UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM 10-Q
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(Mark One)
[ X ] Quarterly Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
July 31, 1998.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
_________ to __________
Commission File No. 0-27498
CFM Technologies, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 22-2298698
------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1336 Enterprise Drive, West Chester, Pennsylvania 19380
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 696-8300
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports 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
-----
The number of outstanding shares of the Registrant's Common Stock, no par
value per share, on September 10, 1998 was 7,869,215.
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of
July 31, 1998 and October 31, 1997 ................. 3
Consolidated Statements of Operations (unaudited)for
the Three and Nine months ended July 31, 1998
and 1997 ............................................ 5
Consolidated Statements of Cash Flows (unaudited)
for the Nine months ended July 31, 1998 and 1997..... 6
Notes to Consolidated Financial Statements .......... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Proceeds ................. 16
Item 6. Exhibits and Reports on Form 8-K ................... 16
Signatures ......................................... 17
Exhibit Index ...................................... 18
<PAGE>
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
(unaudited)
July 31, October 31,
ASSETS 1998 1997
---- ----
CURRENT ASSETS:
Cash and cash equivalents ....... $ 25,227 $ 26,865
Short-term investments .......... 16,971 19,316
Accounts receivable ............. 15,740 33,392
Inventories ..................... 17,307 16,081
Prepaid expenses and other ...... 3,988 1,709
Deferred income taxes ........... -- 1,371
--------- ---------
Total current assets ....... 79,233 98,734
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Land ............................ 540 540
Building and improvements ....... 5,443 3,782
Machinery and equipment ......... 9,467 8,106
Furniture and fixtures .......... 1,424 1,337
--------- ---------
16,874 13,765
Less - Accumulated depreciation
and amortization ......... (5,695) (3,562)
--------- ---------
Net property, plant and equipment 11,179 10,203
--------- ---------
OTHER ASSETS ....................... 2,637 559
--------- ---------
$ 93,049 $ 109,496
========= =========
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(unaudited)
July 31, October 31,
1998 1997
LIABILITIES AND SHAREHOLDERS' EQUITY --------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt ..... $ 648 $ 617
Accounts payable ...................... 1,891 7,709
Accrued expenses ...................... 6,440 8,612
--------- ---------
Total current liabilities .... 8,979 16,938
--------- ---------
LONG-TERM DEBT ........................... 2,579 2,571
--------- ---------
DEFERRED INCOME TAXES .................... -- 119
--------- ---------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred stock, no par value; 1,000,000
authorized shares; no shares issued or
outstanding .......................... -- --
Common stock, no par value; 30,000,000
authorized shares; 7,930,315 and
7,913,588 shares issued .............. 80,814 80,762
Retained earnings ...................... 931 9,341
Deferred compensation .................. (53) (235)
Treasury Stock, 21,500 shares at cost .. (201) --
--------- ---------
Total shareholders' equity .......... 81,491 89,868
--------- ---------
$ 93,049 $ 109,496
========= =========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- -----------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES ................................ $ 3,780 $ 22,914 $ 27,604 $ 57,854
COST OF SALES ............................ 4,652 11,973 18,989 30,715
-------- -------- -------- --------
Gross profit (loss) ................. (872) 10,941 8,615 27,139
-------- -------- -------- --------
OPERATING EXPENSES:
Research, development and engineering 2,307 2,468 8,570 6,665
Selling, general and administrative . 3,491 5,920 13,416 13,626
-------- -------- -------- --------
Total operating expenses ...... 5,798 8,388 21,986 20,291
-------- -------- -------- --------
Operating income (loss) ....... (6,670) 2,553 (13,371) 6,848
INTEREST (INCOME) EXPENSE, NET ........... (415) (634) (1,357) (1,345)
-------- -------- -------- --------
Income (loss) before income taxes .. (6,255) 3,187 (12,014) 8,193
INCOME TAXES ............................. (1,876) 806 (3,604) 2,458
-------- -------- -------- --------
NET INCOME(LOSS) ......................... $ (4,379) $ 2,381 $ (8,410) $ 5,735
======== ======== ======== ========
NET INCOME(LOSS) PER COMMON SHARE:
Basic .............................. $ (0.55) $ 0.30 $ (1.06) $ 0.81
