlasmaQuest, Inc. in November 1998; Sorbios GmbH in
October 1997; and CPI in May 1997. Subsequent to year-end, we acquired the
assets of the Shamrock product line from Sputtered Films, Inc. See Footnote 18
of the Notes to Consolidated Financial Statements.
In March 1999, we completed a secondary offering that raised approximately
$23.8 million through the sale of 2.3 million shares of common stock at $11.00
per share. In November 1993, we completed our IPO and received net proceeds of
$15.9 million through the sale of 2,550,075 shares of common stock at $7.17 per
share and 1,955,000 five-year redeemable warrants at $0.10 per warrant. On
September 3, 1997, we announced that we had met the requirements for the
redemption of our redeemable warrants and called the warrants for redemption.
Net proceeds as a result of the conversion of warrants to common stock were
$15.2 million. The proceeds were used to repay all bank debt, to complete the
ASTeX Sorbios acquisition, and increase working capital. See Footnote 6 of the
Notes to Consolidated Financial Statements.
In October 1995, we purchased $250,000 of Series A Convertible Preferred
Stock of Low Entropy Systems, Inc. (LES). In August 1997, we sold all of our
shares of LES to Balzers and Leybold U.S. Holding, Inc. for $500,000.
During Fiscal 1999 our cash position increased by $24.1 million. Cash
provided from operating activities amounted to $2.9 million, cash used for
investing activities was $1.9 million, and cash provided from financing
activities was $23.2 million. Cash of $2.9 million from operations consisted of
a net loss of $1.25 million offset
17
<PAGE>
by $3.3 million of noncash depreciation, amortization and loss on disposal of
assets of $832,000. Cash used for investing activities was primarily for
additions to property, plant and equipment, and patents. Cash provided by
financing activities was primarily from the issuance of common stock offset by
repayment of notes payable for $686,000 and advances to subsidiaries prior to
acquisition of $1.1 million. We raised $24.9 million from issuance of common
stock, primarily from a subsequent stock offering completed in March 1999 that
raised approximately $23.8 million.
During Fiscal 1998, we generated $2.5 million in net cash flows from
operating activities and used $4.9 million for investing activities. Cash used
for investing activities consisted of $3.7 million for the acquisition of
Sorbios GmbH, $3.0 million for additions to property, equipment, and patents,
offset by sales of $1.3 million in investments (primarily commercial paper and
government treasury bills) and sale of $500,000 for our investment in LES. Cash
provided by financing activities consisted primarily of repayment of bank debt
for $9.2 million and proceeds from issuance of common stock for $16.1 million
which was primarily from the redemption of warrants and exercise of stock
options by employees.
During Fiscal 1997, we generated $4.4 million in net cash flows from
operating activities and used a net $7.0 million for investing activities. Cash
used for investing activities consisted of $6.5 million for the acquisition of
ASTeX CPI, $1.1 million for additions to property, equipment, and patents, and
$1.3 million for the purchase of investments, offset by sales of $2.0 million
in investments. Investments are primarily commercial paper and government
treasury bills. Cash provided by financing activities consisted primarily of
proceeds of notes payable of $5.0 million offset by note repayments of $4.6
million and proceeds of $290,000 from issuance of common stock which was
primarily due to exercise of employee stock options. The proceeds of notes
payable were a result of additional borrowings for the acquisition of ASTeX
CPI, while the repayments were primarily a result of debt restructuring for the
acquisition.
We have a credit facility with State Street Bank which consists of an $8
million unsecured demand line of credit with interest at the bank's prime rate
of 7.75% at June 26, 1999. This facility is subject to certain financial
covenants which are tested quarterly. We are currently in compliance with all
covenants. At June 26, 1999, we had no borrowings against the line of credit.
This 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.
We believe that existing cash resources, 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.
New Accounting Pronouncements
In Fiscal 2000, we will be required to adopt several new accounting
pronouncements. See Footnote 15 of the Notes to Consolidated Financial
Statements.
Factors that May Affect Future Results
From time to time, information we provide or statements made by our
employees may contain "forward-looking" information which involve risks and
uncertainties. In particular, statements contained in the Management's
Discussion and Analysis of Financial Condition and Results of Operations which
are not historical facts (including, but not limited to, statements concerning
anticipated operating expense levels, gross margin estimates and the
availability of funds to meet cash requirements) may be "forward-looking"
statements. Our actual future results may differ significantly from those
stated in any forward-looking statements. Factors that may cause such
differences include, but are not limited to, the factors discussed below and
the accuracy of our internal estimates of revenue and operating expense levels.
18
<PAGE>
Customer Concentration
Relatively few customers account for a substantial portion of our revenues.
Sales to our ten largest customers in Fiscal Years 1999, 1998, and 1997
accounted for 76%, 72%, and 76% of revenues, respectively. In Fiscal Years
1999, 1998, and 1997, sales to Applied Materials, our largest customer in each
of these periods, accounted for approximately 45%, 40%, and 38% of our
revenues, respectively. We expect that sales to Applied Materials will continue
to represent a significant portion of our revenues for the foreseeable future,
although the acquisitions of ASTeX PlasmaQuest, ASTeX Sorbios, ASTeX CPI and
the Shamrock product line acquired in the first quarter of Fiscal 2000 are
expected to provide a reduction in our reliance on Applied Materials. See
subsequent events Footnote 19 of the Notes to Consolidated Financial Statements
for the Shamrock product line acquisition. Although a number of our customers
do enter into long-term supply agreements, these agreements typically allow the
customer to cancel orders with limited penalties. A reduction or delay in
orders from Applied Materials or other significant customers, including
reductions or delays due to market, economic or competitive conditions in the
semiconductor industry, could have a material adverse effect on our future
financial condition, revenues and operating results.
Dependence on Cyclical Industries
Our business is significantly dependent on capital expenditures by
manufacturers of semiconductors. The semiconductor industry is highly cyclical
and historically has experienced periods of oversupply, resulting in
significantly reduced demands for capital equipment, including the products we
manufacture and market. Our future financial condition, revenues and operating
results may be materially adversely affected by semiconductor industry
downturns or slowdowns. During Fiscal 1999, the semiconductor industry had
excess capacity for most types of devices, which caused semiconductor
manufacturers to significantly decrease their levels of capital spending. In
the personal computer market, a shift in demand from more expensive, high
performance computers to lower-priced models resulted in reduced profitability
for semiconductor manufacturers, resulting in delays and further decreases in
capital spending. Our results for the first half of Fiscal 1999 were adversely
affected by the semiconductor capital equipment downturn as a result of these
factors. We restructured our operations, reducing use of temporary employees,
reducing staff and consolidating several facilities to reduce our fixed costs
and incurred consolidation costs as discussed above under the gross profit
comparison of Fiscal 1998 to 1997. Renewed over-capacity in the semiconductor
could cause weakness in demand for our products.
Reliance on OEM Customers; Lengthy Sales Cycle
Our products are primarily sold to OEMs which incorporate our products into
their equipment. Due to the significant capital commitments usually incurred by
semiconductor manufacturers in their purchase of the OEM's equipment, these
manufacturers demand highly reliable products which require as long as several
years for OEMs to develop. Our revenues are therefore primarily dependent upon
the timing and effectiveness of the efforts of our OEM customers in developing
and marketing equipment incorporating our products. There can be no assurance
that any equipment incorporating our products will be marketed successfully by
our customers.
Asian Economies
Asian countries have had economic difficulties that caused economic
slowdowns or recessions in those countries. Asia has historically been an
important region for the semiconductor capital equipment industry. If these
economies do not continue to recover in the near future, the recovery in the
semiconductor capital equipment industry may be interrupted in time or reduced
in scale. The economic difficulties of these countries could also have a
negative impact on the economies of the U.S. and Europe, leading to declines in
demand for our products.
19
<PAGE>
Japanese Market
The Japanese semiconductor equipment markets are large and difficult for
foreign companies to penetrate. We believe that increasing our penetration of
the Japanese market is important to our business, and that we are currently at
a competitive disadvantage to Japanese suppliers, many of which have long-
standing collaborative relationships with Japanese semiconductor process
equipment manufactures. Moreover, our ability to compete effectively in the
Japanese markets may be limited by our size and our geographic location.
Although we intend to expand our direct presence in Japan, there can be no
assurance that we will be able to achieve significant sales to, or compete
successfully in, Japan.
Foreign Revenues
We do business worldwide, both directly and via sales to United States-based
OEMs who sell such products internationally. In Fiscal Years 1999, 1998, and
1997, foreign revenues accounted for 20%, 23%, and 21%, respectively, of our
revenues. We anticipate that foreign revenues will continue to account for a
significant percentage of revenues, which will result in a significant portion
of our revenues and operating results being subject to risks associated with
foreign revenues, including United States and foreign regulatory and policy
changes, political and economic instability, difficulties in accounts
receivable collection, difficulties in managing representatives, and foreign
currency fluctuations.
Highly Competitive Industries
The markets for our products are highly competitive and subject to rapid
technological changes. A number of our current and potential competitors have
substantially greater resources than we do. There can be no assurance that we
will be successful in selling our products to OEMs or end users, regardless of
the performance or the price of our products. Competitors may develop superior
products or products of similar quality at the same or lower prices. Other
technical innovations may impair our ability to market our products. There can
be no assurance that we will be able to compete successfully.
New Products and Technological Change
The semiconductor manufacturing industry has been characterized by rapid
technological change and evolving industry requirements and standards. We
believe that these trends will continue into the foreseeable future. Our
success will depend upon our ability to enhance our existing products and to
develop new products to meet customer requirements and to achieve market
acceptance. There can be no assurance that we will be successful in introducing
products or product enhancements on a timely basis, if at all, or that we will
be able to market successfully these products and product enhancements once
developed. Further, there can be no assurance that our products will not be
rendered obsolete by new industry standards or changing technology.
Management of Growth and Consolidation
We have recently gone though a period of rapid growth subsequent to a period
of consolidation. Due to the level of technical and marketing expertise
necessary to support our existing and new customers, we must attract and retain
highly qualified and well-trained personnel. There can be only a limited number
of persons with the requisite skills to serve in these positions, and it may
become increasingly difficult for us to hire and retain such personnel. Our
expansion and contraction may also significantly strain our management,
manufacturing, financial and other resources. There can be no assurance that
our systems, procedures, controls and existing space will be adequate to
support our operations. Failure to manage our growth properly could have a
material adverse effect on our future financial condition, revenues and
operating results.
Quarterly Fluctuations in Operating Results and Market Price of Securities
Our quarterly operating results may vary significantly from quarter to
quarter depending on factors such as economic conditions in the semiconductor
industry, the timing of significant orders and shipments of our
20
<PAGE>
products, changes and delays in product development, new product introductions
by us and our competitors, the mix of products sold by us and competitive
pricing pressures. Additionally, a number of our products have high selling
prices. As a result, quarterly variations in systems sales could significantly
affect our operating results. Moreover, customers may cancel or reschedule
shipments and production difficulties could delay shipments. These factors
could have a material adverse effect on our future financial condition,
revenues and operating results.
The marketing price of our securities could also be subject to wide
fluctuations in response to quarter-to-quarter variations in operating results,
changes in earnings estimates by analysts, market conditions in the
semiconductor industry, as well as general economic conditions and other
factors external to us.
Effects of Inflation
We believe that, over the past three years, 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 were Year 2000 compliant as of June 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, MA. The current ERP software packages used by ASTeX
ETO, are represented as being Year 2000 compliant. The software package used by
ASTeX Sorbios was not Year 2000 compliant; however, we purchased an upgrade
that is represented as being Year 2000 compliant and implemented this software
in 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 June 1999 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 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. We have contacted critical suppliers and major customers to determine
whether they are, or will be, compliant by the Year 2000. Based upon this
evaluation, we will seek new vendors where necessary and have formulated
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 us or our level of operations in the Year 2000.
We have completed a systematic review of our products in operation at
customer locations and have identified noncompliant products and offered all
necessary modifications to make them compliant. However, as many of our
products are complex, interact with third-party products, and operate on
computer systems that are not under our control, there can be no assurance that
we have identified all of the Year 2000 problems associated with our products.
21
<PAGE>
There is expected to be a significant amount of litigation relating to the
Year 2000 issue and there can be no assurance that we will not incur material
costs in defending or bringing lawsuits. In addition, if any Year 2000 issues
are identified, there can be no assurance that we will be able to retain
qualified personnel to remedy such issues. Any unexpected costs or delays
arising from the Year 2000 issue could have a significant adverse impact on our
business, operations, and financial condition in amounts that cannot be
reasonably estimated at this time.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of changes in value of short term
investments and financial instruments caused by fluctuations in investment
prices, interest rates and foreign currency exchange rates.
We address market risks in accordance with established policies. Our risk-
managment activities involve risk and uncertainties and accordingly, results
could differ materially from those projected.
Interest Rate Risk
Due to the fact that long-term notes receivable mature within 4 years,
management has determined that the fair value does not differ materially from
the carrying amount.
Foreign Exchange Risk
We do not obtain a significant amount of sales denominated in other than US
currency.
Investment Risk
Our investment securities are United States instruments with original
maturities of ninety days or less and are considered cash equivalents.
Item 8. Financial Statements
The following financial statements are filed as part of this report:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................. F-2
Consolidated Balance Sheets as of June 26, 1999 and June 27, 1998........ F-3
Consolidated Statements of Operations for the Years Ended June 26, 1999,
June 27, 1998, and June 28, 1997........................................ F-4
Consolidated Statements of Stockholders' Equity for the Years Ended June
26, 1999, June 27, 1998, and June 28, 1997.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended June 26, 1999,
June 27, 1998, and June 28, 1997........................................ F-6
Notes on Consolidated Financial Statements............................... F-8
</TABLE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
22
<PAGE>
PART III
Items 10 to 13 are incorporated by reference to our definitive Proxy
Statement to be filed with the Securities and Exchange Commission in October
1998.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements:
The list of financial statements required by this item is set forth
in Item 8 "Consolidated Financial Statements and Supplementary
Data" and is incorporated herein by reference.
(2) Financial Statement Schedule:
The following financial statement schedule of Applied Science and
Technology, Inc. and Subsidiaries for the years ended June 26,
1999, June 27, 1998, and June 28, 1997 is filed as part of this
Form 10-K and should read in conjunction with our Consolidated Financial
Statements included in Item 8 of this Report on Form 10-K.
23
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
--------- ------------ ---------- ---------- ---------
Balance Balance
at Charged to Charged to at
Beginning Costs Other End of
of Year and Expenses Accounts* Deductions Year
--------- ------------ ---------- ---------- ---------
Description
- -----------
<S> <C> <C> <C> <C> <C>
Year ended June 28,
1997:
Allowance for doubtful
accounts............. $(352,209) $(72,704) $(35,955) $134,526 $(326,342)
Year ended June 27,
1998:
Allowance for doubtful
accounts............. (326,342) (86,287) (80,841) 116,031 (377,439)
Year ended June 26,
1999:
Allowance for doubtful
accounts............. (377,439) (402,979) (98,625) 143,972 (735,071)
</TABLE>
- --------
* Amounts charged to other accounts were acquired in acquisitions.
Schedules not listed above are omitted because they are inapplicable, not
required, or the information is included elsewhere in the Consolidated
Financial Statements or Notes thereto.
24
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
June 26, 1999 and June 27, 1998
With Independent Auditors' Report Thereon
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Applied Science and Technology, Inc.:
We have audited the accompanying consolidated balance sheets of Applied
Science and Technology, Inc. and subsidiaries as of June 26, 1999 and June 27,
1998, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
June 26, 1999. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Applied
Science and Technology, Inc. and subsidiaries as of June 26, 1999 and June 27,
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended June 26, 1999, in conformity with
generally accepted accounting principles.
