================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _________________________ FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended: JANUARY 31, 1997 Commission File Number 0-26714 ADE CORPORATION (Exact name of registrant as specified in its charter) MASSACHUSETTS 04-2441829 ------------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 80 WILSON WAY, WESTWOOD, MASSACHUSETTS 02090 --------------------------------------------- (Address of principal executive offices, including area code) (617) 467-3500 -------------- (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 Securities 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 outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common Stock, par value $.01 per share 8,570,087 shares - ---------------------------------------- ---------------------------- Class Outstanding at March 6, 1997 ADE CORPORATION Page 1 of 14 pages Exhibit Index on page 13 INDEX PAGE ---- PART I. - FINANCIAL INFORMATION Item 1. Condensed Consolidated Financial Statements (unaudited)- Condensed Consolidated Balance Sheet- January 31, 1997 and April 30, 1996 3 Condensed Consolidated Statement of Income- Three and Nine Months Ended January 31, 1997 and 1996 4 Condensed Consolidated Statement of Cash Flows- Nine Months Ended January 31, 1997 and 1996 5 Notes to Unaudited Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 PART II. - OTHER INFORMATION 11 SIGNATURES 12 EXHIBIT INDEX 13 ADE CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET January 31, April 30, ------------- ------------- 1997 1996 ----------- ----------- (unaudited) ASSETS Current assets: Cash and cash equivalents $12,543,000 $20,997,000 Accounts receivable, net 20,660,000 15,760,000 Inventories 22,365,000 12,981,000 Prepaid expenses and other current assets 380,000 325,000 Deferred income taxes 2,874,000 2,874,000 ----------- ----------- Total current assets 58,822,000 52,937,000 Fixed assets, net 14,998,000 6,538,000 Deferred income taxes 329,000 329,000 Investments in affiliates 2,734,000 -- Other assets 217,000 198,000 ----------- ----------- $77,100,000 $60,002,000 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 254,000 $ 38,000 Accounts payable 4,948,000 4,618,000 Accrued expenses 7,619,000 8,536,000 Deferred income on sale to affiliates 3,662,000 -- Income taxes payable -- 289,000 ----------- ----------- Total current liabilities 16,483,000 13,481,000 ----------- ----------- Long-term debt 5,107,000 38,000 ----------- ----------- Excess of net assets acquired over cost 247,000 436,000 ----------- ----------- Stockholders' equity: Common stock 76,000 76,000 Capital in excess of par value 27,760,000 27,032,000 Retained earnings 27,646,000 19,198,000 ----------- ----------- 55,482,000 46,306,000 Deferred compensation (219,000) (259,000) ----------- ----------- 55,263,000 46,047,000 ----------- ----------- $77,100,000 $60,002,000 =========== =========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 3 ADE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited) Three months ended Nine months ended January 31, January 31, --------------------------- ------------------------- 1997 1996 1997 1996 ---- ---- ---- ---- Revenue $23,775,000 $17,715,000 $64,749,000 $46,585,000 Cost of revenue 11,066,000 8,179,000 28,848,000 21,492,000 ----------- ----------- ----------- ----------- Gross profit 12,709,000 9,536,000 35,901,000 25,093,000 ----------- ----------- ----------- ----------- Operating expenses: Research and development 3,575,000 1,704,000 10,184,000 5,176,000 Marketing and sales 3,227,000 3,010,000 8,976,000 7,470,000 General and administrative 1,747,000 1,668,000 4,885,000 4,687,000 Amortization of excess of net assets acquired over cost (63,000) (63,000) (189,000) (189,000) ----------- ----------- ----------- ----------- Total operating expenses 8,486,000 6,319,000 23,856,000 17,144,000 ----------- ----------- ----------- ----------- Income from operations 4,223,000 3,217,000 12,045,000 7,949,000 Interest income, net 17,000 275,000 302,000 223,000 ----------- ----------- ----------- ----------- Income before provision for income taxes and equity in net earnings of affiliated companies 4,240,000 3,492,000 12,347,000 8,172,000 Provision for income taxes 1,335,000 1,268,000 4,070,000 2,946,000 ----------- ----------- ----------- ----------- Income before equity in net earnings of affiliated companies 2,905,000 2,224,000 8,277,000 5,226,000 Equity in net earnings of affiliated companies 156,000 -- 171,000 -- ----------- ----------- ----------- ----------- Net income $ 3,061,000 $ 2,224,000 $ 8,448,000 $ 5,226,000 =========== =========== =========== =========== Net income per share $0.38 $0.28 $1.05 $0.75 =========== =========== =========== =========== Weighted average common and common equivalent shares outstanding 8,050,000 8,063,000 8,015,000 6,947,000 =========== =========== =========== =========== The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 4 ADE CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited) Nine months ended January 31, --------------------------- 1997 1996 ---- ---- CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES: