<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 June 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)
<TABLE>
<S> <C>
Delaware 13-3607944
(State or other jurisdiction of incorporation
or organization) (I.R.S. Employer Identification No.)
(Address of principal executive offices) (Zip Code)
</TABLE>
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 August 12, 1998.
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SUBMICRON SYSTEMS CORPORATION
INDEX
Part I - Financial Information
<TABLE>
<CAPTION>
Item 1: Financial Statements Page
<S> <C>
Consolidated Balance Sheets at
June 30, 1998 and December 31, 1997 3
Consolidated Statements of Operations
for the three months ended June 30, 1998
and June 30, 1997 4
Consolidated Statements of Operations
for the six months ended June 30, 1998
and June 30, 1997 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1998 and
June 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
</TABLE>
Part II - Other Information
Item 4: Submission of Matters to a Vote of
Security Holders
Item 6: Exhibits
Exhibit 27 - Financial Data Schedule
2
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,249 $ 8,228
Accounts receivable, net 8,977 16,632
Inventories, net 14,277 13,152
Prepaid expenses 3,008 2,288
-------- --------
Total current assets 27,511 40,300
Property and equipment, net 11,473 13,815
Goodwill, net 1,346
1,457
Intangibles and other assets, net 3,749 4,136
-------- --------
$ 44,079 $ 59,708
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY DEFICIT
Current liabilities:
Line of credit $ 3,820 $ 3,024
Current portion of long-term debt 1,821 1,849
Accounts payable 6,705 6,830
Accrued warranty and installation 4,271 5,691
Accrued expenses and other 10,222 9,926
Deferred revenues 7,852 3,955
-------- --------
Total current liabilities 34,691 31,275
Long-term debt 31,594 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 (80,311) (60,559)
-------- --------
Total stockholders' equity deficit (22,206) (2,590)
-------- --------
$ 44,079 $ 59,708
======== ========
</TABLE>
See accompanying notes.
3
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended June 30,
1998 1997
<S> <C> <C>
System sales, net $ 4,720 $ 13,022
Service and other sales 1,278 7,666
-------- --------
Total net sales 5,998 20,688
Cost of system sales 8,072 15,310
Cost of service and other sales 569 8,658
-------- --------
Total cost of sales 8,641 23,968
Gross margin (2,643) (3,280)
Selling, general and administrative expenses 3,641 9,423
Research and development expenses 2,584 2,390
Restructuring charges 2,030 3,792
-------- --------
Operating loss (10,898) (18,885)
Interest expense and other:
Interest income 93 34
Interest expense (1,610) (1,176)
Other income(expense), net 511 (41)
-------- --------
Total interest expense and other, net (1,006) (1,183)
-------- --------
Loss before income taxes (11,904) (20,068)
Income tax provision -- 2,000
-------- --------
Net loss $(11,904) $(22,068)
======== ========
Net loss per Common share:
Basic and diluted loss per Common share $ (.61) $ (1.30)
======== ========
Weighted average number of
shares of Common stock outstanding 19,444 16,945
======== ========
</TABLE>
See accompanying notes.
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
System sales, net $ 12,150 $ 42,702
Service and other sales 3,524 13,763
-------- --------
Total net sales 15,674 56,465
Cost of system sales 16,533 37,985
Cost of service and other sales 2,296 14,787
-------- --------
Total cost of sales 18,829 52,772
Gross margin (3,155) 3,693
Selling, general and administrative expenses 7,264 18,587
Research and development expenses 4,932 4,891
Restructuring charges 2,030 3,792
-------- --------
Operating loss (17,381) (23,577)
Other interest expense and other:
Interest income 185 93
Interest expense (3,131) (2,842)
Other income(expense), net 575 (30)
-------- --------
Total interest expense and other, net (2,371) (2,779)
-------- --------
Loss before income taxes and
extraordinary item (19,752) (26,356)
Income tax provision -- 3,000
-------- --------
Loss before extraordinary charge (19,752) (29,356)
Extraordinary charge on debt extinguishment -- (1,169)
-------- --------
Net loss $(19,752) $(30,525)
======== ========
Net loss per Common share:
Loss before extraordinary charge $ (1.04) $ (1.73)
Extraordinary charge -- (.07)
-------- --------
Basic and diluted loss per Common share $ (1.04) $ (1.80)
======== ========
Weighted average number of
shares of Common stock outstanding 19,016 16,918
======== ========
</TABLE>
See accompanying notes.