KPMG LLP
Boston, Massachusetts
July 23, 1999, except for note 18,
as to which the date is August 24, 1999
F-2
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 26, June 27,
1999 1998
------------ ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 31,775,226 7,686,805
Trade receivables, net (notes 2, 3 and 9).......... 18,093,355 12,734,381
Other receivables (note 11)........................ 905,827 --
Inventories (note 4)............................... 12,418,826 13,737,212
Prepaid expenses and other assets.................. 385,621 548,709
Deferred income taxes (note 7)..................... 1,514,044 1,356,044
------------ ----------
Total current assets.............................. 65,092,899 36,063,151
------------ ----------
Property and equipment:
Land............................................... 473,000 473,000
Building........................................... 1,652,213 1,643,072
Equipment.......................................... 11,181,223 11,107,731
Furniture and fixtures............................. 1,043,002 1,032,497
Leasehold improvements............................. 2,192,523 2,228,246
------------ ----------
16,541,961 16,484,546
Less accumulated depreciation and amortization..... 8,394,234 7,960,282
------------ ----------
Net property and equipment........................ 8,147,727 8,524,264
------------ ----------
Other assets:
Patents, net....................................... 991,818 1,095,090
Goodwill, net of accumulated amortization of
$941,738 and $471,252 in 1999 and 1998,
respectively (note 11)............................ 3,967,884 4,042,031
Deferred income taxes (note 7)..................... 1,936,294 1,099,998
Notes receivable, less current maturities (notes 3
and 12)........................................... 393,463 468,772
Other, net......................................... 5,289 --
------------ ----------
Total other assets................................ 7,294,748 6,705,891
------------ ----------
$ 80,535,374 51,293,306
============ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 5,495,987 3,011,798
Accrued expenses................................... 3,470,827 1,935,229
Accrued compensation expense and related costs..... 2,623,704 1,993,027
Accrued income taxes............................... 607,762 293,444
Commissions payable and customer advances.......... 616,374 259,154
------------ ----------
Total current liabilities......................... 12,814,654 7,492,652
------------ ----------
Commitments and contingencies (notes 5 and 10)
Stockholders' equity (notes 6, 11 and 13):
Common stock....................................... 114,172 86,065
Additional paid-in capital......................... 70,044,379 44,193,116
Accumulated deficit................................ (2,123,991) (247,095)
Accumulated other comprehensive loss............... (165,514) (83,106)
Less: Notes receivable for common stock purchases.. (148,326) (148,326)
------------ ----------
Total stockholders' equity........................ 67,720,720 43,800,654
------------ ----------
$ 80,535,374 51,293,306
============ ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended
-----------------------------------
June 26, June 27, June 28,
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Product sales, net........................ $72,097,565 77,958,080 43,934,476
Research contract revenue................. 855,636 785,607 982,383
Other revenue............................. 5,256,512 4,692,448 3,050,279
----------- ---------- ----------
Total revenue (note 9)................ 78,209,713 83,436,135 47,967,138
----------- ---------- ----------
Cost of sales and revenue:
Product sales and other revenues........ 55,246,379 54,563,883 30,052,877
Research contracts...................... 309,018 422,724 504,357
----------- ---------- ----------
Total cost of sales and revenue....... 55,555,397 54,986,607 30,557,234
----------- ---------- ----------
Gross profit.......................... 22,654,316 28,449,528 17,409,904
----------- ---------- ----------
Operating expenses:
Selling expenses........................ 5,168,292 4,426,521 2,950,117
General and administrative expenses..... 8,054,876 6,648,055 3,957,792
Research and development expenses, net
(note 1)............................... 9,744,706 11,253,490 7,343,190
Acquisition-related expenses (note 11).. -- 212,423 1,500,000
Restructuring charges (note 16)......... 2,260,381 -- --
----------- ---------- ----------
Total operating expenses.............. 25,228,255 22,540,489 15,751,099
----------- ---------- ----------
Earnings (loss) from operations....... (2,573,939) 5,909,039 1,658,805
----------- ---------- ----------
Other (expense) income:
Interest expense........................ (31,874) (196,392) (585,462)
Interest income......................... 649,362 514,363 396,114
Other income............................ 55,529 259,594 18,302
----------- ---------- ----------
Total other (expense) income.......... 673,017 577,565 (171,046)
----------- ---------- ----------
Earnings (loss) before income taxes... (1,900,922) 6,486,604 1,487,759
Income tax expense (benefit) (note 7)..... (650,000) 2,466,000 550,000
----------- ---------- ----------
Net earnings (loss)................... $(1,250,922) 4,020,604 937,759
=========== ========== ==========
Basic earnings (loss) per share........... $ (0.13) 0.50 0.14
=========== ========== ==========
Diluted earnings (loss) per share......... $ (0.13) 0.47 0.14
=========== ========== ==========
Weighted average common shares outstanding
used to calculate basic earnings (loss)
per share................................ 9,398,289 8,052,926 6,686,253
=========== ========== ==========
Weighted average common shares outstanding
used to calculate fully diluted earnings
(loss) per share......................... 9,398,289 8,528,947 6,777,440
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended June 26, 1999, June 27, 1998 and June 28, 1997
<TABLE>
<CAPTION>
Accumulated Notes
Preferred Retained other receivable
stock Common stock Additional earnings comprehensive for common Total
------------- -------------------- paid-in (accumulated income stock stockholders'
Shares Amount Shares Amount capital deficit) (loss) purchases equity
------ ------ ---------- -------- ----------- ------------ ------------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 29,
1996.................. -- $ -- 6,672,563 $ 66,726 $26,667,866 $(5,205,458) $ -- $(233,326) $21,295,808
Repayment of notes
receivable........... -- -- -- -- -- -- -- 7,500 7,500
Canceled stock in
exchange for
cancellation of note
receivable........... -- -- (7,500) (75) (77,425) -- -- 77,500 --
Exercise of stock
options.............. -- -- 52,964 530 289,146 -- -- -- 289,676
Tax benefit of stock
options exercised
(note 13)............ -- -- -- -- 62,242 -- -- -- 62,242
Stock issued in
connection with
acquisition
(note 11)............ -- -- 60,482 604 895,421 -- -- -- 896,025
Net earnings and
total comprehensive
income............... -- -- -- -- -- 937,759 -- -- 937,759
---- ----- ---------- -------- ----------- ----------- --------- --------- -----------
Balance at June 28,
1997.................. -- -- 6,778,509 67,785 27,837,250 (4,267,699) -- (148,326) 23,489,010
Exercise of stock
options and warrants
(note 6)............. -- -- 1,827,954 18,280 16,079,566 -- -- -- 16,097,846
Tax benefit of stock
options exercised
(note 13)............ -- -- -- -- 276,300 -- -- -- 276,300
Comprehensive income
(loss):
Cumulative
translation
adjustment........... -- -- -- -- -- -- (83,106) -- (83,106)
Net earnings......... -- -- -- -- -- 4,020,604 -- -- 4,020,604
-----------
Total comprehensive
income (loss)...... -- -- -- -- -- -- -- -- 3,937,498
---- ----- ---------- -------- ----------- ----------- --------- --------- -----------
Balance at June 27,
1998.................. -- -- 8,606,463 86,065 44,193,116 (247,095) (83,106) (148,326) 43,800,654
Common stock issued,
net of issuance
costs
(note 6)............. -- -- 2,300,000 23,000 23,782,000 -- -- -- 23,805,000
Exercise of stock
options and warrants
(note 6)............. -- -- 222,035 2,220 987,191 -- -- -- 989,411
Retirement of common
stock (note 13)...... -- -- (21,940) (219) (195,197) -- -- -- (195,416)
Tax benefit of stock
options exercised
(note 13)............ -- -- -- -- 443,533 -- -- -- 443,533
Stock issued in
pooling of interest
acquisition
(note 11)............ -- -- 310,604 3,106 833,736 (625,974) -- -- 210,868
Comprehensive income
(loss):
Cumulative
translation
adjustment........... -- -- -- -- -- -- (82,408) -- (82,408)
Net loss............. -- -- -- -- -- (1,250,922) -- -- (1,250,922)
-----------
Total comprehensive
income (loss)...... -- -- -- -- -- -- -- -- (1,333,330)
---- ----- ---------- -------- ----------- ----------- --------- --------- -----------
Balance at June 26,
1999.................. -- $ -- 11,417,162 $114,172 $70,044,379 $(2,123,991) $(165,514) $(148,326) $67,720,720
==== ===== ========== ======== =========== =========== ========= ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years ended
-----------------------------------
June 26, June 27, June 28,
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)..................... $(1,250,922) 4,020,604 937,759
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Depreciation.......................... 2,658,482 2,194,319 1,824,739
Amortization.......................... 623,140 548,390 117,164
Acquisition-related expenses.......... -- 212,423 1,500,000
Deferred income taxes................. (994,296) 37,000 (439,000)
Loss (gain) on disposal of assets..... 831,520 (191,842) --
Equipment transferred to inventories.. -- -- 114,419
Changes in operating assets and
liabilities:
Trade receivables................... (4,327,704) 44,702 (1,739,367)
Other receivables................... (806,163) -- --
Inventories......................... 1,635,927 (2,754,271) 146,391
Prepaid expenses and other assets... 236,893 (271,853) 41,036
Notes receivable.................... (22,973) 231,617 373,304
Accounts payable.................... 1,947,829 (1,896,906) 785,299
Accrued expenses.................... 1,569,949 409,675 188,022
Accrued income taxes................ 758,307 (77,398) 536,205
----------- ---------- ----------
Net cash provided by operating
activities....................... 2,859,989 2,506,460 4,385,971
----------- ---------- ----------
Cash flows from investing activities:
Acquisitions of subsidiaries, less cash
acquired............................... (22,656) (3,682,639) (6,482,933)
Purchases of investments................ -- (339) (1,299,102)
Proceeds from sales of investments...... -- 1,799,545 1,990,519
Additions to property and equipment..... (1,839,209) (2,999,148) (1,029,908)
Patent costs............................ (52,383) (24,943) (57,005)
Investment in other assets.............. 48,033 -- (139,827)
----------- ---------- ----------
Net cash used for investing
activities....................... (1,866,215) (4,907,524) (7,018,256)
----------- ---------- ----------
Cash flows from financing activities:
Advances to subsidiaries prior to
acquisitions........................... (1,050,000) -- --
Proceeds from notes payable............. -- -- 4,983,050
Repayments of notes payable............. (685,509) (9,173,208) (4,583,898)
Repayment of notes receivable for common
stock purchases........................ -- -- 7,500
Net proceeds from issuance of common
stock.................................. 24,912,564 16,097,846 289,676
----------- ---------- ----------
Net cash provided by financing
activities....................... 23,177,055 6,924,638 696,328
</TABLE>
(continued)
F-6
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Years ended
-----------------------------------
June 26, June 27, June 28,
1999 1998 1997
----------- ---------- ----------
<S> <C> <C> <C>
Effect of exchange rates on cash......... $ (82,408) (83,106) --
----------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents............................. 24,088,421 4,440,468 (1,935,957)
Cash and cash equivalents at beginning of
year.................................... 7,686,805 3,246,337 5,182,294
----------- ---------- ----------
Cash and cash equivalents at end of
year.................................... $31,775,226 7,686,805 3,246,337
=========== ========== ==========
Supplemental disclosures of cash flow
information:
Cash paid during the year for:
Interest............................. $ 32,065 249,044 538,893
=========== ========== ==========
Income taxes......................... $ 277,334 2,520,921 453,567
=========== ========== ==========
Acquisitions:
Assets acquired........................ $ 2,578,046 4,700,575 4,074,488
Acquisition related expenses, net of
tax benefit........................... -- 212,423 945,000
Goodwill and other intangible assets... 393,338 2,177,479 3,316,934
Liabilities assumed.................... (2,824,689) (3,407,838) (957,464)
Common stock issued.................... -- -- (896,025)
----------- ---------- ----------
Cash paid........................ 146,695 3,682,639 6,482,933
Less cash acquired..................... (124,039) -- --
----------- ---------- ----------
Net cash paid for acquisitions... $ 22,656 3,682,639 6,482,933
=========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 26, 1999 and June 27, 1998
1. Nature of Business and Summary of Significant Accounting Policies
(a) Nature of Business
Applied Science and Technology, Inc. (the "Company") develops and
manufactures components and sub-systems using reactive gas and power source
technologies for semiconductor, medical, and industrial applications and
complete process systems for electronic applications.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation.
(c) Revenue Recognition
The Company recognizes revenue on product sales and other sales when the
related products are shipped or the related services are rendered. The Company
periodically enters into research contracts which generally provide for
nonrefundable payments. Research contract revenue is recognized based on the
proportion of costs incurred to total estimated costs using the percentage of
completion method. At the time a loss on a contract becomes known, the entire
amount of the estimated loss is recognized.
(d) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investments with original maturities of three
months or less to be cash equivalents. Cash equivalents consist of U.S.
treasury notes, commercial paper and money market funds at June 26, 1999 and
June 27, 1998. The Company uses an investment firm to manage its investment
portfolio.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
using the first-in, first-out (FIFO) method.
(f) Property and Equipment
Property and equipment are stated at cost and depreciated using the
straight-line method over the estimated useful lives of the assets. Estimated
useful lives are as follows:
<TABLE>
<S> <C>
Building............................................. 25 to 31-1/2 years
Equipment, furniture and fixtures.................... 3-1/2 to 7 years
Leasehold improvements............................... Remaining lease term
</TABLE>
(g) Patents
Patent costs are amortized over their estimated useful life of five years.
(h) Goodwill
Goodwill is amortized over 10 years. The Company continually evaluates
whether events or circumstances have occurred that indicate that the remaining
useful life of goodwill may warrant revision or that the
F-8
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
remaining balance may not be recoverable. When factors indicate that goodwill
should be evaluated for possible impairment, the Company estimates the
undiscounted cash flow of the business segment, net of tax, over the remaining
life of the asset in determining whether the asset is recoverable. Charges for
impairment of goodwill would be recorded to the extent unamortized book value
exceeds the related future discounted cash flow, net of tax. The discount
factor would be the long-term debt rate currently obtainable by the Company.
(i) Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of
The Company uses the provisions of SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of.
This statement requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to undiscounted future net cash
flows expected to be generated by the asset. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or fair
value less costs to sell.
(j) Research and Development Costs
All research and development costs are expensed as incurred. Research and
development expenses attributable to research contracts are included in costs
of sales and revenue.
The Company also receives funding for certain research and development costs
which is used to offset its research and development expenses.
The Company incurred research and development expenses, net of funding
received, as follows:
<TABLE>
<CAPTION>
Years ended
--------------------------------
June 26, June 27, June 28,
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Research and development costs................. $ 9,854,600 11,605,103 8,195,367
Less funding................................... 109,894 351,613 852,177
----------- ---------- ---------
Net research and development expenses...... $ 9,744,706 11,253,490 7,343,190
=========== ========== =========
</TABLE>
(k) Income Taxes
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates in effect for the year in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date.
(l) Use of Estimates
Management of the Company has made a number of estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-9
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The significant estimates included in the consolidated financial statements
relate to the determination of the reserves for excess inventories. Management
establishes its reserves for excess inventories based upon expected future
usage and sales of inventories in the normal course of business as adjusted for
anticipated changes in market demand. Certain of the Company's inventories are
product specific and may not be readily saleable in the open market. The
possible loss of sales to certain customers could result in the need for
further adjustment to the carrying value of the Company's inventories.
(m) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures about Fair
Value of Financial Instruments, defines the fair value of a financial
instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties.
The carrying amounts of cash and cash equivalents, trade receivables, other
receivables, prepaid expenses and other assets, accounts payable, and accrued
expenses approximate fair value because of the short maturity of those
instruments.
The carrying amounts of notes receivable approximates fair value as the
rates of interest on these instruments approximate current market rates of
interest for similar instruments with comparable maturities.
(n) Accounting for Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123, Accounting for Stock-Based Compensation ("Statement 123") which
established a fair-value based method of accounting for stock-based
compensation plans. Prior to its adoption of Statement 123, the Company
accounted for employee stock-based compensation under APB Opinion No. 25,
Accounting for Stock Issued to Employees, which required the use of an
intrinsic-value method of accounting for stock-based compensation. Statement
123 allows the continued use of the intrinsic-value method of accounting
prescribed by APB Opinion No. 25 as long as pro forma disclosures of net
earnings (loss) and net earnings (loss) per share, as if the fair-value method
of accounting for stock-based compensation were applied, are presented.
The Company has adopted Statement 123 and has elected to continue to account
for stock-based compensation using the methodology prescribed by APB Opinion
No. 25. Accordingly, pro forma disclosures of net earnings (loss) and net
earnings (loss) per share as if the fair-value method of accounting for stock-
based compensation were applied are presented in note 6.
(o) Foreign Currency Translation
All assets and liabilities of the Company's foreign operations are
translated into U.S. dollars using year-end exchange rates. All revenue and
expense items are translated using weighted-average exchange rates for the
year. Translation gains and losses are included in other comprehensive income
in the statement of stockholders' equity.
(p) Comprehensive Income
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income, during fiscal year 1999.
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 from investments by owners and distributions to owners.
This pronouncement requires that the accumulated total of other comprehensive
F-10
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
2. Trade and Notes Receivable
Trade and notes receivable consist of the following:
<TABLE>
<CAPTION>
June 26, June 27,
1999 1998
------------ ----------
<S> <C> <C>
Trade receivables............................. $ 18,465,878 13,044,466
Notes receivable, current portion (see note
3)........................................... 362,548 67,354
Allowance for doubtful accounts............... (735,071) (377,439)
------------ ----------
$ 18,093,355 12,734,381
============ ==========
</TABLE>
3. Notes Receivable
Notes receivable consist of the following:
<TABLE>
<CAPTION>
June
June 26, 27,
1999 1998
--------- -------
<S> <C> <C>
Note receivable from stockholder with interest at 8%
per annum, payable in principal installments through June
1999, with the remaining balance due in August 1999. The
note is secured by certificates of deposit.................. $ 224,000 288,335
Note receivable with interest at 8% per annum, payable in
monthly installments of $2,327, including interest, with any
remaining balance due on December 2, 2002. The note is
secured by real estate...................................... 190,088 147,791
Unsecured note receivable with interest at 10%............... -- 100,000
Note receivable with interest at 8.5% per annum, payable in
quarterly principal installments of $10,000, plus accrued
interest, with final principal payment of $100,000 on June
30, 2003. This note is secured by equipment................. 250,000 --
Unsecured note receivable due on October 1, 1999............. 90,000 --
Unsecured note receivable with interest at 10.5% per annum,
payable in monthly installments of $44, including interest,
with any remaining balance due on August 2003............... 1,923 --
--------- -------
756,011 536,126
Less current maturities...................................... 362,548 67,354
--------- -------
Notes receivable, less current maturities................ $ 393,463 468,772
========= =======
</TABLE>
Current maturities of notes receivable have been included in trade
receivables.
F-11
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
June 26, June 27,
1999 1998
------------ ----------
<S> <C> <C>
Raw materials..................................... $ 7,905,889 8,990,201
Work in process................................... 3,458,285 3,210,131
Finished goods.................................... 1,054,652 1,536,880
------------ ----------
$ 12,418,826 13,737,212
============ ==========
</TABLE>
5. Leases
The Company leases equipment and office, research and manufacturing
facilities under operating leases which expire through April 2010. Future
minimum lease payments under operating leases are as follows:
<TABLE>
<CAPTION>
Fiscal year ending June
-----------------------
<S> <C>
2000........................................................ $ 1,714,101
2001........................................................ 1,432,633
2002........................................................ 1,252,624
2003........................................................ 1,339,848
2004........................................................ 1,324,069
Thereafter.................................................. 7,292,498
------------
$ 14,355,773
============
</TABLE>
Rent expense totaled $1,339,330, $916,155 and $761,710 for the years
ended June 26, 1999, June 27, 1998 and June 28, 1997, respectively.
6. Stockholders' Equity
Capital stock consists of the following at June 26, 1999 and June 27, 1998:
<TABLE>
<CAPTION>
Number of shares
issued and
outstanding
-------------------- ---
June 27, June 26,
Authorized 1999 1998
---------- ---------- ---------
<S> <C> <C> <C> <C>
Preferred stock, $.01 par value...... 1,000,000 -- --
---------- ---------- ---------
Total preferred stock.............. 1,000,000 -- --
---------- ---------- ---------
Common stock, $.01 par value......... 30,000,000 11,417,162 8,606,463
---------- ---------- ---------
Total common stock................. 30,000,000 11,417,162 8,606,463
---------- ---------- ---------
Total capital stock................ 31,000,000 11,417,162 8,606,463
========== ========== =========
</TABLE>
The holders of common stock are entitled to one vote for each share of
record held on each matter submitted to a vote of stockholders. There is no
cumulative voting for election of directors. Subject to the prior rights of any
series of preferred stock which may from time to time be outstanding, holders
of common stock are entitled to receive ratably such dividends as may be
declared by the board of directors out of funds legally available therefrom,
and, upon the liquidation, dissolution or winding up of the Company, are
entitled to share ratably in all assets remaining after payment of liabilities
and payment of accrued dividends and liquidation
F-12
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
preference on the preferred stock, if any. Holders of common stock have no
preemptive rights and have no rights to convert their common stock into any
other securities. The outstanding common stock is validly issued and
nonassessable.
On March 5, 1999, the Company completed the registration and sale of
2,000,000 shares of common stock at $11 per share. On April 6, 1999, the
underwriters exercised their over-allotment option to purchase an additional
300,000 shares of common stock, bringing total shares issued in this offering
to 2.3 million. The net proceeds from the offering were approximately $23.8
million.
