<PAGE> 1
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 March 31, 1997
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 Number: 0-19507
SUBMICRON SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 13-3607944
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
</TABLE>
6620 Grant Way, Allentown, PA 18106
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (610) 391-9200
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.
(X) Yes ( ) No
APPLICABLE ONLY TO CORPORATE ISSUERS:
There were 16,890,263 shares of Common stock outstanding, $.0001 par value, as
of May 10, 1997.
1
<PAGE> 2
SUBMICRON SYSTEMS CORPORATION
INDEX
Part I - Financial Information
Item 1: Financial Statements Page
Consolidated Balance Sheets at
March 31, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the three months ended March 31, 1997
and March 31, 1996 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1997 and
March 31, 1996. 5
Notes to Consolidated Financial Statements 6-7
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
Part II - Other Information
Item 2: Changes in Securities
As of March 26, 1997, the Company issued 1,302.85
shares of its Series A Convertible Non-Redeemable
Preferred Stock and $8,692,028 principal amount
of its 8% Subordinated Convertible Notes due 2002
(the "Notes") in retirement of $18,350,000
principal amount of its 9% Convertible
Subordinated Notes due December 1997 and
associated warrants to purchase 1,101,000 shares
of Common stock. The issuance was exempt from
registration under Section 3(a)(9) of the
Securities Act of 1933.
The Preferred Stock is convertible on the
2,000-for-1 basis into an aggregate of 2,605,700
shares Common stock. The Notes are convertible,
only after stockholder approval of such
convertibility, at $3.70 per share into
approximately 2,349,000 shares of Common stock.
The Notes provide that if the fair market value
of the Common stock is less than $3.70 per share
in March 1999, the conversion price will be
adjusted to the greater of the fair market price
at such time or $2.50 per share. In addition, the
Notes provide standard adjustments to the
conversion price based on changes in
capitalization and certain issuances of stock at
below the conversion price on a weighted average
basis.
Item 6: Exhibits
Exhibit 27 - Financial Data Schedule 12
2
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,773 $ 5,426
Accounts receivable, net 44,341 47,574
Inventories, net 34,286 34,951
Prepaids and other 7,878 7,307
Deferred income taxes 1,402 2,423
--------- ---------
Total current assets 89,680 97,681
Property and equipment, net 20,055 21,082
Goodwill, net 1,628 1,684
Intangibles and other, net 5,003 5,487
--------- ---------
$ 116,366 $ 125,934
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of credit $ 25,975 $ 28,100
Current portion of long-term debt 2,861 2,294
Accounts payable 22,148 21,741
Accrued expenses and other 16,324 16,823
Deferred revenues 3,432 3,105
--------- ---------
Total current liabilities 70,740 72,063
--------- ---------
Long-term debt 16,254 25,195
--------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, stated value, 5,000 shares
authorized, 1,303 and zero shares issued and outstanding 9,415 --
Common stock, $.0001 par value, 100,000,000
shares authorized, 16,890,263 and 16,890,014
shares issued and outstanding 2 2
Additional paid-in capital 41,418 41,680
Retained-earnings deficit (21,463) (13,006)
--------- ---------
Total stockholders' equity 29,372 28,676
--------- ---------
$ 116,366 $ 125,934
========= =========
</TABLE>
See accompanying notes.
3
<PAGE> 4
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------------ ------------
<S> <C> <C>
System sales, net $ 29,680 $ 39,422
Service and other sales 6,097 5,432
------------ ------------
Total net sales 35,777 44,854
------------ ------------
Cost of system sales 22,675 26,436
Cost of service and other sales 6,129 4,113
------------ ------------
Total cost of sales 28,804 30,549
------------ ------------
Gross margin 6,973 14,305
Selling, general and administrative 9,164 9,455
Research and development 2,501 1,845
------------ ------------
Operating (loss) income (4,692) 3,005
------------ ------------
Other income (expense):
Interest income 59 168
Interest expense (1,666) (1,023)
Other, net 11 81
------------ ------------
Total other expense (1,596) (774)
------------ ------------
(Loss) income before income taxes and
extraordinary item (6,288) 2,231
Provision for income taxes 1,000 781
------------ ------------
(Loss) income before extraordinary item (7,288) 1,450
Extraordinary loss on debt extinguishment (1,169) --
------------ ------------
Net (loss) income $ (8,457) $ 1,450
============ ============
Net (loss) income per Common share:
(Loss) income before extraordinary item (0.43) 0.09
Extraordinary item (0.07) --
------------ ------------
Net (loss) income per Common share $ (0.50) $ 0.09
============ ============
Weighted average number of
shares of Common stock outstanding 16,890,214 16,943,961
============ ============
</TABLE>
See accompanying notes.
