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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JANUARY 31, 1999 COMMISSION FILE NUMBER: 0-26968
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ETEC SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 94-3094580
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
26460 CORPORATE AVENUE, HAYWARD, CALIFORNIA 94545
(ADDRESS AND ZIP CODE OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510)783-9210
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
21,371,379 shares of Common Stock were outstanding as of March 9, 1999.
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Part 1. Financial Information
Item 1. Consolidated Financial Statements
ETEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
(Unaudited)
<TABLE>
<CAPTION>
January 31, July 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $43,009 $63,600
Marketable securities.............................. 24,311 36,689
Accounts receivable, less allowance for
doubtful accounts of $1,286 and $1,226............ 76,177 84,529
Inventory.......................................... 97,051 86,512
Deferred tax assets................................ 17,902 17,902
Other current assets............................... 19,417 11,322
------------ ------------
Total current assets.............................. 277,867 300,554
Property, plant and equipment, net................. 49,108 48,970
Other assets....................................... 8,838 8,990
------------ ------------
$335,813 $358,514
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $32,591 $26,506
Accrued and other liabilities...................... 35,296 60,804
Taxes payable...................................... 15,183 18,132
------------ ------------
Total current liabilities......................... 83,070 105,442
Deferred gain on sale of asset..................... 2,560 2,649
Other liabilities.................................. 4,878 3,754
------------ ------------
Total liabilities................................. 90,508 111,845
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, par value $0.01 per share;
10,000,000 shares authorized; none outstanding.... -- --
Common Stock, par value $0.01 per share;
60,000,000 shares authorized; 21,348,061 and
21,977,070 issued and outstanding................. 213 220
Warrants........................................... 600 600
Additional paid-in capital......................... 186,282 201,327
Cumulative translation adjustments................. 1,366 (1,200)
Retained earnings ................................. 56,844 45,722
------------ ------------
Total stockholders' equity........................ 245,305 246,669
------------ ------------
$335,813 $358,514
============ ============
</TABLE>
See the accompanying notes to these consolidated financial statements.
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
January 31, January 31,
------------------- -------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Products........................... $42,352 $53,161 $111,181 $112,132
Services........................... 10,684 9,007 20,753 18,401
--------- --------- --------- ---------
53,036 62,168 131,934 130,533
--------- --------- --------- ---------
Cost of revenue:
Products........................... 18,652 21,858 49,846 49,605
Services........................... 9,336 6,633 17,343 13,717
--------- --------- --------- ---------
27,988 28,491 67,189 63,322
--------- --------- --------- ---------
Gross profit......................... 25,048 33,677 64,745 67,211
--------- --------- --------- ---------
Operating expenses:
Research, development and
engineering....................... 13,712 13,555 30,844 24,332
Selling, general and
administrative.................... 9,050 8,096 18,040 17,373
--------- --------- --------- ---------
22,762 21,651 48,884 41,705
--------- --------- --------- ---------
Income from operations............... 2,286 12,026 15,861 25,506
Interest expense..................... (159) (161) (312) (360)
Interest income and other, net....... 408 1,124 1,302 2,149
--------- --------- --------- ---------
Income before income tax provision... 2,535 12,989 16,851 27,295
Income tax provision................. 862 4,338 5,729 9,416
--------- --------- --------- ---------
Net income........................... $1,673 $8,651 $11,122 $17,879
========= ========= ========= =========
Net income per share-basic........... $0.08 $0.39 $0.52 $0.82
========= ========= ========= =========
Shares used in per-share
calculation - basic................. 21,209 21,906 21,454 21,820
========= ========= ========= =========
Net income per share-diluted......... $0.08 $0.38 $0.51 $0.78
========= ========= ========= =========
Shares used in per-share
calculation - diluted............... 21,868 22,498 22,021 22,783
========= ========= ========= =========
</TABLE>
See the accompanying notes to these consolidated financial statements.
