<PAGE>
================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
__________________________________
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIRS EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 1999
--------------
(_) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to _________________
COMMISSION FILE NUMBER 0-22646
-------
APPLIED SCIENCE AND TECHNOLOGY, INC.
(Name of Issuer in its Charter)
__________________________________
DELAWARE 04-2962110
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
35 CABOT ROAD, WOBURN, MASSACHUSETTS 01801-1053
(Address of Principal Executive Offices) (Zip Code)
(781) 933-5560
(Registrant's Telephone Number, Including Area Code)
__________________________________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports, and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No___
---
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date:
COMMON STOCK, $0.01 PAR VALUE 11,342,612
----------------------------- -------------------------------
Class Outstanding as of May 3, 1999
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
TITLE PAGE
----- ----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Statements of Operations for the Three Months and
Nine Months Ended March 27, 1999 and March 28, 1998 2
Consolidated Balance Sheets -
March 27, 1999 and June 27, 1998 3
Consolidated Statements of Cash Flows for the Nine Months Ended
March 27, 1999 and March 28, 1998 4
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of
Results of Operations and Financial Condition 8
Item 3 Quantitative and Qualitative Disclosure about Market Risk 13
PART II. OTHER INFORMATION
Items 1 -6 None
SIGNATURES 14
Appendix 15
</TABLE>
<PAGE>
ITEM 1 FINANCIAL STATEMENTS
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ----------------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Product sales, net $ 19,332,410 $ 22,195,896 $ 45,905,850 $ 59,506,344
Research contract revenue 261,480 293,503 497,376 693,923
Other revenue 1,347,804 972,437 3,492,371 3,122,666
--------------- --------------- --------------- ---------------
Total revenue 20,941,694 23,461,836 49,895,597 63,322,933
--------------- --------------- --------------- ---------------
Cost of sales and revenue:
Product sales and other revenue 13,785,521 15,076,802 36,930,991 40,111,450
Research contracts 81,281 177,617 215,924 300,230
--------------- --------------- --------------- ---------------
Total cost of sales and revenue 13,866,802 15,254,419 37,146,915 40,411,860
--------------- --------------- --------------- ---------------
Gross profit 7,074,892 8,207,417 12,748,682 22,911,253
--------------- --------------- --------------- ---------------
Operating expenses:
Selling expenses 1,329,059 1,145,261 3,703,746 3,162,060
General and administrative expenses 1,830,944 1,791,298 5,503,465 5,078,619
Research and development expenses (note 5) 2,476,878 3,019,286 7,045,383 8,430,544
Restructuring charge (note 9) 0 0 1,497,292 0
Acquisition-related expenses (note 11) 0 0 0 212,423
--------------- --------------- --------------- ---------------
Total operating expenses 5,636,881 5,955,845 17,749,886 16,883,646
--------------- --------------- --------------- ---------------
Earnings (loss) from operations 1,438,011 2,251,572 (5,001,204) 6,027,607
--------------- --------------- --------------- ---------------
Other expense (income):
Interest expense 5,327 36 32,787 196,068
Interest income (97,545) (157,522) (284,567) (380,947)
Other expense (income) 8,991 (37,463) (60,103) (252,820)
--------------- --------------- --------------- ---------------
Total other expense (income) (83,227) (194,949) (311,883) (437,699)
--------------- --------------- --------------- ---------------
Earnings (loss) before income taxes 1,521,238 2,446,521 (4,689,321) 6,465,306
Income tax expense (benefit) 737,000 869,000 (1,549,000) 2,458,000
--------------- --------------- --------------- ---------------
Net earnings (loss) $ 784,238 $ 1,577,521 $ (3,140,321) $ 4,007,306
=============== =============== =============== ===============
Basic net earnings (loss) per share $ 0.09 $ 0.19 $ (0.36) $ 0.51
=============== =============== =============== ===============
Diluted net earnings (loss) per share $ 0.08 $ 0.18 $ (0.36) $ 0.47
=============== =============== =============== ===============
Weighted average common shares outstanding
used to calculate basic earnings (loss) per 9,064,624 8,482,518 8,759,678 7,874,262
share
=============== =============== =============== ===============
Weighted average common shares outstanding
used to calculate diluted earnings (loss) 9,689,522 8,922,323 8,759,678 8,455,678
per share
=============== =============== =============== ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
2
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 27, JUNE 27,
1999 1998
------------------- -----------------
ASSETS (unaudited) (audited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 24,265,209 $ 7,686,805
Trade receivables, net (note 3) 15,097,824 12,734,381
Other receivables 906,163 --
Inventories (note 4) 12,210,512 13,737,212
Prepaid expenses and other assets 400,206 548,709