4
<PAGE> 5
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1997 1996
------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net (loss) income $(8,457) $ 1,450
Adjustments to reconcile net (loss) income to
net cash used in operating activities
Depreciation and amortization 1,310 1,071
Extraordinary loss on debt extinguishment 1,169 --
Provision for valuation allowances 144 336
Deferred tax provision 1,021 --
Amortization of deferred compensation -- 84
Accretion of note discount 314 239
Changes in operating assets and liabilities:
Decrease in accounts receivable 3,207 6,643
Decrease (increase) in inventories 547 (8,854)
Increase in prepaid expenses and other (571) (1,299)
Decrease (increase) in other assets 273 (439)
Increase (decrease) in accounts payable 407 (7,137)
(Decrease) increase in accrued expenses and other (499) 219
Increase in deferred revenues 327 1,815
Increase in income taxes payable -- 674
------- --------
Net cash used in operating activities (808) (5,198)
------- --------
Cash flows used in investing activities:
Capital expenditures (227) (1,241)
Purchase of intangible assets -- (56)
------- --------
Net cash used in investing activities (227) (1,297)
------- --------
Cash flows used in financing activities:
Net payments under line of credit agreement (2,125) (350)
Proceeds from exercise of options and warrants -- 48
Collection on notes receivable -- 20
Principal payments under capital lease obligations
and long-term debt (493) (374)
------- --------
Net cash used in financing activities (2,618) (656)
------- --------
Net decrease in cash and cash equivalents (3,653) (7,151)
Cash and cash equivalents at beginning of period 5,426 16,010
------- --------
Cash and cash equivalents at end of period $ 1,773 $ 8,859
======= ========
</TABLE>
See accompanying notes.
5
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SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying unaudited consolidated financial statements have been prepared
in conformity with generally accepted accounting principles. The interim
financial information, while unaudited, reflects all normal recurring
adjustments which are, in the opinion of management, necessary for a fair
presentation of the interim financial statements. The results for the three
months ended March 31, 1997 are not necessarily indicative of results expected
for the full year. These financial statements should be read in conjunction with
the audited financial statements and the notes thereto included in the SubMicron
Systems Corporation Annual Report on Form 10-K for the year ended December 31,
1996.
2. RESTRUCTURING CHARGES:
In response to significant losses from operations in each of the three month
periods ended September 30, 1996, December 31, 1996, and March 31, 1997 and
anticipated losses for the three month period ending June 30, 1997 the Company
is currently developing a worldwide restructuring plan. The plan will refocus
the Company on its core technology. The plan will also restructure the Company's
corporate organization and may include the sale of certain non-strategic assets
to generate liquidity. As a result of the restructuring, the Company expects to
record a restructuring charge in the second quarter of 1997. The restructuring
charge will likely include, among other things, substantial employee severance
costs.
3. INVENTORIES:
Inventories are stated at the lower of cost (first in, first out basis) or
market and consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Raw materials $ 23,234 $ 23,007
Work-in-process and finished goods 13,895 14,669
-------- --------
37,129 37,676
Excess and obsolescence reserve (2,843) (2,725)
-------- --------
$ 34,286 $ 34,951
======== ========
</TABLE>
4. CUSTOMER INFORMATION:
Sales of the Company's products to three customers accounted for 57% of total
sales for the three months ended March 31, 1997, and sales to three different
customers accounted for 43% of total sales for the three months ended March 31,
1996. Accounts receivable from a single customer in 1997 represent 27% of
consolidated receivables as of March 31, 1997.
6
<PAGE> 7
5. CREDIT FACILITY:
In February 1996, the Company entered into a $30.0 million credit facility with
a banking group. The Company used the proceeds from the credit facility to
refinance its previous lines of credit and to provide working capital.
