<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, 1999
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.)
6330 Hedgewood Drive Allentown, PA 18106
(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 19,913,365 shares of Common Stock outstanding, $.0001 par value, as
of May 14, 1999.
1
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SUBMICRON SYSTEMS CORPORATION
INDEX
Part I - Financial Information
Item 1: Financial Statements Page
Consolidated Balance Sheets at
March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the three months ended March 31, 1999
and March 31, 1998 4
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and
March 31, 1998. 5
Notes to Consolidated Financial Statements 6-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-15
Part II - Other Information
Item 2(c) Changes in Securities and Use of Proceeds 16
Item 6: Exhibits and Reports on Form 8-K 16
Signatures 17
2
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PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,752 $ 1,982
Accounts receivable, net of allowance for doubtful
accounts of $1,677 and $1,752 7,841 8,676
Inventories, net 7,702 7,787
Prepaid expenses and other 2,096 1,979
-------- --------
Total current assets 19,391 20,424
Property and equipment, net 5,230 5,926
Goodwill, net 1,175 1,232
Intangibles and other assets, net 3,053 3,155
-------- --------
$ 28,849 $ 30,737
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 6,954 $ 4,824
Current portion of long-term debt 2,573 2,530
Accounts payable 2,825 3,635
Accrued expenses and other 8,635 9,928
Deferred revenues 3,692 3,745
-------- --------
Total current liabilities 24,679 24,662
Long-term debt 37,546 35,187
Commitments and contingencies
Stockholders' deficit:
Preferred Stock, $.01 par value, 5,000 shares
authorized -- --
Series A Convertible Preferred Stock,
stated value, 89 shares issued and
outstanding 58 58
Common Stock, $.0001 par value, 100,000,000
shares authorized, 19,888,207 and 19,669,825
shares issued and outstanding 2 2
Additional paid-in capital 60,579 60,518
Accumulated deficit (94,015) (89,690)
-------- --------
Total stockholders' deficit (33,376) (29,112)
-------- --------
$ 28,849 $ 30,737
======== ========
</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 March 31,
1999 1998
------------ ------------
<S> <C> <C>
System sales $ 6,497 $ 7,430
Other sales 2,027 2,246
------------ ------------
Total net sales 8,524 9,676
Cost of system sales 5,124 8,461
Cost of other sales 1,310 1,727
------------ ------------
Total cost of sales 6,434 10,188
------------ ------------
Gross margin 2,090 (512)
Selling, general and administrative expenses 3,327 3,623
Research and development expenses 1,060 2,348
------------ ------------
Total operating expenses 4,387 5,971
------------ ------------
Operating loss (2,297) (6,483)
Interest expense and other, net:
Interest income 54 92
Interest expense (2,055) (1,521)
Other, net (14) 64
------------ ------------
Total other expense, net (2,015) (1,365)
------------ ------------
Loss before income taxes (4,312) (7,848)
Income tax expense 13 --
------------ ------------
Net loss $ (4,325) $ (7,848)
============ ============
Net loss per Common share:
Basic and diluted loss per Common share $ (0.22) $ (0.42)
============ ============
Weighted average number of
shares of Common Stock outstanding 19,738,166 18,526,546
============ ============
</TABLE>
See accompanying notes.
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SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1999 1998
------- -------
<S> <C> <C>
Cash flows used in operating activities:
Net loss $(4,325) $(7,848)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 803 1,483
Provision for valuation allowances 30 612
Accretion of note discount 499 399
Amortization of debt issuance costs 97 97
Non-cash interest expense 1,076 203
Changes in operating assets and liabilities:
Decrease in accounts receivable 805 5,430
Decrease in inventories 85 661
Increase in prepaid expenses and other (117) (723)
Decrease in other assets 5 110
Decrease in accounts payable (810) (1,326)
Decrease in warranty, accrued expenses and other (1,256) (1,592)
Decrease in deferred revenues (53) (530)
------- -------
Net cash used in operating activities (3,161) (3,024)
Cash flows used in investing activities:
Capital expenditures (50) (171)
------- -------
Net cash used in investing activities (50) (171)
Cash flows provided by (used in) financing activities:
Net borrowings (payments) under line of credit 2,130 (1,223)
Proceeds from issuance of convertible debt 1,250 --
Proceeds from issuance of stock under
Employee Stock Purchase Plan 61 --
Principal payments under capital lease obligations
and long-term debt (460) (408)
------- -------
Net cash provided by (used in) financing activities 2,981 (1,631)
------- -------
Net decrease in cash and cash equivalents (230) (4,826)
Cash and cash equivalents at beginning of period 1,982 8,228
------- -------
Cash and cash equivalents at end of period $ 1,752 $ 3,402
======= =======
</TABLE>
See accompanying notes.
