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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 September 30, 1998
-------------------------------------------------
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)
Delaware 13-3607944
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6330 Hedgewood Drive 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 19,690,979 shares of Common stock outstanding, $.0001 par value, as
of November 12, 1998.
1
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SUBMICRON SYSTEMS CORPORATION
INDEX
-----
Part I - Financial Information
Item 1: Financial Statements Page
Consolidated Balance Sheets at
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three months ended September 30, 1998
and September 30, 1997 4
Consolidated Statements of Operations
for the nine months ended September 30, 1998
and September 30, 1997 5
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and
September 30, 1997 6
Notes to Consolidated Financial Statements 7-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Part II - Other Information
Item 6: Exhibits
Exhibit 27 - Financial Data Schedule
2
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
September 30, December 31,
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,378 $ 8,228
Accounts receivable, net 7,211 16,632
Inventories, net 11,503 13,152
Prepaid expenses 2,171 2,288
Total current assets 23,263 40,300
Property and equipment, net 6,788 13,815
Goodwill, net 1,289 1,457
Intangibles and other assets, net 3,609 4,136
-------- --------
$ 34,949 $ 59,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIT
Current liabilities:
Line of credit $ 4,967 $ 3,024
Current portion of long-term debt 1,854 1,849
Accounts payable 5,831 6,830
Accrued expenses and other 13,496 15,617
Deferred revenues 9,245 3,955
-------- --------
Total current liabilities 35,393 31,275
Long-term debt 31,824 31,023
Commitments and contingencies
Stockholders' equity deficit:
Preferred stock, $.01 par value, 5,000 shares
authorized -- --
Preferred stock, Series A Convertible Preferred
Stock, stated value, 96 and 685 shares
issued and outstanding 649 4,900
Common stock, $.0001 par value, 100,000,000
shares authorized, 19,690,979 and 18,338,949
shares issued and outstanding 2 2
Additional paid-in capital 57,454 53,067
Accumulated deficit (90,373) (60,559)
-------- --------
Total stockholders' equity deficit (32,268) (2,590)
-------- --------
$ 34,949 $ 59,708
======== ========
</TABLE>
See accompanying notes.
3
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended September 30,
1998 1997
-------- --------
<S> <C> <C>
System sales, net $ 10,233 $ 16,507
Service and other sales 1,745 6,058
-------- --------
Total net sales 11,978 22,565
Cost of system sales 9,880 14,696
Cost of service and other sales 912 3,838
-------- --------
Total cost of sales 10,792 18,534
Gross margin 1,186 4,031
Selling, general and administrative expenses 3,560 7,412
Research and development expenses 1,910 2,110
Restructuring charges 3,643 1,563
-------- --------
Operating loss (7,927) (7,054)
Interest expense and other:
Interest income 59 33
Interest expense (1,720) (907)
Other income(expense), net (474) 3,758
-------- --------
Total interest expense and other, net (2,135) 2,884
-------- --------
Loss before income taxes (10,062) (4,170)
Income tax provision -- 2,459
-------- --------
Net loss $(10,062) $ (6,629)
======== ========
Net loss per Common share:
Basic and diluted loss per Common share $ (0.51) $ (0.39)
======== ========
Weighted average number of
shares of Common stock outstanding 19,691 17,171
======== ========
</TABLE>
See accompanying notes.
4
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
-------- --------
<S> <C> <C>
System sales, net $ 22,383 $ 59,209
Service and other sales 5,269 19,821
-------- --------
Total net sales 27,652 79,030
Cost of system sales 26,413 52,681
Cost of service and other sales 3,208 18,625
-------- --------
Total cost of sales 29,621 71,306
Gross margin (1,969) 7,724
Selling, general and administrative expenses 10,824 25,999
Research and development expenses 6,842 7,001
Restructuring charges 5,673 5,355
-------- --------
Operating loss (25,308) (30,631)
Other interest expense and other:
Interest income 244 126
Interest expense (4,851) (3,749)
Other income(expense), net 101 3,728
-------- --------
Total interest expense and other, net (4,506) 105
-------- --------
Loss before income taxes and
extraordinary item (29,814) (30,526)
Income tax provision -- 5,459
-------- --------
Loss before extraordinary charge (29,814) (35,985)
Extraordinary charge on debt extinguishment -- (1,169)
-------- --------
Net loss $(29,814) $(37,154)
======== ========
Net loss per Common share:
Loss before extraordinary charge $ (1.54) $ (2.09)
Extraordinary charge -- (.07)
-------- --------
Basic and diluted loss per Common share $ (1.54) $ (2.16)
======== ========
Weighted average number of
shares of Common stock outstanding 19,344 17,162
======== ========
</TABLE>
See accompanying notes.