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
January 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income............................................... $11,122 $17,879
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.......................... 6,929 3,684
Changes in assets and liabilities:
Accounts receivable.................................... (88) (21,566)
Factoring of accounts receivable....................... 8,440 6,200
Inventory.............................................. (10,539) (12,247)
Other assets........................................... (8,032) (10,558)
Accounts payable....................................... 6,085 2,264
Accrued and other liabilities.......................... (9,559) 21,932
---------- ----------
Net cash provided by operating activities............ 4,358 7,588
---------- ----------
Cash flows from investing activities:
Sales (purchases) of marketable securities, net........ 12,378 (18,131)
Capital expenditures for property and equipment, net... (7,067) (5,331)
---------- ----------
Net cash provided by (used in) investing activities.. 5,311 (23,462)
---------- ----------
Cash flows from financing activities:
Repayment of debt and capital leases................... (82) (50)
Financing from (repayment to) intermediary............. (15,523) 1,882
Collection of notes receivable
to stockholders...................................... -- 200
Repurchase of Common Stock ............................ (19,822) --
Proceeds from issuance of Common Stock................. 4,770 3,025
---------- ----------
Net cash (used in) provided by financing activities.. (30,657) 5,057
---------- ----------
Effect of exchange rate changes on cash.................. 397 (657)
---------- ----------
Net change in cash and cash equivalents.................. (20,591) (11,474)
Cash and cash equivalents at the beginning
of the period.......................................... 63,600 55,975
---------- ----------
Cash and cash equivalents at the end of the period....... $43,009 $44,501
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest................. $468 $360
========== ==========
Cash paid during the period for income taxes............. $10,170 $4,175
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Tax benefits from stock option transactions.............. $1,009 $1,460
========== ==========
</TABLE>
See the accompanying notes to these consolidated financial statements.
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
In the opinion of the management of Etec Systems, Inc. ("Etec" or the
"Company"), the unaudited consolidated interim financial statements included
herein have been prepared on the same basis as the July 31, 1998 audited
consolidated financial statements and include all adjustments, consisting of
normal recurring adjustments, necessary for a fair presentation of the interim
period results.
The results of operations for current interim periods are not
necessarily indicative of results to be expected for the current year or for
any other period.
These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto for the
fiscal year ended July 31, 1998 included in the Company's Annual Report on Form
10-K (File No. 0-26968). The July 31, 1998 balance sheet included herein was
derived from audited consolidated financial statements, but does not include
all disclosures required by generally accepted accounting principles.
For purposes of presentation, the Company has indicated its interim
fiscal periods as ending January 31, 1999 and January 31, 1998.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
Net Income Per Share
The Company adopted Statement of Financial Accounting Standards No. 128
(SFAS 128), "Earnings Per Share," in the second quarter of fiscal 1998. Under
the provisions of SFAS 128, primary earnings per share have been replaced by
basic net income per share, which does not include the dilutive effect of stock
options in its calculation. In addition, fully diluted earnings per share have
been replaced by diluted net income per share. All prior period earnings per
share amounts have been restated to reflect the requirements of SFAS 128. Basic
net income per share has been computed using the weighted average number of
common shares outstanding during the period. Diluted net income per share has
been computed using the weighted average number of common shares and
equivalents (representing the dilutive effect of stock options) outstanding
during the period. Net income has not been adjusted for any period presented
for purposes of computing basic and diluted net income per share.
For purposes of computing diluted net income per share, weighted
average potential common shares do not include stock options with an exercise
price that exceeds the average fair market value of the Company's common stock
for the period. The number of shares excluded from the computation for the
respective quarters ended January 31, 1999 and 1998 were 1,029,330 and 247,400
shares at an average exercise price of $46.39 and $55.35, respectively.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
establishes standards for reporting information about operating segments in
annual and interim financial statements and also establishes standards for
related disclosures about products and services, geographic areas and major
customers. SFAS 131 is effective for fiscal years beginning after December
15, 1997. The Company will begin reporting segment information for product
groups exceeding the quantitative thresholds in its Annual Report on Form
10-K for the year ended July 31, 1999.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (SFAS 133). SFAS 133
establishes new standards of accounting and reporting for derivative
instruments and hedging activities. SFAS 133 requires that all derivatives
be recognized at their fair value in the statement of financial position
and the corresponding gains or losses be either reported in the statement
of operations or as a component of comprehensive income, depending on the
type of hedging relationship that exists. The Company has not yet
determined the effect of adopting SFAS 133, which will be effective for the
Company's fiscal year 2000.
NOTE 2 - CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company considers all highly liquid debt instruments having a
maturity of three months or less on the date of purchase to be cash equivalents.
The Company has classified all investments as available for sale.
Investments classified as available for sale are recorded at fair value and any
temporary difference between an investment's cost and fair value is recorded as
a separate component of stockholders' equity. At January 31, 1999, these
available for sale securities totaling approximately $29.8 million were
included in cash and cash equivalents or marketable securities. The investment
portfolio at January 31, 1999 is comprised of money market funds, corporate
debentures, and municipal obligations. Temporary differences between cost and
fair value at January 31, 1999 and July 31, 1998 were not material.
