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
Securities Exchange Act of 1934 for the quarterly period ended
January 31, 1999.
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
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(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 March 12, 1999 was 7,855,166.
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CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited)
January 31, 1999 and October 31, 1998 ............. 3
Consolidated Statements of Operations (unaudited)
Three months ended January 31, 1999 and 1998 ...... 5
Consolidated Statements of Cash Flows (unaudited)
Three months ended January 31, 1999 and 1998 ...... 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 4. Submission of Matters to a Vote of
Security Holders ............................... 18
Item 6. Exhibits and Reports on Form 8-K ................ 18
Signatures ..................................... 19
Exhibit Index .................................. 21
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PART 1. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
January 31, October 31,
ASSETS 1999 1998
-------- --------
CURRENT ASSETS:
Cash and cash equivalents .......... $ 11,775 $ 31,649
Short-term investments ............. 24,980 9,745
Accounts receivable ................ 14,363 14,040
Inventories ........................ 13,751 13,657
Prepaid expenses and other ......... 4,950 5,020
-------- --------
Total current assets .......... 69,819 74,111
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land ............................... 540 540
Building and improvements .......... 7,341 5,981
Machinery and equipment ............ 9,710 9,599
Furniture and fixtures ............. 1,424 1,423
-------- --------
19,015 17,543
Less - Accumulated depreciation
and amortization.................. (7,117) (6,377)
-------- --------
Net property, plant and equipment 11,898 11,166
-------- --------
OTHER ASSETS .......................... 5,564 4,536
======== ========
$ 87,281 $ 89,813
======== ========
The accompanying notes are an integral part of these financial statements.
3
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CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
January 31, October 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------- --------------
CURRENT LIABILITIES:
Current portion of long-term debt ...... $ 642 $ 672
Accounts payable ....................... 2,980 1,800
Accrued expenses ....................... 6,815 7,373
-------- --------
Total current liabilities ..... 10,437 9,845
-------- --------
LONG-TERM DEBT ............................ 2,051 2,186
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; 7,964,366 and
7,964,366 shares issued ............... 81,033 81,033
Treasury stock, 109,200 and 96,200 common
shares at cost ........................ (865) (762)
Deferred compensation ................... (41) (47)
Retained earnings (deficit) ............. (5,334) (2,442)
-------- --------
Total shareholders' equity .... 74,793 77,782
======== ========
$ 87,281 $ 89,813
======== ========
The accompanying notes are an integral part of these financial statements.
4
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CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three Months Ended
January 31,
-----------------------
1999 1998
---- ----
NET SALES ................................ $ 6,052 $ 15,504
COST OF SALES ............................ 4,837 8,654
-------- --------
Gross profit ........................ 1,215 6,850
-------- --------
OPERATING EXPENSES:
Research, development and engineering 2,471 2,822
Selling, general and administrative . 3,552 5,605
-------- --------
Total operating expenses ...... 6,023 8,427
-------- --------
Operating loss ................ (4,808) (1,577)
INTEREST (INCOME) EXPENSE, NET ........... (426) (505)
-------- --------
Loss before income taxes ........... (4,382) (1,072)
INCOME TAX BENEFIT ....................... (1,490) (322)
======== ========
NET LOSS ................................. $ (2,892) $ (750)
======== ========
NET LOSS PER COMMON SHARE:
Basic .............................. $ (0.37) $ (0.09)
======== ========
Diluted ............................ $ (0.37) $ (0.09)
======== ========
SHARES USED IN COMPUTING NET LOSS
PER COMMON SHARE:
Basic .............................. 7,860 7,914
======== ========
Diluted ............................ 7,860 7,914
======== ========
The accompanying notes are an integral part of these financial statements.