5
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SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(UNAUDITED)
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, 1999 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,
1998.
The Company's consolidated financial statements have been presented on
a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. During the quarter
ended March 31, 1999 and the years ended December 31, 1998, 1997, and 1996, the
Company's operating activities required a net use of cash totaling $3.2 million,
$13.6 million, $7.0 million, and $21.3 million, respectively, and the Company
incurred net losses of $4.3 million, $29.1 million, $47.6 million, and $20.1
million, respectively. At March 31, 1999, the Company had a stockholders'
deficit of $33.4 million and current liabilities exceeded current assets by $5.3
million.
The Company was not in compliance with the covenant under its 12%
Senior Subordinated Notes and new 12% Senior Subordinated Convertible Notes (see
Note 9) as of March 31, 1999, requiring continued listing by NASDAQ. However,
the Company has obtained a waiver from these noteholders for this covenant
violation through January 1, 2001.
The Company's current credit facility, which matures on January 1, 2000
and is annually renewable upon agreement of both parties, permits the lender, in
the event of a material adverse change in the Company's business or financial
condition in the lender's good faith judgment, to exercise its rights under a
covenant violation, 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. The terms of the
credit facility contain a borrowing base related to the Company's eligible
receivables and inventory and permit an overadvance of up to $2.0 million
expiring on September 30, 1999. Periodically, however, availability under the
credit facility has been insufficient to fund the Company's cash needs,
principally due to the long lead time required to manufacture many of the
Company's products and the insufficient revenue levels due to the continued
downturn in the semiconductor capital equipment industry. To date, certain
lenders have covered the cash shortfall through additional lending under the new
12% Senior Subordinated Convertible Notes. Also, there has been an increase in
recent requests for quotes from existing and potential customers.
The conditions described above raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements as of and for the quarter ended March 31, 1999 do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
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2. ESTABLISHMENT OF SUBSIDIARY IN ASIA:
The Company has formed Akrion (S) Pte. Ltd. ("Akrion"), a wholly-owned
subsidiary, to provide automated wet surface preparation solutions to
manufacturers of semiconductor integrated circuits, bare silicon wafers and
other electronic substrates, such as flat panel displays and photomasks, in the
Asia Pacific Region.
The Company is currently funding the start-up operations of Akrion.
Akrion incurred $625,000 of selling, general and administrative expenses and
$80,000 of research and development expenses during the three months ended March
31, 1999 which are included in the consolidated results of operations.
Shipments of products are expected to commence by the end of 1999. The
Company plans to establish manufacturing capabilities and construct an
applications laboratory in Singapore. Consequently, the Company is pursuing
various alternatives and investigating sources of additional investment,
including local government assistance in Singapore. In the meantime,
manufacturing will occur at the Company's U.S. facilities.
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. RECLASSIFICATIONS:
Certain prior period amounts have been reclassified to conform with
current period presentation.
5. 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,
1999 1998
-------- --------
<S> <C> <C>
Raw materials, purchased components
and parts $ 9,074 $ 9,376
Work-in-process and finished goods 2,954 2,674
-------- --------
12,028 12,050
Excess and obsolescence reserve (4,326) (4,263)
-------- --------
$ 7,702 $ 7,787
======== ========
</TABLE>
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6. CUSTOMER INFORMATION:
Sales of the Company's products to two customers accounted for 62% of
total sales for the three months ended March 31, 1999, and sales to three
different customers accounted for 48% of total sales for the three months ended
March 31, 1998. An account receivable from a single customer represents 42% of
consolidated receivables as of March 31, 1999.