NOTE 3 - INVENTORY
January 31, July 31,
1999 1998
----------- -----------
(in thousands)
Purchased parts.................... $25,932 $30,407
Work-in-process.................... 42,882 35,554
Spares............................. 28,237 20,551
----------- -----------
$97,051 $86,512
=========== ===========
NOTE 4 - INCOME TAXES
The Company recorded provisions for income taxes for the three months
ended January 31, 1999 and 1998 of $0.9 million and $4.3 million,
respectively. The Company's provision for income taxes for the three months
ended January 31, 1999 reflects the utilization of research and development tax
credits and tax benefits from the use of a foreign sales corporation, partially
offset by foreign earnings taxed at higher rates. Management will continue to
evaluate the recoverability of the deferred tax assets in future periods.
NOTE 5 - COMPREHENSIVE INCOME
As of the first quarter of fiscal 1999, the Company adopted Statement
of Financial Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive
Income," which establishes standards for the reporting and display of
comprehensive income and its components. SFAS 130 requires that unrealized
gains or losses on investments and foreign currency translation adjustments be
included in other comprehensive income. The components of comprehensive income
are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------ ------------------------
January 31, January 31, January 31, January 31,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Net income................ $1,673 $8,651 $11,122 $17,879
Change in cumulative
translation adjustments.. 1,349 (837) 2,566 (1,236)
----------- ----------- ----------- -----------
Total comprehensive
income................... $3,022 $7,814 $13,688 $16,643
=========== =========== =========== ===========
NOTE 6 - CONTINGENT LIABILITIES
Semiconductor-related industries have experienced substantial
litigation regarding patent and other intellectual property rights. As is
typical in the industry, Etec has from time to time received, and may in the
future receive, communications from third parties alleging infringements of
patents and other intellectual property rights. In the future, protracted
litigation may be necessary to defend us against alleged infringement of
others' rights. Any such litigation, even if we are ultimately successful in
our defense, could result in substantial cost and diversion of time and effort
by management. This in and of itself could have a material adverse effect on
our business, financial condition and results of operations. Further, adverse
determinations in such litigation could result in our loss of proprietary
rights, subject Etec to significant liabilities (including treble damages under
certain circumstances), require us to seek licenses from third parties, or
prevent us from manufacturing or selling our systems.
The Lemelson Foundation has filed a suit against numerous semiconductor
manufacturers, claiming patent infringement of a number of basic U.S. patents
granted to Jerome Lemelson over many years. Some of these semiconductor
companies, and the attorneys for the Lemelson Foundation, have also contacted
semiconductor equipment companies and commercial maskmaking companies, claiming
potential liability for infringement of these same patents. We, in turn, have
been contacted by two of our customers, notifying us of the fact that they have
received claims and claiming that we may have responsibility for indemnifying
them under the terms of our sales contracts. We have reached a settlement with
one customer, and we believe that we will be able to settle with the other
customer on reasonable terms, without any material adverse effect on our
business. However, there is no assurance that we will be able to do so, and the
costs of a lengthy litigation, or a judgment in which we are found liable,
could have a material adverse effect on our business. In addition, we may
receive similar claims for indemnity from other U.S. customers who are pursued
by the Lemelson Foundation.
<PAGE>
ETEC SYSTEMS, INC.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
A. Results of Operations
Quarters Ended January 31, 1999 and January 31, 1998
Revenue. Revenues comprise primarily sales of the Company's MEBES(R), CORE(R),
and ALTA(R) mask pattern generation systems, accessories and upgrades, and the
provision of technical support, maintenance and other services on such
products. Product sales, as a percentage of total revenue, decreased from 86%
in the quarter ended January 31, 1998 to 80% in the quarter ended January 31,
1999, while service revenues increased from 14% to 20% of total revenue over
the same period. These fluctuations are primarily a function of the number of
systems on which revenue was recognized: the Company recognized revenue on
seven systems in the quarter ended January 31, 1998, compared to three systems
and one major upgrade in the quarter ended January 31, 1999. The Company
derives most of its revenues from the sale of a small number of systems and
upgrades. As such, any delay in the recognition of revenue for a single system
or upgrade can have a material adverse effect on the Company's consolidated
results of operations in a particular period.
Product revenue decreased 20% to $42.4 million from $53.2 million for the
quarters ended January 31, 1999 and 1998, respectively. The reduced revenue
resulting from the decrease in system shipments as noted above was partially
offset by an increase in average sales prices and by higher shipments of
accessories and upgrades during the quarter. Weak global demand for
semiconductors has translated into reduced demand for masks and for the
Company's products, which will likely result in reduced product revenue for the
remainder of the fiscal year compared to the prior fiscal year. The duration
and impact of the reduced demand is unclear, but the Company expects to have
better insight by April 1999, when the Japanese semiconductor companies
traditionally establish their capital spending plans for the following twelve
month period.