5
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CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended
January 31,
----------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net loss ........................................ $ (2,892) $ (750)
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities
Depreciation and amortization ................ 740 724
Deferred compensation ........................ 6 21
Deferred income tax benefit .................. (1,490) (122)
(Increase) decrease in -
Accounts receivable ....................... (323) 4,332
Inventories ............................... (94) (1,130)
Prepaid expenses and other current assets . 70 898
Other assets .............................. 462 77
Increase (decrease) in -
Accounts payable .......................... 1,180 (1,529)
Accrued expenses .......................... (558) (1,413)
-------- --------
Net cash (used in) provided by operating
activities ............................... (2,899) 1,108
-------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments .......... (23,130) (965)
Proceeds from short-term investments ......... 7,895 7,488
Purchases of property, plant and equipment ... (1,472) (1,417)
-------- --------
Net cash (used in) provided by investing
activities ................................. (16,707) 5,106
-------- --------
FINANCING ACTIVITIES:
Payments on long-term debt ................... (165) (329)
Proceeds from exercise of stock options ...... -- 6
Purchase of treasury shares, at cost ......... (103) --
-------- --------
Net cash used in financing activities ........ (268) (323)
-------- --------
NET INCREASE(DECREASE) IN CASH AND CASH
EQUIVALENTS ................................... (19,874) 5,891
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD .. 31,649 26,865
======== ========
CASH AND CASH EQUIVALENTS, END OF PERIOD ........ $ 11,775 $ 32,756
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense ............... $ 55 $ 77
Cash received for interest income ............ 474 578
Cash paid for income taxes ................... 6 110
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTIVITIES:
Machinery acquired under capital leases ...... $ -- $ 487
The accompanying notes are an integral part of these financial statements.
6
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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, 1998. The results of operations for the interim periods presented
are not necessarily indicative of the results for the full year.
(2) ACCOUNTS RECEIVABLE:
January 31, 1999 October 31, 1998
---------------- ----------------
Billed....... $11,538,000 $10,058,000
Unbilled..... 2,825,000 3,982,000
----------- -----------
$14,363,000 $14,040,000
=========== ===========
Billed receivables are net of allowances for doubtful accounts of $81,000
and $0 as of January 31, 1999 and October 31, 1998, respectively. Unbilled
receivables represent final retainage amounts to be billed upon completion of
the installation process.
(3) INVENTORIES:
January 31, 1999 October 31, 1998
---------------- ----------------
Raw materials......... $ 9,300,000 $ 8,669,000
Work in progress...... 4,451,000 4,988,000
----------- -----------
$13,751,000 $13,657,000
=========== ===========
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(4) NET LOSS PER SHARE:
Basic net loss per common share was computed by dividing net loss by the
weighted average number of shares of common stock outstanding during the period.
Diluted net loss per common share for the three months ended January 31, 1999
and 1998 would have been antidilutive if it reflected the potential dilution
from the exercise of outstanding stock options into common stock, and therefore
was not included in the calculation.
The net loss and weighted average common shares outstanding for purposes of
calculating net loss per common share are computed as follows:
Three Months Ended
January 31,
-----------------------------
1999 1998
---- ----
Net loss used for basic and diluted net
loss per common share ................. ($2,892,000) ($ 750,000)
=========== ===========
Weighted average common shares
outstanding used for basic and diluted
net loss per common share ............. 7,860,000 7,914,000
=========== ===========
Net loss per common share, basic and
diluted ............................... ($ 0.37) ($ 0.09)
=========== ===========
(5) GEOGRAPHIC INFORMATION:
Historically, a significant portion of the Company's sales have been to
Asian companies. Included in accounts receivable as of January 31, 1999, was
$9.3 million due from Asian companies.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
CFM 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 typically range in price from
$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. International orders accounted for less than 1% of the Company's backlog
at January 31, 1999. The Company's near-term results are likely to be negatively
impacted by over-capacity in the semiconductor industry and the continuing
economic difficulties in Asia.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated, expressed as a percentage of net sales:
Three Months Ended
January 31,
---------------------------
1999 1998
---- ----
Net sales ................... 100.0% 100.0%
Gross profit ................ 20.1% 44.2%
Research, development
and engineering............ 40.8% 18.2%
Selling, general and
administrative............. 58.7% 36.2%
Operating loss .............. (79.4%) (10.2%)
Loss before income taxes .... (72.4%) (6.9%)
Net loss .................... (47.8%) (4.8%)
Net Sales. Net sales of $6.1 million for the three month period ended
January 31, 1999 decreased 61% from $15.5 million in the first quarter of fiscal
1998. Sales results for the first quarter of fiscal 1999 continue to reflect the
excess production capacity currently existing in the semiconductor industry.