Borrowings under the credit facility bear interest at prime, as defined, plus
3.0%, and are secured by substantially all of the assets of the Company. As of
December 31, 1996, the Company was not in compliance with certain requirements
of the credit facility. The banking group has separately agreed not to
accelerate the due date of the credit facility from its maturity date of August
18, 1997, assuming the Company's continued compliance with the terms of a new
agreement entered into on March 31, 1997. The Company was in compliance with the
terms of the new agreement as of March 31, 1997. Borrowings under the new
agreement may not exceed $28.1 million, and the interest rate will increase to
prime, as defined, plus 4.0%, effective June 1, 1997. Borrowings under the new
agreement were $26.0 million at March 31, 1997. The agreement also restricts the
Company's ability to pay dividends.
6. LONG TERM DEBT:
In December 1995, the Company issued $19.0 million principal amount of 9%
convertible subordinated notes with warrants to purchase 1,140,000 shares of
Common stock. The notes were recorded at $16.5 million, net of the estimated
fair value ascribed to the warrants of $2.5 million.
In March 1997, the Company issued shares of its Series A Convertible
Non-Redeemable Preferred Stock (Preferred Stock) convertible into approximately
2.6 million shares of Common stock and approximately $8.7 million principal
amount of its 8% Convertible Subordinated Notes (New Notes) due March 26, 2002
to previous holders of 18,350,000 of its 9% convertible subordinated notes due
December 1997 and associated warrants. The New Notes are convertible, after
stockholder approval, into shares of Common stock at $3.70 per share, subject to
adjustment. Under the agreement pursuant to which the Preferred Stock and the
New Notes were issued, the Company is required to undertake certain registration
obligations and to obtain stockholder approval of the convertibility feature of
the New Notes. If such obligations are not fulfilled by January 31, 1998, the
New Notes will become due as of such date.
7. INCOME TAXES:
The Company accounts for income taxes under Financial Accounting Standards No.
109. As of March 31, 1997, the components of the Company's net deferred income
tax asset were approximately as follows (in thousands):
<TABLE>
<S> <C>
Financial statement reserves $ 4,375
Net operating loss carryforwards 6,036
Uniform capitalization 484
Gain on litigation settlement (1,080)
Other 1,227
Valuation allowance (6,583)
-------
Net deferred tax asset $ 4,459
=======
</TABLE>
The net loss for the first quarter of 1997 included a $4.0 million non-cash
charge, $3.0 million of which related to the loss generated in the first
quarter, to increase the Company's reserve against its net deferred tax assets.
8. EARNINGS PER SHARE:
Earnings per share is based on the weighted average number of shares of common
stock and common stock equivalents (dilutive stock options and warrants using
the treasury stock method) outstanding during the period.
In February 1997, the Financial Accounting Standard Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. The impact is not expected to have an effect on
primary earnings per share for the first quarter ended March 31, 1997 or March
31, 1996. The Company has not yet determined what the impact of Statement 128
will be on the calculation of fully diluted earnings per share.
7
<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
SubMicron's results of operations have varied significantly from quarter to
quarter. These fluctuations, which are likely to continue, are a result of
several factors including, in particular, the relatively high prices of
SubMicron's products in relation to quarterly sales and the lead time to
manufacture such products. Accordingly, quarterly results are likely to
fluctuate and the results for any fiscal quarter may not be indicative of the
results for future fiscal quarters.
Net Sales
Net sales consist of revenues from sales of systems, construction and
installation of systems, sales of spare parts and service contracts. Net sales
decreased 20% for the three month period ended March 31, 1997, as compared to
the same period in the prior year. Sales decreased as a result of a slowdown in
the semiconductor industry coupled with a delay in the shipment of two systems.
These systems are expected to ship in the second quarter of 1997. System sales
accounted for a majority of the decrease. System sales decreased approximately
25% to $29.7 million for the three months ended March 31, 1997, as compared to
system sales of $39.4 million for the three months ended March 31, 1996.
Gross Margin
The gross margin was 19% for the three months ended March 31, 1997, as compared
to a gross margin of 32% for the comparable period in the prior year. First
quarter 1997 gross margin decreased primarily as the result of two low margin
projects shipped by Systems Chemistry Incorporated, one of the Company's
California subsidiaries. Additionally, the delay in the shipment of two systems
by the Company's Allentown subsidiary, Submicron Systems, Inc., also
contributed to the decrease. Gross margins may vary significantly from quarter
to quarter based upon the product sales mix.
