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, 2000.
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
(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 04, 2000 was 8,067,175.
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
Consolidated Balance Sheets (unaudited) as of
July 31, 2000 and October 31, 1999 ................. 3
Consolidated Statements of Operations (unaudited)for
the Three and Nine months ended July 31, 2000
and 1999 ............................................ 5
Consolidated Statements of Cash Flows (unaudited)
for the Nine months ended July 31, 2000 and 1999..... 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 1. Legal Proceedings ................................. 17
Item 6. Exhibits and Reports on Form 8-K .................. 17
Signatures ........................................ 18
Exhibit Index ..................................... 19
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
July 31, October 31,
2000 1999
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $10,149 $13,967
Short-term investments 3,665 10,249
Accounts receivable 14,940 14,826
Inventories 15,210 17,039
Prepaid expenses and other 681 796
Deferred income taxes -- 1,958
------- -------
Total current assets 44,645 58,835
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land 540 540
Building and improvements 6,057 5,932
Machinery and equipment 16,064 14,239
Furniture and fixtures 1,574 1,565
------- -------
24,235 22,276
Less - Accumulated depreciation
and amortization (10,868) (8,739)
------- -------
Net property, plant and equipment 13,367 13,537
------- -------
OTHER ASSETS 314 9,714
------- -------
$58,326 $82,086
======= =======
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
July 31, October 31,
2000 1999
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt $ 545 $ 589
Accounts payable 2,845 3,930
Accrued expenses 8,976 9,246
-------- --------
Total current liabilities 12,366 13,765
-------- --------
LONG-TERM DEBT 1,252 1,628
-------- --------
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; 8,066,875 and
8,035,328 shares issued 81,804 81,495
Treasury stock, 189,617 and 223,100
common shares at cost (1,560) (1,858)
Deferred compensation (116) (23)
Retained earnings (35,420) (12,921)
-------- --------
Total shareholders' equity 44,708 66,693
-------- --------
$ 58,326 $ 82,086
======== ========
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31, July 31,
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $ 12,953 $ 9,620 $ 37,678 $ 22,396
COST OF SALES 8,273 6,064 23,923 15,169
-------- -------- -------- --------
Gross profit 4,680 3,556 13,755 7,227
-------- -------- -------- --------
OPERATING EXPENSES:
Research, development and engineering 2,512 2,492 7,181 7,674
Selling, general and administrative 5,948 4,821 18,169 12,738
-------- -------- -------- --------
Total operating expenses 8,460 7,313 25,350 20,412
-------- -------- -------- --------
Operating loss (3,780) (3,757) (11,595) (13,185)
INTEREST (INCOME) EXPENSE, Net (149) (283) (565) (1,106)
-------- -------- -------- --------
Loss before income taxes (3,631) (3,474) (11,030) (12,079)
INCOME TAX PROVISION (BENEFIT) -- (1,181) 11,397 (4,107)
-------- -------- -------- --------
NET LOSS $ (3,631) $ (2,293) $(22,427) $ (7,972)
======== ======== ======== ========
NET LOSS PER COMMON SHARE:
Basic $ (0.46) $ (0.29) $ (2.85) $ (1.01)
======== ======== ======== ========
Diluted $ (0.46) $ (0.29) $ (2.85) $ (1.01)
======== ======== ======== ========
SHARES USED IN COMPUTING NET LOSS PER
COMMON SHARE:
Basic 7,874 7,852 7,865 7,859
======== ======== ======== ========
Diluted 7,874 7,852 7,865 7,859
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Nine Months Ended
July 31,
-----------------------
2000 1999
-------- --------
OPERATING ACTIVITIES:
Net loss $(22,427) $ (7,972)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation and amortization 2,159 1,628
Deferred compensation 83 18
Deferred income tax provision (benefit) 11,376 (4,107)
(Increase) decrease in -
Accounts receivable (114) (5,196)
Inventories 1,829 (1,332)
Prepaid expenses and other current assets 115 2,458
Other assets (48) 20
Increase (decrease) in -
Accounts payable (1,085) 2,296
Accrued expenses (270) 546
-------- --------
Net cash used in operating activities (8,382) (11,641)
-------- --------
INVESTING ACTIVITIES:
Purchases of short-term investments (4,912) (29,727)
Proceeds from sale of short-term investments 11,496 30,982
Purchases of property, plant and equipment (1,959) (3,867)
-------- --------
Net cash provided by (used in) investing
activities 4,625 (2,612)
-------- --------
FINANCING ACTIVITIES:
Payments on long-term debt (420) (495)