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows (used in) provided by operating activities:
Net loss $(19,752) $(30,525)
Adjustments to reconcile net loss to
net cash (used in) provided by operating activities
Depreciation and amortization 2,808 3,095
Extraordinary loss on debt extinguishment -- 1,169
Provision for valuation allowances 2,000 84
Deferred tax provision -- 3,000
Accretion of note discount 798 314
Non-cash interest expense 600 --
Changes in operating assets and liabilities:
Decrease in accounts receivable 7,812 20,524
(Increase) decrease in inventories (3,282) 807
(Increase) decrease in prepaid expenses and other (720) 1,809
Decrease in other assets 463 1,083
Decrease in accounts payable (125) (6,835)
(Decrease) increase in warranty, accrued expenses and other (1,124) 3,547
Increase in deferred revenues 3,897 1,995
-------- --------
Net cash (used in) provided by operating activities (6,625) 67
-------- --------
Cash flows used in investing activities:
Capital expenditures (466) (423)
-------- --------
Net cash used in investing activities (466) (423)
-------- --------
Cash flows provided by(used in) financing activities:
Net proceeds (payments) under credit agreement 796 (1,297)
Principal payments under capital lease obligations
and long-term debt (684) (981)
-------- --------
Net cash provided by (used in) financing activities 112 (2,278)
-------- --------
Net decrease in cash and cash equivalents (6,979) (2,634)
Cash and cash equivalents at beginning of period 8,228 5,426
-------- --------
Cash and cash equivalents at end of period $ 1,249 $ 2,792
======== ========
</TABLE>
See accompanying notes.
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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
six months ended June 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 six 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
informations 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):
<TABLE>
<CAPTION>
Six months ended June 30, 1997
------------------------------
<S> <C>
Net sales $ 30,488
========
Loss before extraordinary charge $(25,574)
========
</TABLE>
Basic and diluted loss before extraordinary charge per Common share $(1.51)
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
In June 1998, the Company initiated a further workforce reduction as the result
of the delay and possible cancellation of certain orders scheduled for shipment
in the third and fourth quarters of 1998. Results for the three and six month
periods ended June 30, 1998 include restructuring charges associated with this
reduction. The 1998 restructuring charges consist primarily of severance costs
associated with a reduction in workforce and other charges associated with a
further consolidation of facilities. Restructuring charges incurred during the
three months ended June 30, 1997 were the result of a previous restructuring
plan and consisted primarily of severance and other associated costs.
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 Statement 131'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.
Statement No. 131 will not affect the Company's results of operations or
financial position but may affect the disclosures of segment information.
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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. Statement 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):
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
<S> <C> <C>
Raw materials, purchased components
and parts $ 12,898 $ 11,856
Work-in-process and finished goods 7,050 4,810
-------- --------
19,948 16,666
Excess and obsolescence reserve (5,671) (3,514)
-------- --------
$ 14,277 $ 13,152
======== ========
</TABLE>
During the six months ended June 30, 1998 and 1997, the Company increased its
inventory reserve provision increasing its net loss by approximately $2.2
million ($.12 per Common share) and $1.8 million ($.11 per Common share),
respectively.
7. CUSTOMER INFORMATION:
Sales of the Company's products to three customers accounted for 45% and 41% of
total sales for the three and six months ended June 30, 1998, respectively, and
sales to three different customers accounted for 48% and 43% of total sales for
the three and six months ended June 30, 1997. An account receivable from a
single customer represents 52% of consolidated receivables as of June 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% (11.09% at June 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. Based on this borrowing base, the
Company's borrowing limit at June 30, 1998 was approximately $4.6 million.