Deferred income taxes 1,514,044 1,356,044
------------------- -----------------
Total current assets 54,393,958 36,063,151
------------------- -----------------
Property, plant and equipment:
Land 473,000 473,000
Building 1,643,072 1,643,072
Equipment 11,766,907 11,107,731
Furniture and fixtures 1,074,037 1,032,497
Leasehold improvements 2,053,982 2,228,246
------------------- -----------------
17,010,998 16,484,546
Less accumulated depreciation and amortization (8,848,103) (7,960,282)
------------------- -----------------
Net property, plant and equipment 8,162,895 8,524,264
------------------- -----------------
Other assets:
Patents, net 1,010,825 1,095,090
Other assets 9,131 --
Goodwill, net of accumulated amortization 4,088,809 4,042,031
Deferred income taxes 2,835,294 1,099,998
Notes receivable, less current maturities 435,611 468,772
------------------- -----------------
Total other assets 8,379,670 6,705,891
=================== =================
Total assets $ 70,936,523 $ 51,293,306
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable 3,816,316 3,011,798
Accrued expenses 3,100,630 1,935,229
Accrued compensation expense and related costs 1,414,626 1,993,027
Accrued income taxes 393,702 293,444
Commissions payable and customer advances 536,058 259,154
------------------- -----------------
Total current liabilities 9,261,332 7,492,652
------------------- -----------------
Stockholders' equity (note 7)
Common stock (note 10) 107,185 86,065
Additional paid-in capital 65,190,366 44,193,116
Accumulated deficit (3,387,416) (247,095)
Accumulated comprehensive loss (86,618) (83,106)
Less: Notes receivable for common stock purchases (148,326) (148,326)
------------------- -----------------
Total stockholders' equity 61,675,191 43,800,654
------------------- -----------------
$ 70,936,523 $ 51,293,306
=================== =================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
3
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-----------------------------------------
MARCH 27, MARCH 28,
1999 1998
---------------- ---------------
(unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (3,140,321) $ 4,007,306
Adjustments to reconcile net earnings (loss) to net cash
provided by operating (used for) activities:
Depreciation 1,901,039 1,585,587
Amortization 462,461 466,615
Acquisition-related expense -- 212,423
Deferred income taxes (1,893,296) --
Gain on sale of investment -- (250,000)
Loss on disposal of property, plant and equipment 624,691 --
Changes in assets and liabilities:
Accounts receivable (1,349,923) (5,031)
Inventories 1,824,598 (4,875,481)
Prepaid expenses and other assets 210,646 (230,877)
Notes receivable (65,121) 9,920
Accounts payable 292,708 (61,920)
Accrued expenses (235,386) 1,074,647
Commissions payable and customer advances 276,904 (51,198)
---------------- ---------------
Net cash provided by (used for) operating
activities (1,091,000) 1,881,991
---------------- ---------------
Cash flows from investing activities:
Acquisition of subsidiaries, less cash acquired (22,656) (3,682,639)
Purchase of investments -- (339)
Sale of investments -- 500,000
Investments in other assets 44,191 --
Acquisition-related receivable (806,163) --
Advances to subsidiary prior to acquisition (800,000) --
Additions to property and equipment (1,238,955) (1,715,607)
Patents and other assets (31,559) (24,419)
---------------- ---------------
Net cash used for investing activities (2,855,142) (4,923,004)
---------------- ---------------
Cash flows from financing activities:
Repayments of notes payable (685,509) (9,173,208)
Net proceeds from issuance of common stock 21,213,567 15,715,573
---------------- ---------------
Net cash provided by financing activities 20,528,058 6,542,365
---------------- ---------------
Effect of exchange rate changes on cash (3,512) (100,631)
---------------- ---------------
Net increase in cash and cash equivalents 16,578,404 3,400,721
Cash and cash equivalents at beginning of period 7,686,805 3,246,337
---------------- ---------------
Cash and cash equivalents at end of period $ 24,265,209 $ 6,647,058
================ ===============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest $ 33,885 $ 249,580
================ ===============
Income taxes $ 268,709 $ 2,000,921
================ ===============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
4
<PAGE>
APPLIED SCIENCE AND TECHNOLOGY, INC. AND SUBSIDIARIES
NOTES ON CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1) BASIS OF PRESENTATION
The unaudited financial statements as of March 27, 1999 and March 28, 1998,
and for the three month and nine month periods then ended, have been
prepared in accordance with generally accepted accounting principles and
include all adjustments, which, in the opinion of management, are necessary
to present fairly the results of operations for the periods then ended. All
such adjustments are of normal recurring nature. These financial statements
should be read in conjunction with the financial statements for the year
ended June 27, 1998 and the notes thereto included in the Company's Form
10-K filed with the Securities and Exchange Commission.