======== ======== ======== ========
Diluted ............................ $ (0.55) $ 0.29 $ (1.06) $ 0.76
======== ======== ======== ========
SHARES USED IN COMPUTING NET INCOME (LOSS)
PER COMMON SHARE:
Basic .............................. 7,921 7,867 7,918 7,123
======== ======== ======== ========
Diluted ............................ 7,921 8,354 7,918 7,570
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
July 31,
-------------------------
1998 1997
---- ----
OPERATING ACTIVITIES:
Net income (loss) ............................... $ (8,410) $ 5,735
Adjustments to reconcile net income (loss) to net
cash used in operating activities
Depreciation and amortization ................ 2,182 1,697
Deferred compensation ........................ 18 62
Deferred income tax benefit .................. (985) (668)
(Increase) decrease in -
Accounts receivable ....................... 17,652 (15,726)
Inventories ............................... (1,226) (6,496)
Prepaid expenses and other current assets . (2,279) (15)
Other assets .............................. 110 (73)
Increase (decrease) in -
Accounts payable .......................... (5,818) 1,136
Accrued expenses .......................... (2,172) 6,035
--------- ---------
Net cash used in operating activities ........... (928) (8,313)
--------- ---------
INVESTING ACTIVITIES:
Purchases of short-term investments .......... (24,601) (125,397)
Proceeds from short-term investments ......... 26,946 111,047
Purchases of property, plant and equipment ... (2,622) (3,025)
Purchases of Treasury Stock .................. (201) --
--------- ---------
Net cash used in investing
activities ................................... (478) (17,375)
--------- ---------
FINANCING ACTIVITIES:
Payments on long-term debt ................... (448) (413)
Proceeds from sale of common stock, net ...... 210 49,288
Proceeds from exercise of stock options ...... 6 427
Tax benefits from exercise of stock options .. -- 619
--------- ---------
Net cash (used in) provided by financing
activities ................................... (232) 49,921
--------- ---------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS .............................. (1,638) 24,233
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .. 26,865 9,308
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ........ $ 25,227 $ 33,541
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest expense ............... $ 111 $ 202
Cash received for interest income ............ 1,652 1,331
Cash paid for income taxes ................... 139 1,647
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Machinery acquired under capital leases ...... $ 487 $ 750
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Basis of Presentation:
The condensed financial statements included herein have been prepared by
CFM Technologies, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These statements include all adjustments
that, in the opinion of management, are necessary to provide a fair statement of
the results for the periods covered. These financial statements should be read
in conjunction with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1997. The results of operations for the interim periods presented
are not necessarily indicative of the results for the full year.
(2) Accounts Receivable:
July 31, October 31,
1998 1997
----------- -----------
Billed........................ $ 9,112,000 $21,944,000
Unbilled...................... 6,628,000 11,448,000
----------- -----------
$15,740,000 $33,392,000
=========== ===========
Unbilled receivables represent final retainage amounts to be billed upon
completion of the installation process.
(3) Inventories:
July 31, October 31,
1998 1997
----------- -----------
Raw materials................. $ 9,682,000 $ 8,373,000
Work in progress.............. 7,625,000 7,708,000
----------- -----------
$17,307,000 $16,081,000
=========== ===========
(4) Net income (loss) per common share:
Basic net income (loss) per common share was computed by dividing net
income (loss) by the weighted average number of shares of common stock
outstanding during the period. Diluted net income per common share for the three
and nine month periods ended July 31, 1997 reflects the potential dilution from
the exercise of outstanding stock options into common stock. Inclusion of shares
of common stock potentially issuable upon the exercise of stock options in
calculating diluted net loss per common share for the three and nine month
periods ended July 31, 1998 would have been antidilutive, and therefore such
shares were not included in the calculation. In 1997, the Company adopted SFAS
No. 128, "Earnings per Share," effective December 15, 1997. As a result, the
Company's reported earnings per share for the three and nine month periods ended
July 31, 1997 were restated.
