<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, 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 20,167,824 shares of Common Stock outstanding, $.0001 par value, as
of August 13, 1999.
1
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SUBMICRON SYSTEMS CORPORATION
INDEX
<TABLE>
<CAPTION>
Part I - Financial Information
Item 1: Financial Statements (Unaudited) Page
<S> <C>
Consolidated Balance Sheets -
June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations -
three months ended June 30, 1999 and 1998;
six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows -
six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6-9
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
Part II - Other Information
Item 2(c) Changes in Securities and Use of Proceeds 14
Item 6: Exhibits and Reports on Form 8-K 14
Signatures 15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,419 $ 1,982
Accounts receivable, net of allowance for doubtful
accounts of $1,650 and $1,752 6,502 8,676
Inventories, net 8,695 8,078
Prepaid expenses and other 1,506 1,688
-------- --------
Total current assets 18,122 20,424
Property and equipment, net 4,545 5,926
Goodwill, net 1,119 1,232
Intangibles and other assets, net 2,848 3,155
-------- --------
$ 26,634 $ 30,737
======== ========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit $ 7,017 $ 4,824
Current portion of long-term debt 2,581 2,530
Accounts payable 1,746 3,635
Accrued expenses and other 7,001 9,928
Deferred revenues 2,885 3,745
-------- --------
Total current liabilities 21,230 24,662
Long-term debt 44,380 35,187
Commitments and contingencies
Stockholders' deficit:
Preferred Stock, $.01 par value, 5,000 shares
authorized -- --
Series A Convertible Preferred Stock,
stated value, 82 and 89 shares issued and
outstanding 54 58
Common Stock, $.0001 par value, 100,000,000
shares authorized, 19,927,565 and 19,669,825
shares issued and outstanding 2 2
Additional paid-in capital 60,584 60,518
Accumulated deficit (99,616) (89,690)
-------- --------
Total stockholders' deficit (38,976) (29,112)
-------- --------
$ 26,634 $ 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 June 30, Six Months Ended June 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
System sales $ 7,138 $ 4,720 $ 13,634 $ 12,150
Other sales 1,545 1,278 3,572 3,524
------------ ------------ ------------ ------------
Total net sales 8,683 5,998 17,206 15,674
Cost of system sales 5,776 8,072 10,900 16,533
Cost of other sales 770 569 2,080 2,296
------------ ------------ ------------ ------------
Total cost of sales 6,546 8,641 12,980 18,829
------------ ------------ ------------ ------------
Gross margin 2,137 (2,643) 4,226 (3,155)
Selling, general and administrative expenses 4,353 3,641 7,680 7,264
Research and development expenses 1,134 2,584 2,194 4,932
Restructuring charges -- 2,030 -- 2,030
------------ ------------ ------------ ------------
Total operating expenses 5,487 8,255 9,874 14,226
------------ ------------ ------------ ------------
Operating loss (3,350) (10,898) (5,648) (17,381)
Interest expense and other, net:
Interest income 54 93 108 185
Interest expense (2,370) (1,610) (4,425) (3,131)
Other, net 60 511 46 575
------------ ------------ ------------ ------------
Total other expense, net (2,256) (1,006) (4,271) (2,371)
------------ ------------ ------------ ------------
Loss before income taxes (5,606) (11,904) (9,919) (19,752)
Income tax (refunds) expense (6) -- 7 --
------------ ------------ ------------ ------------
Net loss $ (5,600) $ (11,904) $ (9,926) $ (19,752)
============ ============ ============ ============
Net loss per Common share:
Basic and diluted loss per Common share $ (0.28) $ (0.61) $ (0.50) $ (1.04)
============ ============ ============ ============
Weighted average number of
shares of Common Stock outstanding 19,911,510 19,444,235 19,836,904 19,016,092
============ ============ ============ ============
</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,
1999 1998
------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net loss $(9,926) $(19,752)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 1,557 2,808
Provision for valuation allowances 60 2,000
Accretion of note discount 1,015 798
Amortization of debt issuance costs 163 163
Non-cash interest expense 2,197 437
Changes in operating assets and liabilities:
Decrease in accounts receivable 2,114 7,812
Increase in inventories (617) (3,282)