The results of the Company's operations for any interim period are not
necessarily indicative of the results of the Company's operations for a
full fiscal year.
2) EARNINGS (LOSS) PER SHARE
The weighted average number of shares used to compute diluted earnings
(loss) per share consisted of the following:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------- --------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Weighted average common shares 9,064,624 8,482,518 8,759,678 7,874,262
outstanding
Weighted average common equivalent 624,898 439,805 -- 581,416
shares due to stock options and
warrants
----------- ----------- ----------- -----------
9,689,522 8,922,323 8,759,678 8,455,678
=========== =========== =========== ===========
</TABLE>
Weighted average common equivalent shares relating to stock options and
warrants were not included in the weighted average shares used to compute
diluted loss per share for the nine months ended March 27, 1999, as they
had an antidilutive effect.
3) ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
MARCH 27, JUNE 27,
1999 1998
----------------- ---------------
(unaudited) (audited)
<S> <C> <C>
Accounts receivable, trade $ 15,396,979 $ 13,044,466
Notes receivable, current portion 232,178 67,354
Allowance for doubtful accounts (531,333) (377,439)
----------------- ---------------
$ 15,097,824 $ 12,734,381
================= ===============
4) INVENTORIES
MARCH 27, JUNE 27,
1999 1998
--------------- ---------------
(unaudited) (audited)
Raw materials $ 7,797,349 $ 8,990,201
Work in process 3,347,054 3,210,131
Finished goods 1,066,109 1,536,880
---------------- ---------------
$ 12,210,512 $ 13,737,212
================ ===============
</TABLE>
5
<PAGE>
5) RESEARCH AND DEVELOPMENT COSTS
All research and development costs are expensed as incurred. Research and
development expenses attributable to research contracts are included in
costs of sales and revenue.
The Company also receives funding for certain research and development
costs which is used to offset its research and development expenses. The
Company incurred research and development expenses, net of funding
received, as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------------- --------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Research and development costs $ 2,493,045 $ 3,019,286 $ 7,139,390 $ 8,484,481
Less funding 16,167 -- 94,007 53,937
----------- ----------- ----------- -----------
$ 2,476,878 $ 3,019,286 $ 7,045,383 $ 8,430,544
=========== =========== =========== ===========
</TABLE>
6) COMMITMENTS
The Company may borrow up to $8,000,000 from a bank under an unsecured
demand line of credit with interest at bank's prime rate (7.75% at March
27, 1999). Borrowings under the line are limited to 100% of the Company's
cash balance plus 80% of domestic accounts receivable under 90 days
outstanding. As of March 27, 1999 there were no borrowings against the line
of credit.
7) STOCKHOLDERS' EQUITY
Capital stock consists of the following:
<TABLE>
<CAPTION>
NUMBER OF SHARES
-----------------------------------------------------------
AUTHORIZED ISSUED AND OUTSTANDING
-----------------------------------
MARCH 27, JUNE 27,
1999 1998
----------------- --------------
Preferred stock: (unaudited) (audited)
<S> <C> <C> <C>
Preferred stock, $.01 par value 1,000,000 - -
-----------------------------------------------------------
Total preferred stock 1,000,000 - -
-----------------------------------------------------------
Common stock:
Common stock, $.01 par value 30,000,000 10,718,461 8,606,463
-----------------------------------------------------------
Total common stock 30,000,000 10,718,461 8,606,463
-----------------------------------------------------------
Total capital stock 31,000,000 10,718,461 8,606,463
-----------------------------------------------------------
</TABLE>
Effective August 26, 1998, the Company repriced all of its stock options
which had been granted since June 29, 1997 to the closing price on that
date which was $6.00 per share, except for those options which had been
granted to directors of the Company, which were not repriced.