5
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(29,814) $(37,154)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities
Depreciation and amortization 4,296 4,562
Extraordinary loss on debt extinguishment -- 1,169
Gain on sale of SCI assets and PRIMAXX license -- (3,800)
Provision for valuation allowances and write-off
of fixed assets 8,665 1,858
Deferred tax provision -- 5,459
Accretion of note discount 1,197 314
Non-cash interest expense 1,200 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 9,026 23,111
(Increase) decrease in inventories (3,424) 5,337
(Increase) decrease in prepaid expenses and other 117 2,427
Decrease in other assets 695 280
Decrease in accounts payable (999) (7,478)
(Decrease) increase in accrued expenses and other (2,421) 422
Increase in deferred revenues 5,290 49
-------- --------
Net cash used in operating activities (6,172) (3,444)
-------- --------
Cash flows (used in) provided by investing activities:
Capital expenditures (466) (974)
Net proceeds from sale of SCI assets 15,840
-------- --------
Net cash (used in) provided by investing activities (466) 14,866
-------- --------
Cash flows provided by(used in) financing activities:
Net proceeds (payments) under credit agreement 1,943 (19,512)
Proceeds from long-term debt 5,000
Principal payments under capital lease obligations
and long-term debt (1,155) (1,472)
-------- --------
Net cash provided by (used in) financing activities 788 (15,984)
-------- --------
Net decrease in cash and cash equivalents (5,850) (4,562)
Cash and cash equivalents at beginning of period 8,228 5,426
-------- --------
Cash and cash equivalents at end of period $ 2,378 $ 864
======== ========
</TABLE>
See accompanying notes.
6
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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 and
nine months ended September 30, 1998 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, 1997.
2. SALE OF CERTAIN ASSETS
----------------------
On December 31, 1997, the Company completed the sale of certain net assets of
its subsidiary, Imtec Acculine Inc. (Imtec). On August 7, 1997, the Company sold
substantially all of the net assets of its subsidiary, Systems Chemistry
Incorporated (Systems Chemistry). Pro forma nine month results presented below
reflect the results of operations of the Company as if the sale of Systems
Chemistry and Imtec had occurred on January 1, 1997. The pro forma financial
information presented is not necessarily indicative of the results of operations
that the Company would have obtained had such events occurred at the beginning
of the period. Pro forma information is as follows (in thousands, except per
share date):
Nine months ended
September 30, 1997
------------------
Net sales $ 48,011
Loss before extraordinary charge $(32,016)
Basic and diluted loss before
extraordinary charge per Common share $ (1.87)
In October 1998, the Company completed the sale of the net assets of its PRIMAXX
division for $2.6 million. The Company used the cash proceeds of approximately
$1.9 million to fund operations. The Company expects to record a gain on the
sale of approximately $500,000 in the fourth quarter of 1998.
3. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
-----------------------------------------------------------
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 disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
4. RESTRUCTURING CHARGES
---------------------
The Company incurred significant restructuring charges during the first nine
months of 1998. Results for the three and nine month periods ended September 30,
1998 include restructuring charges associated with the write-off of depreciable
assets associated with the consolidation of facilities, the write-off of
equipment associated with the discontinuance of programs due to insufficient
resources and severance costs associated with a reduction in workforce as the
result of the delay and possible cancellation of certain orders scheduled for
shipment in the third and fourth quarters of 1998. Restructuring charges
incurred during the nine months ended September 30, 1997 were the result of
management's initial restructuring plan and consisted primarily of severance
costs and lease termination costs associated with vacating the Company's
corporate office.