Proceeds from sale of common stock, net -- 225
Proceeds from exercise of stock options 133 2
Proceeds from sale of treasury stock 226 --
Purchases of Treasury Stock -- (628)
-------- --------
Net cash used in financing activities (61) (896)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (3,818) (15,149)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 13,967 31,649
-------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 10,149 $ 16,500
-------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense $ 139 $ 160
Cash received for interest income 747 1,300
Cash paid (refunded) for income taxes 6 (2,505)
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION:
The condensed financial statements included herein have been prepared by
CFM Technologies, Inc. without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. These statements include all adjustments
that, in the opinion of management, are necessary to provide a fair statement of
the results for the periods covered. These financial statements should be read
in conjunction with the audited financial statements and the notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999. The results of operations for the interim periods presented
are not necessarily indicative of the results for the full year.
(2) INVENTORIES:
July 31, October 31,
2000 1999
----------- -----------
Raw materials $ 7,560,000 $ 9,282,000
Work in progress 6,363,000 6,813,000
Finished Goods 1,287,000 944,000
----------- -----------
$15,210,000 $17,039,000
=========== ===========
Finished Goods is comprised of evaluation units located at customer sites.
(3) 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, 2000 and 1999, and therefore was not included in the calculation.
7
<PAGE>
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,
----------------------------- -------------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss used for basic
and diluted net loss
per common share $(3,631,000) $(2,293,000) $(22,427,000) $(7,972,000)
=========== =========== =========== ===========
Weighted average common
shares outstanding used
for basic and diluted
net loss per common share 7,874,000 7,852,000 7,865,000 7,859,000
=========== =========== =========== ===========
Net loss per common share,
basic and diluted $(0.46) $(0.29) $(2.85) $(1.01)
=========== =========== =========== ===========
</TABLE>
(4) GEOGRAPHIC INFORMATION:
Historically, a significant portion of the Company's sales has been to
Asian companies. Sales to Asian customers for the three and nine months ended
July 31, 2000 were $3,826,000 and $18,649,000 respectively. Accounts receivable
as of July 31, 2000 included $4,215,000 due from Asian customers.
(5) INCOME TAXES:
Based on an assessment of the Company's recent earnings history and
uncertainties related to expected future taxable income, management has
determined that it can no longer make the assertion that it is more likely than
not that any of the net deferred tax assets recorded as of January 31, 2000
totaling $12,578,000 will be realized in future periods. As a result, the
Company recorded a full valuation allowance against its net deferred tax assets
in the fiscal quarter ended April 30, 2000. The valuation allowance was recorded
in the income tax provision (benefit) in the accompanying statements of
operations for the three and nine months ended July 31, 2000. In addition, based
on the factors noted above the Company has recorded a full valuation allowance
against the income tax benefit for the quarter ended July 31, 2000.
(6) NEW ACCOUNTING PRONOUNCEMENT:
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is reviewing these views and assessing whether any of these
interpretations of generally accepted accounting principles may cause the
Company to report a change in accounting principle. In compliance with SAB 101,
the Company is required to and will make such a determination and report the
impact of such a change, if any, no later than the fourth quarter of fiscal year
2001. While management believes that its revenue recognition policies conform
with the generally accepted accounting principles that have been used
consistently in practice in the capital equipment industry, certain issues
raised in SAB 101, including delivery and performance revenue recognition
criteria, could be interpreted to cause a change in accounting principle by the
Company and many other companies in the capital equipment industry. At this
time, the effect of SAB 101 on the Company's operating results in any future
period cannot be fully determined; however, such a change could materially
adversely affect the Company's financial position and results of operations.