7. CREDIT FACILITY:
In November 1998, the Company renewed its credit facility with Greyrock
Capital, a division of Nations Credit Commercial Corporation ("Greyrock"). As
part of the renewal, the facility was extended through January 1, 2000 and
reduced from $15 million to $10 million. Borrowings under this facility bear
interest at "LIBOR" plus 5.375% (10.3411% at March 31, 1999) and are secured by
the Company's assets. The facility contains a borrowing base related to the
Company's eligible receivables and inventory. Borrowings under the credit
facility were approximately $7.0 million at March 31, 1999, including $2 million
of additional borrowings above the available borrowing base, as of March 31,
1999. These additional borrowings of $2.0 million are due September 30, 1999.
The facility matures on January 1, 2000, 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.
8. ACCRUED EXPENSES AND OTHER:
Accrued expenses and other consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------ ------
<S> <C> <C>
Warranty and installation costs $2,946 $3,259
Commissions 1,067 1,267
Restructuring charges 1,551 1,758
Purchase commitments and other 423 416
Professional fees 67 386
Other 2,581 2,842
------ ------
$8,635 $9,928
====== ======
</TABLE>
9. LONG-TERM DEBT:
The Company's long-term debt arrangements below require the maintenance
of certain financial covenants and limit 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
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During the quarter ended March 31, 1999, the Company issued $1,250,000
of Series 1999 12% Senior Subordinated Convertible Notes due February 1, 2002.
These notes are convertible at the holder's option into approximately 2.2
million shares of Common Stock. The conversion rate is equal to 110% of the
Company's Common Stock closing market value on the date of issuance of the note,
subject to customary adjustment for changes in the capitalization and below
market issuances.
Subsequent to March 31, 1999, the Company issued additional Series 1999
12% Senior Subordinated Convertible Notes in the amount of $3,598,500, which are
convertible at the holder's option into approximately 8.9 million shares of
Common Stock.
As of August 1, 1998, the Company began issuing Series B 12% Senior
Subordinated Notes in lieu of the specified cash interest payments on certain of
its outstanding 12% and 8% notes. All such notes issued have attached 720
detachable warrants for each $1,000 of principal amount. During the three months
ended March 31, 1999, the Company issued Series B 12% Senior Subordinated Notes
in the principal amount of approximately $616,000 with warrants to purchase
approximately 444,000 shares of Common Stock at prices ranging from $.33 to $.76
per share, subject to customary adjustment for changes in capitalization and
below market issuances. Interest is payable quarterly, and, beginning October 1,
1999, only in cash.
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. Interest is payable monthly. However,
the Company has the option under these notes to pay 50% of the interest due in
additional Senior Subordinated Notes. During the three months ended March 31,
1999, the Company exercised its option and issued additional notes of $331,422
in lieu of cash interest payments due during that period.
At March 31, 1999, the Company was not in compliance with the covenant
under its 12% Senior Subordinated Notes and new 12% Senior Subordinated
Convertible Notes requiring continued listing by NASDAQ. However, the Company
has obtained a waiver from these noteholders for this covenant violation through
January 1, 2001.
10. INCOME TAXES:
No income tax benefit has been recorded for the quarter ended March 31,
1999, principally as a result of the Company's recording a valuation allowance
against its deferred tax asset as of March 31, 1999, thereby reducing the
benefit realized on the Company's 1999 net operating loss.
11. LOSS PER SHARE:
Under the requirements for calculating basic loss per share, the dilutive
effect of stock options and convertible securities has been excluded. Diluted
loss per share has not assumed the conversion of all potentially dilutive
securities since to do so would be antidilutive.
9
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net Sales
Net sales of $8.5 million in the first quarter of 1999 decreased by
$1.2 million or 11.9% compared to the first quarter of 1998. This decrease was
primarily the result of the continued downturn in the semiconductor capital
equipment industry.
Cost of Sales
Cost of sales for the first quarter of 1999 was $6.4 million, or 75.5%
of net sales versus $10.2 million or 105.3% of net sales for the first quarter
of 1998. Cost of sales continues to be negatively impacted by low volume
resulting in underabsorbed manufacturing overhead. The net decrease in cost of
sales as a percentage of net sales results primarily from manufacturing
improvements, decreased install times and less spending in the field resulting
from Company resolutions of several equipment problems at customer sites. Also,
during the first quarter of 1998 the Company shipped a system, which had been in
inventory about one year, at no margin to generate positive cash flow.
Selling, General and Administrative
Selling, general and administrative expenses were $3.3 million for the
first quarter of 1999 as compared to $3.6 million for the same period in 1998.