On February 19, 1998, the Company declared a dividend of one preferred share
purchase right (a "right") for each outstanding share of common stock
outstanding on March 2, 1998 (the "record date") to stockholders of record on
that date. Each right entitles the registered holder to purchase one one-
thousandth of a share of Series A Junior Participating Preferred Stock, par
value $0.01 per share ("junior preferred shares"), of the Company at $70 per
one one-thousandth of a junior preferred share, subject to adjustment in the
event of a stock split of the common shares or a stock dividend on the common
shares payable in common shares or subdivisions, consolidations or combinations
of the common shares occurring prior to the distribution date, defined below.
Until the earlier of (i) 10 days following a public announcement that a
person or group of affiliated or associated persons has acquired a beneficial
ownership of 15% or more of the outstanding common shares or (ii) 10 business
days following the commencement of, or announcement of an intention to make, a
tender offer or exchange offer the consummation of which would result in the
beneficial ownership by a person or group of 15% or more of such outstanding
common shares (the earlier of such dates being the "distribution date"), the
rights will be evidenced, with respect to any of the common share certificates
outstanding as of the record date.
Until the distribution date, the rights will be transferred with and only
with the common shares. Until the distribution date (or earlier redemption or
expiration of the rights), new common share certificates issued after the
record date will contain a notation incorporating the rights agreement by
reference.
Preferred shares purchased upon exercise of the rights are not redeemable
and are entitled to quarterly dividend payments of 1000 times dividends
declared on common shares, 1000 votes, voting together with common shares, and
1000 times the aggregate payment made to common shareholders in the event of
liquidation.
The rights are not exercisable until the distribution date and expire on
December 31, 2007, unless extended or redeemed by the Company.
The preferred stock may be issued in one or more series, the terms of which
may be determined at the time of issuance by the board of directors, without
further action by stockholders, and may include voting rights (including the
right to vote as a series on particular matters), preferences as to dividends
and liquidation, conversion, redemption rights and sinking fund provisions.
The future issuance of preferred stock could reduce the rights, including
voting rights, of the holders of common stock, and, therefore, reduce the value
of the common stock. In particular, specific rights granted to future holders
of preferred stock could be used to restrict the Company's ability to merge
with or sell its assets to a third party, thereby preserving control of the
Company by existing management.
On September 3, 1997, the Company announced that it had met the requirements
for the redemption of redeemable warrants issued in connection with the
Company's Initial Public Offering ("IPO") and called the warrants for
redemption. 2,082,451 redeemable warrants and 133,088 underwriter warrants were
converted into 1,691,416 shares of common stock. The net proceeds were
$15,234,000.
F-13
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company adopted the 1993 Stock Option Plan in fiscal 1994 and in fiscal
1995, adopted the 1994 Formula Stock Option Plan to award stock options to non-
employee directors of the Company. The Plans are administered by the Company's
board of directors which has the authority to determine the recipients, number
of shares, and the related terms and provisions of the options which may be
granted.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its stock-based compensation plans. In accordance with APB
Opinion No. 25, no compensation cost has been recognized in connection with
these plans. Had compensation cost for the Company's stock-based compensation
plans been determined consistent with SFAS 123, the Company's net earnings
(loss) and net earnings (loss) per share would have been reduced to the
following pro forma amounts.
<TABLE>
<CAPTION>
Years ended
-------------------------------
June
June 26, June 27, 28,
1999 1998 1997
------------ --------- -------
<S> <C> <C> <C>
Net earnings (loss) as
reported............... $ (1,250,922) 4,020,604 937,759
============ ========= =======
Pro forma net earnings
(loss)................. $ (3,178,374) 2,118,435 225,740
============ ========= =======
Basic earning (loss) per
share as reported...... $ (0.13) 0.50 0.14
============ ========= =======
Pro forma basic earnings
(loss) per share....... $ (0.34) 0.26 0.03
============ ========= =======
Diluted earnings (loss)
per share as reported.. $ (0.13) 0.47 0.14
============ ========= =======
Pro forma diluted
earnings (loss) per
share.................. $ (0.34) 0.22 0.03
============ ========= =======
</TABLE>
The effect of applying SFAS 123 as shown in the above pro forma disclosures
is not representative of the pro forma effect on net earnings in future years
because it does not take into consideration stock options granted prior to
fiscal 1996.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants issued in fiscal 1999, 1998 and 1997: no dividend
yield for all years; expected volatility of 82%, 76% and 75% for 1999, 1998 and
1997, respectively; risk-free interest rates of 4.72% for 1999 grants, 5.8% for
1998 grants and 6% for 1997 grants; and expected lives of 4 years for 1999
grants, 4 years for 1998 grants, and 4 to 8 years for 1997 grants.
F-14
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a summary of stock option activity.
<TABLE>
<CAPTION>
Employee stock options
-------------------------------
Weighted
Option average
shares Options exercise
available outstanding price
--------- ----------- --------
<S> <C> <C> <C>
Balance at June 29, 1996....................... 688,223 716,070 $ 7.39
Options granted.............................. (349,088) 349,088 6.46
Options exercised............................ -- (52,964) 5.47
Options expired.............................. 48,769 (48,769) 7.10
--------- ---------
Balance at June 28, 1997....................... 387,904 963,425 7.17
Options added................................ 1,132,500 -- --
Options granted.............................. (465,579) 465,579 11.61
Options exercised............................ -- (136,538) 6.08
Options expired.............................. 101,800 (101,800) 9.61
--------- ---------
Balance at June 27, 1998....................... 1,156,625 1,190,666 8.84
Options granted.............................. (886,695) 886,695 6.59
Options exercised............................ -- (222,035) 6.76
Options expired.............................. 460,993 (484,993) 10.20
--------- ---------
Balance at June 26, 1999....................... 730,923 1,370,333 $ 7.30
========= =========
</TABLE>
The weighted-average fair value of options granted during fiscal 1999, 1998
and 1997 was $3.13, $6.98 and $3.83, respectively.
Effective August 26, 1998, the Company repriced all of its stock options
which had been granted since June 29, 1997 to the closing market price on that
date, which was $6.00 per share. Options which had been granted to directors of
the Company during the same period were not repriced.
The following is a summary of information relating to stock options
outstanding at June 26, 1999:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
------------------------------------- --------------------
Number Weighted Weighted Number Weighted
outstanding average average exercisable average
Range of at June 26, remaining exercise at June 26, exercise
exercise prices 1999 contractual life price 1999 price
--------------- ----------- ---------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 3.83--5.25 323,282 4.2 years $ 4.03 81,922 $ 4.34
6.00--9.00 760,600 2.9 years 6.85 364,234 6.99
9.75--14.50 254,751 6.6 years 11.28 149,824 10.60
15.00--20.00 31,700 5.2 years 19.20 6,000 19.25
--------- --------- ------ ------- ------
1,370,333 4.0 years $ 7.30 601,980 $ 7.65
========= ====== ======= ======
</TABLE>
Notes receivable for common stock purchases are due through October 2000 or
upon termination of employment with the Company, if earlier. Interest accrues
at 6.28% per annum.
F-15
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Income Taxes
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
Years ended
-------------------------------
June 26, June 27, June 28,
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
Current:
Federal...................................... $ 245,000 2,141,000 775,000
State........................................ 99,296 288,000 214,000
---------- --------- --------
Total current.............................. 344,296 2,429,000 989,000
---------- --------- --------
Deferred:
Federal...................................... (779,320) (267,000) (294,000)
State........................................ (214,976) 304,000 (145,000)
---------- --------- --------
Total deferred............................. (994,296) 37,000 (439,000)
---------- --------- --------
$ (650,000) 2,466,000 550,000
========== ========= ========
</TABLE>
The actual tax expense differs from the "expected" tax expense (benefit)
(computed by applying the U.S. federal corporate income tax rate of 34% to
earnings (loss) before income taxes) as follows:
<TABLE>
<CAPTION>
Years ended
------------------------------
June
June 26, June 27, 28,
1999 1998 1997
---------- --------- -------
<S> <C> <C> <C>
Computed "expected" tax expense (benefit)...... $ (646,313) 2,205,446 505,838
Increase (reduction) in income taxes resulting
from:
State taxes, net of federal benefit.......... (76,348) 390,720 45,540
Goodwill amortization........................ (46,569) 46,569 --
Research and experimentation tax credit...... 90,000 (87,248) (44,000)
Valuation allowance movement................. 99,000 (171,000) --
Other........................................ (69,770) 81,513 42,622
---------- --------- -------
$ (650,000) 2,466,000 550,000
========== ========= =======
Total income tax expense (benefit) was recorded as follows:
<CAPTION>
Years ended
------------------------------
June
June 26, June 27, 28,
1999 1998 1997
---------- --------- -------
<S> <C> <C> <C>
(Loss) income from operations.................. $ (650,000) 2,466,000 550,000
Stockholders' equity, for compensation expense
for tax purposes in excess of amounts
recognized for financial-statement purposes... 443,533 (276,300) (62,242)
---------- --------- -------
$ (206,467) 2,189,700 487,758
========== ========= =======
</TABLE>
F-16
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are as
follows:
<TABLE>
<CAPTION>
June 26, June 27,
1999 1998
----------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 1,415,068 2,163,978
Accrued liabilities................................... 939,143 283,178
Inventory............................................. 1,164,869 613,176
Accounts receivable, principally due to allowance for
doubtful accounts.................................... 251,438 118,138
----------- ---------
Total deferred tax assets........................... 3,770,518 3,178,470
Less valuation allowance................................ -- (99,000)
----------- ---------
Deferred tax assets................................. 3,770,518 3,079,470
Deferred tax liabilities:
Property and equipment, principally due to differences
in depreciation methods.............................. 320,180 623,428
----------- ---------
Net deferred tax assets............................. $ 3,450,338 2,456,042
=========== =========
</TABLE>
The net change in the valuation allowance for the years ended June 26, 1999
and June 27, 1998 was $99,000 and $171,000, respectively. The valuation
allowance was principally attributable to state operating loss carryforwards.
The Company has foreign operating loss carryforwards of approximately
$2,900,000 related to its foreign subsidiary which are available indefinitely
to offset future taxable income of the subsidiary.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. Based upon the level of historical taxable income
and projections for future taxable income over the periods during which
deferred tax assets are deductible, management believes it is more likely than
not the Company will realize the benefits of these deductible differences.
8. Earnings (Loss) Per Share
Basic earnings (loss) per share is based upon the weighted average common
shares outstanding during each year. Diluted earnings (loss) per share is based
upon the weighted average of common shares and dilutive common stock equivalent
shares outstanding during each year. The weighted average number of shares used
to compute diluted earnings (loss) per share consisted of the following:
<TABLE>
<CAPTION>
Years ended
-----------------------------
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Weighted average common shares outstanding
during the year............................. 9,398,289 8,052,926 6,686,253
Weighted average common equivalent shares due
to stock options and warrants............... -- 476,021 91,187
--------- --------- ---------
9,398,289 8,528,947 6,777,440
========= ========= =========
</TABLE>
For 1999, common equivalent shares of 435,345 resulting from stock options
and warrants were not included in the computation of diluted earnings per share
because to do so would have been antidilutive.
F-17
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
9. Sales and Revenue
Total revenue consists of product sales, research contract revenue and other
revenue. Other revenue includes revenues from service and repair activities and
consulting.
One commercial customer accounted for 45%, 40% and 38% of total revenue for
the years ended June 26, 1999, June 27, 1998 and June 28, 1997, respectively.
At June 26, 1999 and June 27, 1998, accounts receivable from this customer
totaled $7,707,404 and $3,307,984, respectively. In 1999, 1998 and 1997, a
second customer accounted for approximately 8%, 6% and 10% of total revenue,
respectively.
Sales to customers in foreign countries for the years ended June 26, 1999,
June 27, 1998 and June 28, 1997 were $15,965,485, $18,923,069 and $10,082,704,
respectively. At June 26, 1999 and June 27, 1998, accounts receivable from
foreign customers totaled $3,453,121 and $8,297,593, respectively.
10. Commitments
The Company may borrow up to $8,000,000 from a bank under an unsecured
demand line of credit with interest at the bank's prime rate (7.75% at June 26,
1999). Borrowings under the line are limited to 100% of the Company's cash
balance plus 80% of domestic accounts receivable outstanding less than 90 days.
The Company may fix a portion or all of the outstanding balances under the line
for periods up to the remaining term of the line. The line may be used for
standby letters of credit.
There are fees of 1.5% for any standby letters of credit and 0.25% on the
unused portion of the line. There were no outstanding borrowings at June 26,
1999 and June 27, 1998. The line of credit expires in May 2000. No security
pledges of assets can be granted nor dividends paid without the approval of the
bank that issued the unsecured line of credit.
11. Acquisitions
On April 5, 1999, the Company completed the acquisition of Klee Corporation
("Klee"), a manufacturer of physical vapor deposition process systems targeted
to a segment of electronics packaging known as under-bump metallurgy or flip-
chip packaging. Klee had limited operations through the date of the
acquisition. The Company acquired all of the stock of Klee in exchange for
310,604 shares of the Company's common stock. The acquisition was accounted for
on a pooling of interests basis. The Company's consolidated financial
statements have not been restated for periods prior to acquisition as the
acquisition was considered to be an immaterial pooling.
On November 4, 1998, the Company completed the acquisition of PlasmaQuest,
Inc., a manufacturer of systems for research and development, magnetic disk
head processing, and electronic packaging applications. The acquired company
was renamed ASTeX PlasmaQuest, Inc. ("PlasmaQuest"). The Company acquired all
of the stock of PlasmaQuest for a preliminary purchase price of $22,656 net of
cash acquired of $124,039. The purchase price was paid in cash from the
Company's cash balances. The terms of certain of the Company's acquisition
agreements provide for amounts advanced to PlasmaQuest prior to the
acquisition, to be repaid. At June 26, 1999, the amount to be repaid to the
Company was being negotiated. A reasonable estimate of the amount to be paid
could not be determined at June 26, 1999. If the amounts are not repaid in
full, the purchase price may be adjusted.
On October 1, 1997, the Company completed the acquisition of Sorbios GmbH,
renamed ASTeX GmbH, a manufacturer of ozone generators and air ionizers for
semiconductor production. The Company acquired all of the stock of Sorbios GmbH
for a total purchase price of $3,682,639. The purchase price was paid in cash,
F-18
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
from the Company's cash balances. Costs associated with the acquired in-process
research and development expenses were charged to expense.
On May 9, 1997, the Company completed its acquisition of the net assets of
Converter Power, Inc. ("CPI"), a manufacturer of high efficiency, small form
factor power sources used in semiconductor, medical, scientific and industrial
applications. The Company acquired the net assets, exclusive of certain
liabilities of CPI for a total purchase price of $7,378,958, which included
$6,482,933 in cash, and 60,482 shares of ASTeX common stock valued at $896,025.
Costs associated with the acquired in-process research and development were
charged to expense.
Except for Klee, these acquisitions have been accounted for by the purchase
method of accounting and, accordingly, the purchase prices have been allocated
to the assets acquired and the liabilities assumed based on their fair values
at the acquisition dates. The consideration paid and the fair value of the
assets acquired and the liabilities assumed for the purchase method
acquisitions, at the acquisition dates are summarized as follows:
<TABLE>
<CAPTION>
Years ended
----------------------------------
June 26, June 27, June 28,
1999 1998 1997
----------- ---------- ---------
<S> <C> <C> <C>
Consideration paid:
Cash..................................... $ 146,695 3,682,639 6,482,933
Common stock (60,482 shares)............. -- -- 896,025
----------- ---------- ---------
Total consideration paid............... $ 146,695 3,682,639 7,378,958
=========== ========== =========
Allocation of purchase price:
Cash..................................... $ 124,039 -- --
Accounts receivable...................... 1,015,574 1,180,473 1,254,662
Inventories.............................. 297,898 969,519 2,051,237
Property and equipment and other assets.. 1,140,535 2,550,583 768,589
Liabilities assumed...................... (2,824,689) (3,407,838) (957,464)
Acquisition related expenses, net of tax
benefits where applicable............... -- 212,423 945,000
Goodwill and other intangible assets..... 393,338 2,177,479 3,316,934
----------- ---------- ---------
Total purchase price................... $ 146,695 3,682,639 7,378,958
=========== ========== =========
</TABLE>
F-19
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following unaudited pro forma results of operations give effect to the
acquisitions as if the AsTex GmbH and CPI acquisitions had occurred at the
beginning of fiscal 1997, (the effect of the PlasmaQuest acquisition is
considered insignificant). Such pro forma information reflects certain
adjustments including amortization of goodwill, interest expense, interest
income, income tax effect and an increase in the number of weighted average
shares outstanding. This pro forma information does not necessarily reflect the
results of operations that would have occurred had the acquisitions taken place
as described and is not necessarily indicative of results that may be obtained
in the future.
<TABLE>
<CAPTION>
Years ended
-----------------------
June 27, June 28,
1998 19976
------------ ----------
(Unaudited)
<S> <C> <C>
Pro forma total revenue......................... $ 84,414,488 59,457,723
============ ==========
Pro forma net earnings.......................... $ 4,877,294 1,142,994
============ ==========
Pro forma basic earnings per share.............. $ 0.61 0.17
============ ==========
Pro forma diluted earnings per share............ $ 0.57 0.17
============ ==========
Pro forma weighted average common shares
outstanding used to calculate pro forma basic
earnings per share............................. 8,052,926 6,738,411
============ ==========
Pro forma weighted average common shares
outstanding used to calculate pro forma diluted
earnings per share............................. 8,528,947 6,827,199
============ ==========
</TABLE>
12. Transaction with Stockholder
In 1997, the Company sold the net assets of a subsidiary, Ehrhorn
Technological Operations ("ETO"), Alpha product line with a cost of $565,022,
to Alpha/Power, Inc. ("API") in exchange for cash and a note receivable. A
majority of API is owned by a former owner of ETO who is currently an ASTeX
stockholder. In connection with this sale, API agreed to assume and indemnify
ETO against all obligations to provide warranty for Alpha products sold prior
to the sale. There was no gain or loss associated with the sale.
13. Noncash Financing and Investing Activities
During the year ended June 26, 1999, 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 prior to their acquisition by the
Company.
In connection with the exercise of stock options, tax benefits of $443,533,
$276,300 and $62,242 were recorded as additional paid-in capital for the years
ended June 26, 1999, June 27, 1998 and June 28, 1997, respectively.
14. Retirement Plans
Prior to January 1, 1997, the Company sponsored two defined contribution
401(k) retirement plans covering substantially all employees of the Company.