8
<PAGE>
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
MERGER AGREEMENT WITH MATTSON TECHNOLOGY, INC.
CFM Technologies, Inc. ("CFM" or the "Company") announced on June 28, 2000
that it entered into a definitive agreement to be acquired by Mattson
Technology, Inc. ("Mattson") (Nasdaq:MTSN). Mattson has also announced that it
would acquire part of STEAG Electronic Systems AG's ("STEAG") Semiconductor
Equipment Division in a related transaction.
Under the terms of the agreements, shareholders of CFM would own
approximately 12 percent of the resulting company, which is expected to rank
among the world's top 15 semiconductor equipment suppliers with annual revenues
in excess of $500 million. The agreement provides for the exchange of 0.5223
Mattson common shares for each share of CFM common stock. The transaction is
expected to be accounted for as a purchase.
The Boards of Directors of Mattson and CFM have approved the agreement and
due diligence has been completed. Based on the terms of the agreements, the
merger of CFM with Mattson is contingent upon a closing between Mattson and
STEAG. The agreement between Mattson and CFM is subject to customary closing
conditions, including shareholder approval by both companies and regulatory
approvals, and is expected to close on or about January 1, 2001. Brad Mattson,
who controls 18% of Mattson common stock, and Christopher F. McConnell, CFM's
Chairman, who controls 14% of CFM common stock, have agreed to support and vote
in favor of the transaction.
As a result of the transaction, STEAG has withdrawn its appeal of a federal
district court judgment that it infringed a CFM patent covering
Direct-Displace(TM) Drying, and will confirm the court's judgment that the
patent is valid and enforceable. This will settle the companies' patent dispute
with all complaints withdrawn and the validity of CFM's patents upheld. The
Company granted to STEAG a non-exclusive, non-transferable worldwide license,
without the right to grant sublicenses, to make, have made, use, sell, offer for
sale, and import licensed products during the term of the agreement. The
particular CFM patent which was infringed by STEAG is also a subject of pending
suits against Dainippon Screen Manufacturing Ltd. and FSI International Corp.
See "Litigation" below.
CFM AND MATTSON PLAN TO FILE A JOINT PROXY STATEMENT/PROSPECTUS AND OTHER
RELEVANT DOCUMENTS WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION IN
CONNECTION WITH THE PLANNED MERGER OF CFM AND MATTSON. BOTH MATTSON AND CFM
EXPECT TO MAIL A PROXY STATEMENT/PROSPECTUS TO THEIR RESPECTIVE STOCKHOLDERS
CONTAINING INFORMATION ABOUT THE TRANSACTION. INVESTORS ARE URGED TO READ THE
PROXY STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC
CAREFULLY WHEN THEY ARE AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION ABOUT MATTSON, CFM, THE STEAG BUSINESS BEING COMBINED WITH MATTSON,
AND THE PROPOSED MERGER. INVESTORS SHOULD READ THE PROXY STATEMENT/PROSPECTUS
AND OTHER RELEVANT DOCUMENTS BEFORE MAKING ANY VOTING OR INVESTMENT DECISIONS.
INVESTORS AND SECURITY HOLDERS WILL BE ABLE TO OBTAIN FREE COPIES OF THESE
DOCUMENTS THROUGH THE WEB SITE MAINTAINED BY THE SEC AT HTTP://WWW.SEC.GOV.
COPIES OF DOCUMENTS FILED WITH THE SEC BY MATTSON MAY BE OBTAINED FREE OF CHARGE
BY CONTACTING PETER BROWN OF MATTSON AT (800) MATTSON. COPIES OF DOCUMENTS FILED
WITH THE SEC BY CFM MAY BE OBTAINED FREE OF CHARGE FROM CFM THROUGH JEFF RANDALL
AT (610) 280-8509.
