-----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, OtLawAEiLtJ3YQMaGvV4wD4Yp1dMfBfuL6icGxMPeoH0brLuHZjNvcrXGJzBRD5u v+FAo7QK1/l4fsZD1yWW7w== 0001010410-99-000083.txt : 19990915 0001010410-99-000083.hdr.sgml : 19990915 ACCESSION NUMBER: 0001010410-99-000083 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990731 FILED AS OF DATE: 19990914 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CFM TECHNOLOGIES INC CENTRAL INDEX KEY: 0000849323 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 232298698 STATE OF INCORPORATION: PA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-27498 FILM NUMBER: 99711049 BUSINESS ADDRESS: STREET 1: 1336 ENTERPRISE DRIVE CITY: WEST CHESTER STATE: PA ZIP: 19380 BUSINESS PHONE: 6106968300 MAIL ADDRESS: STREET 1: 1336 ENTERPRISE DRIVE CITY: WEST CHESTER STATE: PA ZIP: 19380 10-Q 1 UNITED STATES 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 July 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 No. 0-27498 CFM TECHNOLOGIES, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-2786977 ------------------------------ ----------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 150 OAKLANDS BLVD. EXTON, PA 19341 -------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (610) 280-8300 1336 ENTERPRISE DRIVE, WEST CHESTER, PA 19380 -------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports 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. Yes X No The number of outstanding shares of the Registrant's Common Stock, no par value per share, on September 13, 1999 was 7,827,480. 1 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX PART 1. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: Consolidated Balance Sheets (unaudited) as of July 31, 1999 and October 31, 1998 ................. 3 Consolidated Statements of Operations (unaudited)for the Three and Nine months ended July 31, 1999 and 1998 ............................................ 5 Consolidated Statements of Cash Flows (unaudited) for the Nine months ended July 31, 1999 and 1998..... 6 Notes to Consolidated Financial Statements .......... 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................ 9 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K .................. 16 Signatures ........................................ 17 Exhibit Index ..................................... 18 2 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) (UNAUDITED) July 31, October 31, ASSETS 1999 1998 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 16,500 $ 31,649 Short-term investments 8,490 9,745 Accounts receivable 19,236 14,040 Inventories 14,989 13,657 Prepaid expenses and other 2,843 5,020 -------- -------- Total current assets 62,058 74,111 -------- -------- PROPERTY, PLANT AND EQUIPMENT: Land 540 540 Building and improvements 5,791 5,981 Machinery and equipment 13,558 9,599 Furniture and fixtures 1,521 1,423 -------- -------- 21,410 17,543 Less - Accumulated depreciation and amortization (7,975) (6,377) -------- -------- Net property, plant and equipment 13,435 11,166 -------- -------- OTHER ASSETS 8,147 4,536 ======== ======== $ 83,640 $ 89,813 ======== ======== The accompanying notes are an integral part of these financial statements. 3 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED) LIABILITIES AND SHAREHOLDERS' EQUITY July 31, October 31, 1999 1998 ----------- ----------- CURRENT LIABILITIES: Current portion of long-term debt 595 $ 672 Accounts payable 4,096 1,800 Accrued expenses 7,754 7,373 ----------- ----------- Total current liabilities 12,445 9,845 ----------- ----------- LONG-TERM DEBT 1,768 2,186 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY: Preferred stock, no par value; 1,000,000 authorized shares; no shares issued or outstanding -- -- Common stock, no par value; 30,000,000 authorized shares; 8,001,180 and 7,964,366 shares issued 81,260 81,033 Treasury stock, 167,100 and 96,200 common shares at cost (1,390) (762) Deferred compensation (29) (47) Retained earnings (10,414) (2,442) ----------- ----------- Total shareholders' equity 69,427 77,782 =========== =========== 83,640 $ 89,813 =========== =========== The accompanying notes are an integral part of these financial statements. 4 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
Three Months Ended Nine Months Ended July 31, July 31, -------------------------- ----------------------- 1999 1998 1999 1998 ---- ---- ---- ---- NET SALES $ 9,620 $ 3,780 $ 22,396 $ 27,604 COST OF SALES 6,064 4,652 15,169 18,989 -------- -------- -------- -------- Gross profit (loss) 3,556 (872) 7,227 8,615 -------- -------- -------- -------- OPERATING EXPENSES: Research, development and engineering 2,492 2,307 7,674 8,570 Selling, general and administrative 4,821 3,491 12,738 13,416 -------- -------- -------- -------- Total operating expenses 7,313 5,798 20,412 21,986 -------- -------- -------- -------- Operating loss (3,757) (6,670) (13,185) (13,371) INTEREST (INCOME) EXPENSE, NET (283) (415) (1,106) (1,357) -------- -------- -------- -------- Loss before income taxes (3,474) (6,255) (12,079) (12,014) INCOME TAX BENEFIT (1,181) (1,876) (4,107) (3,604) -------- -------- -------- -------- NET LOSS $ (2,293) $ (4,379) $ (7,972) $ (8,410) ======== ======== ======== ======== NET LOSS PER COMMON SHARE: Basic $ (0.29) $ (0.55) $ (1.01) $ (1.06) ======== ======== ======== ======== Diluted $ (0.29) $ (0.55) $ (1.01) $ (1.06) ======== ======== ======== ======== SHARES USED IN COMPUTING NET LOSS PER COMMON SHARE: Basic 7,852 7,921 7,859 7,918 ======== ======== ======== ======== Diluted 7,852 7,921 7,859 7,918 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. 