However, the book-to-bill ratio for semiconductors increased for the fourth
consecutive month, utilization rates are starting to increase and some of the
larger semiconductor equipment companies have started to report increases in
order rates.
9
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In recent months, the Company has experienced an increase in sales
discussions, quotations and proposals and believes that this activity may have a
positive impact on the placement of orders by customers as fiscal 1999
progresses.
International sales represented 1% and 31.6% of total net sales in the
three months ended January 31, 1999 and 1998, respectively. Historically, a
significant portion of the Company's revenues have derived from international
sales.
Gross Profit. Gross profit as a percentage of net sales decreased from
44.2% in the three month period ended January 31, 1998 to 20.1% for the
corresponding period in fiscal 1999. This reduction in gross profit percentage
is primarily due to the underabsorption of certain manufacturing costs resulting
from reduced production volume.
Research, Development and Engineering. Research, development and
engineering expenses for the quarter ended January 31, 1999 decreased by 12% to
$2.5 million from $2.8 million in the corresponding period during fiscal 1998.
The Company continues to develop new process applications for its Full-Flow
platform to increase the breadth of wet processing applications served.
Additionally, existing applications are simplified and optimized to improve the
productivity of the Company's products. The Company believes that continued
investment in research, development and engineering is critical to maintaining a
strong technological position and expects research, development and engineering
expenses in the remainder of fiscal 1999 to continue at approximately the same
level.
Selling, General and Administrative. Selling, general and administrative
expenses decreased from $5.6 million or 36.2% of net sales in the quarter ended
January 31, 1998 to $3.6 million or 58.7% of net sales in the quarter ended
January 31, 1999. Expenses declined due to cost reductions implemented during
the latter part of fiscal 1998 and the reduced level of sales. Costs related to
protecting the Company's intellectual and technological assets during the
quarter ended January 31, 1999 were approximately $0.5 million. The Company
believes that selling, general and administrative expenses, including ongoing
legal expenses related to patent litigation and sales and support expenses in
connection with the Company's efforts to increase its net sales, will increase
during the remainder of fiscal 1999.
Interest (Income) Expense, Net. Interest income, net of interest expense,
was $505,000 and $420,000 in the quarters ended January 31, 1998 and 1999,
respectively. Net interest income was the result of interest income earned by
the Company from investment of funds not immediately needed to support the
Company's operations.
Income Taxes. The Company's effective tax rate was 34% during the three
months ended January 31, 1999 as compared with 30% for the three months ended
January 31, 1998. The income tax benefit recorded during the quarter ended
January 31, 1999 has been recorded as a deferred income tax asset. Based on an
assessment of the Company's taxable earnings history and expected future taxable
income, management has determined that it is more likely than not that the net
deferred tax assets will be realized in future periods. The Company may be
required to provide a valuation allowance for this asset in the future if it
does not generate sufficient taxable income as planned. Additionally, the
ultimate realization of this asset could be negatively impacted by market
conditions and other variables not known or anticipated at this time.
10
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BACKLOG
As of January 31, 1999, the Company's backlog of orders was $4.4 million,
compared to $16.2 million as of January 31, 1998. During the quarter ended
January 31, 1999, substantially all orders were from customers in the U.S. and
were related to semiconductor systems. Backlog at January 31, 1999 consists of
semiconductor systems, substantially all of which have been ordered for delivery
to customers in the U.S. 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 shipments during any particular future period.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1999, the Company had $11.8 million in cash and cash
equivalents, $25.0 million in short-term investments and $59.4 million in
working capital. At October 31, 1998 the Company had $31.6 million in cash and
cash equivalents, $9.7 million in short-term investments and $64.3 million in
working capital.
While $1.1 million of cash was provided by operating activities during the
three months ended January 31, 1998, net cash of $2.9 million was used by
operating activities during the first quarter of fiscal 1999 during the three
months ended January 31, 1999. The net cash used in operating activities was
primarily a result of the net loss of $2.9 million, income tax benefit of $1.5
million and increase in accounts receivable of $.3 million.