Decrease (increase) in prepaid expenses and other 182 (720)
Decrease in other assets 144 463
Decrease in accounts payable (1,889) (125)
Decrease in warranty, accrued expenses and other (2,890) (1,124)
(Decrease) increase in deferred revenues (860) 3,897
------- --------
Net cash used in operating activities (8,750) (6,625)
Cash flows provided by (used in) investing activities:
Capital expenditures (63) (466)
------- --------
Net cash used in investing activities (63) (466)
Cash flows provided by (used in) financing activities:
Net borrowings (payments) under line of credit 2,193 796
Proceeds from issuance of convertible debt 7,035 --
Proceeds from issuance of stock under
Employee Stock Purchase Plan 62 --
Principal payments under capital lease obligations
and long-term debt (1,040) (684)
------- --------
Net cash provided by (used in) financing activities 8,250 112
------- --------
Net decrease in cash and cash equivalents (563) (6,979)
Cash and cash equivalents at beginning of period 1,982 8,228
------- --------
Cash and cash equivalents at end of period $ 1,419 $ 1,249
======= ========
</TABLE>
See accompanying notes.
5
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SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 and
six months ended June 30, 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 six
months ended June 30, 1999 and the years ended December 31, 1998, 1997, and
1996, the Company's operating activities required a net use of cash totaling
$8.8 million, $13.6 million, $7.0 million, and $21.3 million, respectively, and
the Company incurred net losses of $9.9 million, $29.1 million, $47.6 million,
and $20.1 million, respectively. At June 30, 1999, the Company had a
stockholders' deficit of $39.0 million and current liabilities exceeded current
assets by $3.1 million.
At June 30, 1999, the Company was not in compliance with certain
covenants under the Senior Subordinated Notes and the Series 1999 Notes. In
addition, the Company, based upon its current projections, anticipates that it
will not be in compliance with certain financial requirements under the Senior
Subordinated Notes and the Series 1999 Notes during 1999 and 2000. However, the
Company has obtained a waiver from these noteholders for the existing and
expected covenant violations through July 1, 2000.
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. 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. Certain lenders have covered the cash shortfall to date
through the purchase of additional Series 1999 Notes. However, there is no
obligation to continue such funding.
The conditions described above raise substantial doubt about the
Company's ability to continue as a going concern. However, the consolidated
financial statements as of and for the six months ended June 30, 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.
6
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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.
Included in the consolidated results of operations for the three and six months
ended June 30, 1999 is $779,000 and $1.4 million, respectively of selling,
general and administrative expenses related to Akrion, and $319,000 and
$399,000, respectively of research and development expenses related to Akrion.
Shipments of products are expected to commence by the end of 1999. The
Company plans to construct an applications laboratory and establish
manufacturing capabilities in Singapore. Consequently, the Company is continuing
to pursue various alternatives and investigate sources of additional investment,
including local government assistance in Singapore. Until such time that
manufacturing capabilities are established in Singapore, 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>
June 30, December 31,
1999 1998
-------- -----------
<S> <C> <C>
Raw materials, purchased components
and parts $ 9,470 $ 9,667
Work-in-process and finished goods 3,578 2,674
-------- --------
13,048 12,341
Excess and obsolescence reserve (4,353) (4,263)
-------- --------
$ 8,695 $ 8,078
======== ========
</TABLE>
7
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6. CUSTOMER INFORMATION:
Sales of the Company's products to two customers accounted for 58% and
55% of total sales for the three and six months ended June 30, 1999,
respectively, and sales to three customers accounted for 45% and 41% of total
sales for the three and six months ended June 30, 1998, respectively.