The Company contributed 20% of employee voluntary contributions up to 5% of
eligible wages for the plan covering employees of ASTeX, ASTeX/Gerling
Laboratories, and Newton Engineering Service, Inc. The Company contributed 50%
of employee voluntary contributions up to 6% of eligible wages for the plan
covering employees of ETO. Beginning January 1, 1997, the Company merged the
plans and under the new plan contributes 50% of employee voluntary
contributions
F-20
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
up to 6% of eligible wages on a discretionary basis. Total expense under the
plans amounted to $86,546, $324,128 and $110,214 for the years ended June 26,
1999, June 27, 1998 and June 28, 1997, respectively.
15. New Accounting Pronouncements
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
will become effective during fiscal year 2001. Statement No. 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a)
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a foreign-currency-
denominated forecasted transaction.
The accounting for changes in the fair value of a derivative (that is, gains
and losses) depends on the intended use of the derivative and the resulting
designation.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. These methods
must be consistent with the entity's approach to managing risk.
Statement of Position (SOP) 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use, will become effective in
fiscal year 2000. SOP 98-1 requires that certain internal and external costs be
expensed or capitalized when incurred to develop or obtain software for
internal use. Generally, costs incurred during the preliminary project and
post-implementation/operation stages, as well as conversion and general and
administrative costs are to be expensed as incurred. Certain costs incurred
during the application and development stage are to be capitalized.
The Company is evaluating the impact of Statement No.133 and SOP 98-1.
16. Restructuring Charges and Other Related Expenses
During 1999, the Company consolidated its Modesto, California operations
into its Woburn, Massachusetts and Colorado Springs, Colorado sites. The
Company also consolidated its Beverly, Massachusetts operation into Woburn.
These consolidations resulted in a restructuring charge of $1,497,000. The
restructuring charge consisted of severance relating to the termination of 70
employees, abandonment of leasehold improvements and fixed assets, and facility
costs (primarily future lease payments relating to abandoned facilities).
Accrued expenses at June 26, 1999 included approximately $174,000, primarily
relating to restructuring accruals for facility costs expected to be paid over
the next 9 months.
In connection with the aforementioned consolidations, the Company wrote down
inventory having a cost of $1,090,000 during 1999. 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 write-down of inventory and other
transition costs are reflected in the consolidated statement of operations as
cost of sales and revenues, and general and administrative expenses,
respectively.
F-21
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Also during 1999, the Company announced the consolidation of its recently
acquired PlasmaQuest operations based in Dallas, Texas into its newly leased
space in Wilmington, Massachusetts. This consolidation has resulted in a
restructuring charge of approximately $763,000, primarily consisting of
severance relating to the termination of 16 employees, abandonment of leasehold
improvements and fixed assets, and facility costs (primarily future lease
payments relating to the abandoned facility). The consolidation of the facility
is expected to begin in the first quarter of fiscal 2000 and take 6 months to
complete.
Total 1999 costs related to restructurings, inventory writedowns and
transition costs were $3,743,000.
17. Segment and Related Information
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, in 1999, which changes the way the Company
reports information about its operating segments. The information for 1998 and
1997 has been restated from prior years' presentation in order to conform to
the 1999 presentation.
The Company has four reportable segments, Semiconductor, Medical and
Industrial, Systems, and Corporate, that have separate financial results that
are reviewed by the Company's chief operating decision maker. Identifiable
assets and capital expenditures data are presented geographically as they are
managed on that basis.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies.
<TABLE>
<CAPTION>
Medical
Semi- and
conductor Industrial Systems Corporate Total
----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1999:
Net sales............. $51,341,209 22,611,625 4,256,879 -- 78,209,713
Inter-segment net
sales................ 3,225,162 7,921 -- -- 3,233,083
Profit (loss) from
operations........... 3,736,263 332,280 (1,306,045) (5,336,437) (2,573,939)
Depreciation.......... 1,195,043 304,132 335,787 823,520 2,658,482
1998:
Net sales............. 52,803,964 27,715,213 2,916,958 -- 83,436,135
Inter-segment net
sales................ 3,748,808 -- -- -- 3,748,808
Profit from
operations........... 5,634,502 3,507,961 127,777 (3,361,201) 5,909,039
Depreciation.......... 1,374,109 477,746 175,227 167,237 2,194,319
1997:
Net sales............. 29,333,396 15,668,412 2,965,330 -- 47,967,138
Inter-segment net
sales................ 1,434,684 -- -- -- 1,434,684
Profit from
operations........... 1,846,999 2,705,675 243,409 (3,137,278) 1,658,805
Depreciation.......... 1,217,837 301,621 181,212 124,069 1,824,739
</TABLE>
Financial information relating to the Company's geographic area was as
follows:
<TABLE>
<CAPTION>
Total revenue
----------------------------------
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
United States............................. $ 62,244,228 64,513,066 37,884,434
Europe.................................... 11,175,162 12,290,811 6,260,679
Other..................................... 4,790,323 6,632,258 3,822,025
------------ ---------- ----------
$ 78,209,713 83,436,135 47,967,138
============ ========== ==========
</TABLE>
F-22
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
Long-lived assets
----------------------------------
June 26, June 27, June 28
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
United States............................. $ 7,849,181 8,245,080 7,503,249
Europe.................................... 298,546 279,184 --
------------ ---------- ----------
$ 8,147,727 8,524,264 7,503,249
============ ========== ==========
<CAPTION>
Identifiable assets
----------------------------------
June 26, June 27, June 28
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
United States............................. $ 76,533,869 48,533,191 39,327,221
Europe.................................... 4,001,505 2,760,115 --
------------ ---------- ----------
$ 80,535,374 51,293,306 39,327,221
============ ========== ==========
<CAPTION>
Capital expenditures
----------------------------------
June 26, June 27, June 28
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
United States............................. $ 1,733,407 2,877,917 1,029,908
Europe.................................... 105,802 121,231 --
------------ ---------- ----------
$ 1,839,209 2,999,148 1,029,908
============ ========== ==========
</TABLE>
18. Subsequent Event
On August 24, 1999, the Company acquired substantially all of the assets of
Shamrock(TM) from Sputtered Films, Inc. for cash consideration of $6 million.
This acquisition will be accounted for by the purchase method of accounting.
F-23
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
APPLIED SCIENCE AND TECHNOLOGY, INC.
Date: September 24, 1999
/s/ Richard S. Post
By: _________________________________
Richard S. Post
President
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
Name Capacity Date
---- -------- ----
<S> <C> <C>
/s/ Richard S. Post Chairman of the Board, Chief September 24,
___________________________________ Executive Officer and 1999
Richard S. Post President
(principal executive
officer)
/s/ John M. Tarrh Chief Financial Officer, September 24,
___________________________________ Senior 1999
John M. Tarrh Vice President of Finance
(principal financial and
accounting officer) and
Director
/s/ Donald K. Smith Director September 24,
___________________________________ 1999
Donald K. Smith
/s/ John R. Bertucci Director September 24,
___________________________________ 1999
John R. Bertucci
/s/ Michel de Beaumont Director September 24,
___________________________________ 1999
Michel de Beaumont
/s/ Robert R. Anderson Director September 24,
___________________________________ 1999
Robert R. Anderson
/s/ Hans-Jochen Kahl Director September 24,
___________________________________ 1999
Hans-Jochen Kahl
</TABLE>
II-1
<PAGE>
Exhibits
(1) The following exhibits are filed herewith or incorporated by reference
as indicated below:
<TABLE>
<CAPTION>
Exhibit
No. Title
------- -----
<C> <S>
3a Certificate of Incorporation, as amended, dated July 1, 1992.(8)
3b Certificate of Amendment of Certificate of Incorporation, dated
September 1, 1993.(8)
3c Bylaws, as amended.(8)
4a Specimen Common Stock Certificate.(8)
4b Form of Certificate of Designation for the Series A Junior
Participating Preferred Stock.(3)
+10a Master Purchase Order and Sales Agreement between the Company and
Applied Materials, Inc., dated May 27, 1999.
10b Lease for premises at 35 Cabot Road, Woburn, Massachusetts, dated
February 10, 1989 (the "Massachusetts Lease").(8)
10c Extension to the Massachusetts lease, dated June 23, 1995.(7)
10d** 1993 Stock Option Plan, as amended.(5)
10e** Form of Amended Key Employee Agreement for Dr. Richard S. Post, dated
as of July 1, 1996.(5)
10f** Form of Amended Key Employee Agreement for Dr. Donald K. Smith, dated
as of July 1, 1996.(5)
10g** Form of Amended Key Employee Agreement for John M. Tarrh, dated as of
July 1, 1996.(5)
10h** Form of Key Employee Agreement for Brian R. Chisholm, dated November
26, 1996.(5)
10i** Form of Key Employee Agreement for Michael DeLuca, dated May 1,
1997.(5)
10j** Form of Key Employee Agreement for Avishay Katz.(2)
10k** Form of Key Employee Agreement for Jill Maunder.(2)
101** Form of Key Employee Agreement for Stanley Burg.(1)
10m $8,000,000 Unsecured Committed Revolver Loan Agreement between the
Company and State Street Bank and Trust Company.(6)
10n $8,000,000 Unsecured Committed Revolver Promissory Note from the
Company to State Street Bank and Trust Company.(6)
11 Statement Re: Computation of Per Share Earnings.
21 Revised List of Subsidiaries.
23 Consent of KPMG LLP.
27 Financial Data Schedule.
</TABLE>
(1) Previously filed as part of our Form S-3 Registration Statement (Number
333-71467) filed with the Commission on January 29, 1999 and incorporated by
reference herein.
(2) Previously filed as part of our Annual Report on Form 10-K for the year
ended June 27, 1998, filed with the Commission on September 26, 1998 and
incorporated by reference herein.
(3) Previously filed as an exhibit to our Current Report on Form 8-K filed
with the Commission on March 5, 1998 in connection with our adoption of a
Shareholder Rights Plan, and incorporated by reference herein.
(4) Previously filed as part of our Annual Report on Form 10-K for the year
ended June 27, 1998, filed with the Commission on September 26, 1998, and
incorporated by reference herein.
(5) Previously filed as part of our Annual Report on Form 10-K for the year
ended June 28, 1997, filed with the Commission on September 26, 1997, and are
incorporated by reference herein.
<PAGE>
(6) Previously filed as an exhibit to our Current Report on Form 8-K filed
with the Commission on May 23, 1997 in connection with our acquisition of
substantially all of the assets of Converter Power, Inc., and incorporated by
reference herein.
(7) Previously filed as part of our Annual Report on Form 10-K for the year
ended July 1, 1995, filed with the Commission on September 28, 1995, and
incorporated by reference herein.
(8) Previously filed as part of our Form SB-2 Registration Statement
(Number 33-69098-B) declared effective by the Commission on November 9, 1993,
and incorporated by reference herein.
- --------
+ Filed herewith. Certain information withheld and filed separately with the
Commission pursuant to a request for confidential treatment.
** These exhibits relate to executive compensation plans and arrangements
required to be filed as an exhibit to this form pursuant to Item 14(c) of
Form 10-K.
(b)Reports on Form 8-K.
No reports filed on Form 8-K were filed during the last quarter of the
fiscal year ended June 26, 1999.
(c)Exhibits.
The Company hereby files as exhibits to this Annual Report on Form 10-K
those exhibits listed in Item 14(a)(3) above.
(d)Financial Statement Schedules.
Not Applicable.
<PAGE>
Attachment 1: Master P.O. 926021
ITEMS/WARRANTY
Seller: Applied Science and Technology, Inc.
Buyer: Applied Materials
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Applied
Materials
Part ASTeX or ETO
# Mfg Location Numbers Part Numbers DESCRIPTION DIVISION *****
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1
- ----------------------------------------------------------------------------------------------------
2
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Four Channel Generator:
- ----------------------------------------------------------------------------------------------------
3
- ----------------------------------------------------------------------------------------------------
4
- ----------------------------------------------------------------------------------------------------
5
- ----------------------------------------------------------------------------------------------------
6
- ----------------------------------------------------------------------------------------------------
7
- ----------------------------------------------------------------------------------------------------
8
- ----------------------------------------------------------------------------------------------------
9
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Four Channel Generator Options:
- ----------------------------------------------------------------------------------------------------
10
- ----------------------------------------------------------------------------------------------------
11
- ----------------------------------------------------------------------------------------------------
12
- ----------------------------------------------------------------------------------------------------
13
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Field Replaceable Units for the Four Channel Generator:
- ----------------------------------------------------------------------------------------------------
14
- ----------------------------------------------------------------------------------------------------
15
- ----------------------------------------------------------------------------------------------------
16
- ----------------------------------------------------------------------------------------------------
17
- ----------------------------------------------------------------------------------------------------
18
- ----------------------------------------------------------------------------------------------------
19
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Field Replaceable Units for the Dual Generator:
- ----------------------------------------------------------------------------------------------------
20
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
21
- ----------------------------------------------------------------------------------------------------
22
- ----------------------------------------------------------------------------------------------------
23
- ----------------------------------------------------------------------------------------------------
24
- ----------------------------------------------------------------------------------------------------
25
- ----------------------------------------------------------------------------------------------------
26
- ----------------------------------------------------------------------------------------------------
27
- ----------------------------------------------------------------------------------------------------
28
- ----------------------------------------------------------------------------------------------------
29
- ----------------------------------------------------------------------------------------------------
30
- ----------------------------------------------------------------------------------------------------
31
- ----------------------------------------------------------------------------------------------------
32
- ----------------------------------------------------------------------------------------------------
33
- ----------------------------------------------------------------------------------------------------
34
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
ASTRON:
- ----------------------------------------------------------------------------------------------------
35
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Gigafill Components and the Gigafill Assemblies:
- ----------------------------------------------------------------------------------------------------
36
- ----------------------------------------------------------------------------------------------------
37
- ----------------------------------------------------------------------------------------------------
38
- ----------------------------------------------------------------------------------------------------
39
- ----------------------------------------------------------------------------------------------------
40
- ----------------------------------------------------------------------------------------------------
41
- ----------------------------------------------------------------------------------------------------
42
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------
Applied
Materials
Part ASTeX or ETO
# Mfg Location Numbers Part Numbers
- -----------------------------------------------------
<S> <C> <C> <C>
1
- -----------------------------------------------------
2
- -----------------------------------------------------
- -----------------------------------------------------
Four Channel Generator:
- -----------------------------------------------------
3
- -----------------------------------------------------
4
- -----------------------------------------------------
5
- -----------------------------------------------------
6
- -----------------------------------------------------
7
- -----------------------------------------------------
8
- -----------------------------------------------------
9
- -----------------------------------------------------
- -----------------------------------------------------
Four Channel Generator Options:
- -----------------------------------------------------
10
- -----------------------------------------------------
11
- -----------------------------------------------------
12
- -----------------------------------------------------
13
- -----------------------------------------------------
- -----------------------------------------------------
Field Replaceable Units for the Four Channel Generato
- -----------------------------------------------------
14
- -----------------------------------------------------
15
- -----------------------------------------------------
16
- -----------------------------------------------------
17
- -----------------------------------------------------
18
- -----------------------------------------------------
19
- -----------------------------------------------------
- -----------------------------------------------------
Field Replaceable Units for the Dual Generator:
- -----------------------------------------------------
20
- -----------------------------------------------------
- -----------------------------------------------------
- -----------------------------------------------------
21
- -----------------------------------------------------
22
- -----------------------------------------------------
23
- -----------------------------------------------------
24
- -----------------------------------------------------
25
- -----------------------------------------------------
26
- -----------------------------------------------------
27
- -----------------------------------------------------
28
- -----------------------------------------------------
29
- -----------------------------------------------------
- -----------------------------------------------------
30
- -----------------------------------------------------
31
- -----------------------------------------------------
32
- -----------------------------------------------------
33
- -----------------------------------------------------
34
- -----------------------------------------------------
- -----------------------------------------------------
ASTRON:
- -----------------------------------------------------
35
- -----------------------------------------------------
- -----------------------------------------------------
Gigafill Components and the Gigafill Assemblies:
- -----------------------------------------------------
36
- -----------------------------------------------------
37
- -----------------------------------------------------
38
- -----------------------------------------------------
39
- -----------------------------------------------------
40
- -----------------------------------------------------
41
- -----------------------------------------------------
42
- -----------------------------------------------------
- -----------------------------------------------------
</TABLE>
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
Attachment 1: Master P.O. 926021
ITEMS/WARRANTY
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Applied
Materials
Part ASTeX or ETO
# Mfg Location Numbers Part Numbers DESCRIPTION DIVISION *****
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Spare Component Pricing for the Gigafill Assemblies:
- ----------------------------------------------------------------------------------------------------
43
- ----------------------------------------------------------------------------------------------------
44
- ----------------------------------------------------------------------------------------------------
45
- ----------------------------------------------------------------------------------------------------
46
- ----------------------------------------------------------------------------------------------------
47
- ----------------------------------------------------------------------------------------------------
48
- ----------------------------------------------------------------------------------------------------
49
- ----------------------------------------------------------------------------------------------------
50
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Ozone Generator for Giga-Fill:
- ----------------------------------------------------------------------------------------------------
51
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Ozone Generator for Producer:
- ----------------------------------------------------------------------------------------------------
52
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Three Channel Generator:
- ----------------------------------------------------------------------------------------------------
53
- ----------------------------------------------------------------------------------------------------
54
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Cable Option for the ASP & ASP+:
- ----------------------------------------------------------------------------------------------------
55
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Components and Assemblies for the ASP & ASP+:
- ----------------------------------------------------------------------------------------------------
56
- ----------------------------------------------------------------------------------------------------
57
- ----------------------------------------------------------------------------------------------------
58
- ----------------------------------------------------------------------------------------------------
59
- ----------------------------------------------------------------------------------------------------
60
- ----------------------------------------------------------------------------------------------------
61
- ----------------------------------------------------------------------------------------------------
62
- ----------------------------------------------------------------------------------------------------
63
- ----------------------------------------------------------------------------------------------------
64
- ----------------------------------------------------------------------------------------------------
65
- ----------------------------------------------------------------------------------------------------
66
- ----------------------------------------------------------------------------------------------------
67
- ----------------------------------------------------------------------------------------------------
68
- ----------------------------------------------------------------------------------------------------
69
- ----------------------------------------------------------------------------------------------------
70
- ----------------------------------------------------------------------------------------------------
71
- ----------------------------------------------------------------------------------------------------
72
- ----------------------------------------------------------------------------------------------------
73
- ----------------------------------------------------------------------------------------------------
74
- ----------------------------------------------------------------------------------------------------
75
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
<CAPTION>
- -------------------------------------------------------------------------------------------
Applied
Materials
Part ASTeX or ETO
# Mfg Location Numbers Part Numbers
- ------------------------------------------------------
<S> <C> <C> <C>
Spare Component Pricing for the Gigafill Assemblies:
- ------------------------------------------------------
43
- ------------------------------------------------------
44
- ------------------------------------------------------
45
- ------------------------------------------------------
46
- ------------------------------------------------------
47
- ------------------------------------------------------
48
- ------------------------------------------------------
49
- ------------------------------------------------------
50
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
Ozone Generator for Giga-Fill:
- ------------------------------------------------------
51
- ------------------------------------------------------
- ------------------------------------------------------
Ozone Generator for Producer:
- ------------------------------------------------------
52
- ------------------------------------------------------
- ------------------------------------------------------
Three Channel Generator:
- ------------------------------------------------------
53
- ------------------------------------------------------
54
- ------------------------------------------------------
- ------------------------------------------------------
Cable Option for the ASP & ASP+:
- ------------------------------------------------------
55
- ------------------------------------------------------
- ------------------------------------------------------
Components and Assemblies for the ASP & ASP+:
- ------------------------------------------------------
56
- ------------------------------------------------------
57
- ------------------------------------------------------
58
- ------------------------------------------------------
59
- ------------------------------------------------------
60
- ------------------------------------------------------
61
- ------------------------------------------------------
62
- ------------------------------------------------------
63
- ------------------------------------------------------
64
- ------------------------------------------------------
65
- ------------------------------------------------------
66
- ------------------------------------------------------
67
- ------------------------------------------------------
68
- ------------------------------------------------------
69
- ------------------------------------------------------
70
- ------------------------------------------------------
71
- ------------------------------------------------------
72
- ------------------------------------------------------
73
- ------------------------------------------------------
74
- ------------------------------------------------------
75
- ------------------------------------------------------
- ------------------------------------------------------
</TABLE>
Type 5: Bus Route Delivery Mechanism
Type 1: Purchase Order Delivery Mechanism
---------------------------------------------------------------------
NOTES: *****
-----------------------------------------------------------
-----------------------------------------------------------
-----------------------------------------------------------
*****
-----------------------------------------------------------
---------------------------------------------------------------------
---------------------------------------------------------------------
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
Attachment A: Comprehensive Supplier Agreement
COMPREHENSIVE SUPPLIER AGREEMENT #926021
-----------------------------------------
This Agreement dated May 27, 1999 is by and between Applied Materials, Inc.,
("Applied"), a Delaware corporation, having its place of business in Santa
Clara, California and Austin, Texas and Applied Science and Technology, Inc.,
("ASTeX"), having its place of business in Woburn, MA.