Acquisitions of property, plant and equipment, were $1.5 million for the
first three months of fiscal 1999 compared to $1.4 million for the first three
months of fiscal 1998. Acquisitions during the first quarter of fiscal 1999 were
primarily for improvements to new leased production and administration
facilities. The Company commenced the lease of a new 60,000 square foot
production facility during the quarter ended January 31, 1999. In February 1999
the Company commenced occupancy of these new production facilities and is
expected to commence occupancy of a new, leased 80,000 square foot
administrative facility by mid-1999, vacating 47,500 square feet of existing
leased space.
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 $0.8
million and a $7.5 million unsecured revolving demand line of credit with an
interest rate equal to the bank's overnight borrowing rate. The mortgage bears
interest at an annual rate of 8.9%. As of January 31, 1999, 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 $1.3 million bearing interest at rates ranging from
7% to 12% per annum.
The Company had outstanding accounts receivable of approximately $14.4
million and $14.0 million as of October 31, 1999 and January 31, 1998,
respectively. As of January 31, 1999 the Company had accounts receivable of $9.3
million from companies located in Asia. The Company recorded, for the first time
in its history, an allowance for doubtful accounts of $0.1 million in the first
quarter of fiscal 1999, related to a product sold by the Company to a customer
whose facility was destroyed in a fire. Management believes that no additional
allowance for doubtful accounts receivable is needed at this time as the Company
believes that such accounts receivable are fully realizable. Management performs
an ongoing evaluation of the status of accounts receivable balances, including
the effect of the continued economic and currency situation in certain Asian
countries, in order to determine if any additional allowances or any writeoffs
are necessary. Given the economic conditions, particularly in Asia, and the
status of certain of the Company's receivables, the Company may be required to
record significant additional allowances in future periods.
11
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The Company believes that existing cash 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. 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.
YEAR 2000
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 data 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).
The Company is committed to the operation of its business and the operation
of its products without interruption. Certain changes in the Company's operating
procedures may be needed to reduce risks or avoid complications relating to the
Year 2000 issue to ensure that the Company and its customers will not be
negatively impacted by Year 2000 issues.
The Company's chief financial officer has been selected by the Company's
senior management as the coordinator for the Company's Year 2000 compliance
efforts. A team has been formed with active participation by the information
systems, purchasing, software engineering, marketing and customer services
departments and has been working since 1997 to enable the Company to meet its
Year 2000 goals.
The Company views Year 2000 issues in four categories of potential
exposure:
Products - This encompasses the Company's products offered for sale
and the products that are currently in service at customer sites.
12
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Business applications and infrastructure - This includes all
client/server, desktop and network hardware and software used in routine
business operations.
Business relationships and third parties - This includes the supply
chain for the Company's products, customers 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.
Non-Information Technology ("Non-IT") - This includes embedded
microprocessors used in building facilities, manufacturing equipment and
systems and control systems and instrumentation.
State of Readiness
Products
The Company believes it is aware of the potential Year 2000 exposure of its
Full-Flow wet processing systems currently in production at customer sites or of
models available for sale. The Company has made an assessment of its exposure
using the Sematech Year 2000 Readiness Testing standard as the basis for its
assessment. This standard is one of two standards used by the semiconductor
equipment industry for assessing the Year 2000 readiness of the industry's
equipment. Based on an assessment under this standard, the Company's current
products available for sale and those shipped in the past year, with respect to
both hardware and software, are considered to be "Ready Now". Systems shipped
earlier will obtain the "Ready Now" standard once the on-board computer system
date is reset at the beginning of the new millenium. While the products are
"Ready Now" based on industry standards, customers may also elect to have their
on-board computer systems upgraded, for a fee, to be in technical compliance
(four-digit date representation). This upgrade is unnecessary in order to obtain
full functional operation. The Company has successfully completed Year 2000
testing on a representative cross-section of its products in production at a
customer site. While the Company believes it has undertaken all needed
assessment, validation and implementation of product related Year 2000 issues,
it intends to continue to search for any as yet unforeseen issues and develop
action plans to resolve such issues. The Company maintains a website, available
to its customers, that discusses Year 2000 issues related to its products
including detailed testing results.