Service revenue increased 19% to $10.7 million from $9.0 million for the
quarters ended January 31, 1999 and 1998, respectively, due primarily to an
increase in the number of systems under service contracts and significant
fluctuations in Japanese currency.
Gross Profit. The Company's gross profit on product revenue decreased 24% to
$23.7 million from $31.3 million for the quarters ended January 31, 1999 and
1998, respectively. The decrease results from both the lower product revenue as
noted above as well as the lower product gross margin, which decreased to 56%
from 59% for the quarters ended January 31, 1999 and 1998, respectively. The
decrease in product gross margin is primarily attributable to changes in
product mix and to the spreading of fixed costs over lower product revenues.
The Company anticipates that gross margin will remain relatively constant or
potentially decline in the remainder of fiscal 1999. Margins could be
negatively impacted by a number of factors, including lower than expected
volume, especially if coupled with costs associated with new manufacturing
facilities starting in the fourth quarter of fiscal 1999. Margins could also be
adversely affected by product mix skewing toward older, less expensive mask
pattern generation equipment or lower than anticipated margins in the laser
direct imaging business (the Company's Interconnect Products Group) where the
Company does not have significant prior experience. Additional pressure on
margins could come from continued deterioration of Asian currencies relative to
the dollar, which would increase the effective cost of the Company's products
to its customers in that region. A combination of some or all of these factors
may have a material adverse effect on margins in the remainder of fiscal 1999.
The Company's gross profit on service revenue declined 43% to $1.3 million from
$2.4 million for the quarters ended January 31, 1999 and 1998, respectively.
Gross margin on service revenue was 13% and 26% for the quarters ended January
31, 1999 and 1998, respectively. The decreased gross profit and gross margin
reflect higher costs due to increased personnel and inventory levels required
to service the growing installed base and to improve customer satisfaction.
Service margins were also adversely affected by exchange rate fluctuations in
Japan.
Research, Development and Engineering. The Company's research, development and
engineering expenses continue to reflect its commitment to high levels of
product development effort. These expenses, net of third-party funding under
cooperative development agreements, increased to $13.7 million, representing
26% of revenue, from $13.6 million, representing 22% of revenue, for the
quarters ended January 31, 1999 and 1998, respectively. The increase is
primarily due to expenses incurred in the development of future generation ALTA
and MEBES systems, together with costs associated with preparing the initial
beta versions of the Company's new DigiRiteTM 2000 laser direct imaging system
for shipment from the Interconnect Products Group. Funding received under
cooperative development contracts was $2.0 million for both quarters. Research
and development expense in fiscal 1999 could be higher than expected if the
Company is unable to meet milestones necessary to secure funding under its
cooperative development contracts.
Selling, General and Administrative. Selling, general and administrative
expenses increased 12% to $9.1 million, representing 17% of revenue, from $8.1
million, representing 13% of revenue, for the quarters ended January 31, 1999
and 1998, respectively. The increase in selling, general and administrative
expenses was primarily due to headcount growth in these areas. For the
remainder of fiscal 1999, selling, general and administrative expenses can be
expected to increase due to a number of factors, including higher distribution
overhead for the direct laser imaging products, although these expenses may
decrease as a percentage of revenue.
Interest Expense. Interest expense for the quarters ended January 31, 1999 and
1998 was $0.2 million in each quarter.
Interest Income and Other, net. Interest and other income was $0.4 million for
the quarter ended January 31, 1999, compared with $1.1 million in the quarter
ended January 31, 1998. The decrease is mainly due to lower average cash
balances available for investment and to lower interest rates, as the Company
shifted much of its portfolio to tax-exempt instruments.
Income Tax Provision. The Company recorded provisions for income taxes for the
quarters ended January 31, 1999 and 1998 of $0.9 million and $4.3 million,
respectively. The Company's effective tax rate increased from 33.4% in the
quarter ended January 31, 1998 to 34% in the quarter ended January 31, 1999.
Adjustments were made to the effective tax rate in the quarter ended January
31, 1998 to reflect increased research and development tax credits and
increased benefits from the use of a foreign sales corporation.
Six Months Ended January 31, 1999 and January 31, 1998
Revenue. Product revenue decreased 1% to $111.2 million from $112.1 million for
the six months ended January 31, 1999 and 1998, respectively. This decrease
reflects the sale of seven fewer systems, mostly offset by an increase in the
number of upgrades shipped, changes in product mix toward higher-priced
products, and generally higher average selling prices.