The parties agree as follows:
Definitions
The following capitalized terms will have the following meanings:
A. "Applied" means Applied Materials, Inc., including all of its domestic
and international divisions and subsidiaries.
B. "ASTeX" means Applied Science and Technology, Inc., including all of its
divisions and subsidiaries.
C. "Item" or "Items" means the good(s) or service(s) that ASTeX is to
provide to Applied under this Agreement, including all Applied Materials
purchase orders and related agreements that are governed by this CSA, as
specified from time to time by Applied and set forth in Attachment 1 and
any amendments to Attachment 1.
D. "Applied Materials' Terms and Conditions of Purchase" means all the terms
and conditions contained in Exhibit 1 to this agreement, and/or any
Applied form purchase order that may be issued.
E. "Additional Provisions" means all requirements contained in this
Comprehensive Supplier Agreement.
F. "Agreement" means this Comprehensive Supplier Agreement and/or the
Applied's Purchase Order, and other Exhibits or Attachments to the
Comprehensive Supplier Agreement and/or Purchase Order together with any
Nondisclosure Agreement defined below as "NDA".
G. "Comprehensive or Basic Supplier Agreement" means the Comprehensive or
Basic Supplier Agreement No. 926021, including Exhibit 1, the Applied
Terms and Conditions of Purchase.
H. "NDA" means any and all Nondisclosure Agreement(s) between Applied and
ASTeX and any specific Nondisclosure Agreement that may be attached to
this Agreement.
I. "Will" or "shall" have the same meaning and are used to convey an
affirmative duty or obligation (i.e., a requirement).
J. "Release," or "release" means individual purchase orders, spot buys, pick
cards or other orders for Items issued by Applied to ASTeX under this
Agreement.
K. "Proprietary Information" means the Proprietary Information, as that term
is defined by the NDA, of Applied.
L. "Confidential Information" means the Confidential Information, as that
term is defined by the NDA, of Applied.
M. "Applied's Standard Terms and Conditions of Purchase" means the terms and
conditions contained in Exhibit 1 to this Agreement.
N. Normal Business Hours are Monday through Friday, 8:00-5:00 in local time
zone.
O. Off the Shelf is defined as Standard commercial items sold to the general
public to similar customers.
1. Scope
1.1 Intention / Description of Comprehensive Supplier Agreement Principles
- ---------------------------------------------------------------------------
1
<PAGE>
This Comprehensive Supplier Agreement ("CSA") serves as a tool to manage
the Items Applied purchases from ASTeX as well as sub-assemblies ASTeX
processes for Applied. Attachment 1 lists the Items covered by this
Agreement. Any modifications to this document will include a current list
of the items covered by this CSA.
This Agreement defines the relationship and requirements between Applied
and ASTeX to ensure a consistent supply of material that meets Applied's
specifications, as previously furnished by Applied to Supplier with initial
Product orders (hereinafter, each a "specification" and collectively the
"specifications"). Decisions regarding future purchases from ASTeX will be
based upon ASTeX's performance under this CSA as stated in Section 6, and
their achievement toward Applied's business objectives, e.g. Hoshin goals.
1.2 ASTeX Details
-------------
Applied Science and Technology, Inc. Avi Katz, Senior Vice President of
Global Customer Operations
35 Cabot Road Brian R. Chisholm, Senior Vice
Woburn, MA 01801-1053 President of Operations
781-933-5560 Austin Ashley,West Coast Operations
781-933-0750 Sales Manager
Bob Basnett, Service Engineer
Michael DeLuca, Vice President of
Manufacturing Operations
Al Toothaker, Account Manger
Bruce Schardt, ASTeX Colorado (ETO)
Operations Manager
1.3 Entire Agreement
- ---------------------
This CSA, including the Applied Standard Terms and Conditions of Purchase
(Exhibit 1) and any other Exhibits or Attachments which are incorporated by
reference into this CSA, together with any NDA sets forth the entire
understanding and agreement of the parties as to the subject matter of this
CSA and supersedes all prior agreements, understandings, negotiations and
discussions between the parties as to the subject matter. No amendment to
or modification of this CSA will be binding unless in writing and signed by
a duly authorized representative of both parties. In the event of any
conflict between the terms of the CSA and the terms of the Exhibits and
Attachments, the order of precedence shall be given first to the CSA,
followed by the Applied Standard Terms and Conditions of Purchase,
drawings, specifications or other technical documents.
The following lists all of the Exhibits and Attachments referenced in this
agreement:
<TABLE>
<CAPTION>
Attachment # Revision Release Date
- -----------------------------------------------------------------------------
<S> <C> <C>
1. Parts List Revision 1 2/27/98
- -----------------------------------------------------------------------------
2. Applied's Fiscal Year Revision 1 2/27/98
Calendar
- -----------------------------------------------------------------------------
3. Delivery Mechanics Revision 1 2/27/98
- -----------------------------------------------------------------------------
4. The Rolling Forecast Revision 1 2/27/98
(Example)
- -----------------------------------------------------------------------------
5. The Bar Coding Specification Revision 1 2/27/98
(0190-75034)
- -----------------------------------------------------------------------------
6. Packaging Specification Revision 1 2/27/98
(0250-00098)
- -----------------------------------------------------------------------------
7. Applied's corporate Revision 1 2/27/98
Transportation Routing Guide
- -----------------------------------------------------------------------------
8. Part Identification Revision 1 2/27/98
Specification
- -----------------------------------------------------------------------------
Attachment # Revision Release Date
- -----------------------------------------------------------------------------
9. Performance Plan Outline Revision 1 2/27/98
- -----------------------------------------------------------------------------
10. ASTRON Agreement Revision 1 5/27/99
- -----------------------------------------------------------------------------
</TABLE>
2
<PAGE>
1.4 Items Covered
- ------------------
In general, all Items supplied to Applied by ASTeX will be covered by this
agreement. The list of Items covered by this CSA is shown in Attachment 1.
New Items may be added to Attachment 1 upon mutual agreement between
Applied and ASTeX. Items may be removed by Applied from Attachment 1 from
time to time in accordance with this Agreement. Applied may implement
removal for the following reasons without limitations:
a. Specification changes that ASTeX is unable to comply with
b. Quality or delivery default
c. Obsolete Items
d. Outsourcing of the parent assembly
1.5 Duration of Agreement
---------------------
This Agreement commences on and as of the date of the latter of the two
signatures shown in Section 9, Effective Date, when each party has executed
and delivered one or more counterparts of this CSA to the other (the
"Effective Date") and will remain in effect through May 27, 2002 (the
"Initial Term"). Upon conclusion or termination of the Initial Term,
Applied, at Applied's option, may extend this Agreement for at least an
additional three months subject to all terms and conditions of this
Agreement.
1.6 Responsibilities
----------------
1.6.1 Applied Responsibilities
Applied agrees to fully perform all requirements of this Agreement.
Applied's obligations include but are not limited to:
. Provide demand signals to ASTeX as defined in section 2.5.1;
. Provide updated ******** week rolling forecasts to ASTeX;
. Measure inventory levels and scoring compliance to days-of-supply
metric as stated in Section 6;
. Receive and inspect Items from ASTeX and measuring quality for
quality metric as stated in Section 6;
. Notify ASTeX of any discrepancies;
. Provide suggestions on how ASTeX can improve its operation of this
agreement;
. Make recommendations as to how ASTeX might reduce costs and
improve the quality of Items purchased from ASTeX;
. Respond to any of ASTeX's inquiries;
. Identify, in conjunction with ASTeX, possible solutions to resolve
any exceptions that might arise;
. Write and record action plans to resolve exceptions;
. Provide ASTeX with ASTeX performance reports;
. Meet with ASTeX on a semi-annually basis to review its
performance;
1.6.2 ASTeX Responsibilities
ASTeX agrees to fully perform all requirements of this Agreement. ASTeX
obligations include but are not limited to:
. Produce high quality and high reliability Items;
. Deliver Items on time to Applied;
. Respond in a timely manner to any of Applied's inquiries and
requests;
. Continuously improve ASTeX's operations to better serve Applied's
needs and support Applied's business objectives, e.g. ******
goals;
. Work with Applied to improve operation of this agreement;
. Work with Applied to reduce costs and improve the quality for all
Items ASTeX produces for Applied;
. Review regularly the updated forecasts to adjust ASTeX operation
for changes in Applied's plans;
. Work with Applied to resolve any exceptions that may arise;
. Complete any tasks assigned to resolve exceptions on time;
. Meet with Applied on a semi-annually basis to review performance;
3
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
. Monitor and report to Applied the finished goods inventory
levels of the Items listed in Attachment 1 of this Agreement.
2. Logistics Framework
2.1 Operation of CSA
- ---------------------
2.1.1 Operating calendar & holidays
This CSA operates by Applied fiscal year calendar, shown in Attachment
2. Recognized holidays are those holidays shown on Applied fiscal year
calendar. Should any discrepancies between the operating calendars of
Applied and ASTeX arise, ASTeX must make provisions so that Applied's
operations are unaffected.
2.1.2 Flowchart of day to day operations
(Reserved)
2.1.3 Forecasts
ASTeX's production of Items will be guided by Applied's most current
***** rolling forecast, as provided by Applied to ASTeX on a weekly
basis ("Applied's Forecast"). ASTeX will plan, manufacture, and stock
inventory to meet Applied's forecast. ASTeX will keep each of
Applied's forecasts for audit purposes for a minimum of six (6) months
and may be asked to present this document for verification of
authorized inventory levels. Applied's forecast is Proprietary
Information to be used only by ASTeX to meet its obligations to
Applied under this Agreement.
2.1.4 Releases
Applied may require a part or Items on an accelerated basis, either in
addition to or in place of Items forecast for release or scheduled for
delivery at a later date. If feasible, as determined by Applied and
ASTeX, such Items will be provided by ASTeX to meet Applied's
requirements. Unless otherwise agreed to by Applied, such accelerated
deliveries will not affect the delivery schedule of any Items
currently allocated for forecast requirements. Lead times for each
accelerated release will be agreed upon by both parties. If ASTeX and
Applied are unable to agree on delivery schedule or other terms
affecting Items for accelerated delivery, Applied shall have the right
to purchase or procure affected Items from other persons, without
obligation to ASTeX.
2.1.5 Delivery Guidelines
2.1.5.1 General Delivery
ASTeX will exercise all efforts to meet Applied's delivery
requirements on time. Shipments to Applied by ASTeX will be
delivered in the right quantities ordered by Applied.
For part orders issued via a separate purchase order form ("Spot
Buy"), deliveries will be accepted on the requested date or
up to 3 days before the requested date. For Spot Buy
purchases for spares, deliveries will be accepted on the
requested date or up to two days before the requested date.
Any delivery dates that falls on a non-operational date of
Applied will default to the next Applied operational date.
ASTeX should assure the implementation of all delivery
programs identified in the joint Hoshin Plans
2.1.6 Replenishment Approach
ASTeX will be expected to supply Items using one or more of the
following replenishment approaches:
. Bus Route
. Spot Buy
4
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
The replenishment methodology to be used for a particular Items are
defined on Attachment 1. Specific delivery mechanics are outlined on
Attachment 3.
2.1.7 Electronic Commerce
ASTeX is required to communicate with Applied using EDI ANSI X.12
standards and encouraged to use either GEIS or EDICT software.
2.1.8 Changes to Logistics
Applied may on occasion change any aspect of any logistics
requirement. Applied will expect ASTeX to accommodate these changes to
the best of its ability. ASTeX will be given at least ******
notification prior to the change being implemented. Applied will then
consider all claims for pricing adjustment due to the change in the
logistics framework if made within the three week notification period.
2.2 Service Levels
- -------------------
2.2.1 Inventory Levels
ASTeX, is expected to have Finished Goods Inventory ("FGI") of the
Items on Attachment 1 which have a `5' in the column titled "Type of
Contract" in order to manage demand fluctuations. ASTeX will maintain
a minimum FGI of ***** and a maximum of ***** of each these Items
identified in Attachment 1, to meet Applied's needs based on the most
recent rolling forecast (see Attachment 4 for example of forecast).
ASTeX may present a claim for "non-purchase" for payment of inventory
manufactured in response to a valid Applied purchase order, or an
authorized demand signal, as explained in Section 2.5.1, if Applied
has not taken delivery of the FGI within ***** from date of
manufacture. This claim must be made within ***** days from the end of
the ***** time frame. Applied is not responsible for payment to ASTeX
for FGI built without a valid Applied purchase order, an authorized
demand signal (as explained in Section 2.5.1), or Applied's Forecast
(as explained in Section 2.1.3)
Applied will not hold any financial responsibility for FGI consisting of
"off-the-shelf" Items.
2.2.1.1 WIP Tracking
ASTeX is expected to monitor, track, and report their Work-In-Process
("WIP") inventory.
2.2.1.2 Excess and Obsolete Items
Applied will not be responsible for excess and obsolete parts other
than to the amounts specified above in Section 2.2.1, and in any
event ASTeX must make all efforts to mitigate claims for "non-
purchase".
5
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
2.2.2 Responses Requirements
Responses to the following types of inquiries are expected within the time
periods in the tables below.
2.2.2.1 ASTeX Response Time
- -----------------------------------------------------------------------
Inquiry Type Applied Response Time Applied Contact
- -----------------------------------------------------------------------
Lead-time ***** Master Planner
- -----------------------------------------------------------------------
Technical ***** Manufacturing
Engineer
- -----------------------------------------------------------------------
Quotations ***** Customer Service
Representative
- -----------------------------------------------------------------------
Quality ***** Quality Engineer
- -----------------------------------------------------------------------
Price/invoice ***** Customer Service
Representative
- -----------------------------------------------------------------------
Component failure ***** Quality Engineer
- -----------------------------------------------------------------------
Field Safety ***** Quality Engineer
- -----------------------------------------------------------------------
Product Problems ***** Account Manager
- -----------------------------------------------------------------------
2.2.2.2 Applied Response Time
- -----------------------------------------------------------------------
Inquiry Type Applied Response Time Applied Contact
- -----------------------------------------------------------------------
Lead-time ***** ASTeX Account Team
Lead/Member
- -----------------------------------------------------------------------
Technical ***** ASTeX Account Team
Lead/Member
- -----------------------------------------------------------------------
Quality ***** ASTeX Account Team
Lead/Member
- -----------------------------------------------------------------------
Price/invoice ***** ASTeX Account Team
Lead/Member
- -----------------------------------------------------------------------
2.2.3 Flexibility Requirements
ASTeX is expected to perform regular capacity planning and to
demonstrate upside/downside manufacturing flexibility in case of
demand volume changes at Applied. For Bus Route Items, ASTeX shall be
capable of manufacturing to unplanned sustained increases/decreases in
demand above/below Applied's forecast as defined below. For Spot Buy
Items, ASTeX allows the following increases/decreases to Purchase
Order quantities above/below the quantities originally requested:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------
Weeks until
Delivery Date less than 1 week less than 4 weeks less than 8 weeks less than 12 weeks 12+ weeks
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Flexibility +/- ***** ***** ***** ***** *****
-----------------------------------------------------------------------------------------------------------------
</TABLE>
As determined by Applied, ASTeX may be asked to provide logistics,
quality engineering, and new product development support on-site at
Applied's facilities. At the appropriate juncture, Applied will
require ASTeX to execute the On-site Representative Agreement prior to
issuing a building badge to ASTeX's representatives.
2.2.5 Global Support
For the Items listed in Attachment 1, and all other Items that ASTeX
provides to Applied, ASTeX will provide support globally for Applied
and Applied's customers. Specifically, Applied's requirements for
global support are:
In the event that Applied opens a new depot, based on specific
customer requirements and/or product concentration, Applied and ASTeX
will discuss the feasibility of ASTeX creating a supporting repair
facility.
6
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
New Repair Centers must be audited and approved by Applied's Installed
Base System Support (IBSS) designated groups before repairing parts at
new location, as specified in the IBSS Spares Quality System. Applied
will at the beginning of this Agreement provide to ASTeX the auditable
guidelines.
Complete repair/refurbish and test to a like new condition of all
ASTeX's products identified as repairable material by Applied before
returning.
ASTeX must have an established and deployed global service capability.