7
<PAGE>
The net income (loss) and weighted average common and common equivalent shares
outstanding for purposes of calculating net income (loss) per common share are
computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- -----------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) used for basic
and diluted net income (loss)
per common share $ (4,379) $ 2,381 $ (8,410) $ 5,735
========= ========= ========= =========
Weighted average common shares
outstanding used for basic net
income (loss) per common share 7,921,000 7,867,000 7,918,000 7,123,000
--------- --------- --------- ---------
Dilutive effect of common stock
options outstanding - 487,000 - 447,000
--------- --------- --------- ---------
Weighted average common and common
equivalent shares outstanding
used for diluted net income (loss)
per common share 7,921,000 8,354,000 7,918,000 7,570,000
========= ========= ========= =========
</TABLE>
(5) Geographic Information:
Historically, a significant portion of the Company's sales have been to Asian
companies. Included in accounts receivable as of July 31, 1998, was
approximately $8.3 million due from Asian companies. The current economic and
currency situation affecting certain Asian countries, which includes currency
devaluation, external support and economic reorganization programs to reduce
growth and credit demand has had and could continue to have a material adverse
effect on the Company's operating results.
(6) Stock Repurchase Authorization:
On June 9, 1998, the Board of Directors authorized the Company to repurchase up
to 750,000 shares of the Company's common stock in open market, privately
negotiated or other transactions in conformity with the rules of the Securities
and Exchange Commission. As of July 31, 1998, the Company had repurchased 21,500
shares of the Company's common stock.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2.
Overview
CFM Technologies, Inc. ("CFM" or the "Company")designs, manufactures and
markets advanced wet processing equipment for sale to the worldwide
semiconductor and flat panel display (FPD) manufacturing industries. The Company
was founded in 1984 and began commercial operations in 1990 following a period
of technology and product development, during which time the Company's patented
Full-Flow(TM) enclosed processing and Direct-Displacement(TM) drying
technologies were developed.
The Company has derived substantially all of its revenues from the sale of
a relatively small number of its systems, which range in price from
approximately $1.2 million to $2.7 million. The Company sells its systems
worldwide and records a significant portion of its sales to customers outside
the United States. The Company's international sales have occurred in Korea,
Europe, Taiwan, Japan and Israel. The Company anticipates that international
sales will continue to account for a significant portion of net sales, although
the percentage of international sales is expected to fluctuate from period to
period. Because of the current economic and currency situation in Asia, the
Company expects the proportion of its total net sales represented by
international sales to be lower during fiscal 1998, than it has been
historically. The Company's near-term results are likely to continue to be
negatively impacted by the continuing economic difficulties in Asia and certain
over-capacity issues facing the semiconductor and FPD industries.
Results of Operations
The following table sets forth certain financial data for the periods
indicated, expressed as a percentage of net sales.
Three Month Period Nine Month Period
Ended Ended
July 31, July 31,
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit (loss) (23.1)% 47.7% 31.2% 46.9%
Research, development and
engineering 61.0% 10.8% 31.0% 11.5%
Selling, general and
administrative 92.4% 25.8% 48.6% 23.6%
Income (loss) from operations (176.5)% 11.1% (48.4)% 11.8%
Income (loss) before
income taxes (165.5)% 13.9% (43.5)% 14.2%
Net income (loss) (115.8)% 10.4% (30.5)% 9.9%
9
<PAGE>
Net Sales. Net sales for the three month period ended July 31, 1998 of $3.8
million decreased 83.5% from $22.9 million in the corresponding period in fiscal
1997. International sales represented 90.7% and 64.1% of total net sales for the
three months ended July 31, 1998 and 1997, respectively. Net sales in the second
quarter of fiscal 1998 were $8.3 million. The decrease in net sales was due to
the impact of the broad semiconductor industry downturn caused by the Asian
economic and currency situation and by general over-capacity in the
semiconductor and FPD manufacturing industries.