Borrowings under the credit facility were $3.8 million at June 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 June 30, 1998.
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.
8
<PAGE> 9
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, by the Company, investors 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 or the failure of the Company's Common Stock to be listed on the NASDAQ
National Market, the New York Exchange or the American Exchange, the holders
have the right to designate a majority of the Board of Directors, subject in
each case, to stockholder approval so long as such applicable Nasdaq
regulations would require such approval.
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 are convertible into shares of Common stock
at $3.70 per share, subject to adjustment. Results for the six months ended June
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 $1,010,000 at June 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 six months ended June
30, 1998, principally a result of the Company's recording a valuation allowance
against its deferred tax asset as of June 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.
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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 six months ended June
30, 1997 include results of operations for both subsidiaries.
Net Sales
Net sales for the second quarter of 1998 were $6.0 million, a $14.7 million
decrease, from $20.7 million in sales for the second quarter of 1997. Net sales
for the six months ended June 30, 1998 were $15.7 million as compared to $56.5
million for the six months ended June 30, 1997. The decrease in sales for the
three and six month periods ended June 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 six months
ended June 30, 1997 include sales of Systems Chemistry and Imtec of $9.1 million
and $26.0 million respectively.
Cost of Sales
Cost of sales for the second quarter of 1998 was $8.6 million, or 144% of net
sales, versus $24.0 million, or 116% of net sales, for the second quarter of
1997. Cost of sales for the six months ended June 30, 1998 was $18.8 million, or
120% of net sales, as compared to $52.8 million, or 93% on net sales, for the
six months ended June 30, 1997. The increase in cost of sales, as a percentage
of sales, for the second quarter of 1998 as compared to the second quarter of
1997 is primarily the result of underabsorbed labor and manufacturing overhead
associated with lower production volume. Additionally, cost of sales for the
second quarter of 1998 includes a $1.5 million charge to reserve for excess
inventory created by the drop in projected revenue for the second half of 1998.
Cost of sales for the second quarter of 1997 included a writedown of $1.8
million of certain inventory associated with a specific customer order. Cost of
sales, as a percentage of sales, excluding Systems Chemistry and Imtec, was 120%
and 94% of net sales for the three and six months ended June 30, 1997,
respectively.
Selling, General and Administrative
Selling, general and administrative expenses were $3.6 million, or 61% of net
sales, for the second quarter of 1998, as compared to $9.4 million, or 46% of
net sales, for the second quarter of 1997. Selling, general and administrative
expenses were $7.3 million, or 46% of net sales, for the six months ended June
30, 1998, as compared to $18.6 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
$7.0 million and $13.4 million for the three and six months ended June 30, 1997,
respectively.
Research and Development
Research and development expenses were $2.6 million and $4.9 million for the
three and six month periods ended June 30, 1998, respectively, as compared to
$2.4 million and $4.9 million for the three and six month periods ended June 30,
1997. Research and development spending remained at prior year levels as the
Company continues its development efforts. Excluding Systems Chemistry and
Imtec, research and development spending was $2.2 million and $4.5 million for
the three and six months ended June 30, 1997, respectively.
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Restructuring Charges
Results for the three and six month periods ended June 30, 1998 and June 30,
1997 include $2.0 million and $3.8 million of restructuring charges. The 1998
restructuring charges were recorded in response to the delay and possible
cancellation of several orders scheduled for shipment in the third and fourth
quarter of 1998. These charges consist primarily of severance costs associated
with a further reduction in workforce and other charges associated with a
consolidation of facilities. Restructuring charges incurred during the three
months ended June 30, 1997 were the result of an initial restructuring plan and
consisted primarily of severance and other associated costs.
Interest expense
Interest expense was $1.6 million and $3.1 million for the three and six months
ended June 30, 1998, respectively, as compared to $1.2 million and $2.8 million
for the three and six months ended June 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 six months ended June 30, 1998, includes a gain realized on
the sale of Systems Chemistry, of approximately $500,000, resulting from the
final settlement with the acquirer.
