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
July 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.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2786977
------------------------------ -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
150 OAKLANDS BLVD. EXTON, PA 19341
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 280-8300
1336 ENTERPRISE DRIVE, WEST CHESTER, PA 19380
--------------------------------------------------------
(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 13, 1999 was 7,827,480.
1
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CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART 1. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of
July 31, 1999 and October 31, 1998 ................. 3
Consolidated Statements of Operations (unaudited)for
the Three and Nine months ended July 31, 1999
and 1998 ............................................ 5
Consolidated Statements of Cash Flows (unaudited)
for the Nine months ended July 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 6. Exhibits and Reports on Form 8-K .................. 16
Signatures ........................................ 17
Exhibit Index ..................................... 18
2
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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 1999 1998
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 16,500 $ 31,649
Short-term investments 8,490 9,745
Accounts receivable 19,236 14,040
Inventories 14,989 13,657
Prepaid expenses and other 2,843 5,020
-------- --------
Total current assets 62,058 74,111
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land 540 540
Building and improvements 5,791 5,981
Machinery and equipment 13,558 9,599
Furniture and fixtures 1,521 1,423
-------- --------
21,410 17,543
Less - Accumulated depreciation
and amortization (7,975) (6,377)
-------- --------
Net property, plant and equipment 13,435 11,166
-------- --------
OTHER ASSETS 8,147 4,536
======== ========
$ 83,640 $ 89,813
======== ========
The accompanying notes are an integral part of these financial statements.
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CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
LIABILITIES AND SHAREHOLDERS' EQUITY
July 31, October 31,
1999 1998
----------- -----------
CURRENT LIABILITIES:
Current portion of long-term debt 595 $ 672
Accounts payable 4,096 1,800
Accrued expenses 7,754 7,373
----------- -----------
Total current liabilities 12,445 9,845
----------- -----------
LONG-TERM DEBT 1,768 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; 8,001,180 and 7,964,366
shares issued 81,260 81,033
Treasury stock, 167,100 and 96,200 common
shares at cost (1,390) (762)
Deferred compensation (29) (47)
Retained earnings (10,414) (2,442)
----------- -----------
Total shareholders' equity 69,427 77,782
=========== ===========
83,640 $ 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)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
-------------------------- -----------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET SALES $ 9,620 $ 3,780 $ 22,396 $ 27,604
COST OF SALES 6,064 4,652 15,169 18,989
-------- -------- -------- --------
Gross profit (loss) 3,556 (872) 7,227 8,615
-------- -------- -------- --------
OPERATING EXPENSES:
Research, development and engineering 2,492 2,307 7,674 8,570
Selling, general and administrative 4,821 3,491 12,738 13,416
-------- -------- -------- --------
Total operating expenses 7,313 5,798 20,412 21,986
-------- -------- -------- --------
Operating loss (3,757) (6,670) (13,185) (13,371)
INTEREST (INCOME) EXPENSE, NET (283) (415) (1,106) (1,357)
-------- -------- -------- --------
Loss before income taxes (3,474) (6,255) (12,079) (12,014)
INCOME TAX BENEFIT (1,181) (1,876) (4,107) (3,604)
-------- -------- -------- --------
NET LOSS $ (2,293) $ (4,379) $ (7,972) $ (8,410)
======== ======== ======== ========
NET LOSS PER COMMON SHARE:
Basic $ (0.29) $ (0.55) $ (1.01) $ (1.06)
======== ======== ======== ========
Diluted $ (0.29) $ (0.55) $ (1.01) $ (1.06)
======== ======== ======== ========
SHARES USED IN COMPUTING NET
LOSS PER COMMON SHARE:
Basic 7,852 7,921 7,859 7,918
======== ======== ======== ========
Diluted 7,852 7,921 7,859 7,918
======== ======== ======== ========
</TABLE>
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)
Nine Months Ended
July 31,
----------------------
1999 1998
---- ----
OPERATING ACTIVITIES:
Net loss $ (7,972) $ (8,410)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 1,628 2,182
Deferred compensation 18 18
Deferred income tax benefit (4,107) (985)
(Increase) decrease in -
Accounts receivable (5,196) 17,652
Inventories (1,332) (1,226)
Prepaid expenses and other current assets 2,458 (2,279)
Other assets 20 110
Increase (decrease) in -
Accounts payable 2,296 (5,818)
Accrued expenses 546 (2,172)
-------- --------
Net cash used in operating
activities (11,641) (928)
-------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments (29,727) (24,601)
Proceeds from short-term investments 30,982 26,946
Purchases of property, plant and equipment (3,867) (2,622)
-------- --------
Net cash used in investing
activities (2,612) (277)
-------- --------
FINANCING ACTIVITIES:
Payments on long-term debt (495) (448)
Proceeds from sale of common stock, net 225 210
Proceeds from exercise of stock options 2 6
Purchases of Treasury Stock (628) (201)
-------- --------
Net cash used in financing activities (896) (433)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (15,149) (1,638)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,649 26,865
======== ========
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,500 $ 25,227
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest expense $ 160 $ 111
Cash received for interest income 1,300 1,652
Cash paid for income taxes (2,505) 139
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:
July 31, October 31,
1999 1998
----------- -----------
Billed $16,383,000 $10,058,000
Unbilled 2,853,000 3,982,000
----------- -----------
19,236,000 $14,040,000
=========== ===========
Unbilled receivables represent final retainage amounts to be billed
upon completion of the installation process.