For the nine months ended July 31, 1998 net sales of $27.6 million
decreased 52.3% from $57.9 million during the nine months ended July 31, 1997.
International sales represented 36.9% and 64.1% of total net sales for the nine
months ended July 31, 1998 and 1997, respectively. Asian sales declined from
48.0% of net sales during the nine-month period ended July 31, 1997 to 16.0%
during the nine-month period ended July 31, 1998. This decline reflects the
impact of both the Asian economic and currency situation and the general
over-capacity in the semiconductor and FPD manufacturing industries on purchases
of production equipment by Asian manufacturers in these sectors. As a result of
these declines in net sales, the Company has reduced active headcount by
approximately 35% since the beginning of fiscal 1998. Additionally, the Company
has out-placed certain skilled employees to other local companies. Management
believes that some of these employees will return to the organization when
market conditions improve.
Gross Profit (Loss). Gross profit (loss) as a percentage of net sales
decreased from 47.7% in the three-month period ended July 31, 1997 to a negative
23.1% for the same corresponding in fiscal 1998. Gross profit for the third
quarter of fiscal 1998 was adversely affected by a very low rate of production
as a result of the current low sales rate, including costs associated with
slowed inventory turnover and unabsorbed production costs. Gross profit was
31.7% in the second quarter of fiscal 1998.
During the first nine months of fiscal 1998, gross margins decreased to
31.2% from 46.9% for the corresponding nine months of fiscal 1997. This was the
result of adjustments to warranty reserves, additional allowances for obsolete
inventory, system reconfiguration costs and excess capacity costs recorded in
fiscal 1998 as a result of the significantly reduced level of net sales during
that period. The Company's gross margins have varied significantly from quarter
to quarter and will continue to be affected by a variety of factors. These
factor include sales volumes, the mix and average selling prices of systems,
sales of OEM automation equipment which yield relatively lower gross margins,
the cost of reconfiguration of systems prepared in anticipation of orders not
subsequently placed and excess production capacity.
Research, Development and Engineering. Research, development and
engineering expenses for the quarter ended July 31, 1998 decreased by 6.5 % to
$2.3 million from $2.5 million recorded in the corresponding period during
fiscal 1997. Research, development and engineering expenses were $3.4 million in
the second quarter of 1998. During the third quarter of fiscal 1998, work
continued on the Company's joint development project with Semiconductor 300 (a
joint venture of Siemens and Motorola) in Dresden, Germany. As part of a joint
development program, Semiconductor 300 and the Company will qualify the CFM
system's performance for a broad spectrum of production processes during the
next twelve months. During this period, work also continued on broadening the
number of applications supported by the Company's Full-Flow wet processing
system platform. The Company anticipates that research, development and
engineering spending in the coming quarters will continue at recent levels.
Research, development and engineering expenses for the nine months ended
July 31, 1998 increased to $8.6 million, or 31.0% of net sales, from $6.7
million, or 11.5% of net sales, for the corresponding period during fiscal 1997.
In connection with the project with Semiconductor 300 discussed above, support
modules and related equipment with an aggregate cost of approximately $0.5
million were contributed by CFM in the second quarter of fiscal 1998. In
addition to development work on the Semiconductor 300 project, the Company
continues to develop new processes for existing and new equipment and to invest
in its applications laboratory, which is used for process development and
demonstrations.