Service revenue increased 13% to $20.8 million from $18.4 million for the six
months ended January 31, 1999 and 1998, respectively, due primarily to higher
service activity caused by an increase in the number of systems under service
contracts.
Gross Profit. The Company's gross profit on product revenue decreased 2% to
$61.3 million from $62.5 million for the six months ended January 31, 1999 and
1998, respectively. The decrease in gross profit on product revenue was due to
a decrease in product revenue and a lower gross margin on product revenue,
which decreased to 55% for the six months ended January 31, 1999 from 56% for
the six months ended January 31, 1998. The decrease in product gross margin is
primarily attributable to excess manufacturing capacity and to increased
provisions for excess and obsolete inventory.
The Company's gross profit on service revenue decreased 27% to $3.4 million
from $4.7 million for the six months ended January 31, 1999 and 1998,
respectively. Gross margin on service revenue was 16% and 25% for the six
months ended January 31, 1999 and 1998, respectively. The decreased gross
profit and gross margin reflect higher costs due to increased personnel and
inventory levels required to service the growing installed base and to improve
customer satisfaction. There can be no assurance that the Company will be able
to increase gross margin on service revenue in future periods.
Research, Development and Engineering. The Company's research, development and
engineering expenses continue to reflect its commitment to high levels of
product development effort. These expenses, net of third-party funding under
cooperative development agreements, increased to $30.8 million, representing
23% of revenue, from $24.3 million, representing 19% of revenue, for the six
months ended January 31, 1999 and 1998, respectively. The increase was
primarily due to higher consumption of materials on next-generation MEBES and
ALTA development projects. These increased expenses were partially offset by an
increase in funding from $3.6 million in the first six months of fiscal 1998 to
$4.1 million in the first six months of fiscal 1999. The Company expects future
increases in net spending due to its commitment to product development.
Selling, General and Administrative. Selling, general and administrative
expenses increased 4% to $18.0 million, representing 14% of revenue, from $17.4
million, representing 13% of revenue, for the six months ended January 31, 1999
and 1998, respectively. Selling, general and administrative expenses increased
primarily due to headcount growth.
Income Tax Provision. The Company recorded provisions for income taxes for the
six months ended January 31, 1999 and 1998 of $5.7 million and $9.4 million,
respectively. The Company's provision for income taxes for the six months ended
January 31, 1999 reflects the utilization of tax credits and tax benefits from
the use of a foreign sales corporation, partially offset by foreign earnings
taxed at higher rates. Management's evaluation of the recoverability of the
Company's deferred tax assets is based in part upon the current product backlog
and the Company's presumed ability to increase manufacturing capacity.
Management will continue to evaluate the recoverability of the deferred tax
assets in future periods.
B. Liquidity and Capital Resources
In addition to its operational cash flows, in fiscal 1998 the Company entered
into agreements with its landlords under which they agreed to make investments
of up to $121.0 million for the construction of additional manufacturing
facilities under operating lease arrangements. The Company has used $75.5
million of the $121.0 million total in fiscal 1998 and the first two quarters
of fiscal 1999. In fiscal 1996 and fiscal 1997 the Company raised approximately
$108.0 million from sales of its common stock in an initial public offering,
two additional public offerings, and a private placement. In fiscal 1997, the
Company received $5.0 million from the sale and leaseback of its headquarters
campus.
The Company spent approximately $7.1 million for net capital expenditures in
the six months ended January 31,1999, primarily to purchase testing and process
equipment.
In October 1997, the Company purchased approximately 4.2 acres of land in
Hayward, California for $0.9 million. This site provides the Company
flexibility for future expansion of its Hayward-based operations. In addition,
in November 1997, the Company completed the purchase of approximately 15.2
acres of land in Hillsboro, Oregon for approximately $2.4 million. The Company
is having a new facility constructed on this site to meet development and
manufacturing requirements for its laser mask pattern generation products and
to back up its electron-beam manufacturing capabilities in Hayward, California.
The new facilities in Hayward and Hillsboro are scheduled to be completed in
the middle of calendar year 1999. The amortization of the cost of these
facilities will increase the Company's manufacturing costs, starting in the
fourth quarter of fiscal 1999. There can be no assurance that revenue growth
and maintenance of product price levels will be adequate to completely offset
these costs.