(3) INVENTORIES:
July 31, October 31,
1999 1998
----------- -----------
Raw materials $ 9,336,000 $ 8,669,000
Work in progress 5,653,000 4,988,000
----------- -----------
$14,989,000 $13,657,000
=========== ===========
(4) NET LOSS PER COMMON 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. Inclusion of shares of common stock potentially issuable upon
the exercise of outstanding stock options would have been antidilutive in
the calculation of diluted net loss per common share for the three and
nine month periods ended July 31, 1999 and 1998, and therefore was not
included in the calculation.
7
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The net loss and weighted average common shares outstanding for
purposes of calculating net loss per common share are computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
------------------------------- -------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss used for basic
And diluted net loss
Per common share $(2,293,000) $(4,379,000) $(7,972,000) $(8,410,000)
=========== =========== =========== ===========
Weighted average common
shares outstanding used for
basic and diluted net loss
per common share 7,852,000 7,921,000 7,859,000 7,918,000
=========== =========== =========== ===========
Net loss per common share,
basic and diluted $ (0.29) $ (0.55) $ (1.01) $ (1.06)
=========== =========== =========== ===========
</TABLE>
(5) GEOGRAPHIC INFORMATION:
Historically, a significant portion of the Company's sales has been to
Asian companies. Included in accounts receivable as of July 31, 1999 and
October 31, 1998, was $10.9 and $10.0 million, respectively, owed by Asian
companies, of which $4.3 and $2.9 million, respectively, was currently
due.
(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, 1999, the
Company had repurchased 167,100 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 $1.0 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. The proportion of the Company's total net sales represented by
international sales has been lower during fiscal 1999 than it had been
historically.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated, expressed as a percentage of net sales.
<TABLE>
<CAPTION>
Three Month Period Nine Month Period
Ended Ended
July 31, July 31,
------------------------- ------------------------
1999 1998 1999 1998
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit (loss) 37.0% (23.1)% 32.3% 31.2%
Research, development and
engineering 25.9% 61.0% 34.3% 31.0%
Selling, general and
administrative 50.1% 92.4% 56.9% 48.6%
Loss from operations (39.1)% (176.5)% (58.9)% (48.4)%
Loss before income taxes (36.1)% (165.5)% (53.9)% (43.5)%
Net Loss (23.8)% (115.8)% (35.6)% (30.5)%
</TABLE>
9
<PAGE>
Net Sales. Net sales for the three month period ended July 31, 1999 of
$9.6 million increased 154% from $3.8 million in the corresponding period in
fiscal 1998. International sales represented 40.1% and 90.7% of total net sales
for the three months ended July 31, 1999 and 1998, respectively. Net sales in
the second quarter of fiscal 1999 were $6.7 million. The increase in net sales
for the third quarter of 1999 was the result of improved business conditions in
the semiconductor industry. The corresponding period of 1998 was impacted by the
broad semiconductor industry downturn caused by general over-capacity in the
semiconductor and FPD manufacturing industries and exacerbated by the Asian
economic and currency situation.
For the nine months ended July 31, 1999, net sales of $22.4 million
decreased 18.9% from $27.6 million during the nine months ended July 31, 1998.
International sales represented 36.8% and 36.9% of total net sales for the nine
months ended July 31, 1999 and 1998, respectively. The decline in net sales for
nine months ended July 31, 1999, is primarily the result of the commencement of
the broad semiconductor industry downturn in the second fiscal quarter of 1998.
Gross Profit (Loss). Gross profit (loss) as a percentage of net sales
improved from a negative 23.1% for the three-month period ended July 31, 1998 to
37.0% for the same corresponding period in fiscal 1999. Gross profit for the
third quarter of fiscal 1998 was adversely affected by a very low rate of
production as a result of the low sales rate, and include the impact of costs
associated with slowed inventory turnover and unabsorbed production costs. Gross
profit was 36.5% in the second quarter of fiscal 1999.