6
<PAGE>
On March 5, 1999, the Company completed the registration and sale of
2,000,000 shares of common stock at $10.35, net of underwriters discount of
$0.65 per share. Subsequent to March 27, 1999, the underwriters exercised
their over-allotment option to purchase an additional 300,000 shares of
common stock, bringing total shares issues in this offering to 2.3 million.
The total net proceeds from the offering of approximately $23 million will
be used for general working capital purposes.
8) COMPREHENSIVE INCOME
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income during the quarter ended
September 26, 1998. Comprehensive income is defined as the change in equity
of a business enterprise during a period from transactions and other events
and circumstances from non-owner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. This pronouncement requires that the accumulated
total of other comprehensive income be shown as a separate component of
stockholders' equity with additional disclosure of accumulated balances for
each classification within other comprehensive income in addition to the
reporting of total comprehensive income. Accumulated other comprehensive
income, a component of stockholders' equity previously titled "cumulative
translation adjustment," consists solely of foreign currency translation.
The components of total comprehensive income (loss) were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ----------------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
----------------- ----------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net income (loss) $ 784,238 $ 1,577,521 $ (3,140,321) $ 4,007,306
Comprehensive income (loss) (144,535) (51,915) (3,512) (100,631)
----------------- ----------------- --------------- ---------------
$ 639,703 $ 1,525,606 $ (3,143,833) $ 3,906,675
================= ================= =============== ===============
</TABLE>
9) RESTRUCTURING CHARGE AND OTHER RELATED EXPENSES
During the first quarter of Fiscal 1999, the Company announced its
intention to consolidate its Modesto, California operations into its
Woburn, Massachusetts and Colorado Springs, Colorado sites, which was
completed by the end of the first quarter. The Company also initiated a
plan to consolidate its Beverly, Massachusetts operation into Woburn, which
was completed by the end of the second quarter.
These consolidations resulted in a restructuring charge of $1,497,000, most
of which has been expensed. 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 March 27,
1999 included approximately $304,000 relating to restructuring accruals for
severance and facility costs expected to be paid over the next 12 months.
In addition, the Company wrote down inventory totaling $1,090,000 during
the first quarter of Fiscal 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
7
<PAGE>
personnel. The total expense related to restructuring, inventory
write-down, and transitional costs was $2,980,000.
10) NONCASH TRANSACTION
During the quarter ended September 26, 1998, 21,940 shares of common
stock were returned to the Company in lieu of a cash reimbursement for
warranty costs incurred related to products shipped by CPI, Inc. prior
to their acquisition by ASTeX.
11) ACQUISITIONS
On April 5, 1999 the Company completed the acquisition of Klee
Corporation, a manufacturer of physical vapor deposition process
systems targeted to a segment of electronics packing known as under-
bump metallurgy or flip-chip packaging. Klee has had limited operations
through the date of its acquisition.
The company acquired all of the stock of Klee in exchange for 310,604
shares of ASTeX common stock. The acquisition was accounted for on a
pooling of interests basis.
On November 4, 1998 the Company completed the acquisition of
PlasmaQuest, Inc., a manufacturer of ECR systems for R&D, magnetic disk
head processing, and electronic packaging applications. The acquired
company was renamed ASTeX PlasmaQuest, Inc.
The Company acquired all the stock of PlasmaQuest for a total purchase
price of $22,656. The purchase price was paid in cash from the
Company's cash reserves.
On October 1, 1997 the Company completed the acquisition of Sorbios
GmbH, renamed ASTeX GmbH, a manufacturer of ozone generators and air
ionizers for semiconductor production.
The Company acquired all the stock of Sorbios GmbH for a total purchase
price of $3,699,413. The purchase price was paid in cash from the
Company's cash reserves. Acquisition costs of $212,423 related to in-
process research and development were charged to operating expense.