10
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses decreased from $5.9 million or 25.8% of net sales in the quarter ended
July 31, 1997 to $3.5 million or 92.4% of net sales in the quarter ended July
31, 1998. Selling, general and administrative expenses were $4.3 million for the
second quarter of 1998. Selling, general and administrative expenses for the
third quarter of fiscal 1998 reflect lower commission costs due to reduced
sales, reduced patent litigation costs and the results of stringent cost
controls.
For the nine months ended July 31, 1998, selling, general and
administrative expenses were $13.4 million, or 48.6% of net sales, compared to
$13.6 million, or 23.6% of net sales, for the nine months ended July 31, 1997.
During the nine months ended July 31, 1998, selling, general and administrative
expenses included increases for increased customer support, selling activity and
legal expenses related to litigation undertaken to enforce one of the Company's
patents. These expenses were offset in part by lower commission costs resulting
from reduced sales levels and cost controls related to the low level of net
sales.
Interest (Income) Expense, Net. Interest income, net of interest expense,
was $634,000 and $415,000 in the quarters ended July 31, 1997 and 1998,
respectively. Such interest income was earned by the Company from investment of
funds not immediately needed to support the Company's operations.
Interest income, net of interest expense, for the nine months ended July
31, 1997 and 1998 was $1,345,000 and $1,357,000, respectively. The net interest
income recorded during these periods was the result of interest income earned by
the Company from investment of funds not immediately needed to support the
Company's operations. These funds were raised in the Company's initial public
offering completed on June 21, 1996 and in a follow-on public offering completed
on February 19, 1997. The Company anticipates that the investment of these funds
will continue to generate interest income, net of interest expense, during the
remainder of fiscal 1998.
Income Taxes. The Company's effective tax rate was 30% for the three and
nine-month periods ended July 31, 1998. The rate is consistent with the
effective rate for fiscal 1997.
Backlog
As of July 31, 1998, the Company's backlog of orders was $14.6 million,
compared to $17.1 million as of July 31, 1997. Customer orders for the third
quarter of fiscal 1998 were $8.3 million. All orders recorded during the third
quarter of fiscal 1998 were for semiconductor systems. No FPD orders were
received during the third quarter of fiscal 1998 or 1997. A single system
ordered from and shipped to Asia accounted for 61% of the net sales for the
third quarter of fiscal 1998. Orders for the first nine months of fiscal 1998
were $20.4 million. In the nine months, orders from the U.S. accounted for 56%
of total orders, Asia 26% and Europe 18%. It has been the experience of the
Company that neither reported backlog at a particular date nor the pattern of
receipt of orders is necessarily indicative of future orders or revenues.
Liquidity and Capital Resources
At July 31, 1998, the Company had $25.2 million in cash and cash
equivalents, $17.0 million in short-term investments and $70.3 million in
working capital. At October 31, 1997 the Company had $26.9 million in cash and
cash equivalents, $19.3 million in short-term investments and $81.8 million in
working capital.
11
<PAGE>
Approximately $1.0 million was used in operating activities during the nine
months ended July 31, 1998, as compared with $8.3 million used in operating
activities during the nine months ended July 31, 1997. The cash used in
operating activities during the nine months ended July 31, 1998 was primarily
the result of the net loss of $8.4 million, a decrease in accounts payable and
accrued expenses of $8.0 million, an increase in inventories, prepaid expenses
and other assets of $3.4 million and a decrease in accounts receivable of $17.7
million. While inventory balances are at an historically high level, the Company
believes that this inventory will be utilized through fulfillment of future
orders for the Company's products; however, there can be no assurance that such
orders will be received and failure to receive such orders could have a material
adverse impact on the operations of the Company. The Company had accounts
receivable of $8.3 and $14.3 million due from Asian companies as of July 31,
1998 and 1997, respectively. Acquisitions of property, plant and equipment were
$2.6 million for the first nine months of fiscal 1998 and $3.0 million for the
first nine months of fiscal 1997. Fiscal 1998 acquisitions included improvements
to leased facilities under construction and improvements and additions to the
Company's applications laboratory in general and to support development work on
systems to process 300mm wafers.