Tax Provision
No income tax benefit has been recorded for the six months ended June 30, 1998,
principally a result of the Company's recording a valuation allowance against
its deferred tax asset as of June 30, 1998, thereby eliminating the benefit
realized on the Company's 1998 net operating loss.
Income tax expense of $3.0 million for the six months ended June 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 six 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 9% convertible subordinated notes that were exchanged for 8%
convertible subordinated notes and series A convertible non-redeemable preferred
stock.
LIQUIDITY AND CAPITAL RESOURCES
Total current assets decreased $12.8 million, to $27.5 million at June 30, 1998,
from $40.3 million at December 31, 1997. Cash and cash equivalents decreased
$7.0 million during the six month period ended June 30, 1998. Cash used in
operations totaled $6.6 million for the six months ended June 30, 1998 due
primarily to the net loss of $13.5 million before depreciation and other non
cash charges of $6.2 million, partially offset by collections of accounts
receivable. Accounts receivable decreased $7.6 million, to $9.0 million at June
30, 1998, from $16.6 million at December 31, 1997, as collections outpaced
shipments. In addition, the Company collected $2.0 million of past due retainage
receivables. Inventories increased $3.3 million, to $14.3 million at June 30,
1998 versus the balance at December 31, 1997 due primarily to additional work in
process inventory to satisfy shipments scheduled for the third quarter 1998.
Total current liabilities increased $3.4 million to $34.7 million at June 30,
1998, from $31.3 million at December 31, 1997. The primary component of the
increase was deferred revenue which increased $3.9 million, to $7.9 million at
June 30, 1998, as compared to $4.0 million at December 31, 1998, as the result
of deposits received on customer orders during the first six months of 1998.
Investing activities utilized cash of approximately $466,000 for capital
equipment purchases.
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<PAGE> 12
Financing activities provided cash of $112,000 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 then paid by 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 (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, by the
Company, investors 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 or the failure
of the Company's Common Stock to be listed on the NASDAQ National Market, the
New York Exchange or the American Exchange, the holders have the right to
designate a majority of the Board of Directors, subject in each case, to
stockholder approval so long as such applicable Nasdaq regulations would
require such approval.
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% (11.09% at June 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. The Company's borrowing capacity
at June 30, 1998, was approximately $4.6 million. Borrowings under the credit
facility were $3.8 million at June 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 to "The BOC Group" 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 the then 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 are convertible into
shares of Common stock at $3.70 per share, subject to adjustment.
The Company incurred operating losses during the first half of 1998, in fiscal
1997 and 1996, and as of June 30, 1998, had an accumulated deficit of $80.3
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.
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<PAGE> 13
During the second quarter of 1998, the Company became aware that certain orders
scheduled for shipment during the third and fourth quarter of 1998 were delayed
and that the possibility existed for the cancellation of an $8.9 million order
from a single customer. In response, the Company is reducing its workforce by
over 25% from June 29, 1998, levels, further consolidating facilities and
trimming other operating expenses. In addition the Company has entered into
discussions with certain of its 12% and 8% noteholders regarding the deferral
of interest payments and providing additional debt 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, with an oral commitment to advance a total
of $3.0 million in excess of current limits upon receipt of $2.0 million in
additional subordinated debt or equity financing by a third party. There can be
no assurances that these activities will result in definitive agreements.
The Company planned to sell its PRIMAXX division during 1998 to generate
additional liquidity. During the second quarter of 1998, the Company received an
offer to purchase Primaxx and is currently preparing a response to the offer.