Net income $8,448,000 $5,226,000 Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization 1,074,000 1,190,000 Equity in net earnings of affiliated companies (171,000) -- Deferred profits on sales to affiliates 3,662,000 -- Change in assets and liabilities: Accounts receivable (4,900,000) (4,725,000) Inventories (9,384,000) (2,062,000) Prepaid expenses and other current assets (55,000) (431,000) Accounts payable 330,000 (416,000) Accrued expenses (917,000) 2,190,000 Income taxes payable (289,000) (1,261,000) ----------- ----------- Net cash used in operating activities (2,202,000) (289,000) ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES: Purchases of fixed assets (9,683,000) (665,000) Equity investments (2,563,000) -- Change in other assets (19,000) (20,000) ------------ ------------ Net cash used in investing activities (12,265,000) (685,000) ------------ ------------ CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES: Repayment of long-term debt (215,000) (169,000) Proceeds from long-term debt 5,500,000 -- Proceeds from common stock issuance, net of expenses 728,000 20,990,000 ------------ ------------ Net cash provided by financing activities 6,013,000 20,821,000 ------------ ------------ Net increase (decrease) in cash and cash equivalents (8,454,000) 19,847,000 Cash and cash equivalents, beginning of period 20,997,000 2,767,000 ------------ ------------ Cash and cash equivalents, end of period $12,543,000 $22,614,000 ============ ============ The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 ADE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PREPARATION The accompanying unaudited condensed consolidated financial statements of ADE Corporation (the "Company") include, in the opinion of management, all adjustments (consisting only of normal and recurring adjustments) necessary for a fair statement of the Company's financial position as of January 31, 1997 and the results of operations for the three and nine month periods ended January 31, 1997 and 1996. Results of operations for interim periods are not necessarily indicative of those to be achieved for full fiscal years. Pursuant to accounting requirements of the Securities and Exchange Commission applicable to quarterly reports on Form 10-Q, the accompanying unaudited condensed consolidated financial statements and these notes do not include all disclosures required by generally accepted accounting principles for complete financial statements. Accordingly, these statements should be read in conjunction with the financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1996. 2. INVENTORIES Inventories consist of the following: January 31, April 30, 1997 1996 (unaudited) Raw materials and purchased parts $11,969,000 $6,099,000 Work-in-process 9,731,000 6,728,000 Finished goods 665,000 154,000 ----------- ----------- $22,365,000 $12,981,000 =========== =========== 3. EQUITY INVESTMENTS (UNAUDITED) The Company's investments in affiliated companies which are not majority owned or controlled are accounted for using the equity method. Investments carried at equity and the percentage interest owned consist of Japan ADE Ltd. (50%) and Microspec Technologies Ltd. (25.1%). Profits resulting from sales to these affiliates subsequent to the respective acquisition dates in July 1996 which have not been resold to unrelated third parties, have been eliminated and recorded as deferred revenue. 6 ADE CORPORATION NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Pro forma results of operations as though the investments were made at the beginning of the periods presented, including the effect of eliminating the profit on affiliated sales in beginning and ending inventory for the period, are as follows: Three months ended Nine months ended January 31, January 31, ------------------------ ------------------------ 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Revenue $23,775,000 $16,634,000 $64,889,000 $46,441,000 Net income 3,061,000 1,742,000 8,393,000 4,820,000 Earnings per share $ 0.38 $ 0.22 $ 1.05 $ 0.69 4. LONG-TERM DEBT (UNAUDITED) In June 1996, the Company issued a $5.5 million tax exempt Industrial Development Bond through the Massachusetts Industrial Finance Agency. The bond carries a 5.74% interest rate for 10 years with amortization of 50% of the principal with the remaining 50% due in June 2006. The proceeds of the bond were used to fund the acquisition and renovation of the manufacturing facility in the Company's new headquarters site. The Company secured the issuance of the bond with a standby letter of credit from a financial institution. The standby letter of credit, bearing a fee of 1.25% of the outstanding bond balance, is secured by a mortgage on the building and land. Under the terms of the letter of credit, the Company is required to comply with certain financial covenants, including a limitation on the payment of dividends. 