Business applications and infrastructure
The Company has completed an assessment of all of its internally used
business applications (software) and the hardware on which such applications
run. This assessment was conducted primarily by contacting developers of the
systems and manufacturers of the hardware and obtaining statements regarding the
Year 2000 readiness of the software and hardware presently in use.
The primary enterprise-wide system used for business operations, including
order processing, systems design and documentation, procurement, manufacturing
and accounting has been described as Year 2000 compliant by the manufacturer.
The underlying hardware and operating system that the enterprise-wide system
runs on are also compliant, as described by their respective manufacturers.
Desktop computers in use throughout the Company vary in their Year 2000
compliance for both hardware and software. While the majority of the hardware is
compliant, most of the non-compliant hardware may be upgraded with software from
the manufacturer available free over the Internet. The Company intends to
perform such upgrades by the end of June 1999. The Company has a few
non-compliant machines that cannot be upgraded which are not currently in use
for any date comparison functions, and which it may elect to replace at a cost
of approximately $15,000. The Company is implementing Year 2000 compliant
desktop software and expects to have all computers using a date comparison
function upgraded by September 1999 at a cost to the Company of approximately
$20,000. Year 2000 compliant network server software is expected to be made
available early in 1999 by the manufacturer at an upgrade cost of approximately
$10,000. The Company intends to implement the upgrades to its server software by
June 1999.
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Business relationships and third parties
The Company has had varying success in assessing the Year 2000 readiness of
companies with which it has business relationships. In each case, the Company
has either contacted its vendors, customers or service providers or searched
their websites for information regarding Year 2000 compliance. While the Company
has received statements from many in this group, it has not yet obtained
certification statements from certain critical vendors. Many of the statements
received, including those from public utilities, stated intentions to become
compliant during 1999. The Company is pursuing additional discussions with
critical vendors to assess the potential impact, if any, on its operations.
Non-IT
A special effort has been made to identify embedded microprocessors with
date functions 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. Non-IT embedded microprocessors
may also be present in elevators, heating and air-conditioning systems,
telecommunications devices and manufacturing equipment.
Costs to Address Year 2000 Issues
Costs to address Year 2000 issues have primarily been incurred internally.
As the Company does not have a project tracking system, past and future Year
2000 costs can only be estimated.
Past costs are estimated to be $30,000 and future costs for internal labor
are expected to be approximately $15,000. Costs to replace desktop computers are
estimated to be $15,000, software upgrades for the desktop computers are
estimated to be $20,000 and the upgrade to network server software is estimated
to be $10,000. The new telecommunications equipment, heating and
air-conditioning systems, and elevators in the new facilities in Exton, PA are
the result of moving to newly built facilities and not a result of Year 2000
issues. There may be additional costs incurred for unforeseen Year 2000 issues.
All costs will be funded out of general operating funds and are not expected to
be material.
Risks of the Company's Year 2000 Issues
Although not expected, the most likely worst case scenario includes the
inability of vendors to supply product on a timely basis and the inability of
customers to take delivery of currently ordered equipment, order more equipment
or to pay the Company for products already purchased.
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Management will, in conjunction with its customers, continue to evaluate
currently identified and as yet unforeseen potential Year 2000 issues in its
products that could adversely affect customers' production capabilities.
Commercially available software capable of finding date comparison programs and
databases on desktop computers will be executed to minimize the risk of date
comparison errors. The Company will continue to seek readiness certification
from critical suppliers and customers.
Contingency Plans
The Company is currently seeking alternate suppliers or obtaining in-house
capabilities for vendors that it deems to be both critical to the Company's
success and unable to adequately demonstrate Year 2000 readiness. As a part of
the Company's continuing customer service efforts, the Company is working with
its customers to encourage Year 2000 testing that includes the Company's
products.
The current status of the Company's efforts to deal with Year 2000 issues
has been posted on the Company's Internet site which may be viewed at
HTTP://WWW.CFMTECH.COM.