Included in 1999 expenses is $625,000 related to Akrion, consisting primarily of
personnel-related expenses, travel and facility expenses. Excluding the Akrion
expenses, selling, general and administrative expenses decreased $921,000
compared to the prior year primarily due to decreased selling expenses
associated with the $1.2 million decrease in sales, and expense reductions
related to lower headcount as a result of the Company's 1998 restructuring
efforts.
Research and Development
Research and development expenses were $1.1 million or 12.4% of net
sales for the first quarter of 1999 versus $2.3 million or 24.3% for the first
quarter of 1998. The reduction of $1.3 million primarily resulted from lower
headcount, decreased depreciation and no PRIMAXX spending in the first quarter
of 1999 due to its disposition in October 1998. PRIMAXX expenses incurred during
the three months ended March 31, 1998 aggregated approximately $400,000.
Interest Expense
Interest expense, which is incurred on Company borrowings and capital
lease obligations, was $2.1 million for the first quarter of 1999 as compared to
$1.5 million for the first quarter of 1998. This increase resulted from higher
levels of borrowing to support working capital needs.
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Income Tax Expense
No income tax benefit has been recorded for the quarter ended March 31,
1999, principally as a result of the Company's recording a valuation allowance
against its deferred tax assets as of March 31, 1999, thereby eliminating the
benefit realized on the Company's 1999 net operating loss. Income tax expense
for the three months ended March 31, 1999 represents certain state minimum
income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $230 thousand during the first
quarter of 1999. Cash used in operating activities totaled $3.2 million during
the period due primarily to the net loss adjusted for non-cash expenses and the
decrease in accounts payable and accrued expenses. This net use of cash from
operations was largely offset by net borrowings under the line of credit and
proceeds from issuance of convertible debt.
Financing activities provided cash of $3.0 million during the quarter
ended March 31, 1999, with borrowings under the line of credit providing $2.1
million and proceeds from the issuance of new convertible debt providing
approximately $1.3 million, partially offset by payments on capital lease
obligations. At March 31, 1999, no additional availability existed under the
credit facility. During the quarter, the Company issued $1,250,000 of Series
1999 12% Senior Subordinated Convertible Notes due February 1, 2002. These notes
are convertible at the holder's option into approximately 2.2 million shares of
Common Stock at a conversion rate equal to 110% of the Company's Common Stock
closing market value on the date of issuance of the note, subject to customary
adjustment for changes in the capitalization and below market issuances.
Subsequent to March 31, 1999, the Company issued additional Series 1999
12% Senior Subordinated Convertible Notes in the amount of $3,598,500, which are
convertible at the holder's option into approximately 8.9 million shares of
Common Stock.
The Company's working capital deficit increased $1.1 million to $5.3
million as of March 31, 1999, from $4.2 million as of December 31, 1998.
As of August 1, 1998, the Company began issuing Series B 12% Senior
Subordinated Notes in lieu of the specified cash interest payments on certain of
its outstanding 12% and 8% notes. All such notes issued have attached 720
detachable warrants for each $1,000 of principal amount. During the three months
ended March 31, 1999, the Company issued Series B 12% Senior Subordinated Notes
in the principal amount of approximately $616,000 with warrants to purchase
approximately 444,000 shares of Common Stock at prices ranging from $.33 to $.76
per share, subject to customary adjustment for changes in capitalization and
below market issuances. Interest is payable quarterly, and, beginning October 1,
1999, only in cash.
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. Interest is payable monthly. However,
the Company has the option under these notes to pay 50% of the interest due in
additional Senior Subordinated Notes. During the three months ended March 31,
1999, the Company exercised its option and issued $331,422 in lieu of cash
interest payments due during that period.
11
<PAGE> 12
The Company was not in compliance with the covenant under its 12%
Senior Subordinated Notes and new 12% Senior Subordinated Convertible Notes as
of March 31, 1999, requiring continued listing by NASDAQ. However, the Company
has obtained a waiver from these noteholders for this covenant violation through
January 1, 2001.
The Company's current credit facility, which matures on January 1, 2000
and is annually renewable upon agreement of both parties, contains a borrowing
base related to the Company's eligible receivables and inventory and an
overadvance of up to $2.0 million expiring on September 30, 1999. Periodically,
however, availability under the credit facility has been insufficient to fund
the Company's cash needs, principally due to the long lead time required to
manufacture many of the Company's products and the insufficient revenue levels
due to the continued downturn in the industry. To date, certain lenders have
covered the cash shortfall through additional lending under the new 12% Senior
Subordinated Convertible Notes. Also, there has been an increase in recent
requests for quotes from existing and potential customers.