Except for Klee, these acquisitions were accounted for by the purchase
method of accounting and accordingly, the purchase prices were
allocated to the assets acquired and the liabilities assumed based on
their fair market value at the dates of acquisition.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
GENERAL
Applied Science and Technology, Inc. (the "Company" or "ASTeX") provides
precision reactive gas processing solutions and specialty power sources to the
semiconductor, electronics, medical, and industrial markets. The Company's broad
product line is based on one or more of its core technologies including reactive
gas processing, power sources, and system integration. Depending on our
customers' needs, we provide varying levels of integration - from components to
integrated subsystems to complete process systems. Our reactive gas solutions
give our customers a competitive advantage by improving their time to market
with lower costs and less complexity.
RESULTS OF OPERATIONS FOR THE THREE MONTHS AND NINE MONTHS ENDED MARCH 27, 1999
AND MARCH 28, 1998
The following table compares the consolidated statements of operations for the
three-month and nine-month periods ended March 27, 1999 and March 28, 1998,
expressed as a percentage of total revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------- ----------------------------------
MARCH 27, MARCH 28, MARCH 27, MARCH 28,
1999 1998 1999 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Product sales, net 92.3% 94.6% 92.0% 94.0%
Research contract revenue 1.2% 1.3% 1.0% 1.1%
Other revenue 6.4% 4.1% 7.0% 4.9%
--------------- --------------- --------------- ---------------
Total revenue 100.0% 100.0% 100.0% 100.0%
--------------- --------------- --------------- ---------------
Cost of sales and revenue:
Product sales and other revenue 65.8% 64.3% 74.0% 63.3%
Research contracts 0.4% 0.8% 0.4% 0.5%
--------------- --------------- --------------- ---------------
Total cost of sales and revenue 66.2% 65.0% 74.4% 63.8%
--------------- --------------- --------------- ---------------
Gross profit 33.8% 35.0% 25.6% 36.2%
--------------- --------------- --------------- ---------------
Operating expenses:
Selling expenses 6.4% 4.9% 7.4% 5.0%
General and administrative expenses 8.7% 7.6% 11.0% 8.0%
Research and development expenses 11.8% 12.9% 14.1% 13.3%
Restructuring charge 0.0% 0.0% 3.0% 0.0%
Acquisition-related expenses 0.0% 0.0% 0.0% 0.3%
--------------- --------------- --------------- ---------------
Total operating expenses 26.9% 25.4% 35.6% 26.7%
--------------- --------------- --------------- ---------------
Earnings (loss) from operations 6.9% 9.6% (10.0%) 9.5%
--------------- --------------- --------------- ---------------
Other expense (income):
Interest expense 0.0% 0.0% 0.1% 0.3%
Interest income (0.5%) (0.7%) (0.6%) (0.6%)
Other expense (income) 0.0% (0.2%) (0.1%) (0.4%)
--------------- --------------- --------------- ---------------
Total other income (0.4%) (0.8%) (0.6%) (0.7%)
--------------- --------------- --------------- ---------------
Earnings (loss) before income taxes 7.3% 10.4% (9.4%) 10.2%
Income tax expense (benefit) 3.5% 3.7% (3.1%) 3.9%
--------------- --------------- --------------- ---------------
Net earnings (loss) 3.7% 6.7% (6.3%) 6.3%
=============== =============== =============== ===============
</TABLE>
9
<PAGE>
REVENUE
Total revenue declined 11% to $20,942,000 in the third quarter and declined 21%
to $49,896,000 for the nine months of the 1999 periods compared to $23,462,000
and $63,323,000 for the 1998 periods. This decline was primarily due to the
severe downturn in the semiconductor segment and a decline in the
industrial/medical segment of the business. The semiconductor segment declined
by 27% for the nine months, and in the third quarter declined by 1% in the 1999
periods compared to the 1998 periods. The industrial/medical segment declined by
34% in the third quarter and 16% for the nine months of 1999 compared to the
1998 periods.
GROSS PROFIT
Gross profit decreased 14% to $7,075,000 in the third quarter and decreased 44%
to $12,749,000 for the nine months of 1999 compared to the 1998 periods. Gross
profit as a percent of total revenue decreased to 34% for the third quarter and
decreased to 26% for the nine months of 1999 compared to 35% for the third
quarter and 36% for the nine months in the 1998 periods. These declines resulted
from reduced manufacturing volumes, a less favorable product mix and an
inventory write down in the first quarter of Fiscal 1999 of $1,090,000 primarily
due to the unexpected severity of the downturn in the semiconductor equipment
industry and customer-specific product terminations.