The required support services must be available globally, however,
ASTeX may utilize an ASTeX distributor, or other qualified entity
designated by ASTeX to meet this requirement. Technical assistance and
product support services shall be provided according to the below
table. This table reflects technical support only, and repairs will be
covered in the repair section (2.2.6).
- --------------------------------------------------------------------------
Technical Support Table:
- --------------------------------------------------------------------------
In Warranty: Normal Hours: After Hours:
- --------------------------------------------------------------------------
Phone, Fax, and E-Mail Support ***** *****
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Out of Warranty: Normal Hours: After Hours:
- --------------------------------------------------------------------------
Phone, Fax, and E-Mail Support ***** *****
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
ASTeX shall provide reasonable training to Applied personnel and its
affiliates. ***** of training will be offered free of charge for each major
product line in each of the following geographic areas: *****. Training
will be performed by the local ASTeX personnel or Representative in the
country where the training is to occur.
Additional training will be offered by ASTeX at a certain rate per
individual according to the local depots needs.
2.2.6 Turn-around time for Repairs
ASTeX will supply Applied with repair Items within ***** business days
from receipt of product. Applied shall have the right to designate
certain parts for a turnaround time of ***** for repair or
replacement. The labor rate for repairs shall not exceed ***** for
non-warranty repairs. If Applied-IBSS Division issues an large volume
of returns due to an accumulative return, ASTeX will notify Applied of
the turn around time for those repairs. All repaired parts will have a
******* Warranty.
2.3 Information
-----------
2.3.1 Applied Planning Systems
ASTeX may be given electronic access to Applied's planning data. This
access, if granted, should only be used to facilitate production and
delivery of Items to support Applied's requirements. ASTeX's access
to, and utilization of, Applied's planning data is subject to the
confidentiality terms of this Agreement and any NDA.
2.3.3 Applied New Product Plans
ASTeX will, on occasion and at Applied's discretion, be invited to
forums in which Applied's new product plans are shared. Any Applied
new product plans provided to ASTeX is subject to the confidentiality
provisions of this Agreement and any NDA.
2.4 Packaging and Transportation
----------------------------
2.4.1 Packaging and Shipment
7
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
ASTeX will have all Items packaged "ready for use" in accordance with
Applied's packaging specification (Attachment 6). ASTeX will mark and
identify every item in compliance with Applied's part identification
specifications and requirements (reference Attachment 8).
ASTeX is required to comply with IBSS's tie wrap requirements.
2.4.2 Bar Coding
All shipments should be bar coded to Applied's specifications
(Attachment 5).
2.4.3 Transportation Mode
Items will be transported, FOB Origin, Freight Collect in accordance
with Attachment A of Applied's Corporate Transportation Routing Guide
which is provided in Attachment 7.
2.5 Payment
-------
2.5.1 Demand Signal
Bus Route
---------
***** Applied sends via EDI transmission an order sheet to ASTeX
containing Applied's material requirements information. This
information is organized at the part-number level and represents
Applied's daily purchase from ASTeX. This EDI transmission constitutes
an authorized demand signal.
Spot Buy
--------
As needed, Applied sends via EDI transmission an order sheet to ASTeX
---------------------------------------------
containing Applied's material requirements information. This
information is organized at the part-number level and represents an
Applied purchase from ASTeX. This EDI transmission constitutes an
authorized demand signal.
2.5.2 Invoices
Invoices shall contain the following information: purchase order number,
item number, description of goods, sizes, quantities, unit prices, and
extended totals in addition to any other information requested.
Applied's payment of invoice does not represent unconditional
acceptance of items and will be subject to adjustment for errors,
shortages, or defects. Applied may at any time set off any amount owed
by Applied to ASTeX against any amount owed by ASTeX or any of its
affiliated companies to Applied.
All invoices must be sent directly to Accounts Payable in Austin:
Accounts Payable
Applied Materials
9700 US Highway 290 East M/S 4500
Austin, TX 78724-1199
2.5.3 Cash Discounts
Payment will be made net thirty (30) days from receipt of:
a. invoice, in form and substance acceptable to Applied, or
b. delivery and acceptance of the invoiced Item(s), whichever is
later.
2.6 Disaster Recovery Plan
----------------------
ASTeX is expected to develop and provide to Applied, upon request,
reasonable information describing [provide evidence of] a disaster recovery
plan that includes emergency back up capacity and appropriate record
protection and recovery. Furthermore, ASTeX represents that its information
systems are year 2000 compatible and hereby grants Applied the right to
verify ASTeX's internal processes for ensuring compliance with this
provision. ASTeX agrees to
8
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
include this same requirement in its purchase orders to its supply base and
to provide reasonable efforts to verify its supply base is compliant with
the requirements herein.
2.7 Managing Exceptions
-------------------
2.7.1 Identifying constraints
ASTeX is responsible for anticipating inability to perform its
obligations and limitations on manufacturing, delivery and other
performance to meeting CSA objectives, informing Applied when those
constraints occur, and initiating action plans to resolve them.
Constraints might typically include, but not be limited to:
a. Consumption over forecast
b. Consumption under forecast
c. Quality problems
d. Capacity/production problems
e. Secondary supplier supply-chain management problems
f. Other business issues
2.7.2 Process for Exceptions
Applied will work with ASTeXs to determine the impact of an exception
and approve and execute or disapprove the action plans in accordance
with Section 24, Changes, of Applied's Standard Terms and Conditions
of Purchase. ASTeX will notify the ASTeX Account Team Lead as soon as
exceptions are identified.
3. Quality framework
3.1 Supplier Non-conformances and Corrective Action
-----------------------------------------------
ASTeX's quality must meet all applicable Applied specifications (including
all technical specifications and detailed drawings). ASTeX is required to
replace or repair defective Items at ASTeX's expense in a timely manner.
ASTeX is required to use the most expeditious manner possible to affect the
corrections including the use of overnight delivery services for shipment
of Items; at Applied's request, in certain circumstances, ASTeX may be
asked to provide new Items in lieu of repairing a part to ensure immediate
corrective action.
ASTeX will be notified of defects with a corrective action form to which
they are expected to respond appropriately. A corrective action process to
resolve non-conformances will be documented and used. In addition, ASTeX
will participate in continuous improvement plans and programs as defined by
Applied and ASTeX. Should ASTeX fail to conform to the specifications,
Applied may purchase comparable items in the open market as necessary to
meet its requirements.
3.2 Applied non-conformances and corrective action
----------------------------------------------
Applied will return Items at Applied's expense that do not conform to
Applied's requirements due to Applied errors. These Items will be returned
for potential rework. Applied and ASTeX will agree in advance on "standard"
repair costs (labor, Items and freight) on items not covered under
warranty; the standard repair costs will be identified in the Items list
(Attachment 1).
To the extent that a "standard" repair cost has not been established, ASTeX
will assess rework costs and timing and inform Applied before work is
performed. The parties agree that under no circumstances will the total
price charged for repairing a part exceed ***** of the current purchase
price stated in Attachment 1. In the case the price of repair exceeds *****
of the new purchase price, Applied will at its option elect not to repair
the Item or will have the option to purchase a new Item according to
Attachment I.
Prior to return of repaired Items to Applied, ASTeX will mark each
container with Applied's part number, ASTeX's serial number, and purchase
order number. Applied shall bear the risk of loss or damage during transit
of Items whether or not the Items meets warranty requirements.
Repair quotes must be provided and approved by Applied's Repair Group
designee as noted on the PO, prior to commencement of work and delivery of
part. Non-repairable parts require approval/notification prior to the
return of
9
- --------------
*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
these parts to Applied. Also, repair quotes must included: purchase order
number, line item number, Applied's RMA number, description of part,
Applied's part number, ASTeX's serial number, description of repair, repair
cost, and warranty expiration date. In the event the part has been sent in
for evaluation for new, supplier shall also confirm if the part is new or
used. Applied and supplier shall mutually agree upon a fixed cost for "
Evaluation for New" parts.
Packing slip must include Applied's purchase order number, Applied's RMA
number, ASTeX's serial number, ASTeX's model number. If the Purchase Order
designates Applied order type as customer paid repair, supplier shall add
the suffix "R" after the part number, which identifies the part as customer
owned material. If the part is NEW for Evaluation, no suffix is required.
If the part is neither "R" or NEW, the default shall be a suffix of "W" for
all Applied warranty pool parts. If the part is identified as "scrap" -non-
repairable, supplier shall clearly mark on the packing slip and box "SCRAP-
NON-REPAIRABLE".
Repaired parts must include a Certificate of Compliance (C of C) and test
data. In the case where a new part is sent for evaluation, supplier will so
state, part is new and unused and the C of C shall so state. Applied and
ASTeX will agree upon fix "evaluation fee" for new parts.
ASTeX shall provide Failure Analysis (FA)/Repair Analysis (RA) if so
requested on the Purchase Order. Non-warranty related FA/RA shall be
mutually agreed to by Supplier and Applied prior to commencement, unless
there is a fixed fee already established.
In addition, as stated below in the quality assurance section, a corrective
action process to resolve non-conformance(s) will be documented and used.
3.3 Quality Assurance
------------------
All Items purchased under this CSA will be subject to inspection and test
by Applied at appropriate time and place, including the period of
manufacture and anytime prior to final acceptance. If inspection or test is
made by Applied on ASTeX 's premises, ASTeX will provide all reasonable
facilities and assistance for the safety and convenience of Applied's
inspectors at no charge to Applied. No preliminary inspection or test shall
constitute acceptance. Records of all inspection work shall be kept
complete and available to Applied during the performance of this order and
for such further period as Applied may determine.
With regard to repair services, ASTeX shall maintain documentation
evidencing that all test inspections have been performed. The documentation
shall indicate the nature and number of observations made, the quantities
approved and rejected as well as the nature of the corrective action taken.
ASTeX's service centers shall be responsible for submitting this data for
Applied's review of the delivery summaries. From time to time Applied may
request the data be submitted to Applied's Engineering and Applied's IBSS
Repairs Purchasing Group.
At Applied's request, ASTeX will provide a certificate and/or a copy of the
final inspection records showing compliance to applicable specifications,
contract requirements and any other required documents stipulated in
Applied's repair authorization. ASTeX also agrees to provide Applied with
copies of its current procedures relative to repairs, range change and
warranty repairs.
Through ASTeX's internal Quality Service Organization, ASTeX will track and
maintain its internal manufacturing reject rate by percentage of
assemblies, and/or part per million ("PPM"). Trend reporting and corrective
actions shall be furnished to Applied within 10 working days or as
requested by Applied Purchasing or Quality representatives. ASTeX will
provide quality data in the format, and as required by Applied. ASTeX may
also be required to provide reasonable additional data to support
qualification and certification programs.
3.4 Warranty
--------
ASTeX warrants that all Items delivered to Applied will be free from
defects in workmanship, material, and manufacture; will comply with the
requirements of this Agreement, and, where design is ASTeX's
responsibility, will be free from defects in design. All services will be
performed in a competent, professional and workmanlike manner, free from
defects and in accordance with best professional practices or the like.
ASTeX further warrants all Items purchased or repaired will be of
merchantable quality and will be fit and suitable for the purpose intended
by Applied. These warranties are in addition to all other warranties,
10
<PAGE>
whether expressed or implied, and will survive any delivery, inspection,
acceptance, or payment by Applied. If any Items delivered by ASTeX do not
meet the warranties specified herein or otherwise applicable, Applied may
seek any remedies provided in this Agreement, including any of the
following, at its option:
(i) require ASTeX to correct at no cost to Applied any defective
or non-conforming Items by repair or replacement, or
(ii) if ASTeX can not repair the Item under warranty within *****
days, Applied may return such defective or non-conforming
Item at ASTeX's expense to ASTeX and recover from ASTeX the
order price thereof, or
(iii) correct the defective or non-conforming Item itself and
charge ASTeX with the cost of such correction
All warranties will run to Applied and to its customers. Applied's approval
of ASTeX's material or design will not relieve ASTeX of the warranties
established in this agreement. In addition, if Applied waives any drawing or
specification requirement for one or more of the goods, it will not
constitute a waiver of all requirements for the remaining goods to be
delivered unless stated by Applied in writing. Warranty length for all parts
is listed in Attachment 1.
3.5 Other Quality Programs
- --------------------------
3.5.1 Supplier's Quality Systems Plan
Supplier's quality system must be in compliance with ISO 9000.
Certification to ISO 9000 is desired.
Applied Materials quality requirements and workmanship standards shall
be integrated into supplier's processes and identified accordingly. If
ASTeX is manufacturing Applied critical parts, all data generated as a
result of the critical manufacturing processes shall be collected,
processed and used for process control and continuous improvement.
Critical parts are defined as those parts deemed critical by Applied
engineering to ensure the proper form, fit, and function of the
component. Evidence of process control of critical processes is a
requirement and the presence of control charts and statistical process
control is required. Processes not exhibiting a process capability
index, ***** will require a formal corrective action plan to achieve the
required process control. The critical manufacturing processes are:
*****
*****
3.5.2 Part Quality Containment
Should Applied Materials identify a quality issue or problem on a piece
part and requests the supplier to implement containment action on the
part failure, supplier shall respond within ***** with a documented
containment plan and shall have implemented the plan. Applied will
review the plan and notify the supplier of acceptance. Supplier shall
substantiate this containment plan with a closed loop corrective action
identifying a permanent fix.
3.5.3 Supplier Audits
Applied Materials may conduct the following audits, deemed necessary, to
ensure a high level of quality of parts and assemblies purchased from
its suppliers.
3.5.3.1 Piece part audits: Piece part audits may be
performed by Applied's quality representative at the
supplier's site or at Applied Materials' facility after
part delivery. Supplier shall agree to respond and
commit to correct the part failures in a timely manner
as detailed by Applied Materials and to maintain the
required high piece part quality.
3.5.3.2 Process audits: When a systemic failure trend is
observed in the piece part or assembly supplied, Applied
Materials will request the supplier to identify the
processes which are causing the failure and Applied may
audit the suspected processes at the supplier's site.
Any deficiencies or opportunities
11
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*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
for improvements identified from the audit will be
discussed with the supplier so that a mutually agreed to
corrective action plan can be implemented. ASTeX will
initiate closed loop corrective action, specifying the
corrective action required with a specified timeline for
implementation. Supplier shall agree to work on the
corrective action and provide closure to all
deficiencies within the time period mutually agreed
upon.
3.5.3.3 System assessment: Applied Materials, at any time,
may decide to perform a quality system assessment at
the supplier site. Any deficiencies or opportunities
for improvements identified as a result of the
assessment will be discussed with the supplier and a
closed loop corrective action will be mutually agreed
upon to be established by ASTeX, specifying the
corrective action required with a specified timeline
for implementation. Supplier shall agree to work on the
corrective action and provide closure to all
deficiencies within the time period agreed upon.
3.5.3.4 Source Inspection
Applied Materials may, without prior notice to ASTeX,
conduct source inspection at the supplier's site at any
time. Performance of source inspection does not constitute
acceptance of the Items nor waive supplier responsibility
for any defects that might subsequently be identified by
Applied Materials or its customers.
3.5.4 Applied Materials may develop or request supplier develop
Inspection Standard Sheets ("ISS") on identified part numbers to be
used in supplier's operation. ISS's will be utilized in final
inspection, completed and records maintained as part of supplier's
quality system. Templates for ISS may be provided by Applied
Materials supplier quality organization.
3.5.5 ASTeX is required to provide Applied Materials with a quality
plan for the selection, control and maintenance of it's subtier
suppliers. The quality plan will include requirements for ASTeX to
conduct periodic quality testing of subtier supplier parts and
assemblies to validate compliance with Applied Materials
specifications. ASTeX shall demonstrate compliance to it's quality
plan by establishing and maintaining an Approved Supplier List of
subtier suppliers that have passed an on-site quality audit and that
have no open corrective actions resulting from ASTeX's audit. ASTeX
will, upon Applied Materials' request, provide evidence that ASTeX
quality representatives have conducted periodic subtier supplier on-
site audits and have validated with subtier suppliers that all
subtier supplier corrective actions resulting from ASTeX's quality
audits are closed in a timely manner.
3.5.6 Supplier communication
Supplier agrees to send a report on the Supplier's internal quality
performance to Applied Materials quality representative on either a
weekly or monthly basis the frequency of which is to be mutually
agreed to between the quality engineering representatives from each
party. Applied's quality engineer may schedule a periodic meeting
with the supplier's representative managing the supplier's internal
quality program to discuss the contents of Supplier's quality report,
parts containment, closed loop corrective action, audit findings or
any other issues related to quality.
3.5.7 A formal quality plan will be developed jointly by the
supplier and Applied Materials and will contain part and process
specific requirements identified to ensure the manufacture of high
quality parts. The supplier will perform to all requirements of the
plan. Periodic assessments of the quality plan will be performed by
the Applied supplier quality engineer to ensure conformance to all
requirements. The completed plan will be an attachment to this
contract and will be updated by the parties to reflect current ASTeX
quality performance against plan.
3.5.8 Suppliers shall provide to Applied Materials a quality plan
for the control and maintenance of suppliers used to distribute and
store product for shipment to Applied Materials. The plan shall
include the requirement for periodic source inspection and audit of
the distributor for proper storage, inventory control and shelf life
control. The supplier will have the responsibility for the quality of
product shipped from the distributor.
3.5.9 ASTeX shall assure the implementation of all quality programs
identified in the joint *****.
4. Pricing framework
12
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*****Confidential treatment requested as to certain portions, which portions
are omitted and filed separately with the Commission.
<PAGE>
4.1 Pricing By Part Number
----------------------
The pricing for the Items are shown in Attachment 1. Any modifications to
these must be made in accordance with Section 7 of this Agreement. ASTeX
commits to on-going cost improvement during the period of this Agreement in
accordance with Section 6.
At the time of the Agreement Effective Date, the remaining balance of
undelivered items on all open purchase orders will be revised to the
agreement price.
Specific circumstances may result in a review of the agreement terms,
including prices. These include, but are not limited to:
a. Volume increases resulting in an increase in agreement value of over
*****% (subsequent to completion of negotiations on the existing
prices);
b. Addition of Items to the agreement increasing the value of the
Agreement over *****%;
c. Cost reductions/savings over and above those committed in the ASTeX
performance plan.
d. Price reductions in accordance with Section 6, *****, of Applied's
Standard Terms and Conditions of Purchase.
4.2 Cooperative Pricing Models/Formulas
-----------------------------------
Not Applicable
4.3 Volume
------
ASTeX will be provided a range of potential volume that may be purchased.
Applied does not commit to buy a specific volume of a part number from a
ASTeX. Applied does not limit its ability to buy the same part number from
multiple sources.