The Company schedules production of its systems based upon order
backlog. The Company includes in its backlog only those customer orders for
which it has accepted purchase orders and assigned shipment dates within the
next twelve-month period. As of March 31, 1999, the Company's backlog was $9.2
million. Because of possible changes in delivery schedules and cancellations of
orders, the Company's backlog at any particular date is not necessarily
representative of actual sales for any succeeding period.
The Company incurred operating losses during the three months ended
March 31, 1999 and the years ended December 31, 1998, 1997 and 1996, and as of
March 31, 1999, had a stockholders' deficit of $33.4 million. Consequently, the
Company has been substantially dependent upon borrowings to finance its
operations in recent years. In response to the significant losses from
operations, the Company hired a new management team in 1997 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. A summary of
management's actions completed thus far, as well as certain actions initiated
that are continuing into 1999 to address the financial conditions described
above, include the following:
- - Divested three subsidiaries with products inconsistent with the Company's
core business, using certain of the proceeds to significantly reduce its
outstanding and maximized line of credit;
- - Refinanced its remaining line of credit balance with term debt and an
additional credit facility;
- - Renegotiated $2 million of additional borrowings above qualified accounts
receivable and inventory as defined by the credit facility through
September 30, 1999, as well as an extension of the remainder of the
facility through January 1, 2000;
- - Established in 1999 an arrangement whereby certain of the Company's
noteholders will provide, at their sole discretion, cash infusions when
requested by the Company in return for the issuance of convertible debt;
- - Reduced the Company's cash usage through significant workforce reductions,
facilities consolidation from three buildings to one, and reductions in
other spending;
- - Initiated improvements in the cost structure and manufacturability by
engineering the Company's core product lines to use less materials while
maintaining process integrity and reducing costly product refinements and
rework during production thereby improving gross margins;
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<PAGE> 13
- - Initiated procedures to shorten installation time through improving the
quality controls on the product before it leaves the manufacturing
facility and through better coordination with the customer regarding the
timing and prerequisites of the installation which will reduce
installation delays, reduce costs to the Company, increase customer
satisfaction, and accelerate payments of receivables;
- - Improved the sales quoting process to involve all functional areas so as
to more accurately estimate costs thereby improving gross margins;
- - Initiated and completed a program 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 upcoming annual cash
requirements; and
- - Established a detailed budget to manage the upcoming year's operating
activity with defined timely reporting periods and ongoing monitoring of
strict adherence to budgeted amounts.
Management believes many of the actions taken have contributed to the
improved gross margins on shipments in the first quarter of 1999 and the last
two quarters of 1998. However, management also believes that future results of
operations will be influenced by a number of factors, including general economic
conditions, the volume, mix and timing of orders received, timely new product
introductions and testing, and numerous other factors. Additionally, the
semiconductor industry and related capital equipment suppliers, such as the
Company, have experienced a reduction in demand which has led and could continue
to lead to reduced sales and increased pricing pressures.
Since a significant portion of the Company's sales represent custom
equipment orders for which pricing can range from $300,000 to over $3,000,000,
the volume and timing of orders can have a significant effect on the Company's
operating results and cash flows. Based on semiconductor capital equipment
industry information available to the Company, management is optimistic that the
industry's downcycle may improve during the second half of 1999 and continue the
favorable trend in 2000; however, no assurance can be given that such
improvement in the industry will occur.
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Management believes the cash requirements for the upcoming twelve
months will be provided by operations and supplemented by borrowings on the
Company's credit facility, cash infusions from certain of the Company's
noteholders in return for additional convertible debt, deferral of substantially
all cash interest on long-term debt through September 30, 1999, and customer
deposits on certain orders. Without such supplemental sources of cash, the
Company is susceptible to severe cash shortages which may impact its ability to
operate. While management believes that its plans and implemented programs,
along with the supplemental sources of cash, will result in adequately funding
its working capital and cash requirements during the upcoming twelve months,
certain of these plans, programs, and supplemental cash sources are contingent
upon future events that are not within the Company's control; therefore, there
can be no assurances that management's actions will be successful or certain of
the supplemental cash sources will be available.