Receivables from three customers represent 58% of consolidated receivables as of
June 30, 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% (10.5950% at June 30, 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 June 30, 1999, including $2 million
of additional borrowings above the available borrowing base, as of June 30,
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>
June 30, December 31,
1999 1998
------- -----------
<S> <C> <C>
Warranty and installation costs $2,622 $3,259
Commissions 597 1,267
Restructuring charges 1,105 1,758
Purchase commitments and other 423 416
Professional fees 58 386
Other 2,196 2,842
------ ------
$7,001 $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
<PAGE> 9
During the six months ended June 30, 1999, the Company issued $7.0
million of Series 1999 12% Senior Subordinated Convertible Notes due February 1,
2002. These notes are convertible at the holder's option into approximately 15.9
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 June 30, 1999, the Company issued additional Series 1999
12% Senior Subordinated Convertible Notes in the amount of $3.3 million, which
are convertible at the holder's option into approximately 8.2 million shares of
Common Stock. In addition, in July 1999, certain holders elected to convert
$740,000 of the Company's 8% convertible subordinated notes due March 2002 into
240,259 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 six months
ended June 30, 1999, the Company issued Series B 12% Senior Subordinated Notes
in the principal amount of approximately $1.2 million with warrants to purchase
approximately 898,000 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 six months ended June 30, 1999,
the Company exercised its option and issued additional notes of $673,000 in lieu
of cash interest payments due during that period.
At June 30, 1999, the Company was not in compliance with certain
covenants under the Senior Subordinated Notes and the Series 1999 Notes. In
addition, the Company, based upon its current projections, anticipates that it
will not be in compliance with certain financial requirements under the Senior
Subordinated Notes and the Notes during 1999 and 2000. However, the Company has
obtained a waiver from these noteholders for the existing and expected covenant
violations through July 1, 2000.
10. INCOME TAXES:
No income tax benefit has been recorded for the three and six months
ended June 30, 1999 and 1998, principally as a result of the Company's recording
a valuation allowance against its deferred tax asset as of June 30, 1999 and
1998, thereby reducing the benefit realized on the Company's net operating
losses.
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 antidulitive.
9
<PAGE> 10
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net Sales
Net sales increased approximately $2.7 million (or 45%) to $8.7 for the
three months ended June 30, 1999 from $6.0 million for the corresponding period
in 1998. Net sales increased approximately $1.5 million (or 10%) to $17.2 for
the six months ended June 30, 1999 from $15.7 for the corresponding period in
1998. The increases are due primarily to an increase in the sale of automated
wet bench systems.
Cost of Sales
Cost of sales was $6.5 million (or 75.4% of Net Sales) for the three
months ended June 30, 1999 as compared to $8.6 million (or 144.1% of Net Sales)
for the corresponding period in 1998. Cost of sales was $13.0 million (or 75.4%
of Net Sales) for the six months ended June 30, 1999 as compared to $18.8
million (or 120.1% of Net Sales) for the corresponding period in 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 $4.4 million (50% of
Net Sales) for the three months ended June 30, 1999 as compared to $3.6 million
(61% of Net Sales) for the corresponding period in 1998. Selling, general and
administrative expenses were $7.7 million (45% of Net Sales) for the six months
ended June 30, 1999 as compared to $7.3 million (46% of Net sales) for the
corresponding period in 1998. Included in 1999 expenses for the three and six
months ended June 30, 1999 are $779,000 and $1.4 million, respectively, related
to Akrion, consisting primarily of personnel-related expenses and travel.
Research and Development
Research and development expenses were $1.1 million (13.1% of net
sales) for the three months ended June 30, 1999 as compared to $2.6 million (43%
of net sales) for the corresponding period in 1998. Research and development
expenses were $2.2 million (12.8% of net sales) for the six months ended June
30, 1999 as compared to $4.9 million (31.5% of net sales) for the corresponding
period in 1998. The reduction in research and development is primarily the
result of lower headcount, decreased depreciation and no PRIMAXX spending in
1999 due to its disposition in October 1998. PRIMAXX expenses incurred during
the three and six months ended June 30, 1998 aggregated approximately $350,000
and $750,000, respectively.
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Interest Expense
Interest expense, which is incurred on Company borrowings and capital
lease obligations, was $2.4 million and $4.4 million for the three and six
months ended June 30, 1999, respectively, as compared to $1.6 million and $3.1
million for the corresponding periods in 1998. The increase is primarily the
result of higher levels of borrowing necessary to support working capital needs.