9
<PAGE>
IN ADDITION, MATTSON AND CFM FILE ANNUAL, QUARTERLY AND SPECIAL REPORTS,
PROXY STATEMENTS AND OTHER INFORMATION WITH THE SEC. YOU MAY READ AND COPY ANY
REPORTS, STATEMENTS AND OTHER INFORMATION FILED BY MATTSON AND CFM AT THE SEC
PUBLIC REFERENCE ROOMS AT 450 FIFTH STREET, NW, WASHINGTON, D.C. 20549 OR AT THE
SEC'S OTHER PUBLIC REFERENCE ROOMS IN NEW YORK, NEW YORK AND CHICAGO, ILLINOIS.
PLEASE CALL THE SEC AT 1-800-SEC-0330 FOR FURTHER INFORMATION ON PUBLIC
REFERENCE ROOMS. MATTSON'S AND CFM'S FILINGS WITH THE SEC ARE ALSO AVAILABLE TO
THE PUBLIC FROM COMMERCIAL DOCUMENT RETREIVAL SERVICES AND AT THE WEB SITE
MAINTAINED BY THE SEC AT HTTP://WWW.SEC.GOV. CFM, ITS DIRECTORS, AND CERTAIN
EXECUTIVE OFFICERS AND MEMBERS OF MANAGEMENT AND EMPLOYEES MAY BE DEEMED TO BE
SOLICITING PROXIES FROM MATTSON'S AND CFM'S STOCKHOLDERS IN FAVOR OF THE
ADOPTION OF THE DEFINITIVE AGREEMENTS AND THE PROPOSED MERGER. INFORMATION
REGARDING THE IDENTITY OF THESE PERSONS AND THEIR INTEREST IN THE SOLICITATION
IS SET FORTH IN A SCHEDULE 14A FILED UNDER RULE 425 OF THE REGULATIONS
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, ON JULY 17, 2000, AND
AVAILABLE FREE OF CHARGE AS SET FORTH ABOVE.
OVERVIEW
The Company designs, manufactures and markets advanced wet processing
equipment for sale to the worldwide semiconductor manufacturing industry. 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 $3.0 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 Taiwan,
Korea, Europe, 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.
RESULTS OF OPERATIONS
The following table sets forth certain financial data for the periods
indicated, expressed as a percentage of net sales:
Three Month Period Nine Month Period
Ended July 31, Ended July 31,
------------------- ------------------
2000 1999 2000 1999
------ ------ ------ ------
Net sales 100.0% 100.0% 100.0% 100.0%
Gross profit 36.1% 37.0% 36.5% 32.3%
Research, development and
engineering 19.4% 25.9% 19.1% 34.3%
Selling, general and
administrative 45.9% 50.1% 48.2% 56.9%
Operating loss (29.2)% (39.1)% (30.8)% (58.9)%
Loss before income taxes (28.0)% (36.1)% (29.3)% (53.9)%
Net loss (28.0)% (23.8)% (59.5)% (35.6)%
10
<PAGE>
Net Sales. Net sales for the three month period ended July 31, 2000 of
$13.0 million increased 34.6% from $9.6 million in the corresponding period in
fiscal 1999. International sales represented 32.3% and 40.1% of total net sales
for the three months ended July 31, 2000 and 1999, respectively. Net sales in
the second quarter of fiscal 2000 were $12.0 million. The increase in net sales
for the third quarter of 2000 was the result of the continuing impact of the
broad semiconductor industry upturn.
For the nine months ended July 31, 2000, net sales of $37.7 million
increased 68% from $22.4 million during the nine months ended July 31, 1999.
International sales represented 53.7% and 36.8% of total net sales for the nine
months ended July 31, 2000 and 1999, respectively. The increase in net sales for
nine months ended July 31, 2000, is primarily the result of the semiconductor
industry upturn.
Gross Profit. Gross profit as a percentage of net sales was slightly lower
at 36.1% for the three-month period ended July 31, 2000 compared to 37.0% for
the same corresponding period in fiscal 1999. Gross profit was 34.5% in the
second quarter of fiscal 2000.