As of January 31, 1999, the Company had cash, cash equivalents and marketable
securities of $67.3 million. This decline from the $100.3 million in cash, cash
equivalents and marketable securities at 1998 fiscal year end is primarily due
to the use of cash to repurchase Common Stock, to repay certain indebtedness to
an intermediary, and an increase in inventory. The Company believes that
existing cash balances (including cash equivalents and marketable securities),
together with other sources of liquidity, including cash flows from operating
activities and amounts available under the existing $50.0 million revolving
line of credit (all of which was available at January 31, 1999), will provide
adequate cash to fund its operations for at least the next twelve months. The
Company also believes that success in its industry requires substantial capital
to maintain the flexibility to take advantage of opportunities as they arise.
As such, the Company may effect additional equity or debt financings from time
to time in the future.
Cash Flows from Operations
Net cash provided by operations for the six months ended January 31, 1999 and
1998 was $4.4 million and $7.6 million, respectively.
Cash flows provided by operating activities in the six months ended January 31,
1999 primarily reflected net income of $11.1 million, depreciation and
amortization of $6.9 million, factoring of accounts receivable of $8.4 million,
increases in inventory of $10.5 million, increases in other assets of $8.0
million, increases in accounts payable of $6.1 million and decreases in accrued
and other liabilities of $9.6 million.
Cash flows from operating activities for the six months ended January 31, 1998
primarily reflected net income of $17.9 million, increases in depreciation and
amortization of $3.7 million, increases in accounts receivable of $21.6
million, factoring of accounts receivable of $6.2 million, increases in
inventory of $12.2 million, increases in other assets of $10.6 million,
increases in accounts payable of $2.3 million, and increases in accrued and
other liabilities of $21.9 million.
Fluctuations in accounts receivable, inventory and current liabilities for the
above periods were caused primarily by the timing of system orders, the timing
of revenue recognition, variations in unit shipments and the timing of payments
to vendors. In the remainder of fiscal 1999, there is risk that receivables
could increase disproportionately to revenues due to continued difficulties for
the Company's Asian customers, as well as adverse credit and collection
experience for sales of direct laser imaging products, a new business for the
Company. Inventories in fiscal 1999 could be adversely affected by the
inability of the Company to achieve its expected unit sales volume, due to the
same factors discussed under Revenue, previously, coupled with inability to
cancel or delay orders for raw materials.
Prior to the shipment of a system, the Company generally receives payment for a
portion of the system sales price. Such payments are generally received when
the Company accepts an order and at various points while the system is being
installed and thereafter. Therefore, the amount of customer advances at each
reporting period fluctuates based on the number of systems on order, the timing
of order acceptance, and the status of each system within the manufacturing
cycle. Advances from customers decreased to $5.9 million at January 31, 1999
from $10.3 million at July 31, 1999.
Cash Flows from Investing Activities
Net cash provided by investing activities for the six months ended January 31,
1999 was $5.3 million. Net cash used in investing activities for the six months
ended January 31, 1998 was $23.5 million. Cash flows from investing activities
in the six months ended January 31, 1999 comprised net sales of marketable
securities of $12.4 million offset by net capital expenditures of $7.1 million.
Cash flows used in investing activities for the six months ended January 31,
1998 reflected net purchases of marketable securities of $18.1 million and net
capital expenditures of $5.3 million.
Cash Flows from Financing Activities
Net cash used in financing activities for the six months ended January 31, 1999
was $30.7 million. Net cash provided by financing activities for the six
months ended January 31, 1998 was $5.1 million. Cash flows used in financing
activities for the six months ended January 31, 1999 primarily reflected
repayments of $15.5 million to a third-party financing intermediary and open
market purchases of the Company's stock totaling $19.8 million, partially
offset by stock issuance proceeds of $4.8 million. In June 1998, the Board of
Directors authorized the repurchase of up to $30 million of Common Stock.
Shares may be repurchased at prevailing market rates from time to time. In
fiscal 1998, the Company repurchased 165,000 shares of Common Stock for
approximately $5.6 million. In the six months ended January 31, 1999, the
Company has repurchased 840,000 for approximately $19.8 million. Cash flows
from financing activities for the six months ended January 31, 1998 primarily
reflected proceeds from stock issuance of $3.0 million and an increase in
financing from the third-party intermediary of $1.9 million.
Certain Factors that May Affect Future Results
Statements in this report that are prefaced with words such as "expects,"
"anticipates," "believes" and similar words and other statements of similar
sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances that may or may not be within the Company's control and as to
which there can be no firm assurances. These forward-looking statements, like
any other forward-looking statements, involve risks and uncertainties that
could cause actual results to differ materially from those projected or
anticipated.