5. EARNINGS PER SHARE (UNAUDITED) Earnings per share are determined by dividing net income by the weighted average number of common shares and common share equivalents outstanding during the period. Common share equivalents consist of common stock which may be issuable upon exercise of outstanding stock options and warrants using the treasury stock method. Common stock and options issued or granted at prices below the public offering price per share during the twelve-month period prior to the initial filing of the Registration Statement for the Company's initial public offering have been included in the calculation as if outstanding for all periods presented through July 31, 1995, using the treasury stock method and an initial public offering price of $14.00 per share. 6. SUBSEQUENT EVENT (UNAUDITED) On February 28, 1997, the Company acquired by merger all of the business and assets (including plant and equipment), subject to liabilities, of Digital Measurement Systems, Inc. (DMS), Burlington, Massachusetts in exchange for approximately 820,000 shares of common stock of the Company. It is intended that this acquisition be treated as a pooling of interests for accounting purposes. DMS manufactures equipment that measures the magnetic properties of computer disks. 7 ADE CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION ADE Corporation (the "Company") designs, manufactures, markets and services highly precise, automated measurement, defect detection and handling equipment with current applications in the production of semiconductor wafers, semiconductor devices and computer disks. The following information should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto included in this Quarterly Report and the audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 1996. RESULTS OF OPERATIONS THREE MONTHS ENDED JANUARY 31, 1997 COMPARED TO THREE MONTHS ENDED JANUARY 31, 1996 Revenues increased 34.2% to $23.8 million in the third quarter of fiscal 1997 from $17.7 million in the third quarter of 1996. The increase was due to increased unit sales of the Company's products. The increase in unit sales resulted primarily from stronger demand for capital equipment in the semiconductor wafer manufacturing industry and an increase in demand for gaging equipment in the computer disk drive industry. Gross margin decreased to 53.5% in the third quarter of fiscal 1997 from 53.8% in the third quarter of 1996. The decrease resulted from increased overhead costs associated with the opening of a new manufacturing facility and changes in product and distribution channel mix, which affect gross margins. Research and development expense increased 109.8% to $3.6 million in the third quarter of fiscal 1997 from $1.7 million in the third quarter of 1996 and increased as a percentage of revenue to 15.0% from 9.6% in the third quarter of 1996. New product development and product improvements have led to higher research and development expenses. The Company is committed to increasing its investment in research and development to continue its position as a technological leader in the rapidly changing semiconductor and computer disk industries. Marketing and sales expense increased 7.2% to $3.2 million in the third quarter of fiscal 1997 from $3.0 million in the third quarter of 1996, but decreased as a percentage of revenue to 13.6% in the third quarter of fiscal 1997 from 17.0% in 1996. The decrease as a percentage of revenue is a result of marketing and sales expense growing at a lower rate than revenue. 8 General and administrative expenses were $1.7 million in the third quarter of fiscal 1997 versus $1.6 million in the third quarter of 1996. Net interest income was $17,000 in the third quarter of fiscal 1997 compared to $275,000 in the third quarter of 1996. The decrease in income resulted from additional interest expense on the Industrial Development Bond used to finance the new facility in Westwood, Massachusetts and lower cash balances resulting from the increase in inventory and accounts receivable and fixed asset purchases. NINE MONTHS ENDED JANUARY 31, 1997 COMPARED TO NINE MONTHS ENDED JANUARY 31, 1996 Revenues increased 39.0% to $64.7 million for the first nine months of fiscal 1997 from $46.6 million for the first nine months of 1996. The increase was due to increased unit sales of the Company's products. The increase in unit sales resulted primarily from stronger demand for capital equipment in the semiconductor wafer manufacturing industry and increased demand for gaging equipment in the computer disk drive industry. Gross margin increased to 55.4% for the first nine months of fiscal 1997 from 53.9% for the first nine months of 1996. The increase resulted from lower overhead rates resulting from higher production levels during the first nine months of fiscal 1997, the switch from a distributor to direct distribution in Europe and a decrease in discounts offered to the Company's 50% owned Japanese distributor. Research and development expense increased 96.8% to $10.2 million from $5.2 million for the first nine months of 1996, and increased as a percentage of revenue to 15.7% from 11.1% for the first nine months of 1996. Higher expenses resulted from new product development and product improvements aimed at maintaining the Company's technological leadership. Marketing and sales expense increased 20.2% to $9.0 