During the first nine months of fiscal 2000, gross profit increased to
36.5% from 32.3% for the corresponding nine months of fiscal 1999. The increase
in the gross profit percentage is attributable to increased manufacturing
production in fiscal 2000. 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, 2000, compared to the
corresponding period of fiscal 1999, remained stable at $2.5 million. Research,
development and engineering expenses were $2.2 million in the second quarter of
fiscal 2000. The Company anticipates that research, development and engineering
spending in the coming quarters will continue at the current level.
Research, development and engineering expenses for the nine months ended
July 31, 2000 decreased slightly to $7.2 million from $7.7 million for the
corresponding period during fiscal 1999. During the nine month period ended July
31, 2000, the Company continued its support of the 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 to $5.9 million or 45.9% of net sales in the quarter ended
July 31, 2000 from $4.8 million or 50.1% of net sales in the quarter ended July
31, 1999. Selling, general and administrative expenses were $6.1 million for the
second quarter of fiscal 2000. Selling, general and administrative expenses for
the third quarter of fiscal 1999 reflects higher patent litigation costs
compared to the same period in the prior year. See "Litigation" below. The
Company anticipates that selling, general and administrative expenses will
continue at current levels.
For the nine months ended July 31, 2000, selling, general and
administrative expenses were $18.2 million, or 48.2% of net sales, compared to
$12.7 million, or 56.9% of net sales, for the nine months ended July 31, 1999.
During the nine months ended July 31, 2000, expenses included approximately $4.1
million related to the Company's ongoing efforts to protect its intellectual
property compared to $1.7 million in the comparable prior year period. Sales
commission expenses were higher in both the three and nine month period of
fiscal 2000 and fiscal 1999 as a result of higher net sales.
Interest (Income) Expense, Net. Interest income, net of interest expense,
was $149,000 and $283,000 for the quarters ended July 31, 2000 and 1999,
respectively.
11
<PAGE>
Interest income, net of interest expense, for the nine months ended July
31, 2000 and 1999 was $565,000 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.
Income Taxes. The Company's effective tax rate was 34% for the three and
nine month periods ended July 31, 1999. The income tax benefit recorded in 1999
was recorded as a deferred income tax asset. Based on an assessment of the
Company's recent earnings history and uncertainties related to expected future
taxable income, management has determined that it can no longer make the
assertion that it is more likely than not that any of the net deferred tax
assets recorded as of January 31, 2000 totaling $12,578,000 will be realized in
future periods. As a result, the Company recorded a full valuation allowance
against its net deferred tax assets in the fiscal quarter ended April 30, 2000.
The valuation allowance was recorded in the income tax provision (benefit) in
the accompanying statements of operations for the nine months ended July 31,
2000. In addition based on the factors noted above the Company has recorded a
full valuation allowance against the income tax benefit for the quarter ended
July 31, 2000.
BACKLOG
As of July 31, 2000, the Company's backlog of orders was $9.9 million,
compared to $10.7 million as of July 31, 1999. Customer orders for the third
quarter of fiscal 2000 were $14.1 million and $37.0 million for the first nine
months of fiscal 2000. Orders from the U.S. accounted for 80% of total orders
for the third quarter, 18% were from Asia and the remainder were from Europe.
For the nine months ended July 31, 2000, U.S. orders accounted for 44.9% of the
total orders, 50.7% were from Asia 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, 2000, the Company had $10.1 million in cash and cash
equivalents, $3.7 million in short-term investments and $32.3 million in working
capital. At October 31, 1999 the Company had $14.0 million in cash and cash
equivalents, $10.2 million in short-term investments and $45.1 million in
working capital.
Approximately $8.4 million was used in operating activities during the nine
months ended July 31, 2000, as compared with $11.6 million used in operating
activities during the nine months ended July 31, 1999. The cash used in
operating activities during the nine months ended July 31, 2000 was primarily
the result of the net loss of $22.4 million and a decrease in accounts payable
of $1.1 million. Cash provided by operating activities was derived from a
decrease in inventories of $1.1 million and non-cash charges of $2.2 million of
depreciation and amortization and $11.4 million related to deferred taxes.