On June 9, 1998, the Company announced the initiation of a stock repurchase
program of up to 750,000 shares of its common stock. As of July 31, 1998, the
Company had repurchased 21,500 shares.
The Company has a relationship with a commercial bank which includes a
mortgage on one of the Company's manufacturing facilities in the amount of $0.9
million and a $7.5 million unsecured revolving demand line of credit with an
interest rate equal to the bank's overnight borrowing rate plus 1/4%. The
mortgage bears interest at an annual rate of 8.9%. As of July 31, 1998, no
balance was outstanding under the Company's line of credit.
The Company also has mortgage notes payable to the Pennsylvania Industrial
Development Authority in the amount of $0.5 million bearing interest at 2.0% and
to the Chester County Development Council in the amount of $0.1 million bearing
interest at 5.0%. In addition, the Company has outstanding capital lease
obligations in the amount of $1.5 million bearing interest at rates ranging from
7% to 12% per annum.
The Company had outstanding accounts receivable of approximately $33.4
million and $15.7 million as of October 31, 1997 and July 31, 1998,
respectively. The Company sells its systems under terms which require billing
for a portion of each sale upon completion of certain events related to
installation and process validation. These unbilled amounts have decreased from
$11.4 million at October 31, 1997 to $6.6 million at July 31, 1998. No allowance
for doubtful accounts receivable has been recorded because the Company believes
that all such accounts receivable are fully realizable.
The Company believes that existing cash, cash equivalents and short-term
investment balances and its available line of credit will be sufficient to meet
the Company's cash requirements during the next 12 months. The board of
directors has authorized the repurchase of up to 750,000 shares of the Company's
common stock (see Note 6 of the Notes to Consolidated Financial Statements). The
repurchase of stock is not expected to have a material adverse affect on the
Company's ability to meet its cash requirements during the next 12 months.
However, depending upon its rate of growth and profitability, the Company may
require additional equity or debt financing to meet its working capital
requirements or capital expenditure needs. There can be no assurance that
additional financing, if needed, will be available when required or, if
available, will be on terms satisfactory to the Company.
12
<PAGE>
Year 2000 Problem
At midnight on December 31, 1999, all computer systems that use two digits
to represent the year are at risk of malfunction or failure. Many systems will
continue to run, but may interpret any date in the year '00 to be prior to any
date in the year '99, posing potential date comparison problems, or may fail to
recognize that the Year 2000, unlike 1900, is a leap year. Businesses and
systems that use a four-digit format to report and process dates later than
December 31, 1999 are often denoted as "Year 2000 compliant". While many systems
have no date comparison functions and operate in a date-independent mode they
may have a date function. If full system operation and correct display of dates
subsequent to January 1, 2000 are possible, these systems may be denoted as
"Year 2000 operationally ready". Many systems and subsystems using two digit
dates will operate smoothly until the end of their technological or economic
life without regard to the actual date. These systems are unaffected by whether
it is 2000 or 1900, make no "real-time" date comparisons and have no date
display features. At the other extreme are systems which will cease functioning
or malfunction when an unacceptable date is perceived (which in some cases could
be during 1999). In its investigations to date, the Company has found no
internal systems or subsystems, in the Company's products or otherwise, which
will cease to function or malfunction, due to a date induced error, in a manner
which would potentially cause personal injury or material damage to property.
The categories in which the Company faces potential exposure are as follows:
o Business Applications - This category includes all client/server and desktop
hardware and software used in routine business operations including order
processing, system design and documentation, procurement, manufacturing and
customer service.
o Infrastructure/Embedded Systems - This category includes building facilities,
manufacturing equipment and systems, control systems and instrumentation.
o Telecommunications - This category includes voice, video and data switching
systems and network components.
o Business Relationships - This category includes the supply chain for the
Company's products and service providers including banks, insurance
companies, payroll and pension plan administrators, legal, accounting and
consulting firms as well as public utilities, long distance
telecommunications providers, transportation and overnight delivery companies
and local government services.