7
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5. NEW ACCOUNTING STANDARDS
------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ("SFAS No.
131"), which the Company will be required to adopt for year-end 1998 reporting,
and 1999 interim reporting. Under the Statement's "management approach", the
Company will report financial and descriptive information about its "operating
segments". Operating segments are revenue-producing components for which
separate financial information is produced internally and is subject to
evaluation by the chief operating decision maker in deciding how to allocate
resources to segments. The Company currently has two operating segments. SFAS
No. 131 will not affect the Company's results of operations or financial
position but may affect the disclosures of segment information.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources and includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners. SFAS No. 130 is not expected to materially affect the
Company's results of operations or financial position.
6. INVENTORIES:
------------
Inventories are stated at the lower of cost (first in, first out basis) or
market and consist of the following (in thousands):
September 30, December 31,
1998 1997
------- -------
Raw materials, purchased components
and parts $12,695 $11,856
Work-in-process and finished goods 7,395 4,810
------- -------
20,090 16,666
Excess and obsolescence reserve (8,587) (3,514)
------- -------
$11,503 $13,152
======= =======
During the nine months ended September 30, 1998 and 1997, the Company increased
its inventory reserve by approximately $5.1 million ($.26 per Common share) and
$1.0 million ($.06 per Common share), respectively.
7. CUSTOMER INFORMATION:
---------------------
Sales of the Company's products to three customers accounted for 77% and 45% of
total sales for the three and nine months ended September 30, 1998,
respectively. Sales to three different customers accounted for 64% and 34% of
total sales for the three and nine months ended September 30, 1997. An account
receivable from a single customer represents 24% of consolidated receivables as
of September 30, 1998.
8. CREDIT FACILITY:
----------------
In November 1997, the Company entered into a new credit facility in the amount
of up to $15 million with Greyrock Business Credit (Greyrock), a division of
Nations Credit Commercial Corporation. Borrowings under this facility bear
interest at "LIBOR" plus 5.375% ( 10.75 % at September 30, 1998) and are secured
by the Company's assets. The facility contains a borrowing base related to the
Company's eligible receivables and inventory and an overadvance of $2.0 million.
Based on this borrowing base and the overadvance, the Company's borrowing limit
at September 30, 1998 was approximately $5.5 million. Borrowings under the
credit facility were $5.0 million at September 30, 1998. The facility matures on
January 1, 1999, and is renewable upon agreement of both parties. The terms of
the facility limit certain actions of the Company, including the payment of
dividends, and permit Greyrock, in the event of a material adverse change in the
Company's business or financial condition in Greyrock's good faith judgment, to
exercise its rights under a default, including ceasing making additional funds
available under the facility, declaring all or part of the outstanding balance
immediately payable, and taking possession of the pledged collateral.
Consequently, the credit facility is classified as a current liability at
September 30, 1998.
8
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9. LONG TERM DEBT:
---------------
The Company's long term debt described below requires the maintenance of certain
financial covenants and limits certain actions of the Company, including the
level of research and development and capital expenditures, issuance of
additional capital stock, and payment of dividends.
In November 1997, the Company completed a $20 million private placement of
securities consisting of $20 million principal amount of 12% Senior Subordinated
Notes due February 1, 2002 (Senior Subordinated Notes), with associated warrants
to purchase 6,616,367 shares of the Company's Common stock at $2.25 per share,
subject to customary adjustment for changes in the capitalization and below
market issuances. The Company used the net proceeds to repay its bank debt, fund
operations and fund its restructuring activities.
Upon certain payment defaults in connection with the Company's Senior credit
facility holders of the 12% notes have the option to purchase up to $4.0 million
of additional 12% notes, which would include up to approximately 2.9 million
additional warrants. In addition, upon payment default under the 12% Notes, the
holders have the right to designate a majority of the Board of Directors,
subject in each case, to stockholder approval if applicable Nasdaq regulations
would require such approval. The Company is not currently subject to any such
regulations.