The Company continues to seek to develop and introduce products having higher
gross margins and to focus on improving manufacturing efficiencies and methods
in order to improve gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE
Selling expenses increased 16% in the third quarter of the 1999 period to
$1,329,000 and increased 17% to $3,704,000 for the nine months of the 1999
period as a result of the establishment of the Global Customer Operations
organization and increased staffing to strengthen the Company's global
marketing, sales, service and product management infrastructure. General and
administrative expenses decreased 2% in the third quarter to $1,831,000 and
increased 8% for the nine months of 1999 to $5,503,000 compared to the 1998
periods due to costs associated with a management change in Europe, and in the
US, higher information systems costs due to implementation of a new company-wide
Enterprise Resource Planning ("ERP") system, increased goodwill amortization,
and general and administrative expenses associated with new acquisitions.
As a result of the consolidation of two facilities in the first half of Fiscal
1999, the Company recorded a restructuring charge of $1,497,000. The
restructuring charge consisted of severance relating 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. Accrued expenses at March 27, 1999 included approximately $304,000
relating to restructuring accruals primarily for facility costs expected to be
paid over the next nine months. The Company also incurred $393,000 of other
transition costs related to the consolidations for moving inventory and
equipment and training personnel. The total expense relating to restructuring,
inventory write-down, and transition costs was $2,980,000. These consolidations
are estimated to reduce the Company's future operating costs by approximately
$2.0 million per year.
10
<PAGE>
RESEARCH AND DEVELOPMENT
Net research and development expenses decreased 18% to $2,477,000 in the third
quarter and decreased 16% to $7,045,000 for the nine months of 1999 as the
Company reduced its overall level of investment in response to the decline in
revenue levels. Gross spending (total research and development spending,
including funded joint development and the direct costs of research contracts)
decreased 17% in the third quarter and 16% in the nine months of 1999 in
comparison to the 1998 periods.
As a part of the acquisition of ASTeX Sorbios in the 1998 period, the Company
incurred an expense of $212,000 for in-process research and development. There
were no such acquisition-related charges in 1999.
OPERATING INCOME (LOSS)
Operating income was $1,438,000 in the third quarter reflecting an increase in
revenues over the prior two quarters. The Company realized income of $2,252,000
in the third quarter of the 1998 period. Operating loss for the nine months of
1999 period was $5,501,000 compared to operating income of $6,028,000 in the
nine months in the 1998 period. The operating loss in the nine month 1999 period
resulted from the one-time charges of $3.0 million relating to restructuring,
inventory write-down and transition costs, the reduced revenues yielding lower
gross margins in comparison to the 1998 period, and the increased operating
expenses as a percentage of total revenue.
OTHER EXPENSES AND INCOME TAXES
Total other income declined to $83,000 in the third quarter of 1999 primarily
due to having less interest income on less cash reserves compared to the third
quarter of 1998 and declined to $312,000 for the nine months of 1999 compared to
the 1998 period. The decline in interest expense in the three months and the
nine months of 1999 resulted from repayment of bank debt. Other income declined
in 1999 because the sale of an investment in Low Entropy Systems, Inc. in 1998
resulted in a one-time gain of $250,000.
Income tax expense declined to $737,000 in the third quarter of 1999 compared to
$869,000 in 1998, and declined from $2,458,000 in the nine months of 1998 to a
tax benefit of $1,549,000 in the nine months of 1999 because of operating
losses.
LIQUIDITY AND CAPITAL RESOURCES
At March 27, 1999, the Company had cash and short-term investments of $24.3
million with working capital of $45.1 million compared to June 27, 1998, when
the Company had cash and short-term investments of $7.7 million and working
capital of $28.5 million.
During the nine months ended March 27, 1999, the Company's cash position
increased from $7.7 million to $24.3 million for an increase of $16.6 million.
Cash used for operating activities was $1.1 million, cash used for investing
activities was $2.9 million and cash provided from financing activities was
$20.5 million, primarily net proceeds of $21.2 million raised from issuance of
common stock in a subsequent stock offering completed in March 1999, offset by
repayment of debt. Cash of $1.1 million used for operating activities consisted
of $3.1 million net loss and $0.9 million used for net changes in operating
assets, including deferred income taxes. These sums were offset by noncash
depreciation and amortization of $2.4 million and a noncash loss on disposal of
assets of $625,000. Net cash used for investing activities of $2.9 million
included $1.2 million in additions to property and equipment and $0.8 million in
acquisition-related receivables.