During the first nine months of fiscal 1999, gross profit increased to
32.3% from 31.0% for the corresponding nine months of fiscal 1998. This increase
was the result of production efficiencies realized from the Company's new
manufacturing facility which was occupied in February 1999. 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 and the customization of systems.
Research, Development and Engineering. Research, development and
engineering expenses for the quarter ended July 31, 1999 increased by 8% to $2.5
million from $2.3 million recorded in the corresponding period during fiscal
1998. Research, development and engineering expenses were $2.7 million in the
second quarter of 1999. 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, 1999 decreased to $7.7 million, or 34.3% of net sales, from $8.6
million, or 31.1% of net sales, for the corresponding period during fiscal 1998.
During the nine month period ended July 31, 1999, work continued, but at a
reduced rate, on the Company's joint development project with Semiconductor 300
(a joint venture of Infineon and Motorola) in Dresden, Germany. As part of this
joint development program, Semiconductor 300 and the Company have qualified the
CFM system's performance for a broad spectrum of production processes using
300mm silicon wafers. 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.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $3.5 million or 92.4% of net sales in the quarter ended
July 31, 1998 to $4.8 million or 50.1% of net sales in the quarter ended July
31, 1999. Selling, general and administrative expenses were $4.4 million for the
second quarter of 1999. Selling, general and administrative expenses for the
third quarter of fiscal 1999 reflect higher patent litigation costs compared to
the same period in the prior year. The Company anticipates that selling, general
and administrative expenses will increase in the fourth quarter of 1999 due to
further increases in patent litigation costs.
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<PAGE>
For the nine months ended July 31, 1999, selling, general and
administrative expenses were $12.7 million, or 56.9% of net sales, compared to
$13.4 million, or 48.6% of net sales, for the nine months ended July 31, 1998.
During the nine months ended July 31, 1999, selling, general and administrative
expenses decreased due to lower sales commissions offset by an increase in legal
expenses related to litigation undertaken to enforce the Company's patents and
the recognition of an uncollectible account and commission expenses associated
with sales in Asia in fiscal 1999.
Interest (Income) Expense, Net. Interest income, net of interest expense,
was $415,000 and $283,000 in the quarters ended July 31, 1998 and 1999,
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, 1998 and 1999 was $1,357,000 and $1,106,000, 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 in June 1996 and in a follow-on public offering completed in
February 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 1999.
Income Taxes. The Company's effective tax rate was 34% for the three and
nine-month periods ended April 30, 1999, compared with 30% for the corresponding
periods in 1998. The income tax benefit recorded in 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 asset 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 anticipated. Additionally, the ultimate realization of this asset could be
negatively impacted by market conditions and other variables not known or
anticipated at this time.
BACKLOG
As of July 31, 1999, the Company's backlog of orders was $10.7 million,
compared to $14.6 million as of July 31, 1998. Customer orders for the third
quarter of fiscal 1999 were $12.7 million and $24.3 million for the first nine
months of fiscal 1999. All orders recorded during the third quarter of fiscal
1999 were for semiconductor systems. Orders from Asia accounted for 62% of total
orders for the third quarter, 35% were from the U.S. and the remainder were from
Europe. 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, 1999, the Company had $16.5 million in cash and cash
equivalents, $8.5 million in short-term investments and $49.6 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.
Approximately $11.6 million was used in operating activities during the
nine months ended July 31, 1999, as compared with $1.0 million used in operating
activities during the nine months ended July 31, 1998. The cash used in
operating activities during the nine months ended July 31, 1999 was primarily
the result of the net loss of $8.0 million and an increase in accounts
receivable of $5.2 million. As of September 10, 1999, $8.3 million of the
accounts receivable as of July, 31, 1999 had been collected, $4.3 million of
which were from Asian customers. Cash provided by operating activities was
derived from the receipt of income tax payments of $2.5 million related to the
carry back of net operating losses to prior periods, additional accounts payable
of $2.3 million and depreciation and amortization of $1.6 million.
11
<PAGE>
For the nine months ended July 31, 1998, approximately $1.0 million was
used in operating activities. The net cash used was the result of a 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 offset by a decrease in accounts receivable of $17.7 million.
The Company had accounts receivable of $10.9 and $8.3 million due from
Asian companies as of July 31, 1999 and 1998, respectively. Management performs
an ongoing evaluation of the status of accounts receivable balances, including
the effect of the 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.