There can be no assurances that the Company will not experience serious
unanticipated negative consequences and/or material costs caused by undetected
errors or defects in technology used in its products or internal systems, which
are comprised predominantly of third party software and hardware, or by the
inability of third parties to adequately disclose and correct their Year 2000
issues. While the Company presently believes that the ultimate outcome of its
efforts to be Year 2000 ready will not have a material effect on the Company's
financial position liquidity or operations, there can be no assurances that
unanticipated increased costs could have a material effect on the results of
operations.
LITIGATION
In the United States, the Company has asserted its U.S. Patent No.
4,911,761 (the "`761 patent")for Direct Displacement(TM) drying against
defendants in two actions alleging infringement, inducement of infringement, and
contributory infringement of the patent. The Company also is both a defendant
and a counterclaim plaintiff in a third proceeding where the plaintiff seeks a
declaratory judgment of non-infringement and that the `761 patent is invalid.
The Company has counterclaimed, alleging infringement, inducement of
infringement, and contributory infringement of both the `761 patent and U.S.
Patent Nos. 4,778,532 (the "`532 patent") and 4,917,123 (the "`123 patent").
On July 10, 1995, the Company filed an action against STEAG Microtech, Inc.
("STEAG"), entitled CFMT, INC. AND CFM TECHNOLOGIES, INC. V. STEAG MICROTECH,
INC., Civil Action No. 95-CV442, in the United States District Court for the
District of Delaware. The Company sought damages and a permanent injunction to
prevent further infringement. STEAG denied infringement and asserted, among
other things, that the `761 patent is invalid and unenforceable. On December 12,
1997, following a two-week trial, the jury returned a verdict that STEAG
willfully infringed the `761 patent and that the patent was not invalid. The
jury awarded the Company damages of $3,105,000. The District Court subsequently
upheld the jury's verdict and entered final judgment and a permanent injunction
in the Company's favor. STEAG has appealed the verdict and various rulings to
the Court of Appeals for the Federal Circuit. The Company filed a cross appeal
on the grounds that the District Court erred in denying the Company's request
for enhancement of damages pursuant to 35 U.S.C. ss.ss. 284 and 285. The parties
are currently briefing the issues on appeal.
15
<PAGE>
On September 11, 1995, the Company brought an action against YieldUP
International Corp. ("YieldUP"), entitled CFMT, INC. AND CFM TECHNOLOGIES, INC.
V. YIELDUP INTERNATIONAL CORP., Civil Action No. 95-549-RRM, in the United
States District Court for the District of Delaware. The Company seeks damages
and a permanent injunction to prevent further infringement. YieldUP has denied
infringement and has asserted, among other things, that the subject patent is
invalid and unenforceable. On October 14, 1997, the District Court issued a
decision granting summary judgment in favor of YieldUP on the grounds that the
process used in YieldUP's processing equipment does not infringe the `761
patent. The District Court subsequently granted the Company's request for
reargument of the decision, and the Company and YieldUP have submitted
additional briefs on the issue. The District Court has not issued a decision on
the reargued summary judgment motion.
In March 1997, Dainippon Screen Mfg. Co. Ltd. and DNS Electronics LLC
(collectively "DNS") filed an action against the Company entitled DAINIPPON
SCREEN MANUFACTURING CO., LTD. AND DNS ELECTRONICS, LLC V. CFMT, INC. AND CFM
TECHNOLOGIES, INC., Civil Action No. 97-20270 JW in the United States District
Court for the Northern District of California. In this action, DNS requested the
Court to declare that DNS does not infringe the `761 patent and that the patent
is invalid and unenforceable. DNS sought monetary damages and injunctive relief
for alleged violations of the Lanham Act, unfair competition, tortious
interference with prospective economic advantage, and unfair advertising. The
Court dismissed this action on the grounds of lack of personal jurisdiction and
absence of an indispensable party. DNS appealed this ruling, and the appellate
court reversed the district court decision as to the patent causes of action on
April 29, 1998. The case has been returned to the United States District Court
for the Northern District of California, although the causes of action relating
to the Lanham Act, unfair competition, tortious interference with prospective
economic advantage, and unfair advertising have been dismissed. The Company has
answered the complaint brought by DNS and has counterclaimed, alleging
infringement by DNS of the `532, `123, and `761 patents. Discovery is presently
ongoing with a claims construction hearing set for September 10, 1999, and trial
currently set to begin May 1, 2000.