4.4 Export Pricing
--------------
ASTeX should quote Applied in unit prices based upon delivery FCA Free
carrier. ASTeX is expected to prepare the export paperwork and be the
exporter of record. ASTeX must utilize Applied's preferred carriers to
arrange the export of the goods. Applied will pay the freight charges based
on Applied's rates with its preferred carriers. Applied will be responsible
for importing the goods into the destination country.
4.5 Currency
--------
All prices are quoted in US dollars; prices for foreign manufactured Items
will not be adjusted to reflect changes in the exchange rate. ASTeX is
encouraged to obtain any necessary currency exchange protection it deems
appropriate
Prototypes
- ----------
ASTeX is committed to price all prototypes consistent with contract prices.
4.7 Advances for Raw Materials
--------------------------
Applied does not provide advance payments for the purchase of raw
materials.
5. Technical framework
5.1 Engineering change orders
-------------------------
Applied may change its drawings, design, and specifications at any time in
accordance with Section 25, Changes, of Applied's Standard Terms and
Conditions of Purchase. Applied Supplier Engineer will review with ASTeX
all
13
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*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
proposed Engineering Change Orders (ECO's) that impact the form, fit, or
function of Items. Applied will, in writing, provide approved ECO's and
state the effectivity dates of all changes. Unless otherwise notified,
Applied Receiving Inspection will inspect to the latest revision in effect
at the time of receipt.
ASTeX may request engineering changes via a ASTeX Problem Sheet. This form
should be submitted to Applied Supplier Engineer. Changes shall not be
implemented by ASTeX until written permission to proceed is given by
Applied's authorized purchasing representative and the agreement is
modified accordingly. Applied will consider claims for adjustment in the
terms of this Agreement if made before the implementation of the changes.
5.2 Tooling
-------
Unless otherwise agreed to in writing, special dies, tools, patterns and
drawings used in the manufacture of Items shall be furnished by and at the
expense of, ASTeX.
5.3 Design Changes and Resolution
-----------------------------
For the term of this Agreement, ASTeX will not make changes to the design
of any part that may alter form, fit, function or manufacturing process
without a documented engineering change request and prior written approval
from Applied's authorized purchasing representative and the agreement is
modified accordingly.
If Applied's design changes impact the pricing, delivery, lead-time, or
other terms and conditions of this Agreement, and agreement upon alternate
terms cannot be reached with ASTeX, then Applied may remove the subject
Items from this Agreement without affecting the remaining Items.
14
<PAGE>
5.4 Process Changes and Resolution
------------------------------
ASTeX is expected to inform Applied of process and supplier changes to all,
critical Items (to be defined by SMO), even when specifications are met.
ASTeX must receive approval in writing from Applied before implementing
changes.
5.5 Subcontracting
--------------
ASTeX shall not subcontract for completed or substantially completed Items
supplied to Applied without prior written approval of Applied. ASTeX will
ensure that all subcontractors to ASTeX that have access (directly or
indirectly) to Applied specifications must be covered by a NDA that is
similar in form and substance to Applied's NDA.
5.6 First Articles
--------------
A new Item, Item with revised drawings, or other changes as delineated
above, must have a first article evaluated and accepted by Applied (a
"First Article"). An Item will not be authorized for deliveries until
acceptance of the First Article by Applied. ASTeX will maintain First
Article qualifications/evidence data file with content as defined by
Applied for the specific part. First Article data is to be made available
to Applied upon request and shall be retained by ASTeX during the
performance of this Agreement or subsequent agreements.
5.7 Outsourcing
-----------
Applied may at its discretion elect to outsource an assembly or module to a
third party ("Subassembler") and if the selected assembly or module
includes any Item under this CSA (an "affected Item"), Applied will advise
ASTeX of the Subassembler, unless precluded from doing so by
confidentiality or other requirements. ASTeX understands that the selection
and responsibility for sourcing any affected Items will generally be the
responsibility of the Subassembler. If ASTeX is not selected as the source
for an affected Item, any affected Items or applicable quantities of
affected Items may, at Applied's discretion, be removed from this
Agreement.
5.8 Product Support
---------------
ASTeX agrees to provide Items, and technical and service support to Applied
for all of the Items for a minimum of ten years from the date of final
shipment of a part to Applied. Alternatively, the parties may agree to
establish a product support period less than ten years provided that ASTeX
agrees to grant to Applied a non-exclusive license to make, have made, use,
sell, and support the Items in a form and on terms acceptable to Applied.
5.9 Commodity Specific Issues
-------------------------
Reserved
5.10 Technology Roadmap
-----------------
Reserved
6. Performance Management
6.1 Supplier Performance Plan
-------------------------
As part of this Comprehensive Supplier Agreement, Applied and ASTeX agree
to jointly develop a Supplier Performance Plan. Attachment 9 outlines the
performance plan.
6.2 Supplier Performance Management
-------------------------------
6.2.1 Metrics and Targets
ASTeX agrees to the best of its abilities to perform to the operational
performance measures defined below. Performance targets for FY2000 are
listed. Intermediate performance targets are established in the Supplier
15
<PAGE>
Performance Management Plan. The following defines how Applied and ASTeX
will measure performance metrics:
Applied agrees to use all reasonable efforts to assist ASTeX in meeting the
above performance criteria and resolve discrepancies should they occur.
7. Amendments and Modifications
This CSA may be revised by the mutual consent of Applied and ASTeX. Revisions to
this CSA must be in writing, signed by both Applied and ASTeX duly authorized
representatives, traced by revision numbers and attached to this original
agreement. A change to one attachment of this agreement will constitute a
revision level change. The master copy of this CSA and any revisions are to be
maintained by Applied.
Updates to Section 2.2, Service levels, and changes may be communicated via
memos sent by mail, fax or e-mail.
8. Glossary
Not Applicable
9. Acceptance
Accepted:
______________________________ _________________________________
Kristine Brock/Don Cook Avishay Katz
Supplier Manager for ASTeX Senior Vice President
Applied Materials, Inc. Applied Science and Technology, Inc.
OEM-Electrical SMO
Date: Date:
16
<PAGE>
APPLIED MATERIALS STANDARD TERMS AND CONDITIONS OF PURCHASE
Table of Contents
<TABLE>
<CAPTION>
- -------------------------------------------------------------
Article Topic
Page #
- -------------------------------------------------------------
<S> <C> <C>
1 Acceptance 2
- -------------------------------------------------------------
2 Confidential and Proprietary 2
Information
- -------------------------------------------------------------
3 Intellectual Property 3
- -------------------------------------------------------------
4 Patent License 3
- -------------------------------------------------------------
5 Press Releases/Public 4
Disclosure not Authorized
- -------------------------------------------------------------
6 ***** 4
- -------------------------------------------------------------
7 Duty Drawback 4
- -------------------------------------------------------------
8 ODC Elimination 5
- -------------------------------------------------------------
9 Compliance with Laws 5
- -------------------------------------------------------------
10 Equal Employment Opportunity 5
- -------------------------------------------------------------
11 Applicable Law 5
- -------------------------------------------------------------
12 Notice of Labor Disputes 6
- -------------------------------------------------------------
13 Taxes 6
- -------------------------------------------------------------
14 Responsibility for Goods 6
- -------------------------------------------------------------
15 Insurance 6
- -------------------------------------------------------------
16 Change of Control 7
- -------------------------------------------------------------
17 Assignments 7
- -------------------------------------------------------------
18 Gratuities 7
- -------------------------------------------------------------
19 Insolvency 7
- -------------------------------------------------------------
20 Waiver 8
- -------------------------------------------------------------
21 Disclaimer and Limitation of 8
Liability
- -------------------------------------------------------------
22 Indemnity by Supplier 8
- -------------------------------------------------------------
23 Force Majeure 8
- -------------------------------------------------------------
24 Changes 9
- -------------------------------------------------------------
25 Termination for Default 9
- -------------------------------------------------------------
26 Termination for Convenience 9
- -------------------------------------------------------------
</TABLE>
Page 1
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*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
EXHIBIT 1
APPLIED MATERIALS TERMS AND CONDITIONS OF PURCHASE
--------------------------------------------------
1. Acceptance
The terms and conditions stated in these Applied Materials Standard Terms
and Conditions of Purchase become the agreement between the parties
covering the purchase of the goods or services (collectively referred to as
"Items") ordered in the Purchase Agreement/Comprehensive Supplier
Agreement/Basic Supplier Agreement of which these Terms and Conditions are
a part when this Agreement is accepted by acknowledgment or commencement of
performance. This Agreement can be accepted only on these terms and
conditions. Additional or different terms proposed by Supplier will not be
applicable unless accepted in writing by the Buyer. No change,
modification, or revision of this Agreement will be effective unless in
writing and signed by duly authorized representative of Buyer.
2. Confidential and Proprietary Information
Supplier will observe and is bound by the terms and conditions of any and
all Non-Disclosure Agreements (NDAs) executed by Supplier with or for the
benefit of Buyer, whether now or hereafter in effect. In addition, all
schematics, drawings, specifications and manuals, and all other technical
and business information provided to Supplier by Buyer during the term of,
or in connection with the negotiation, performance or enforcement of this
Agreement shall be deemed included in the definition (subject to any
applicable exclusions therefrom) of "Proprietary Information" for purposes
of this Agreement.
Supplier may use Buyer's Proprietary Information only for the purpose of
providing Items, parts or components of Items or services to Buyer.
Supplier will not discuss and further will not use any of Buyer's
Proprietary Information, directly or indirectly, for any other purpose
including, without limitation, (a) developing, designing, manufacturing,
refurbishing, selling or offering for sale parts or components of Items or
parts, or providing services, for or to any party other than Buyer, and (b)
assisting any third party, in any manner, to perform any of the activities
described herein . All Proprietary Information shall (a) be clearly marked
by Supplier as Buyer's property and segregated when not in use, and (b) be
returned to Buyer promptly upon request.
Supplier acknowledges and agrees that Buyer would suffer irreparable harm
for which monetary damages would be an inadequate remedy if Supplier were
to breach its obligations under this provision. Supplier further
acknowledges and agrees that equitable relief, including injunctive relief,
would be appropriate to protect Buyer's rights and interests if such a
breach were to arise, or threatened.
Supplier will use reasonable efforts to notify Buyer of any third party
requests to engage in any of the activities prohibited by this Article.
Page 2
<PAGE>
3. Intellectual Property
Nothing in this Agreement shall be deemed to grant to Supplier any license
or other right under any of Buyer's intellectual property (including,
without limitation, Buyer's patents, copyrights, trade and service marks,
trade secrets, and Proprietary Information) for Supplier's own benefit or
to provide or offer Items to any party other than Buyer.
Other than the license rights granted to Buyer pursuant to section 4,
nothing in this Agreement shall be deemed to grant to Buyer any license or
other right under any of Supplier's intellectual property ( including,
without limitations, Supplier's patents, copyrights, trade and service
marks, trade secrets, and Proprietary Information).
All Items supplied by Supplier and the sale of Items by Supplier and, as
applicable, use thereof by Buyer or its subsequent purchasers or
transferees will be free from liability for or claim by any persons of
royalties, patent rights, copyright, trademark, mechanics' liens or other
encumbrances, and trade secrets or confidential or proprietary intellectual
property rights (collectively "rights" and "encumbrances"), and Supplier
shall defend, indemnify and hold harmless Buyer against all claims,
demands, costs and actions for actual or alleged infringements of patent,
copyright, trademark or trade secret rights or other rights and
encumbrances in the use, sale or re-sale of any Item which are valid at the
time of or after the effective date of this Agreement; except to the extent
that the infringement was unavoidably caused by Supplier's compliance with
a detailed design furnished and required by Buyer or by Buyer's non-
compliance with Supplier's prior written advice or warning of a possible
and likely infringement. Notwithstanding the foregoing, Buyer agrees that
Seller assumes no liability for patent infringement resulting from Buyer's
processes or chemistries for the products supplied hereunder to the extent
that Seller is not a party to the development of such processes or
chemistries.
At the request of Buyer, Supplier will provide to Buyer the most current
and complete specifications and drawings (the "Drawings") for each Item
manufactured or produced for Buyer that is based on Buyer's design or
Drawings showing the complete specifications and design for the Item as
manufactured or produced by Supplier. All Drawings and specifications that
are of the Buyer's designs are the Proprietary Information of Buyer.
Drawings and specifications that are of the Supplier's designs are
Proprietary Information of the Supplier.
Upon termination of this Agreement, Supplier will return all Applied
Proprietary Information and documentation to Buyer. Notwithstanding this
requirement, Supplier may request Buyer approval to destroy any Proprietary
Information of Buyer that has become obsolete or outdated (e.g., financial
projections, forecasts, et cetera); provided that Supplier certifies to
Buyer the destruction of such Proprietary Information.
Page 3
<PAGE>
Upon termination of this Agreement, Buyer will return all ASTeX Proprietary
Information and documentation to Supplier. Notwithstanding this
requirement, Buyer may request Supplier approval to destroy any Proprietary
Information of Supplier that has become obsolete or outdated (e.g.,
financial projections, forecasts, et cetera); provided that Buyer certifies
to Supplier destruction of such Proprietary Information.
4. Patent License
Supplier, as part of the consideration for this Agreement and without
further cost to Buyer, hereby grants to Buyer a royalty free right and
license to use inventions of Supplier incorporated into Supplier's products
sold hereunder to Buyer, and for Buyer to incorporate Supplier's products
incorporating such inventions into its own products and sell same to
Buyer's customers. In addition, Buyer's customers shall be licensed to use
Supplier's products and all such incorporated inventions during the
operation of Buyer's products.
5. Press Releases/Public Disclosure Not Authorized
Supplier will not, without the prior written approval of Buyer, issue any
press releases, advertising, publicity, public statements or in any way
engage in any other form of public disclosure that indicates the terms of
this Agreement, Buyer's relationship with Supplier or implies any
endorsement by Buyer of Supplier or Supplier's products or services.
Supplier further agrees not to use, without the prior written consent of
Buyer, the name or trademarks (including, but not limited to Buyer's
corporate symbol). Any requests under this Section must be made in writing
and submitted to the parties designated by Buyer for the review and
authorization of such matters.
6. *****
7. Duty Drawback
Supplier will provide Buyer with U.S. Customs entry data, including
information and receipts for duties paid directly or indirectly on all
Items that are either imported or contain imported parts or components,
that Buyer determines is necessary for Buyer to qualify for duty drawback
("Duty Drawback Information"). This data will be provided to Buyer within
fifteen (15) days after each calendar quarter [or fiscal year quarter of
Buyer] and be accompanied by a completed Certificate of Delivery of
Imported Merchandise or Certificate of Manufacture and Delivery of Imported
Merchandise (Customs Form 331) as promulgated pursuant to 19 CFR 191.
8. ODC Elimination
In the event Supplier's goods are manufactured with or contain Class I ODCs
as defined under Section 602 of the Federal Clean Air Act (42 USC Section
7671a) and implementing regulations, or if Supplier suspects that such a
condition exists,
Page 4
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*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
Supplier shall notify Buyer prior to performing any work against this
Agreement. Buyer reserves the right to: (a) terminate all Agreements for
such goods without penalties, (b) to return any and all goods delivered
which are found to contain or have been manufactured with Class I ODCs, or
(c) to terminate any outstanding Agreements for such goods without
penalties. Supplier shall reimburse Buyer all monies paid to Supplier and
all additional costs incurred by Buyer in purchasing and returning such
goods.
9. Compliance With Laws
Supplier warrants that no law, rule, or ordinance of the United States, a
state, any other governmental agency, or that of any country has been
violated in supplying the goods or services ordered herein.
10. Equal Employment Opportunity
Supplier represents and warrants that it is in compliance with Executive
Agreement 11246, any amending or supplementing Executive Agreements, and
implementing regulations unless exempted.
11. Applicable Law, Consent to Jurisdiction, Venue
This Agreement shall be governed by, be subject to, and be construed in
accordance with the internal laws of the State of California, excluding
conflicts of law rules. The parties agree that any suit arising out of this
Agreement, for any claim or cause of action, whether in contract, in tort,
statutory, at law or in equity, shall exclusively be brought in the United
States District Court for the Northern District of California or in the
Superior or Municipal Courts of Santa Clara County, California, or in the
United States District Court for the Western District of Texas, Austin
Division, or the Texas State District Courts of Travis County, Texas,
provided that such court has jurisdiction over the subject matter of the
action. Each party agrees that each of the named courts shall have personal
jurisdiction over it and consents to such jurisdiction. Supplier further
agrees that venue of any suit arising out of this Agreement is proper and
appropriate in any of the courts identified above; Supplier consents to
such venue therein as Buyer selects and to any transfer of venue that Buyer
may seek to any of such courts, without respect to the initial forum.
With respect to transactions to which the1980 United Nations Convention of
Contracts for the International Sale of Goods would otherwise apply, the
rights and obligations of the parties under the Agreement, including these
terms and conditions, shall not be governed by the provisions of the 1980
United Nations Convention of Contracts for the International Sale of Goods;
instead, applicable laws of the State of California, including the Uniform
Commercial Code as adopted therein (but exclusive of such 1980 United
Nations Convention) shall govern.
12. Notice of Labor Disputes
Page 5
<PAGE>
Whenever an actual or potential labor dispute, or any government embargoes,
regulatory or tribunal proceedings relating thereto is delaying or
threatens to delay the timely performance of this Agreement, Supplier will
immediately notify Buyer of such dispute and furnish all relevant details
regardless of whether said dispute arose directly, or indirectly, as a
result of an actual or potential dispute within the Supplier's subtier
supply base or its own operations.
13. Taxes
Unless otherwise specified, the agreed prices include all applicable
federal, state, and local taxes. All such taxes shall be stated separately
on Supplier's invoice.
14. Responsibility for Goods; Risk of Loss
Notwithstanding any prior inspections, Supplier shall bear all risks of
loss, damage, or destruction to the Items called for hereunder until *****.
These Supplier responsibilities remain with respect to any Items rejected
by Buyer provided, however, that in either case, Buyer shall be responsible
for any loss occasioned by the gross negligence of its employees acting
within the scope of their employment. Items are not accepted by reason of
any preliminary inspection or test, at any location.
15. Insurance
A. Supplier shall maintain (i) comprehensive general liability insurance
covering bodily injury, property damage, contractual liability,
products liability and completed operations, (ii) Worker's Compensation
and employer's liability insurance, and (iii) auto insurance, in such
amounts as are necessary to insure against the risks to Supplier's
operations.
B. Minimally, Supplier will obtain and keep in force, insurance of the
types and in the amounts set forth below:
Insurance Minimum Limits of Liability
--------- ---------------------------
Worker's Compensation Statutory
Employer's Liability *****
Automobile Liability *****
Comprehensive General Liability *****
(including Products Liability)
Umbrella/Excess Liability *****
All policies must be primary and non-contributing, and shall include Buyer
as an additional insured. Supplier also waives all rights of subrogation.