The Company plans to modify or replace its affected systems in a manner
that will minimize any detrimental effects on operations. Toward that end, the
Company has formed a management team with active participation by
representatives of departments throughout the Company which has been working
together since 1997 to enable the Company to meet its Year 2000 goals. In
addition to the Company's Year 2000 team, additional personnel within each
functional area are working to complete the assessment and remediation process.
An inventory of exposures has been completed and operational steps necessary to
deal with each of these exposures have been established. In its investigations
to date, the Company has found no internal systems or subsystems, in the
Company's products or otherwise, where a value for the date will cause any
interruption in operation which would cause any personal injury or material
damage to property. Following a rollover and reset of internal date information,
tests have shown that date and time functions behave consistently before, during
and after the year 2000. As a result, CFM Full-Flow wet processing systems are
Y2K operationally ready. A program to inventory the hardware and software
configuration of every CFM Full-Flow semiconductor or flat panel wet processing
system is underway. This information is being used to assess the Year 2000
impact of any hardware and software changes on reported systems which may be
proposed through 1-1-2000. An action plan to provide technical Year 2000
compliance has been prepared and, in many cases, has been or is in the process
of being implemented. Product related issues include data recording and host
communications. In each of these cases, technical compliance will not impact the
product's full functional operation. Technical compliance (four-digit date
representation), while unnecessary for full product operation, will be
available, for a fee, for implementation late in 1998. Extensive testing using
commercially available information systems test programs and programs developed
by the British Standards Institution and Sematech have been used and will
continue to be used to assess Year 2000 issues in appropriate categories. This
testing will continue until after January 1, 2000 to ensure that any new issues
that are identified can be addressed promptly. As part of its year 2000
compliance efforts, the Company is concerned about maintaining the stability of
its supplier network. The Company's current strategy is to prioritize suppliers
as to their criticality and then to investigate their Year 2000 compliance
status starting with those suppliers most critical to the Company's operations.
A special effort has been made to identify embedded microprocessors with date
functions which may impact their operation in any part, assembly, subsystem or
OEM component used in or distributed in conjunction with the Company's products.
No such embedded microprocessors have been discovered, to date.
13
<PAGE>
The Company recognizes that the Year 2000 problem is a serious,
enterprise-wide issue. Management believes that appropriate personnel and
resources have been assigned to this effort and have made significant progress
to date. Continued diligence by the members of the Company's Year 2000 team and
appropriate monitoring by and support from senior management throughout the
remainder of 1998 and 1999 are intended to further enhance the Company's efforts
to ensure that its business will not be negatively impacted by any Year 2000
issues in any material adverse respect.
The Company believes that the cost of developing an inventory of potential
Year 2000 issues within the Company, the analysis of that inventory and
remediation of any issues found to cause potential operational problems will not
exceed $100,000. It is not possible, at present, to quantify the overall cost of
any modifications or replacements which may be needed. The current status of the
Company's efforts to deal with these issues has been posted on the Company's
internet site which may viewed at http://CFMTech.com. While the Company
presently believes that the ultimate outcome of any such modifications or
replacements will not have a material effect on the Company's current financial
position, liquidity or results of operations, information developed as a result
of the Company's continuing inventory and analysis of issues may result in
increased costs estimates and such costs could have a material effect on results
of operations.
Litigation
In the United States, the Company has asserted its U.S. Letters Patent No.
4,911,761 (the "'761 patent") for Direct Displacement(TM) drying against two
defendants, and is the defendant in a third litigation where the plaintiff seeks
a declaratory judgment of non-infringement and that the `761 patent is invalid.
In CFMT, Inc. and CFM Technologies, Inc. v. YieldUp International Corp.