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.
The substantial losses the Company incurred have burdened the Company
with a level of debt that has severely limited the Company's access to working
capital. The Company has retained an investment banking firm to advise on the
Company's strategic alternatives, including possible ways to restructure the
balance sheet.
YEAR 2000
The Year 2000 issue, or "The Y2K Bug" as it is sometimes called, is the
result of computer programs and equipment that were written and manufactured
using two digits rather than four to define the applicable year. Date-sensitive
computer programs and equipment may recognize a date using only the last two
digits. This could result in the Year 2000 being recognized as the year 1900.
System failures or miscalculations can occur, which would cause disruptions in
operations and/or the inability to process normal business transactions.
In November 1997, the Company initiated a company-wide Year 2000
Project to address this issue. Utilizing both internal and external resources,
the Company has been defining, assessing, converting, or replacing, various
programs, hardware and equipment instrumentation systems to make them Year 2000
compatible. The Company has incurred costs of approximately $75,000 through
March 31, 1999 to address the Year 2000 issue and it expects to incur additional
costs of approximately $75,000.
Information Technology ("IT") systems have been evaluated and assessed
for Year 2000 readiness. All network IT systems are in the process of being
upgraded as part of a corporate upgrade program that will also address
identified Year 2000 related issues and concerns. Non-IT systems typically
include embedded technology such as microcontrollers. These types of systems are
more difficult to assess and repair than IT systems. In fact, the Company will
have to replace non-IT systems since they cannot be repaired. All upgrades and
replacement programs are expected to be completed in 1999.
14
<PAGE> 15
Manufactured equipment that the Company supplies to its customers have
been identified and assessed for Year 2000 readiness. A report system outlines
known issues of concerns regarding sub-systems and sub components integrated
into the Company's equipment. A corrective action plan has been developed and
deployment of the plan is in effect. The Company is alerting all of its
customers to the concerns regarding Year 2000, though it is ultimately the
responsibility of the end-users to deploy all recommended corrective action
plans.
Third parties who supply the Company with real time goods and services
have been identified and are being assessed. Approximately 90% of these third
parties have stated their readiness and capabilities to successfully supply
their goods and services through the Year 2000 and beyond without interruption
in deliveries of goods and services.
The potential risk to the Company due to the Year 2000 related issues
are as follows. Disruptions in computer hardware, software or delivery of
supplier goods and services could result in the inability to engineer, schedule
and deliver manufactured equipment and services to customers as well as the
failure to fulfill contractual agreements. Customers may experience Year 2000
related problems that could interrupt their abilities to perform business and
financial transactions thus interrupting collections or bank processes.
Disruptions in supplier services may interfere with the Company's ability to
communicate to its customers and adversely effect delivery of products. The
amount of total potential liability and lost revenue cannot be reasonably
estimated at this time.
The Company is preparing to handle the most reasonably likely worst
case scenarios. Secondary critical suppliers are available in many cases.
Communication capabilities are vast through many different media's. All
computers and software will be standardized with secondary systems available to
perform any critical tasks in the event of a system failure. The Company
believes it will be adequately prepared for any significant Year 2000-related
issues that may occur. The Company believes it has sufficient hardware and
resources to address such issues on a timely basis.
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: 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 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.
15
<PAGE> 16
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During March 1999, the Company sold an aggregate of $1,250,000
principal amount of its Series 1999 12% Senior Subordinated Convertible
Notes due February 1, 2002 to KB Mezzanine II, LP and Celerity Silicon,
L.L.C. for an aggregate purchase price of $1,250,000. The notes are
currently convertible into approximately 2.2 million shares of Common
Stock. Each note is convertible at any time at the holder's option and
has an initial conversion rate equal to 110% of the closing price of
the Common Stock on its date of issuance. The conversion price is
subject to adjustment for changes in capitalization and below market
issuances. The issuance of the notes was exempt from Registration under
the Securities Act pursuant to Section 4(2) thereof.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 27 - Financial Data Schedule
The Company did not file any reports on Form 8-K during the three
months ended March 31, 1999.
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: May 17, 1999 By: /s/ David J. Ferran
------------------------------------
David J. Ferran
President & CEO
Dated: May 17, 1999 /s/ John W. Kizer
------------------------------------
John W. Kizer
Vice President Finance
Chief Financial Officer
17
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