11
<PAGE>
The Company has a credit facility with State Street Bank and Trust Company which
consists of an $8.0 million unsecured demand line of credit with interest at the
bank's prime rate of 7.75% at March 27, 1999. This facility is subject to
certain financial covenants which are tested quarterly. The Company is currently
in compliance with all covenants. As of March 27, 1999, there were no borrowings
against the line of credit.
The Company believes that existing cash resources and funds from the secondary
public offering of common stock, anticipated cash flows from operations and the
credit facility will be sufficient to meet planned operating expenses and
working capital requirements for a period of at least the next 12 months.
EFFECTS OF INFLATION
We believe that inflation has not had a significant impact on our revenues or
operating results.
YEAR 2000 DISCLOSURE
Many currently installed computer systems and software products are dependent
upon internal calendars coded to accept only two digit entries in the date code
field. These date code fields will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with Year 2000 requirements.
We believe that our financial reporting and enterprise resource planning (ERP)
systems is Year 2000 compliant as of April 1999 except for the recently acquired
ASTeX PlasmaQuest operation which is not currently a material component of our
business. We are currently in the process of updating our financial reporting
and ERP systems with SAP R/3, which has been represented as being Year 2000
compliant by its producer. We are currently using SAP R/3 in our facility in
Woburn, Massachusetts. The current ERP software packages used by ASTeX ETO and
an upgrade recently installed at ASTeX Sorbios are represented as being Year
2000 compliant. We plan to upgrade the ASTeX PlasmaQuest system to be Year 2000
compliant before October 1999. Our other software is generally certified as Year
2000 compliant or is not considered critical to our operations.
We have spent approximately $1.5 million through March 27, 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 commenced contacting critical suppliers and major customers to determine
whether they are, or will be, compliant by the Year 2000. We expect to complete
this assessment in the next few months. Based upon this evaluation, we will seek
new vendors where necessary and formulate contingency plans to resolve customer-
related issues that may arise. At this time we cannot estimate the impact that
noncompliant suppliers and customers may have on our level of operations in the
Year 2000. At present, we have not developed contingency plans, but we will
determine whether to develop such plans when our assessment is completed.
12
<PAGE>
Although we have not made a systematic review of our products in operation at
customer locations, we believe that a small number of complete process systems
may not be Year 2000 compliant. Over the next several months, we plan to
identify noncompliant products and offer all necessary modifications or
recommendations for upgrades to make them compliant. Additional noncompliant
products could be identified during this process. Because a formal
identification program has not been completed, we are unable to estimate the
cost that will be incurred to remediate Year 2000 problems related to
noncompliant products under warraanty that are in operations at customer
locations.
BACKLOG
Backlog consists of purchase orders for standard products and contracts for
research and development. At March 27, 1999, backlog was approximately $26.3
million of which $25.6 million was for standard products and $675,000 was for
research contracts. We had record bookings of $34.4 million and a book-to-bill
ratio of 1.6:1 for the third quarter of 1999. The backlog at March 28, 1998 was
approximately $19.3 million of which $18.7 million was for standard products and
$607,000 was for research contracts. We expect to complete all standard product
backlog during the next six months and all research contract backlog during the
next twelve months. The backlog figures exclude orders under certain just-in-
time supply agreements with major semiconductor capital equipment manufacturers.
These multi-year supply agreements, as well as certain government contracts,
typically provide for cancellation or modification with little or no penalty. In
addition, customers may push out deliveries, put firm orders on hold, or cancel
existing firm orders with little or no penalty.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable
PART II.
Items 1 - 6
Not Applicable.
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 7, 1999
APPLIED SCIENCE AND TECHNOLOGY, INC.
(Registrant)
Name Capacity Date
- ---- -------- ----
/s/ Richard S. Post Chairman of the Board, Chief May 7, 1999
- --------------------- ------------
Richard S. Post Executive Officer and President
(principal executive officer)
/s/ John M. Tarrh Chief Financial Officer, Senior May 7, 1999
- --------------------- -----------
John M. Tarrh Vice President of Finance
(principal financial and accounting
officer) and Director
14
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