Income Tax Expense
No income tax benefit has been recorded for the three and six month
periods ended June 30, 1999 and 1998, principally as a result of the Company's
recording a valuation allowance against its deferred tax assets as of June 30,
1999 and 1998, thereby eliminating the benefit realized on the Company's net
operating losses. Income tax expense for the three and six months ended June 30,
1999 represents certain minimum state income tax obligations or refunds.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased approximately $563,000 to $1.4
million at June 30, 1999 from $2.0 at December 31, 1998. Cash used in operating
activities totaled $8.8 million for the six months ended June 30, 1999, 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 $8.3 million during the six
months ended June 30, 1999, with borrowings under the line of credit providing
$2.2 million and proceeds from the issuance of convertible debt providing
approximately $7.0 million, partially offset by payments on capital lease
obligations. At June 30, 1999, no additional availability existed under the
credit facility. During the six months ended June 30, 1999, the Company issued
$7.0 million of Series 1999 Notes due February 1, 2002. These notes are
convertible at the holder's option into approximately 15.9 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 June 30, 1999, the Company issued additional Series 1999
Notes in the amount of $3.3 million, which are convertible at the holder's
option into approximately 8.2 million shares of Common Stock. In addition, in
July 1999, certain holders elected to convert $740,000 of the Company's 8%
convertible subordinated notes due March 2002 into 240,259 shares of Common
Stock.
The Company's working capital deficit decreased $1.1 million to $3.1
million as of June 30, 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 six months
ended June 30, 1999, the Company issued Series B 12% Senior Subordinated Notes
in the principal amount of approximately $1.2 million with warrants to purchase
approximately 898,000 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.
11
<PAGE> 12
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 six months ended June 30, 1999,
the Company exercised its option and issued $673,000 in lieu of cash interest
payments due during that period.
At June 30, 1999, the Company was not in compliance with certain
covenants under the Senior Subordinated Notes and the Series 1999 Notes. In
addition, the Company, based upon its current projections, anticipates that it
will not be in compliance with certain financial requirements under the Senior
Subordinated Notes and the Series 1999 Notes during 1999 and 2000. However, the
Company has obtained a waiver from these noteholders for the existing and
expected covenant violations through July 1, 2000.
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. 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. Certain lenders have covered the cash shortfall to
date through the purchase of additional Series 1999 Notes. However, there is no
obligation to continue such funding.
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 June 30, 1999, the Company's backlog was $12.6
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 six months ended June
30, 1999 and the years ended December 31, 1998, 1997 and 1996, and as of June
30, 1999, had a stockholders' deficit of $39 million. Consequently, the Company
has been substantially dependent upon borrowings to finance its operations in
recent years.
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. Management also believes that future results
will be influenced by a number of other factors, including but not limited to,
availability of continuing sources of funding, industry and general economic
conditions and the ability to introduce new products.
Management expects cash requirements to be met primarily by the
purchase of additional Series 1999 Notes by certain lenders. However, there is
no obligation for such lenders to purchase additional Notes.
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 continues to work with an investment banking firm to
determine the Company's strategic alternatives, including possible ways to
restructure the balance sheet.
12
<PAGE> 13
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 late 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 $100,000 through
June 30, 1999 to address the Year 2000 issue and it expects to incur additional
costs of approximately $50,000.
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.
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. A substantial number 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 delaying cash collections or otherwise interrupting
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. 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.
13
<PAGE> 14
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.
PART II - OTHER INFORMATION
ITEM 2: CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) During three months ended June 30, 1999, the Company sold an aggregate
of $5,785,154 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
$5,785,154. The notes are currently convertible into approximately 13.6
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 June 30, 1999.
14
<PAGE> 15
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 17, 1999 By: /s/David J. Ferran
------------------------------------
David J. Ferran
President & CEO
Dated: August 17, 1999 /s/John W. Kizer
------------------------------------
John W. Kizer
Vice President Finance
Chief Financial Officer
15
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