Acquisitions of property, plant and equipment were $3.9 million for the
first nine months of fiscal 1999 and $2.6 million for the first nine months of
fiscal 1998. The Company commenced the lease of its new 60,000 square foot
production facility during the first quarter of 1999 and its new 80,000 square
foot administrative facility during the second quarter of 1999. Fiscal 1999
acquisitions included improvements to the Company's newly leased production and
administrative facilities, added engineering test equipment, and new telephone
and networking equipment for these facilities.
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,
1999, the Company had repurchased 167,100 shares at a cost of $1.4 million.
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 $0.7
million and a $7.5 million unsecured revolving demand line of credit with an
interest rate equal to the bank's prime rate. The mortgage bears interest at an
annual rate of 8.9%. As of July 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 $1.1 million bearing interest at rates ranging from
7% to 12% per annum.
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.
YEAR 2000 READINESS DISCLOSURE
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).
12
<PAGE>
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.
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.
13
<PAGE>
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 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 $10,000. The Company is implementing Year 2000 compliant
desktop software and expects to have all computers using a date comparison
function upgraded by October 1999 at a cost to the Company of approximately
$15,000. Year 2000 compliant network server software has been obtained and
installed on all of the Company's network servers.
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. The
Company has begun to prepare operational contingency plans, assuming a
disruption of business operations occurs for each supplier not reporting
readiness. These plans will be completed and implemented prior to year-end.
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 $45,000 and future costs for internal labor
are expected to be approximately $10,000. Costs to replace desktop computers are
estimated to be $10,000 and software upgrades for the desktop computers are
estimated to be $15,000. The new telecommunications equipment, heating and
air-conditioning systems, and elevators in the Company's new facilities in
Exton, Pennsylvania were acquired in connection with 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/or the inability of
customers to take delivery of currently ordered equipment, order additional
equipment or pay the Company for products already purchased.
14
<PAGE>
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 assurance that
unanticipated increased costs will not have a material effect on the Company's
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"). The
Company has also asserted it U.S. Patent Nos. 4,778,532 and 4,917,123 against
one of the defendants involved in an action over the `761 patent.
On July 10, 1995, the Company filed an action against STEAG Microtech,
Inc. ("STEAG"), captioned 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 appealed the
verdict and various rulings to the United States Court of Appeals for the
Federal Circuit ("CAFC"). On May 13, 1999, the CAFC affirmed the judgment of the
District Court in all aspects except one. With respect to infringement, the CAFC
vacated the judgment and remanded the case to the District Court for
reconsideration of its holding of literal infringement, instructing the court to
consider whether there was substantial evidence in the record to support one
aspect of the jury's infringement finding. The Company petitioned for rehearing
of this CAFC decision. The CAFC denied the rehearing and remanded the case to
the District Court. Steag and the Company each filed motions asking the District
Court to resolve the issue in its favor. The District Court has not yet ruled on
the issue.
15
<PAGE>
On September 11, 1995, the Company filed an action against YieldUP
International Corp. ("YieldUP"), captioned 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 sought damages
and a permanent injunction to prevent further infringement. YieldUP denied
infringement and 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 captioned 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 October 22, 1999, and trial
currently set to begin no earlier than May 1, 2000.
On December 30, 1998, the Company filed an additional action against
YieldUP, Civil Action No. 98-790-RRM, in the United States District Court for
the District of Delaware. The Company alleges patent infringement of the `123
and `532 patents by YieldUP and seeks 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. YieldUP recently
has amended its answer to the Company's complaint, asserting counterclaims for
alleged tortious interference with prospective economic advantage and
defamation, and seeking compensatory and punitive damages. Discovery is
presently ongoing and trial is currently set to begin May 1, 2000.
There can be no assurance that when any of the foregoing litigation is
final, 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.
STEAG has filed nullification proceedings against the Company's drying
patents in Germany (DE68921757.8), UK (EP428,784), France (EP428,784),
Netherlands (23184), Ireland (66389), and Japan(2,135,270). The Company is
proceeding to defend these patents. These proceedings could result in the
nullification of the subject patents in some or all of the respective countries.
The Company chose to abandon the UK patent (EP 428,784) because in the Company's
judgement, the anticipated costs of defending the nullity action are not
warranted in view of the patent's limited added value to CFM's existing patent
portfolio in the UK. The Company may choose to abandon patents in other foreign
countries if the anticipated costs of defending the nullity action are not
warranted in view of the patent's added value to CFM's existing patent portfolio
in that country. Decisions, if any, to abandon additional patents will be made
on a country-by-country basis.
16
<PAGE>
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, 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.
17
<PAGE>
PART II. OTHER INFORMATION
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: September 14, 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>
EXHIBIT INDEX
EXHIBIT
27 Financial Data Schedule.
20
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