In addition to other risks and uncertainties that may be described elsewhere in
this document, certain risks and uncertainties that could affect the Company's
financial results include, but are not limited to, the following: risks
associated with the timely development and market acceptance of new products in
an environment of rapid technological change, reduced or postponed orders as a
result of changes in customers' planned capital spending, timely availablity of
key components, delays in factory testing and acceptance, increased costs and
manufacturing capacity associated with the addition of new facilities, ability
of certain potential new customers to finance new system purchases, the
possibility of new products or technologies introduced by competitors, and
material variations in financial results due to a delay in delivery of even one
system. (See additional discussion contained in "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Other Factors
Affecting Company Results," set forth in Part II, Item 7 of the Company's
Report on Form 10-K for the year ended July 31, 1998, which data is
incorporated herein by reference.)
Year 2000 Readiness Disclosure
Computer programs and systems that make use of dates represented by only two
digits (98 rather than 1998) may not operate properly after the year 2000.
Two-digit fields can cause problems with sorting, mathematical calculations and
comparisons when working with years outside the range of 1900 through 1999. The
problem also potentially extends to any systems or devices that include
embedded technology, such as microchips.
The Company has established a formal project with a project office and project
team to address this issue and achieve Year 2000 (Y2K) readiness. The Company
has chosen the U.S. Government Accounting Office (GAO) Program Management
Model, as modified, to manage and measure its progress. The project focuses on
four key readiness areas: 1) product readiness, addressing product
functionality; 2) supplier readiness, addressing the preparedness of our
suppliers; 3) internal infrastructure readiness, addressing mission-critical
internal information technology (IT) and non-IT systems; and 4) customer
readiness, addressing customer preparedness and the Company's customer support.
For each readiness area, the Company is systematically performing an
enterprise-wide risk assessment, implementing the GAO Program Management Model
as a project and developing contingency plans to mitigate unknown risk. The
Company is also communicating with its customers, suppliers, employees, and
other third-party business partners to reinforce awareness and to inform them
of its progress toward Y2K readiness. The Company is doing this through a
variety of media, including regular updates to the Y2K section of the corporate
web site. The Awareness and Assessment phases of the project have been
substantially completed and the Renovation phase commenced in May 1998.
Product Readiness: A comprehensive set of tests was used to test all of the
Company's products. This process provides a complete assessment of potential
Y2K impacts and precludes inefficient use of resources that would result from
the performance of individual customer tests. Etec is performing its testing in
accordance with SEMATECH Year 2000 Test Scenarios. The Company has communicated
to its customers the current status for each of its products, as well as a
proposed remediation plan and schedule.
Customer Readiness: The Company commenced making Y2K compliant updates to its
customers' systems through its standard Service Update Plan process by January
1999, with completion planned by September 1999. A Monitoring phase of the
program is planned as well, which provides for the contingency of customers
experiencing issues with the validation and implementation phases of the
project.
Supplier Readiness: This aspect of the program is focused on minimizing risk
associated with the Company's suppliers in two areas: first, the supplier's
capability to provide Y2K compliant products and second, the supplier's
business capability to continue to provide the required products and services.
The Company is using the SEMATECH Year 2000 Readiness Supplier Questionnaire as
an aid in assessing risk. A supplier action list and contingency plans are
being developed based on this assessment. Supplier issues that potentially
affect the Company's products are targeted to be resolved by March 1999.
Internal Infrastructure Readiness: The Company has completed an assessment of
its information technology and non-information technology applications and its
business processes. Some applications and processes have already been made Y2K
compliant, while others are being prioritized and assigned resources based upon
their importance to the Company's ability to conduct business. All
implementations are scheduled to be completed no later than July 1999.
The Company estimates that the total Y2K costs will range from $5 to $8
million. Approximately half of these costs have been incurred with the
remainder expected to be spent over the next three quarters. The Company is
continuing its assessment and is developing alternatives that will result in a
further refinement of this estimate over time. There can be no assurance that
actual costs will not differ materially from the current estimate.
If computer systems used by the Company or its suppliers, or the software
applications used in systems manufactured and sold by the Company, fail or
experience significant difficulties, the Company's results of operations could
be materially adversely affected.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's market risk exposures as set forth in Item 7A of its Annual
Report on Form 10-K for the year ended July 31, 1998 have not changed
significantly.