Supplier will also require and verify that each of its major subcontractors
carry at least the same insurance coverage and minimum limits or insurance
as Supplier carries under this Agreement. Supplier shall notify Buyer at
least thirty (30) days prior to the cancellation of or implementation of
any material change in the foregoing policy
Page 6
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*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
coverage that would affect the Buyer's interests. Upon request, Supplier
shall furnish to Buyer as evidence of insurance a certificate of insurance
stating that the coverage would not be canceled or materially altered
without thirty (30) days prior notice to the Buyer.
16. Change of Control
Supplier will notify Buyer immediately of any change of control or change
(including any change in person or persons with power to direct or cause
the direction of management or policies of Seller) or any change (***** or
more) in the ownership of Supplier, or of any materially adverse change in
Supplier's financial condition or in the operation of Supplier's business,
including, but not limited to, Supplier's net worth, assets, production
capacity, properties, obligations or liabilities (fixed or contingent)
(collectively, a "change of control"). Notwithstanding any other rights
Buyer may have under this Agreement, upon a change of control, Buyer may,
in its discretion, renegotiate or terminate for convenience this Agreement.
17. Assignments
A. No right or obligation under this Agreement shall be assigned by
Supplier without the prior written consent of Buyer, and any purported
assignment without such consent shall be void.
B. Buyer may assign this Agreement in whole or part at any time if such
assignment is considered necessary by Buyer in connection with a sale
of Buyer's assets, or a transfer of any of its contracts or obligations
under such contracts, or a transfer to a third party of manufacturing
activities previously conducted by Buyer.
18. Gratuities
Supplier warrants that it has not offered or given and will not offer or
give any gratuity to induce this or any other agreement. Upon Buyer's
written request, an officer of Supplier shall certify in writing that
Supplier has complied with and continues to comply with this Section. Any
breach of this warranty shall be a material breach of each and every
agreement and contract between Buyer and Supplier.
19. Insolvency
The insolvency of Supplier, the filing of a voluntary or involuntary
petition for relief by or against Supplier under any bankruptcy, insolvency
or like law, or the making of an assignment for the benefit of creditors,
by Supplier, shall be a material breach hereof and default.
20. Waiver
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omitted and filed separately with the Commission.
<PAGE>
In the event Buyer fails to insist on performance of any of the terms and
conditions, or fails to exercise any of its rights or privileges hereunder,
such failure shall not constitute a waiver of such terms, conditions,
rights or privileges.
21. Disclaimer and Limitation of Liability
In no event shall Buyer be liable for any special, indirect, incidental,
consequential, or contingent damages (the foregoing being collectively
called "Damages"), whether or not Buyer has been advised of the possibility
of such damages, for any reason. Buyer excludes and Supplier waives any
liability of Buyer for any "Damages", as so defined.
22. Indemnity by Supplier
Supplier shall defend, indemnify and hold harmless Buyer from and against,
and shall solely and exclusively bear and pay, any and all claims, suits,
losses, penalties, damages (whether actual, punitive, consequential or
otherwise) and all liabilities and the associated costs and expenses
(including reasonable attorney's fees, expert's fees, and costs of
investigation; all of the foregoing being collectively called "Indemnified
Liabilities"), to the extent such are caused by Supplier's breach of any
term or provision of this Agreement, or in whole or in any part by any
negligent, grossly negligent or intentional acts, errors or omissions by
Supplier, its employees, officers, agents or representatives in the
performance of this Agreement or that are for, that are in the nature of,
or that arise under, strict liability or products liability with respect to
or in connection with the Items. The indemnity by Supplier in favor of
Buyer shall extend to Buyer, its officers, directors, agents, and
representatives and shall include and is intended to include Indemnified
Liabilities which arise from or are caused by, in whole or in part, the
concurrent negligence, including negligence or gross negligence of
Supplier, but shall not extend to Indemnified Liabilities to the extent
such are caused by the negligence or willful misconduct of Buyer. Seller
assumes no liability under this Indemnity for system failures, personal
injury or property damage to the extent resulting from improper operation,
improper maintenance, abuse or modifications from the original product
specifications or configuration, on the part of Buyer.
23. Force Majeure
A failure by either party to perform due to causes beyond the control and
without the fault or negligence of the party is deemed excusable during the
period in which the cause of the failure persists. Such causes may include,
but not be limited to, acts of God or the public enemy, acts of the
Government in either sovereign or contractual capacity, fires, floods,
epidemics, strikes, freight embargoes and unusually severe weather. If the
failure to perform is caused by the default of a subcontractor, and such
default arises out of causes beyond the control of both the Supplier and
subcontractor, and without the fault or negligence of either of them, the
Supplier will not be liable for any excess cost for failure to perform,
unless the supplies or services to be
Page 8
<PAGE>
furnished by the subcontractor were obtainable from other sources in
sufficient time to permit the Supplier to meet the required delivery
releases. When Supplier becomes aware of any potential force majeure
condition as described in this Agreement, Supplier shall immediately notify
Buyer of the condition and provide relevant details.
24. Changes
Buyer may at anytime, by a written order and without notice to sureties or
assignees, suspend performance hereunder, increase or decrease the
Agreement quantities, or make changes within the general scope of this
Agreement in any one or more of the following:
(a) applicable drawings, designs, or specification;
(b) method of shipment or packing, and/or;
(c) place and date of delivery;
(d) place and date of inspection or acceptance.
If any such change causes an increase or decrease in the cost of or time
required for performance of the Agreement, an equitable adjustment shall be
made in the Agreement price or delivery schedule, or both, and the
Agreement shall be modified in writing accordingly. No claim by Supplier
for adjustment hereunder shall be valid unless asserted within ****** days
from the date of receipt by Supplier of the notification of change,
provided, however, that such period may be extended upon the written
approval of Buyer. However, nothing in this clause shall excuse Supplier
from proceeding with the Agreement as changed or amended.
25. Termination for Default
(a) Buyer may, by notice, terminate this Agreement in whole or in part (i)
if Supplier fails to deliver goods or services on agreed delivery
schedules or any installments thereof strictly within the time
specified; (ii) if Supplier fails to replace or correct defective
goods or services; (iii) if Supplier fails to comply strictly with any
provision of, or repudiates this agreement, or (iv) Supplier defaults
under, or any event or condition stated to be a default occurs under,
any provision of the Agreement, including these Applied Materials
Standard Terms and Conditions of Purchase.
(b) In the event of termination pursuant to this Section:
(i) Supplier shall continue to supply any portion of the Items
contracted for under this Agreement that are not terminated;
(ii) Supplier shall be liable for additional costs, if any, for the
purchase of such similar goods and services to cover such
default;
(iii) At Buyer's request Supplier will transfer title and deliver to
Buyer (1) any completed goods, (2) any partially completed goods
and (3) all unique materials. Prices for partially completed
goods and unique materials so accepted shall be negotiated.
However, such prices shall not exceed the Agreement price per
item.
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omitted and filed separately with the Commission.
<PAGE>
(c) Buyer's rights and remedies herein or otherwise stated in this
Agreement, any Purchase Order, Comprehensive Supplier Agreement or
Basic Supplier Agreement are in addition to and shall not limit or
preclude resort to any other rights and remedies provided by law or in
equity. Termination under this Agreement shall constitute
"cancellation" under the Uniform Commercial Code.
26. Termination for convenience
(a) Buyer may terminate, for convenience, work under this Agreement in
whole or in part, at any time by written or electronic notice. Upon
any such termination Supplier shall, to the extent and at the time
specified by Buyer, stop all work on this Agreement, place no further
orders hereunder, terminate work outstanding hereunder, assign to
Buyer all Supplier's interests under terminated sub-contracts and
Agreements, settle all claims thereunder after obtaining Buyer's
approval, protect all property in which Buyer has or may acquire an
interest, and transfer title and make delivery to Buyer of all Items,
materials, work in process, or other things held or acquired by
Supplier in connection with the terminated portion of this Agreement.
Supplier shall proceed promptly to comply with Buyer's directions
respecting each of the foregoing without awaiting settlement or
payment of its termination claim.
(b) Within six (6) months from such termination, Supplier may submit to
Buyer its written claim for termination charges, in the form and with
supporting data and detail prescribed by Buyer. Failure to submit such
claim within the prescribed time frame and with such items shall
constitute a waiver of all claims and a release of all Buyer's
liability arising out of such termination.
(c) The parties may agree upon the amount to be paid Supplier for such
termination. If they fail to agree, Buyer shall pay Supplier the
amount due for Items delivered prior to termination and in addition
thereto but without duplication, shall pay the following amounts:
(i) The contract price for all Items completed in accordance with
this Agreement and not previously paid for;
(ii) The actual costs for work in process incurred by Supplier which
are properly allocable or apportionable under Generally Accepted
Accounting Principles (GAAP) to the terminated portion of this
Agreement and a sum constituting a fair and reasonable profit on
such costs. The Supplier agrees to keep true, complete, and
accurate records in compliance with GAAP for the purpose of
determining allocability of Suppliers costs under this agreement.
Such records shall contain sufficient detail to permit a
determination of the accuracy of the costs; Independent
nationally recognized accountants (the "Auditor") designated by
Buyer and reasonably acceptable to Supplier shall have the right,
at Buyer's expense and upon reasonable notice, to conduct audits
of all of the relevant books and records of Supplier in order to
determine the accuracy and allocability of costs submitted by
Supplier to Buyer under this provision.
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<PAGE>
(iii) The reasonable costs of Supplier in making settlement hereunder
and in protecting Items to which Buyer has or may acquire an
interest.
(d) Payments made under subparagraphs (c)(i) and (c)(ii) shall not exceed
the aggregate price specified in this Agreement, less payment
otherwise made or to be made. Buyer shall have no obligation to pay
for Items lost, damaged, stolen or destroyed prior to delivery to
Buyer.
(e) The foregoing paragraphs (a) to (d) inclusive, shall be applicable
only to a termination for Buyer's convenience and shall not affect or
impair any right of Buyer to terminate this Agreement for Supplier's
default in the performance hereof.
Page 11
<PAGE>
[LOGO]
APPLIED MATERIALS
APPLIED MATERIALS, INC.
Attachment 10 to Applied MPO 926021
Special Terms for Applied Part No. *****
This Attachment 10 represents the agreement (the "Agreement") of Applied
Materials ("APPLIED" or "APPLIED MATERIALS") and Applied Science & Technology,
Inc. ("ASTeX") concerning ASTeX's manufacture and sale to APPLIED of ASTeX's
*****
Scope of Agreement
The only ASTeX product to which this Agreement relates is the following ASTeX
component, including related software: the ***** (as such item may be improved
from time to time during the Contract Period [as hereinafter defined] by ASTeX
or ASTeX and APPLIED acting in concert, the "Product"); additionally, the only
APPLIED application for the Product to which this Agreement relates is the
integration of the Product with Applied ****** for the purpose of *****
(hereinafter, the "Application"). APPLIED has assigned the following part number
to the Product *****.
This Agreement is an attachment to and is subject to the provisions and terms
and conditions of APPLIED MPO 926021 (which includes the Comprehensive Supplier
Agreement and Terms and Conditions) (collectively, the "MPO"), and modifies the
MPO as provided herein.
ASTeX, for a minimum period of ***** years from the date of the MPO, will
provide for sale to APPLIED, all individual spare components for the Product.
The intent of this provision is so that APPLIED shall not be required to
purchase complete Products whenever individual Product components fail out of
warranty.
Product Pricing
In consideration of APPLIED's selection of ASTeX as a supplier of the Product as
provided above and APPLIED's other agreements set forth herein, ASTeX agrees
that the per unit price of the Product to APPLIED shall be the price set forth
on the following table (the "Price Table") for the indicated period of time,
subject to adjustment as hereinafter set forth:
Applicable Period Per Unit Price
----------------- --------------
***** *****
If APPLIED shall have purchased an aggregate number of Products during *****,
the unit price for all additional units purchased during ***** shall be $*****,
subject to further reduction according to other applicable adjustment provisions
hereinafter set forth. If during the Contract Period APPLIED (i) shall have
purchased, or (ii) shall issue ASTeX a firm purchase order to purchase, a number
of Product units which, when aggregated with the number of Product units already
purchased or to be purchased under previously issued firm purchase orders,
determined on a calendar year basis, is equal to or greater than *****, the unit
price for all additional units purchased during the remainder of the Contract
Period and any extensions thereof shall be $*****. Additionally, if, on or
before *****, APPLIED shall present a forecast to ASTeX indicating that APPLIED
shall purchase at least *****, the unit price for all additional units purchased
as of *****0 and during the remainder of the Contract Period and any extensions
thereof shall be $*****.
All prices noted in this Agreement include any documentation or training
necessary to permit APPLIED to integrate the Product with the Application.
*****
Design Modification
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omitted and filed separately with the Commission.
<PAGE>
[LOGO]
APPLIED MATERIALS
Additionally, the Parties agree that ASTeX shall provide APPLIED, on or before
*****, at no additional cost or charge of any kind, a design modification of the
Product as required to eliminate the requirement for *****. *****. The affected
Products shall be shipped to ASTeX free of charge to APPLIED or its customers
for retrofitting; following retrofitting, the Products shall be shipped back to
the affected facilities free of charge.
Applied Materials, Inc.
By: ______________
Name: ____________
Title: ____________
ACCEPTED AND AGREED:
Applied Science & Technology, Inc.
By: ___________________
Name: ___________________
Title: ___________________
Date: _____________________
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*****Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE>
<TABLE>
<CAPTION>
[LOGO] APPLIED MATERIALS BILL TO: ACCOUNTS PAYABLE MAILSTOP NO. 3200 PURCHASE ORDER
9700 U.S. HIGHWAY 290 EAST
AUSTIN, TX 78724-1102
PHONE (512) 272-1000 FAX (512) 272-3000 No. 926021
---------------------------------------------------------------
To: ASTeX SHIP TO: 9700 U.S. Highway 290 East, Bldg 36, AUSTIN TX 78724
---------------------------------------------------------------
35 Cabot Drive
Woburn, MA 01801-1053 SHIP TO ABOVE ADDRESS UNLESS OTHERWISE NOTED BELOW
---------------------------------------------------------------
Attn.: Avi Katz DATE: 09/24/99
- --------------------------------------------------------------------------------------------------------------------------
TERMS INSP. CODE RESALE NO. 3-00103-8201-5
CONFIRMING: Norman Butler BY PL See Contract TAXABLE [ ] RESALE [X] PPD
- --------------------------------------------------------------------------------------------------------------------------
ITEM NO. QUANTITY UNIT AMI PART NO. REV. DESCRIPTION DELIVERY
SCHEDULE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
- ----------------------------------------------------
SHIP VIA: FOB
COL [ ] See Contract See Contract
- ----------------------------------------------------
ACCT. NO UNIT PRICE EXTENDED
PRICE
- ----------------------------------------------------
<S> <C> <C>
This Master Purchase Order and Sales Agreement 926021 is issued to ASTeX to initiate a
new contract between Applied Materials and ASTeX effective 5/27/99.
Ship To: Applied Materials
9700 U.S. Highway 290 East
Building 36 Warehouse
Austin, Texas 78724
or
Applied Materials, Bldg. 17, 2821 Scott Blvd., Santa Clara, CA 95060
Estimated 3 Year Contract Value $142,000,000
- ---------------------------------------------------------------------------------------------------------------------
NOTE: APPLIED MATERIALS WILL NOT BE LIABLE FOR GOODS, SERVICES, COSTS OR EXPENSES WHICH HAVE NOT BEEN AUTHORIZED
BY APPLIED MATERIALS PURCHASING PERSONNEL.
- ---------------------------------------------------------------------------------------------------------------------
[LOGO] APPLIED MATERIALS
THIS ORDER CAN BE ACCEPTED ONLY UPON THE TERMS AND CONDITIONS _________________________
SPECIFIED ON THE FACE AND REVERSE SIDE HEREOF, INCLUDING SUCH Acknowledged by Vendor
SPECIFICATIONS, DRAWINGS OR OTHER DOCUMENTS AS ARE INCORPORATED
HEREIN BY REFERENCE OR ATTACHED HERETO. READ THEM! By:________________ _________________________
BUYER Date Acknowledged
</TABLE>
<PAGE>
EXHIBIT 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
Years Ended
---------------------------------
June 26, June 27, June 28,
1999 1998 1997
------------ --------- ---------
<S> <C> <C> <C>
Net earnings (loss)......................... $ (1,250,922) 4,020,604 937,759
============ ========= =========
Basic earnings (loss) per share: Weighted
average common shares outstanding.......... 9,398,289 8,052,926 6,686,253
Basic earnings (loss) per share............. $ (0.13) 0.50 0.14
============ ========= =========
Diluted earnings (loss) per share:
Weighted average common shares outstanding.. 9,398,289 8,052,926 6,686,253
Weighted average common equivalent shares
due to stock options and warrants.......... 0 476,021 91,187
------------ --------- ---------
9,398,289 8,528,947 6,777,440
============ ========= =========
Diluted earnings (loss) per share........... $ (0.13) 0.47 0.14
============ ========= =========
</TABLE>
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
ASTeX CPI, Inc.
ETO, Inc.
Newton Engineering Service, Inc.
Applied Science and Technology, GmbH
ASTeX/Gerling Laboratories, Inc.
ASTeX GmbH
ASTeX PlasmaQuest, Inc.
Klee Corporation
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-26-1999
<PERIOD-START> JUN-28-1998
<PERIOD-END> JUN-26-1999
<CASH> 31,775,226
<SECURITIES> 0
<RECEIVABLES> 18,093,355
<ALLOWANCES> 735,071
<INVENTORY> 12,418,826
<CURRENT-ASSETS> 65,092,899
<PP&E> 16,541,961
<DEPRECIATION> (8,394,234)
<TOTAL-ASSETS> 80,535,374
<CURRENT-LIABILITIES> 12,814,654
<BONDS> 0
0
0
<COMMON> 114,172
<OTHER-SE> 67,606,548
<TOTAL-LIABILITY-AND-EQUITY> 80,535,374
<SALES> 77,354,077
<TOTAL-REVENUES> 78,209,713
<CGS> 55,246,379
<TOTAL-COSTS> 55,555,397
<OTHER-EXPENSES> 25,228,255
<LOSS-PROVISION> 402,979
<INTEREST-EXPENSE> 31,874
<INCOME-PRETAX> (1,900,922)
<INCOME-TAX> (650,000)
<INCOME-CONTINUING> (1,250,922)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,250,922)
<EPS-BASIC> (0.13)
<EPS-DILUTED> (0.13)
</TABLE>