("YieldUp"), Civil Action No. 95-549-RRM, the United States District Court for
the District of Delaware granted summary judgment dismissing the Company's
infringement claim against YieldUp in October 1997. The Company requested
reargument of the summary judgment decision in November 1997, which the court
allowed in June 1998. The Company and YieldUp submitted supplemental briefs on
whether the Court's initial dismissal of the Company's infringement claim was
appropriate in August 1998. The Company is currently awaiting the court's
decision. In a separate matter, CFMT, Inc. and CFM Technologies, Inc. v. Steag
Microtech Inc., Civil Action No. 95-442-RRM, on December 12, 1997, following
trial in the United States District Court for the District of Delaware, a jury
found all asserted claims of the `761 patent valid and enforceable, and found
the defendant to have willfully infringed all asserted claims. The judge upheld
the jury's findings and entered final judgment for $3.1 million in the Company's
favor. The defendant has appealed that final judgment. In the third litigation
matter, certain of the plaintiff's claims in the declaratory judgment action
were dismissed for lack of jurisdiction and subsequently were reinstated
following appeal. The case is ongoing.
In Europe, nullification proceedings have been filed against the Company's
drying patents, each of which is based on the `761 patent, in England (patent
no. EP428,784), Ireland (patent no. 66839), France (patent no. EP428,784),
Germany (patent no. DE68921757.8), and The Netherlands (patent no. EP428,784).
The Company is currently evaluating an appropriate response to these actions.
Although management believes that the ultimate resolution of these matters
will not have a material adverse impact on the Company's financial position or
results of operations, there can be no assurance in that regard.
14
<PAGE>
Forward Looking Statements
Statements in this Quarterly Report on Form 10-Q, including those
concerning the Company's expectations of future sales, gross profits, research,
development and engineering expenses, selling, general and administrative
expenses, product introductions, cash requirements and Year 2000 compliance,
include certain forward-looking statements. As such, actual results may vary
materially from such expectations. Factors which could cause actual results to
differ from expectations include variations in the level of orders which can be
affected by general economic conditions and growth rates in the semiconductor
and FPD manufacturing industries and in the markets served by the Company's
customers, the international economic and political climates, difficulties or
delays in product functionality or performance, the delivery performance of sole
source vendors, the timing of future product releases, failure to respond
adequately to either changes in technology or customer preferences, changes in
pricing by the Company or its competitors, ability to manage growth, risk of
nonpayment of accounts receivable, changes in budgeted costs, ability to
evaluate, identify and correct date recognition problems in software used by the
Company, its customers or suppliers or failure to realize a successful outcome
to pending patent litigation, all of which constitute significant risks. There
can be no assurance that the Company's results of operations will not be
adversely affected by one or more of these factors.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 21, 1996, the Company consummated an initial public offering of its
Common Stock. The Company sold 2,249,661 (including the underwriters
over-allotment) shares of Common Stock, no par value, at an initial public
offering price of $10.00 per share. After deducting the underwriter's discount
and other offering expenses, the net proceeds to the Company were approximately
$19,976,000.
The Company has used substantially all of the proceeds of the initial
public offering in the following approximate amounts:
Repayment of short-term working capital borrowings $ 5,300,000
Expansion of manufacturing facilities 1,200,000
Expansion of applications laboratory 2,000,000
Payment of long-term indebtedness 1,600,000
Expansion of office facilities 2,700,000
Expansion of information systems infrastructure 1,700,000
Purchases of automated design software and workstation 1,100,000
Used in working capital 5,976,000
-----------
$19,976,000
===========
None of the forgoing payments were made, directly or indirectly, to
directors, officers or other affiliates of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE>
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.
Dated: September 14, 1998
CFM Technologies, Inc.
(Registrant)
By: /s/ Roger A. Carolin
---------------------------
Roger A. Carolin
Chief Executive Officer
By: /s/ Lorin J. Randall
---------------------------
Lorin J. Randall
Chief Financial Officer
17
<PAGE>
EXHIBIT INDEX
Exhibit
27 Financial Data Schedule.
18
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