million for the first nine months of fiscal 1997 from $7.5 million for the first nine months of 1996, and decreased as a percentage of revenue to 13.9% for the first nine months of fiscal 1997 from 16.0% in 1996. This increase in expenditures was due to additional costs required to sustain high revenue levels. General and administrative expenses were $4.9 million for the first nine months of fiscal 1997 compared to $4.7 million for the first nine months of 1996. Net interest income increased to $302,000 for the first nine months of fiscal 1997 compared to a net interest income of $223,000 for the first nine months of 1996. This increase resulted from the interest earned on the proceeds of the initial public offering of the Company's common stock completed in October 1995, and the cancellation of subordinated debt related to the exercise of warrants in connection with the initial public offering, partially offset by interest expense on the Industrial Development Bond. 9 LIQUIDITY AND CAPITAL RESOURCES At January 31, 1997, the Company had $12.5 million in cash and cash equivalents and $42.3 million in working capital. Net cash used in operating activities for the nine months ended January 31, 1997 was $2.2 million. Net income generated from operation was $8.4 million. The primary uses of cash included increased expenditures for inventory and the financing of accounts receivable. Significant cash was also used to increase accounts receivable as a result of increasing revenue. Cash used in investing activities consisted of $9.7 million to purchase fixed assets, consisting primarily of the purchase, renovation and furnishing of the Westwood facility and improvements to increase the production capacity of the Charlotte facility. Cash provided by financing activities consisted primary of $5.5 million received as the proceeds of an Industrial Development Bond issued by the Company through the Massachusetts Industrial Development Agency. This bond carries a 5.74% annual interest rate over its ten year life. Fifty percent of the bond principal amortizes on a monthly basis over the life of the bond. The Company expects to meet its near-term working capital and fixed assets needs primarily with existing cash and cash equivalents and future cash generated from operations. During the 1996 calendar year, the semiconductor industry experienced a well- publicized slowdown. The Company's business depends in large part upon the capital expenditures of semiconductor wafer and device manufacturers. While the Company has not experienced any reduction in its backlog during the nine months ended January 31, 1997, there can be no assurance that the Company's sales will not be affected adversely in the future as a result of this slowdown in the semiconductor industry. Furthermore, the Company's success is dependent upon supplying technologically superior products to the marketplace at appropriate times to satisfy customer needs. Product development requires substantial investment and is subject to technological risks. Delays or difficulties in product development could adversely affect the performance of the Company. 10 PART II. OTHER INFORMATION Item 1. Legal Proceedings: ----------------- None Item 2. Changes in Securities: --------------------- None Item 3. Defaults Upon Senior Securities: ------------------------------- None Item 4. Submission of Matters to a Vote of Security Holders: --------------------------------------------------- None Item 5. Other Information: ----------------- On February 28, 1997, the Company acquired by merger all of the business and assets (including plant and equipment), subject to liabilities, of Digital Measurement Systems, Inc. (DMS), Burlington, Massachusetts in exchange for approximately 820,000 shares of common stock of the Company. It is intended that this acquisition be treated as a pooling of interests for accounting purposes. DMS manufactures equipment that measures the magnetic properties of computer disks. The acquired assets will continue to be operated in that business as the DMS division of ADE Technologies, Inc., the wholly owned subsidiary of the Company that provides metrology and inspection equipment to the computer disk industry. The consideration paid by the Company was determined by negotiation. Item 6. Exhibits and Reports on Form 8-K: -------------------------------- a. See Exhibit Index, Page 14 b. Reports on Form 8-K No reports on Form 8-K were filed during the quarter for which this report is filed. 11 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ADE CORPORATION Date: March 12, 1997 /s/ Mark D. Shooman ---------------------------------- Mark D. Shooman Vice President and Chief Financial Officer Date: March 12, 1997 /s/ Joseph E. Rovatti ---------------------------------- Joseph E. Rovatti Controller (Principal Accounting Officer) 12 ADE CORPORATION EXHIBIT INDEX EXHIBIT PAGE - ------- ---- 4 Employee Stock Purchase Plan/1/ 11 Statement Regarding Computation of Net Income per Share (Filed herewith) 14 /1/ Filed as an exhibit to the Registration Statement on Form S-8 (Registration Number 333-4652) and incorporated by reference herein. 13