Selling, General and Administrative
Selling, general and administrative expense was 26% of net sales for the three
month period ended March 31, 1997, as compared to 21% for the comparable period
in the prior year. The increase as a percentage of sales is the result of a
significant decrease in sales volume in the first quarter of 1997, in comparison
to the Company's high proportion of fixed costs included in selling, general and
administrative expense.
Research and Development
Research and development expenses were 7% and 4% of net sales for the three
month periods ended March 31, 1997 and March 31, 1996, respectively. Research
and development efforts consisted primarily of expenses associated with
development of the Company's 300mm and Primaxx product lines.
Other Income (Expense), Net
Other expense, net was approximately $1.6 million for the three month period
ended March 31, 1997, as compared to other expense, net of approximately
$774,000 for the prior year comparable period. Other expense for the three
months ended March 31, 1997, is due primarily to interest charges associated
with the Company's convertible debt and its line of credit.
Tax Provision
The net loss for the first quarter of 1997 included a $4.0 million non-cash
charge, $3.0 million of which related to the loss generated in the first
quarter, to increase the Company's reserve against its net deferred tax assets.
8
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LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by approximately $3.7 million during the
three month period ended March 31, 1997, to approximately $1.8 million. Cash
used in operations totaled approximately $808,000 for the three months ended
March 31, 1997, which was largely due to the net loss recognized during the
first quarter of 1997 offset partially by collections of accounts receivable,
depreciation and amortization and the non-cash extraordinary loss on debt
extinguishment. Accounts receivable decreased approximately $3.2 million from
$47.6 million at December 31, 1996 to $44.3 million at March 31, 1997. Inventory
balances of $34.3 million at March 31, 1997 were consistent with inventory
balances at December 31, 1996 of $35.0 million. Investing activities utilized
cash of approximately $230,000 to purchase equipment. Financing activities
utilized approximately $2.2 million of cash primarily to repay borrowings on the
Company's line of credit. Working capital decreased approximately $6.7 million
to $18.9 million at March 31, 1997, from $25.6 million at December 31, 1996.
In March 1997, the Company issued shares of its Series A Convertible
Non-Redeemable Preferred Stock (Preferred Stock) convertible into approximately
2.6 million shares of Common stock and approximately $8.7 million principal
amount of its 8% Convertible Subordinated Notes (New Notes) due March 26, 2002
to previous holders of 18,350,000 of its 9% convertible subordinated notes due
December 1997 and associated warrants. The New Notes are convertible, after
stockholder approval, into shares of Common stock at $3.70 per share, subject to
adjustment. Under the agreement pursuant to which the Preferred Stock and the
New Notes were issued, the Company is required to undertake certain registration
obligations and to obtain stockholder approval of the convertibility feature of
the New Notes. If such obligations are not fulfilled by January 31, 1998, the
New Notes will become due as of such date.
Management of SubMicron initially budgeted approximately $3 million for capital
expenditures in 1997 to expand its production facilities. The Company has
currently suspended the expansion of its production facilities and has sharply
curtailed spending on capital equipment.
In response to significant losses from operations in each of the three month
periods ended September 30, 1996, December 31, 1996, and March 31, 1997 and
anticipated losses for the three period ending June 30, 1997 the Company is
currently developing a worldwide restructuring plan. The plan will refocus the
Company on its core technology. The plan will also restructure the Company's
corporate organization and may include the sale of certain non-strategic assets
to generate liquidity. As a result of the restructuring, the Company expects to
record a significant restructuring charge in the second quarter of 1997. The
restructuring charge will likely include, among other things, substantial
employee severance costs. Additional second quarter charges will include costs
associated with the recruitment of a new executive management team.