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. 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, an increase in accounts
payable of $2.3 million and non-cash charges of $1.6 million of depreciation and
amortization.
Acquisitions of property, plant and equipment were $2.0 million for the
first nine months of fiscal 2000 and $3.9 million for the first nine months of
fiscal 1999. Acquisitions during the first nine months of fiscal 2000 were
primarily for the purchase of systems control software while acquisitions in the
first nine months of fiscal 1999 were related to the acquisition of leasehold
improvements for the Company's production and administrative facilities.
12
<PAGE>
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 $0.6
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 8.56%. As of July 31, 2000, 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 $0.4 million bearing interest at 2.0% and
to the Chester County Development Council in the amount of $0.05 million bearing
interest at 5.0%. In addition, the Company has outstanding capital lease
obligations in the amount of $.8 million bearing interest at rates ranging from
7% to 12% per annum.
The Company had outstanding accounts receivable of approximately $14.9
million and $14.8 million as of July 31, 2000 and October 31, 1999,
respectively. The Company has recorded an allowance for doubtful accounts of
$13,000 as of July 31, 2000. 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 in order to
determine if any additional allowances or any write-offs are necessary. The
Company may be required to record significant additional allowances in future
periods should it determine that any of its accounts receivable become
uncollectable.
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. 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. It is management's expectation that the announced
transaction with Mattson will take place on or shortly after January 1, 2001, at
which point the Company will be acquired by Mattson (See "Merger Agreement with
Mattson Technology" above).
LITIGATION
The Company is currently litigating three ongoing cases involving the
Company's intellectual property. The Company has asserted claims of its U.S.
Patent No. 4,911,761 (the "`761 patent") against a defendant in CFMT and CFM
Technologies, Inc. v. YieldUP International Corp., Civil Action No. 95-549-RRM,
alleging infringement, inducement of infringement, and contributory
infringement. The Company further asserted claims of U.S. Patent Nos. 4,778,532
(the "'532 patent") and 4,917,123 (the "'123 patent") against this defendant in
a subsequent action, CFMT, Inc. and CFM Technologies. v. YieldUP International
Corp., Civil Action No. 98-790-RRM. In addition, the Company is also both a
defendant and a counterclaim plaintiff in a third litigation, Dainippon Screen
Manufacturing Co., Ltd. and DNS Electronics, LLC v. CFMT, Inc. and CFM
Technologies, Inc., Civil Action No. 97-20270 JW. In this action, the plaintiffs
seek a declaratory judgment of invalidity and unenforceability of the `761
patent and U.S. Patent No. 4,984,597 (the "`597 patent"), and a declaratory
judgment of non-infringement of the `761 patent. The Company has counterclaimed
alleging infringement, inducement of infringement, and contributory infringement
of certain claims of each of the `761 patent, the '532 patent, the '123 patent,
and the `597 patent. Dainippon Screen Manufacturing Co., Ltd. and DNS
Electronics, LLC have also filed an antitrust count against the Company charging
improper use of patents known to be invalid.
On September 11, 1995, the Company brought an action against YieldUP
International Corp. ("YieldUP") 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 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.
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On December 30, 1998, the Company filed an additional lawsuit in the United
States District Court for the District of Delaware charging patent infringement
of the '123 and '532 patents by YieldUP. The Company is seeking a permanent
injunction preventing YieldUP from using, making or selling equipment that
violates these patents and requests damages for past infringement. YieldUP
amended its Answer to the Company's Complaint, asserting counterclaims for
alleged tortious interference with prospective economic advantage and
defamation, a declaratory judgment that the patents are unenforceable due to
applicants' alleged inequitable conduct in obtaining the patents, and seeking
compensatory and punitive damages. Fact discovery in this lawsuit closed on
December 10, 1999. A claims construction and pre-trial hearing for this action
was held on March 15, 2000. On April 4, 2000, the District Court issued an Order
granting a YieldUP motion for summary judgment and denying CFM's cross-motion
for summary judgment. In this Order, the District Court found that the `532 and
`123 patents were both invalid due to lack of enablement. In this same Order,
the District Court construed the claims of the `532 and `123 patents. CFM filed
a motion seeking reconsideration and re-argument of the summary judgment ruling,
which the District Court denied on August 10, 2000. YieldUP has agreed to
withdraw with prejudice the tortious interference and defamation counts. A bench
trial on the remaining inequitable conduct count was held on July 28, 2000. The
District Court has not yet ruled on the inequitable conduct count nor entered
final judgment that the `532 and `123 patents are invalid for lack of
enablement.