In March 1997, the Company issued shares of its Series A Convertible
Non-Redeemable Preferred stock convertible into approximately 2.7 million shares
of Common stock (Convertible Preferred stock) and approximately $8.7 million
principal amount of its 8% Convertible Subordinated Notes due March 26, 2002 to
previous holders of its 9% Convertible Subordinated Notes due December 1997 and
associated Warrants. The New Notes were initially convertible into shares of
Common stock at $3.70 per share, subject to adjustment. Results for the nine
months ended September 30, 1997 include an extraordinary charge for debt
extinguishment of $1.2 million, or $0.07 per Common share, in connection with
the Company's issuance of its 8% Convertible Subordinated notes and Convertible
Preferred stock.
The Company issued a $5 million non-interest bearing note due in August 2000.
This note was issued in connection with the sale of substantially all the net
assets of Systems Chemistry and carries a discount of $945,000 at September 30,
1998 based on imputed interest at 10%. This Note is collateralized by foreign
accounts receivable of SubMicron Systems Corporation.
The fair value of the Company's long term debt approximates its carrying value.
10. INCOME TAXES:
-------------
No income tax benefit has been recorded for the three and nine months ended
September 30, 1998, principally a result of the Company's recording a valuation
allowance against its deferred tax asset as of September 30, 1998, thereby
eliminating the benefit realized on the Company's 1998 net operating loss.
11. EARNINGS PER SHARE:
-------------------
The Company adopted Financial Accounting Standards Board Statement No. 128,
"Earnings per Share", on December 31, 1997. Primary earnings per share has been
replaced with basic earnings per share. Under the new requirements for
calculating basic earnings per share, the dilutive effect of stock options and
convertible securities has been excluded. Diluted earnings per share assumes the
conversion of all potentially dilutive securities.
9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
- -------
Comparative results were impacted by the sale of Systems Chemistry in August
1997 and Imtec in December 1997. Results for the three and nine months ended
September 30, 1997 include results of operations for both subsidiaries.
Net Sales
- ---------
Net sales for the third quarter of 1998 were $12.0 million, a $10.6 million
decrease, from $22.6 million in sales for the third quarter of 1997. Net sales
for the nine months ended September 30, 1998 were $27.7 million as compared to
$79.0 million for the nine months ended September 30, 1997. The decrease in
sales for the three and nine month periods ended September 30, 1998 versus the
comparable periods of 1997 are primarily a result of the sale of Systems
Chemistry and Imtec and a slowdown in the semiconductor industry. Results for
the three and nine months ended September 30, 1997 include sales of Systems
Chemistry and Imtec of $5.0 million and $31.0 million, respectively.
Cost of Sales
- -------------
Cost of sales for the third quarter of 1998 was $10.8 million, or 90% of net
sales, versus $18.5 million, or 82% of net sales, for the third quarter of 1997.
Cost of sales for the nine months ended September 30, 1998 was $29.6 million, or
107% of net sales, as compared to $71.3 million, or 90% on net sales, for the
nine months ended September 30, 1997. The increase in cost of sales, as a
percentage of sales, for the third quarter of 1998 as compared to the third
quarter of 1997 is the result of a $2.9 million charge to reserve for excess
inventory. Management made these adjustments to bring inventories in line with
the level and mix of projected sales. Cost of sales for the third quarter of
1997 included an increase in the allowance for excess and obsolete inventory of
$1.4 million.
Selling, General and Administrative
- -----------------------------------
Selling, general and administrative expenses were $3.6 million, or 30% of net
sales, for the third quarter of 1998, as compared to $7.4 million, or 33% of net
sales, for the third quarter of 1997. Selling, general and administrative
expenses were $10.8 million, or 39% of net sales, for the nine months ended
September 30, 1998, as compared to $26.0 million, or 33% of sales, for the
comparable period of 1997. The decrease in selling, general and administrative
expenses is due to cost reduction activities, reduced sales commissions
resulting from the decrease in sales volume and the sale of Systems Chemistry
and Imtec. Excluding Systems Chemistry and Imtec, selling, general and
administrative expense was $6.3 million and $19.7 million for the three and nine
months ended September 30, 1997, respectively.