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:
- - Divested two subsidiaries in 1997 with products inconsistent with the
Company's core business, using the proceeds from one of these divestitures to
significantly reduce its outstanding and fully utilized line of credit;
- - Refinanced in 1997 its remaining line of credit balance with term debt and
an additional credit facility;
- - Reduced the Company's cash usage through workforce reductions and reductions
in other spending;
- - 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;
- - Initiated processes 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
regarding the timing and prerequisites of the installation which are intended
to reduce installation delays, reduce costs to the Company, increase customer
satisfaction and accelerate collection of receivables;
- - Initiated ongoing reviews of all sales contract bids by the Company's
management to improve margins;
- - Initiated a program, which is substantially complete at June 30, 1998, to
fix system operating problems in the field using a more focused approach
toward customer requirements, thereby accelerating the collection of past due
receivables and improving customer satisfaction;
- - 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;
- - Initiated improvements in cash flow through negotiating customer deposits
and extended payment terms with vendors;
- - Developed comprehensive and timely measures for ongoing monitoring of cash
flow to more effectively manage the Company's future cash requirements; and
- - Established a detailed budget to manage operating activity with defined
timely reporting periods and ongoing monitoring of strict adherence to
budgeted amounts.
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 several past due receivables, expected
additional investments, expected deferral of interest on long term debt and the
sale of its PRIMAXX subsidiary. 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, and raise
additional capital through potential private placements of debt or equity
securities or obtain an expanded or replacement credit facility.
13
<PAGE> 14
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
softening demand which could 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.
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 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 Year 2000 project is well under way and the Company
expects to be fully Year 2000 compliant by the end of 1998. The Company
estimates that it has incurred costs of approximately $75,000 to address the
year 2000 issue and it expects additional costs of approximately $40,000.
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
references 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
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a vote of Security-Holders.
The Company held its annual meeting of stockholders on June 30,
1998. The purpose of the meeting was:
(i) To elect two directors to hold office until the Annual Meeting of
Stockholders in 2001.
(ii) To approve an amendment to the company's Employee Stock Purchase
Plan to increase the number of shares issuable thereunder.
(iii) To approve an amendment to the company's 1991 Amended and Restated
Stock Option Plan to increase the number of shares issuable
thereunder.
(iv) To approve the company's 1997 Stock Option Plan for Non-Employee
Directors.
(v) To ratify the appointment of Ernst & Young LLP as the company's
independent accountants for 1998.
The vote with respect to electing two directors to hold office until the Annual
Meeting of Stockholders in 2001 was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
Barry Ridings 16,854,957 140,166 --
Donald Zito 16,857,897 137,226 --
</TABLE>
The vote with respect to approving an amendment to the company's Employee Stock
Purchase Plan to increase the number of shares issuable thereunder was as
follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
6,947,300 303,311 40,422
</TABLE>
The vote with respect to approving an amendment to the company's 1991 Amended
and Restated Stock Option Plan to increase the number of shares issuable
thereunder was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
6,764,771 479,597 46,665
</TABLE>
The vote with respect to approving the company's 1997 Stock Option Plan for
Non-Employee Directors was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
6,768,069 469,546 53,418
</TABLE>
The vote with respect to ratifying the appointment of Ernst & Young LLP as the
company's independent accountants for 1998 was as follows:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN
--- ------- -------
<S> <C> <C> <C>
16,922,283 42,705 30,135
</TABLE>
15
<PAGE> 16
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 27. Financial Data Schedule
B. Reports on Form 8-K
None
16
<PAGE> 17
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: August 14, 1998 By: /s/David J. Ferran
-------------------
David J. Ferran
President & CEO
Dated: August 14, 1998 /s/John W. Kizer
----------------
John W. Kizer
Vice President Finance
Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,249
<SECURITIES> 0
<RECEIVABLES> 9,729
<ALLOWANCES> 752
<INVENTORY> 14,277
<CURRENT-ASSETS> 3,008
<PP&E> 26,717
<DEPRECIATION> 15,244
<TOTAL-ASSETS> 44,079
<CURRENT-LIABILITIES> 34,691
<BONDS> 31,594
0
649
<COMMON> 2
<OTHER-SE> 57,454
<TOTAL-LIABILITY-AND-EQUITY> 44,079
<SALES> 15,674
<TOTAL-REVENUES> 15,674
<CGS> 18,829
<TOTAL-COSTS> 18,829
<OTHER-EXPENSES> 14,226
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,131
<INCOME-PRETAX> (19,752)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,752)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,752)
<EPS-PRIMARY> 0
<EPS-DILUTED> (1.04)
</TABLE>
