-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Wkhjfz/YipixbwELQJKc2KPdgtF8L1kPlR/UECrZBCkbwAjtXDOl9UfS++nOHqDa H7s2UGlkWpKlb7gVcG41pA== 0000893220-99-000614.txt : 19990518 0000893220-99-000614.hdr.sgml : 19990518 ACCESSION NUMBER: 0000893220-99-000614 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUBMICRON SYSTEMS CORP CENTRAL INDEX KEY: 0000877210 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 133607944 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19507 FILM NUMBER: 99626587 BUSINESS ADDRESS: STREET 1: 6330 HEDGEWOOD DRIVE NO 150 CITY: ALLENTOWN STATE: PA ZIP: 18106 BUSINESS PHONE: 2153919200 MAIL ADDRESS: STREET 1: 6330 HEDGEWOOD DRIVE #150 CITY: ALLENTOWN STATE: PA ZIP: 18106 FORMER COMPANY: FORMER CONFORMED NAME: TRINITY CAPITAL ENTERPRISE CORP DATE OF NAME CHANGE: 19930328 FORMER COMPANY: FORMER CONFORMED NAME: TRINITY INVESTMENT CORP /DE DATE OF NAME CHANGE: 19600201 10-Q 1 FORM 10-Q SUBMICRON SYSTEMS CORPORATION 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) 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)
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 2 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 3 PART I - FINANCIAL INFORMATION ITEM 1: FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS (unaudited) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
March 31, December 31, 1999 1998 -------- -------- 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 ======== ========
See accompanying notes. 3 4 SUBMICRON SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Three Months Ended March 31, 1999 1998 ------------ ------------ 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 ============ ============
See accompanying notes. 4 5 SUBMICRON SYSTEMS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (IN THOUSANDS)
Three Months Ended March 31, 1999 1998 ------- ------- 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 ======= =======
See accompanying notes. 5 6 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. 6 7 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):
March 31, December 31, 1999 1998 -------- -------- 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 ======== ========
7 8 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):
March 31, December 31, 1999 1998 ------ ------ 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 ====== ======
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 9 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 10 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. 10 11 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 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; 12 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. 13 14 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 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 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 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 EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1999 MAR-31-1999 1,752 0 9,518 1,677 7,702 19,391 20,299 15,069 28,849 24,679 40,119 0 58 2 (33,436) 28,849 8,524 8,524 6,434 6,434 4,387 30 2,055 (4,312) 13 (4,325) 0 0 0 (4,325) (.22) (.22)
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