Research and Development
- ------------------------
Research and development expenses were $1.9 million and $6.8 million for the
three and nine month periods ended September 30, 1998, respectively, as compared
to $2.1 million and $7.0 million for the three and nine month periods ended
September 30, 1997. Research and development spending remained at prior year
levels. Excluding Systems Chemistry and Imtec, research and development spending
was $1.9 million and $6.4 million for the three and nine months ended September
30, 1997, respectively.
10
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Restructuring Charges
- ---------------------
Results for the three and nine month periods ended September 30, 1998 include
restructuring charges of $3.6 and $5.7 million, respectively, associated with
the write-off of depreciable assets associated with the consolidation of
facilities, the write-off of equipment associated with the discontinuance of
programs due to insufficient resources and severance costs associated with a
reduction in workforce as the result of the delay and possible cancellation of
certain orders scheduled for shipment in the third and fourth quarters of 1998.
Restructuring charges incurred during the three and nine months ended September
30, 1997 were $1.6 million and $5.4 million, respectively, and were the result
of management's initial restructuring plan which consisted primarily of
severance and other associated costs.
Interest expense
- ----------------
Interest expense was $1.7 million and $4.9 million for the three and nine months
ended September 30, 1998, respectively, as compared to $0.9 million and $3.7
million for the three and nine months ended September 30, 1997. Interest expense
is primarily comprised of interest on the Company's line of credit and long term
debt.
Other income (expense), net
- ---------------------------
Other income for the nine months ended September 30, 1997, includes a gain
realized on the sale of Systems Chemistry, of approximately $2.5 million and a
gain of $1.3 million associated with a licensing agreement of the Company's
PRIMAXX cleaning technology in a specific field of use.
Tax Provision
- -------------
No income tax benefit has been recorded for the nine months ended September 30,
1998, principally a result of the Company's recording a valuation allowance
against its deferred tax asset as of September 30, 1998, thereby eliminating the
benefit realized on the Company's 1998 net operating loss.
Income tax expense of $5.4 million for the nine months ended September 30, 1997
relates to a non-cash charge to increase the Company's valuation allowance for
net deferred tax assets. Such allowance will be available to offset future
income tax expense when it becomes more likely than not that such deferred tax
assets will be realized.
Extraordinary Loss
- ------------------
Results for the first nine months of 1997 include an extraordinary loss for debt
extinguishment of $1.2 million primarily related to the write-off of the
original issue discount and unamortized debt issuance costs related to the
Company's issuance of its 8% convertible subordinated notes and series A
convertible non-redeemable preferred stock to the holders of the 9% convertible
subordinated notes.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Total current assets decreased $17.0 million, to $23.3 million at September 30,
1998, from $40.3 million at December 31, 1997. Cash and cash equivalents
decreased $5.9 million during the nine month period ended September 30, 1998.
Cash used in operations totaled $6.2 million for the nine months ended September
30, 1998 due primarily to the loss of $14.4 million before depreciation and
other non cash charges of $15.4 million, partially offset by collections of
accounts receivable. Accounts receivable decreased $9.0 million, to $7.2 million
at September 30, 1998, from $16.6 million at December 31, 1997, as collections
outpaced shipments, including the collection of $3.9 million of past due
retainage receivables. Inventories, excluding reserves, increased $3.4 million,
to $11.5 million at September 30, 1998 versus the balance at December 31, 1997
due primarily to finished goods inventory shipped in the fourth quarter of 1998.
11
<PAGE> 12
Total current liabilities increased $4.1 million to $35.4 million at September
30, 1998, from $31.3 million at December 31, 1997. The primary component of the
increase was deferred revenue which increased $5.3 million, to $9.2 million at
September 30, 1998, as compared to $4.0 million at December 31, 1998, as the
result of the higher level of advance payments received on customer orders
during the first nine months of 1998.
Investing activities utilized cash of approximately $466,000 for capital
equipment purchases.
Financing activities provided cash of $788,000, primarily as a result of net
borrowings on the Company's line of credit offset partially by principal
payments on long term debt and capital lease obligations.
In December 1997, the Company sold substantially all of the assets of its Imtec
subsidiary in exchange for a note of $1.5 million payable through December 2004.
Interest is payable semiannually on June 30 and December 31 at the lesser of 10%
or the rate paid to the Company's principal secured lender.