In March, 1997, another competitor, Dainippon Screen Mfg. Co. Ltd. and DNS
Electronics LLC (collectively "DNS"), filed a suit against the Company 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 also 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 the patent counts 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 on April 29, 1998. The causes of action relating to the Lanham Act,
unfair competition, tortious interference with prospective economic advantage,
and unfair advertising were dismissed without prejudice. The remainder of the
case has been returned to the district court.
The Company answered DNS's Complaint and counterclaimed, alleging
infringement by DNS of the '532, '123, and `761 patents. A claims construction
hearing was held on November 12, 1999, and an initial Claims Construction Order
issued on December 9, 1999, and two subsequent claims construction Orders were
issued on July 12, 2000. In February, 2000, DNS added two additional counts to
this litigation: one for antitrust violations and additional declaratory
judgment counts that the `597 patent was invalid and unenforceable. The
antitrust count asserts that the Company knowingly brought causes of action
against competitors with patents -- the `761 patent and the `597 patent -- that
the Company knew were invalid or unenforceable. In the new declaratory judgment
count, DNS has asked the court to declare that DNS does not infringe the `597
patent and that this patent is invalid and unenforceable. The Company
counterclaimed asserting infringement, inducement of infringement, and
contributory infringement of the `597 patent. A Markman (i.e., Claims
Construction) hearing on the `597 patent was held on July 21, 2000, and there
has been subsequent briefing as to the proper construction of the asserted
claims of the `597 patent. No claims construction ruling has issued yet as to
the `597 patent. As a result of the additional new counts, the liability trial
now is scheduled for February 2001.
DNS has recently moved the court for permission to update its antitrust
count, and to add new counts for unfair competition, interference with business
relations, and trade libel into the case. That motion is still pending.
Furthermore, as a result of the Summary Judgment finding of invalidity due to
lack of enablement of the `532 and `123 patents in the YieldUP case, DNS has
requested that the counts concerning these two patents be stayed pending further
results in the YieldUP case. The damages issues for all patent and antitrust
counts have been bifurcated, and will be tried only after liability issues have
been resolved.
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The Company has recently settled actions with a third competitor, STEAG, as
a result of the pending mergers involving STEAG, CFM, and Mattson. These settled
actions include an infringement case brought by the Company against Steag in the
United States District Court for the District of Delaware involving the `761
patent, CFMT, Inc. and CFM Technologies, Inc. v. Steag Microtech, Inc., Civil
Action No. 95-CV442, as well as nullification proceedings against the Company's
drying patents in Germany (DE68921757.8), France (EP428,784), Netherlands
(23184), Ireland (66389) and Japan (2,135,270). The settlement agreement between
the Company and STEAG acknowledges that the `761 patent and its foreign
counterparts are valid, enforceable and infringed by STEAG.
As a result of the transaction, STEAG will withdraw its pending appeal of a
federal district court judgment that it infringed a CFM patent covering
Direct-Displace(TM) Drying, and will confirm the court's judgment that the
patent is valid and enforceable. This will settle the companies' patent dispute
with all complaints withdrawn and the validity of CFM's patents upheld. The CFM
patent is also a subject of pending suits against Dainippon Screen Manufacturing
and FSI International Corp - See "Litigation" below.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 - Revenue Recognition in Financial Statements ("SAB
101"). SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company is reviewing these views and assessing whether any of these
interpretations of generally accepted accounting principles may cause the
Company to report a change in accounting principle. In compliance with SAB 101,
the Company is required to and will make such a determination and report the
impact of such a change, if any, no later than the fourth quarter of fiscal year
2001. While management believes that its revenue recognition policies conform
with the generally accepted accounting principles that have been used
consistently in practice in the capital equipment industry, certain issues
raised in SAB 101, including delivery and performance revenue recognition
criteria, could be interpreted to cause a change in accounting principle by the
Company and many other companies in the capital equipment industry. At this
time, the effect of SAB 101 on the Company's operating results in any future
period cannot be fully determined; however, such a change could materially
adversely affect the Company's financial position and results of operations.