On December 30, 1999, the Company filed an additional action against
YieldUP International Corp., Civil Action No. 98-790-RRM, in the United States
District Court for the District of Delaware. The Company is alleging patent
infringement of the `123 and `532 patents by YieldUp and is seeking a permanent
injunction to prevent YieldUP from using, making or selling equipment that
violates these patents. In addition, the Company is seeking damages for past
infringement.
There can be no assurance that when any of the foregoing litigation is
final that any of the claims of the patents in suit will be found to encompass
use of the competitors' products or that the subject patents will not be found
to be unenforceable or invalid. A finding of invalidity or unenforceability
could result in the Company's competitors being able to develop products using
the Company's proprietary technology, which in turn could have a material
adverse effect on the Company. Further, there can be no assurance that any
rights granted under any of the Company's patents will provide adequate
protection to the Company, or that the Company will have sufficient resources to
continue to prosecute its rights in the current actions or others.
16
<PAGE>
Furthermore, in Europe, STEAG has filed nullification proceedings against
the Company's drying patents in Germany (DE68921757.8), UK (EP428,784), France
(EP428,784), Netherlands (23184), and Ireland (66389). The Company is proceeding
to defend these patents. These proceedings could result in the nullification of
the subject patents in the respective countries.
In Japan, the Company filed an Invalidation Appeal of Japanese Patent No,
2634350 against Dainippon Screen Manufacturing K.K.
Although there are no other pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any claims that the Company is infringing intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by parties in the future. Also, there can be no assurance in the event
of such claims of infringement that the Company will be able to obtain licenses
on reasonable terms.
The Company's involvement in any patent dispute or other intellectual
property dispute or action to protect trade secrets and know-how could result in
a material adverse effect on the Company's business. Adverse determinations in
current litigation or any other litigation in which the Company may become
involved could subject the Company to significant liabilities to third parties,
require the Company to grant licenses to or seek licenses from third parties,
and prevent the Company from manufacturing and selling its products. Any of
these situations could have a material adverse effect on the Company.
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 and cash requirements 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 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.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on March 4, 1999. The
following are results of the voting on the proposal submitted to the stockholder
at the annual meeting:
Proposal No. 1:
Election of Directors. The following individuals were elected as directors:
NAME FOR WITHHELD
---- --- --------
Christopher F. McConnell 6,868,305 283,332
Roger A. Carolin 6,868,305 283,332
James J. Kim 6,889,381 262,256
Brad S. Mattson 6,889,381 262,256
Milton S. Stearns, Jr. 6,889,381 262,256
Proposal No. 2:
Approval of an Amendment to the Amended and Restated 1995 Incentive Plan:
For AGAINST
--------- ---------
3,135,626 1,983,711
Proposal No. 3:
Approval of an Amendment to the Amended and Restated Non-Employee Directors
Stock Option Plan:
For AGAINST
--------- ---------
5,583,973 1,484,557
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<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: March 15, 1999
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
19
<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: March 15, 1999
CFM Technologies, Inc.
(Registrant)
By:
--------------------------------
Roger A. Carolin
Chief Executive Officer
By:
--------------------------------
Lorin J. Randall
Chief Financial Officer
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
- -------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<CAPTION>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-START> NOV-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 11,775
<SECURITIES> 24,980
<RECEIVABLES> 14,444
<ALLOWANCES> 81
<INVENTORY> 13,751
<CURRENT-ASSETS> 69,819
<PP&E> 19,015
<DEPRECIATION> (7,117)
<TOTAL-ASSETS> 87,281
<CURRENT-LIABILITIES> 10,437
<BONDS> 2,051
0
0
<COMMON> 81,033
<OTHER-SE> (6,240)
<TOTAL-LIABILITY-AND-EQUITY> 87,281
<SALES> 6,052
<TOTAL-REVENUES> 6,052
<CGS> 4,837
<TOTAL-COSTS> 6,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (426)
<INCOME-PRETAX> (4,382)
<INCOME-TAX> (1,490)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,892)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