In November 1997, the Company completed a private placement of securities
consisting of $20 million principal amount of 12% Senior Subordinated Notes due
February 1, 2002, with associated warrants to purchase 6,616,367 shares of the
Company's Common Stock at $2.25 per share, subject to customary adjustment for
changes in the capitalization and below market issuances. The Company used the
net proceeds to repay its bank debt, fund operations and fund its restructuring
activities. Upon certain payment defaults in connection with the Company's
Senior credit facility, holders of the 12% notes have the option to purchase
incremental Senior Subordinated Notes up to $4.0 million including up to
approximately 2.9 million additional warrants. In addition, upon payment default
under the 12% Notes, the holders have the right to designate a majority of the
Board of Directors, subject in each case, to stockholder approval if applicable
Nasdaq regulations would require such approval. The Company is not currently
subject to any such regulations.
Also in November 1997, the Company entered into a new credit facility in the
amount of up to $15 million with Greyrock Business Credit, a division of Nations
Credit Commercial Corporation (Greyrock). Borrowings under this facility bear
interest at "LIBOR" plus 5.375% (10.75% at September 30, 1998) and are secured
by the Company's assets. The facility contains a borrowing base related to the
Company's eligible receivables and inventory and an overadvance of $2.0 million.
The Company's borrowing capacity at September 30, 1998, was approximately $5.5
million. Borrowings under the credit facility were $5.0 million at September 30,
1998. The facility matures on January 1, 1999, and is renewable upon agreement
of both parties. Although there can be no assurances, management believes its
relationship with Greyrock is good and the credit facility will be renewed, upon
maturity, for an additional year. The terms of the facility limit certain
actions of the Company, including the payment of dividends, and permit Greyrock,
in the event of a material adverse change in the Company's business or financial
condition in Greyrock's good faith judgment, to exercise its rights under a
default, including ceasing making additional funds available under the facility,
declaring all or part of the outstanding balance immediately payable, and taking
possession of the pledged collateral.
In August 1997, the Company completed the sale of substantially all of the net
assets of its Systems Chemistry subsidiary for $20.8 million, which amount
includes a non-interest bearing loan of $5 million due in three years. The
Company applied the proceeds of $18.5 million, after transaction costs and bank
fees, to reduce the amount borrowed under its existing credit facility.
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 the previous holders of $18,350,000 of its 9% convertible subordinated notes
due December 1997 and associated warrants. The New Notes were initially
convertible into shares of Common stock at $3.70 per share, subject to
adjustment.
12
<PAGE> 13
The Company incurred operating losses during the first three quarters of 1998,
in fiscal 1997 and 1996, and as of September 30, 1998, had an accumulated
deficit of $90.4 million. Consequently, the Company has been substantially
dependent upon borrowings to finance its operations. During 1997, the Company
hired a new management team and implemented a worldwide restructuring plan. The
restructuring plan was developed based on an evaluation of the Company's current
products, its available technology, its relationships with its customers and its
financial position.
During the first nine months of 1998, the Company incurred significant
restructuring charges. Results for the three and nine month periods ended
September 30, 1998 include restructuring charges associated the write-off of
depreciable assets associated with the consolidation of facilities, the
write-off of equipment associated with the discontinuance of programs due to
insufficient resources and severance costs associated with a reduction in
workforce as the result of the delay and possible cancellation of certain orders
scheduled for shipment in the third and fourth quarters of 1998. The Company has
reduced its workforce by over 30% from June 29, 1998 levels.
In addition, the Company has entered into discussions with certain of its
noteholders regarding the deferral of cash interest payments and providing
additional debt/equity financing. Also, the Company has negotiated an
overadvance of $2.0 million of additional borrowings above qualified accounts
receivable and inventory as defined by the credit facility agreement through
January 1, 1999. Continuance of the credit facility including is at the
discretion of Greyrock. There can be no assurances that any of these activities
will result in definitive agreements.
As planned, the Company sold its PRIMAXX division for $2.6 million on October
16, 1998. The cash proceeds of approximately $1.9 million was used to fund
operating activities.