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, merger with Mattson
Technology and SAB 101 adoption, 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 manufacturing industries and in the markets served by
the Company's customers, the international economic and political climates,
difficulties or delays in product functionality or performance, the delivery
performance of sole source vendors, the timing of future product releases,
failure to respond adequately to either changes in technology or customer
preferences, changes in pricing by the Company or its competitors, ability to
manage growth, risk of nonpayment of accounts receivable, changes in budgeted
costs, ability to evaluate, identify and correct date recognition problems in
software used by the Company, its customers or suppliers or failure to realize a
successful outcome to pending patent litigation, all of which constitute
significant risks. There can be no assurance that the Company's results of
operations will not be adversely affected by one or more of these factors.
15
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See "Litigation" section of PART I - FINANCIAL INFORMATION, Item 2.
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.27 Change of Control and Severence Agreement dated as of April 10, 2000
between CFM Technologies, Inc. and Christopher F. McConnell
10.28 Change of Control and Severence Agreement dated as of April 10, 2000
between CFM Technologies, Inc. and Roger A. Carolin.
10.29 Amendment No 1. to Employment Agreement dated as of April 10, 2000
between CFM Technologies, Inc. and Lorin J. Randall amending an
Employee Agreement dated October 25, 1999.
10.30 Interim Patent License Agreement dated as of June 28, 2000 between
CFM Technologies, Inc., CFMT, Inc. and STEAG Electronic Systems AG.
[The Registrant has requested confidential treatment for portions of
this Exhibit.]
10.31 Amendment No. 1, Change of Control and Severence Agreement dated as of
June 27, 2000 between CFM Technologies, Inc. and Roger A. Carolin.
10.32 Amendment No. 1 dated as of June 26, 2000, to the Rights Agreement
dated as of April 24, 1997 between CFM Technologies, Inc. and American
Stock Transfer & Trust Co., as Rights Agent.
10.33 Agreement for Termination of Litigation and Nullity Proceedings dated
as of June 27, 2000 between CFM Technologies, Inc. and STEAG Electronic
Systems AG.
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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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, 2000
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
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EXHIBIT INDEX
EXHIBIT
10.27 Change of Control and Severence Agreement dated as of April 10, 2000
between CFM Technologies, Inc. and Christopher F. McConnell
10.28 Change of Control and Severence Agreement dated as of April 10, 2000
between CFM Technologies, Inc. and Roger A. Carolin.
10.29 Amendment No 1. to Employment Agreement dated as of April 10, 2000
between CFM Technologies, Inc. and Lorin J. Randall amending an
Employee Agreement dated October 25, 1999.
10.30 Interim Patent License Agreement dated as of June 28, 2000 between CFM
Technologies, Inc., CFMT, Inc. and STEAG Electronic Systems AG. [The
Registrant has requested confidential treatment for portions of this
Exhibit.]
10.31 Amendment No. 1, Change of Control and Severence Agreement dated as of
June 27, 2000 between CFM Technologies, Inc. and Roger A. Carolin.
10.32 Amendment No. 1 dated as of June 26, 2000 to the Rights Agreement dated
as of April 24, 1997 between CFM Technologies, Inc. and American Stock
Transfer & Trust Co., as Rights Agent.
10.33 Agreement for Termination of Litigation and Nullity Proceedings dated
as of June 27, 2000 between CFM Technologies, Inc. and STEAG Electronic
Systems AG.
27 Financial Data Schedule.
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