Part II - Other Information
Item 1. Legal Proceedings
Semiconductor-related industries have experienced substantial litigation
regarding patent and other intellectual property rights. As is typical in the
industry, Etec has from time to time received, and may in the future receive,
communications from third parties alleging infringements of patents and other
intellectual property rights. In the future, protracted litigation may be
necessary to defend us against alleged infringement of others' rights. Any such
litigation, even if we are ultimately successful in our defense, could result
in substantial cost and diversion of time and effort by management. This in and
of itself could have a material adverse effect on our business, financial
condition and results of operations. Further, adverse determinations in such
litigation could result in our loss of proprietary rights, subject Etec to
significant liabilities (including treble damages under certain circumstances),
require us to seek licenses from third parties, or prevent us from
manufacturing or selling our systems.
The Lemelson Foundation has filed a suit against numerous semiconductor
manufacturers, claiming patent infringement of a number of basic U.S. patents
granted to Jerome Lemelson over many years. Some of these semiconductor
companies, and the attorneys for the Lemelson Foundation, have also contacted
semiconductor equipment companies and commercial maskmaking companies, claiming
potential liability for infringement of these same patents. We, in turn, have
been contacted by two of our customers, notifying us of the fact that they have
received claims and claiming that we may have responsibility for indemnifying
them under the terms of our sales contracts. We have reached a settlement with
one customer, and we believe that we will be able to settle with the other
customer on reasonable terms, without any material adverse effect on our
business. However, there is no assurance that we will be able to do so, and the
costs of a lengthy litigation, or a judgment in which we are found liable,
could have a material adverse effect on our business. In addition, we may
receive similar claims for indemnity from other U.S. customers who are pursued
by the Lemelson Foundation.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on December 8, 1998.
Matters voted upon at the meeting included:
(1) Election of directors (listed below)
The following directors were elected to hold office until the next
Annual Meeting of Stockholders of the Company:
Directors Affirmative Negative Withheld
------------------------- ----------- --------- ---------
Stephen E. Cooper 19,348,712 0 113,914
Takeshi (John) Suzuki 19,346,011 0 116,615
Edward L. Gelbach 19,349,739 0 112,887
John M. McBennett 19,346,949 0 115,677
William J. Ryan 19,348,249 0 114,377
William T. Siegle 19,346,591 0 116,035
Thomas M. Trent 19,349,099 0 113,527
Robert M. Wehrli 19,346,836 0 115,790
(2) Approval of increase in number of shares of Common Stock available
for issuance under the 1995 Omnibus Incentive Plan by 1,000,000
shares (from 2,975,000 to 3,975,000):
Votes in the affirmative: 10,765,228
Votes in the negative: 8,634,605
Votes withheld: 62,793
Broker non-votes: 0
(3) Ratification of the appointment of Price WaterhouseCoopers LLP as
independent public accountants for the Company for the fiscal year
ending July 31, 1999.
Votes in the affirmative: 19,391,785
Votes in the negative: 14,141
Votes withheld: 56,700
Broker non-votes: 0
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith:
Exhibit No. Description
- ------------------------- -------------------
27 Financial Data Schedule
(b) Reports on Form 8-K: None.
ETEC SYSTEMS, INC.
SIGNATURE
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, on March 11, 1999.
ETEC SYSTEMS, INC.
(Registrant)
By /s/ William D. Snyder
---------------------------------------------
William D. Snyder
Vice President and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE>
ETEC SYSTEMS, INC.
INDEX OF EXHIBITS
Exhibit
No. Description
- ---------- -----------------
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUL-31-1999
<PERIOD-START> AUG-01-1998
<PERIOD-END> JAN-31-1999
<CASH> 43,009
<SECURITIES> 24,311
<RECEIVABLES> 77,463
<ALLOWANCES> 1,286
<INVENTORY> 97,051
<CURRENT-ASSETS> 277,867
<PP&E> 49,108
<DEPRECIATION> 0
<TOTAL-ASSETS> 335,813
<CURRENT-LIABILITIES> 83,070
<BONDS> 0
0
0
<COMMON> 213
<OTHER-SE> 245,092
<TOTAL-LIABILITY-AND-EQUITY> 335,813
<SALES> 111,181
<TOTAL-REVENUES> 131,934
<CGS> 49,846
<TOTAL-COSTS> 67,189
<OTHER-EXPENSES> 30,844 <F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 312
<INCOME-PRETAX> 16,851
<INCOME-TAX> 5,729
<INCOME-CONTINUING> 11,122
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,122
<EPS-PRIMARY> $0.52
<EPS-DILUTED> $0.51
<FN>
<F1> EXCLUDES SG&A AS SG&A IS PART OF 5-03(b)(4).
</FN>
</TABLE>