A summary of additional actions undertaken by management completed thus far, as
well as actions initiated that will continue throughout the upcoming twelve
month period, include the following:
o Reduced the Company's cash usage through workforce reductions of over 30%,
facility consolidations in Allentown from three buildings to one and
reductions in other spending;
o Initiated improvements in the cost structure and manufacturability through
engineering the Company's core product lines to use less materials while
maintaining process integrity and reducing costly product refinements and
rework during production(margins on recent equipment shipments have
significantly improved);
o Initiated procedures intended to shorten installation time through
improving the quality controls on the Company's products before they leave
the manufacturing facility and through better coordination with the
customer. (recent customer source inspections have gone very smoothly and
installation times on recent shipments are tracking under 60 days);
o Improved the quoting process to involve all functional areas and to better
reflect costs to improve margins;
o Initiated a Product and Cycle Time Excellence program to refocus the
Company's new product development efforts and reduce the number of
development projects to those with strong market and margin potential;
o Initiated improvements in cash flow through negotiating customer deposits
and extended payment terms with vendors;
o Completed a program to fix system operating problems in the field using a
more focused approach toward customer requirements, resulting in the
collection of past due receivables totaling $3.9 million and improved
customer satisfaction;
o Developed comprehensive and timely measures for ongoing monitoring of cash
flow to more effectively manage the Company's future cash requirements;
o Established a detailed budget to manage operating activity with defined
timely reporting periods and ongoing monitoring of strict adherence to
budgeted amounts; and
o Sold the net assets of its PRIMAXX division in October 1998.
13
<PAGE> 14
Management believes the cash requirements in the next twelve months will be
generated by operations, borrowings on the Company's credit facility, customer
deposits on certain orders, collection of currently outstanding past due
receivables, expected additional debt/equity financing, and expected deferral of
cash interest on long term debt. Without such actions, the Company is
susceptible to severe cash shortages which may impact its ability to operate.
Management is confident that its plans and programs will result in the
successful funding of its working capital and cash requirements throughout the
next twelve months. However, if financial results for the upcoming year do not
meet management's expectations, management plans to further reduce discretionary
expenditures such as research and development expenditures, capital
expenditures, accelerate collection of receivables, enter into sales-leaseback
transactions, or raise additional capital through potential private placements
of debt or equity securities or obtain an expanded or replacement credit
facility.
The Company believes that future results of operations will be influenced by a
number of factors, including general economic conditions, timely new product
introductions, the volume, mix and timing of orders received and numerous other
factors. Additionally, the semiconductor industry continues to experience a weak
demand which has lead to reduced future sales and increased pricing pressures.
Due to the inherent risk in the timing of the development and testing of new
products, the Company's operating results may fluctuate significantly.
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 LIBOR rate. No assurance can be given that the
LIBOR rate of interest will not fluctuate significantly, which could have an
adverse effect on operations.
YEAR 2000
Until recently, computer programs were written to store only two digits of
date-related information in order to more efficiently handle and store data.
Thus the programs were unable to properly distinguish between the year 1900 and
the year 2000. This is frequently referred to as the "Year 2000 Problem." In
November 1997, the Company initiated a company-wide Year 2000 Project to address
this issue. Utilizing both internal and external resources, the Company is in
the process of defining, assessing and converting or replacing, various
programs, hardware and instrumentation systems to make them Year 2000
compatible. The Company's internal operating systems were upgraded during the
quarter and are currently year 2000 compliant. The Company is in the process of
upgrading systems used on its equipment in the field with expected completion in
mid 1999. The Company has incurred costs of approximately $85,000 to address the
year 2000 issue and it expects minimal costs in the future.
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 the Company's
financing arrangements and liquidity and capital resources. 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: the ability to fund operations
from cash flows and the other sources described above; general economic and
business conditions as well as conditions in the semiconductor capital equipment
industry; 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.
14
<PAGE> 15
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27. Financial Data Schedule
B. Reports on Form 8-K
None
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
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: November 13, 1998 By: /s/ DAVID J. FERRAN
--------------------------------
David J. Ferran
President & CEO
Dated: November 13, 1998 /s/ JOHN W. KIZER
--------------------------------
John W. Kizer
Vice President Finance
Chief Financial Officer
16
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