In recent years, the Company has been substantially dependent upon borrowings to
finance its operations. Management's estimates of the cash requirements to fund
operating, investing and financing activities will require replacement of the
funds currently available under the credit facility. Without the availability of
a sufficient credit facility, the Company is susceptible to severe cash
shortages which may impact its ability to operate. To provide for the Company's
cash and working capital requirements, management is pursuing additional funding
arrangements and believes it can improve the Company's operating performance and
cash flows sufficiently as follows:
- In response to the problems associated with the Company's rapid growth,
and the semiconductor industry slowdown which negatively impacted the
Company's operations, management has instituted programs designed to
reduce costs and improve performance. Management is pursuing an
improvement in gross margins through the implementation of enhanced
quality systems, controlled operations resulting from the reduction in
the direct labor workforce and increased management review of all
contract bidding. Additionally, the Company has altered its strategy
from revenue growth to operating efficiency and management is focusing
its resources on the application of the Company's core technology.
9
<PAGE> 10
- Management is in active negotiations with a number of lending
organizations to replace its existing credit facility.
- Management intends to evaluate its alternatives and currently plans to
sell certain non-strategic assets to generate liquidity. Management
expects to complete this process by the maturity date of the credit
facility.
- As needs require or market opportunities arise, management, from time to
time, may consider raising additional funds through equity financing or
strategic partnering arrangements.
- Management is confident that its cost reduction and performance
improvement programs, controlled growth strategy, current negotiations
with lending organizations, and pursuit of other alternatives will result
in the successful funding of its working capital and cash requirements for
at least the next year; however, if the financial results during such
period do not meet management's expectations and sufficient additional
financings are not available, management has the ability and intent to
reduce certain expenditures and accelerate collection of receivables to
minimize additional capital requirements.
The Company believes that future results of operations will be influenced by a
number of factors, including general economic conditions, timely new product
introduction, the volume, mix and timing of orders received and numerous other
factors. Due to the continued weakness in the semiconductor industry and the
Company's current financial condition it has experienced a period of soft
bookings which has created an uncertainty in the expected revenues for the
remainder of 1997.
The Company's future results will depend upon its ability to achieve profitable
sales growth of its existing products and to successfully introduce new products
to its customers in the semiconductor industry. Due to the inherent risk in the
timing of the development and testing of new products, the Company's operating
results may fluctuate significantly. The Company's results will also be affected
by the condition of the semiconductor industry, as well as the general economy.
Inflation has not significantly affected the Company's financial position or
operations. Inflation will have the general effect of increasing the Company's
operating expenses. A substantial portion of the Company's indebtedness bears
interest that fluctuates with the prime rate. No assurance can be given that the
prime rate of interest will not fluctuate significantly, which could have an
adverse effect on operations.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended, and is subject to the safe-harbor created by such sections.
Such forward-looking statements concern the Company's operations, economic
performance and financial condition, including in particular sales, the
Company's restructuring of operations and the Company's financing arrangements.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions; changes in customer preferences; competition; changes
in technology; changes in business strategy; the indebtedness of the Company;
quality of management, business abilities and judgment of the Company's
personnel; the availability, terms and deployment of capital; and various other
factors referenced in this Report. The forward-looking statements are made as of
the date of this Report, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons why actual results could
differ from those projected in the forward-looking statements.
10
<PAGE> 11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
amendment has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date included.
SUBMICRON SYSTEMS CORPORATION
Dated: May 15, 1997 By: /s/ David J. Ferran
---------------------------------------
David J. Ferran
President & CEO
Dated: May 15, 1997 /s/ R. G. Holmes
---------------------------------------
R. G. Holmes
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 1,773
<SECURITIES> 0
<RECEIVABLES> 45,664
<ALLOWANCES> 1,323
<INVENTORY> 34,286
<CURRENT-ASSETS> 89,680
<PP&E> 29,613
<DEPRECIATION> 9,558
<TOTAL-ASSETS> 116,366
<CURRENT-LIABILITIES> 70,740
<BONDS> 16,254
0
9,415
<COMMON> 2
<OTHER-SE> 19,955
<TOTAL-LIABILITY-AND-EQUITY> 116,366
<SALES> 35,777
<TOTAL-REVENUES> 35,777
<CGS> 28,804
<TOTAL-COSTS> 28,804
<OTHER-EXPENSES> 11,665
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,666
<INCOME-PRETAX> (6,288)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (7,288)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,169)
<CHANGES> 0
<NET-INCOME> (8,457)
<EPS-PRIMARY> (.50)
<EPS-DILUTED> 0
</TABLE>