5 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED) Nine Months Ended July 31, ---------------------- 1999 1998 ---- ---- OPERATING ACTIVITIES: Net loss $ (7,972) $ (8,410) Adjustments to reconcile net loss to net cash used in operating activities Depreciation and amortization 1,628 2,182 Deferred compensation 18 18 Deferred income tax benefit (4,107) (985) (Increase) decrease in - Accounts receivable (5,196) 17,652 Inventories (1,332) (1,226) Prepaid expenses and other current assets 2,458 (2,279) Other assets 20 110 Increase (decrease) in - Accounts payable 2,296 (5,818) Accrued expenses 546 (2,172) -------- -------- Net cash used in operating activities (11,641) (928) -------- -------- INVESTING ACTIVITIES: Purchases of short-term investments (29,727) (24,601) Proceeds from short-term investments 30,982 26,946 Purchases of property, plant and equipment (3,867) (2,622) -------- -------- Net cash used in investing activities (2,612) (277) -------- -------- FINANCING ACTIVITIES: Payments on long-term debt (495) (448) Proceeds from sale of common stock, net 225 210 Proceeds from exercise of stock options 2 6 Purchases of Treasury Stock (628) (201) -------- -------- Net cash used in financing activities (896) (433) -------- -------- NET DECREASE IN CASH AND CASH EQUIVALENTS (15,149) (1,638) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 31,649 26,865 ======== ======== CASH AND CASH EQUIVALENTS, END OF PERIOD $ 16,500 $ 25,227 ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid for interest expense $ 160 $ 111 Cash received for interest income 1,300 1,652 Cash paid for income taxes (2,505) 139 SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: Machinery acquired under capital leases $ -- $ 487 The accompanying notes are an integral part of these financial statements. 6 CFM TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION: The condensed financial statements included herein have been prepared by CFM Technologies, Inc. without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. These statements include all adjustments that, in the opinion of management, are necessary to provide a fair statement of the results for the periods covered. These financial statements should be read in conjunction with the audited financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998. The results of operations for the interim periods presented are not necessarily indicative of the results for the full year. (2) ACCOUNTS RECEIVABLE: July 31, October 31, 1999 1998 ----------- ----------- Billed $16,383,000 $10,058,000 Unbilled 2,853,000 3,982,000 ----------- ----------- 19,236,000 $14,040,000 =========== =========== Unbilled receivables represent final retainage amounts to be billed upon completion of the installation process. (3) INVENTORIES: July 31, October 31, 1999 1998 ----------- ----------- Raw materials $ 9,336,000 $ 8,669,000 Work in progress 5,653,000 4,988,000 ----------- ----------- $14,989,000 $13,657,000 =========== =========== (4) NET LOSS PER COMMON SHARE: Basic net loss per common share was computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Inclusion of shares of common stock potentially issuable upon the exercise of outstanding stock options would have been antidilutive in the calculation of diluted net loss per common share for the three and nine month periods ended July 31, 1999 and 1998, and therefore was not included in the calculation. 7 The net loss and weighted average common shares outstanding for purposes of calculating net loss per common share are computed as follows:
Three Months Ended Nine Months Ended July 31, July 31, ------------------------------- ------------------------------- 1999 1998 1999 1998 ---- ---- ---- ---- Net loss used for basic And diluted net loss Per common share $(2,293,000) $(4,379,000) $(7,972,000) $(8,410,000) =========== =========== =========== =========== Weighted average common shares outstanding used for basic and diluted net loss per common share 7,852,000 7,921,000 7,859,000 7,918,000 =========== =========== =========== =========== Net loss per common share, basic and diluted $ (0.29) $ (0.55) $ (1.01) $ (1.06) =========== =========== =========== ===========
(5) GEOGRAPHIC INFORMATION: Historically, a significant portion of the Company's sales has been to Asian companies. Included in accounts receivable as of July 31, 1999 and October 31, 1998, was $10.9 and $10.0 million, respectively, owed by Asian companies, of which $4.3 and $2.9 million, respectively, was currently due. (6) STOCK REPURCHASE AUTHORIZATION: On June 9, 1998, the Board of Directors authorized the Company to repurchase up to 750,000 shares of the Company's common stock in open market, privately negotiated or other transactions in conformity with the rules of the Securities and Exchange Commission. As of July 31, 1999, the Company had repurchased 167,100 shares of the Company's common stock. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. OVERVIEW CFM Technologies, Inc. ("CFM" or the "Company")designs, manufactures and markets advanced wet processing equipment for sale to the worldwide semiconductor and flat panel display ("FPD") manufacturing industries. The Company was founded in 1984 and began commercial operations in 1990 following a period of technology and product development, during which time the Company's patented Full-Flow(TM) enclosed processing and Direct-Displacement(TM) drying technologies were developed. The Company has derived substantially all of its revenues from the sale of a relatively small number of its systems, which range in price from approximately $1.0 million to $2.7 million. The Company sells its systems worldwide and records a significant portion of its sales to customers outside the United States. The Company's international sales have occurred in Korea, Europe, Taiwan, Japan and Israel. The Company anticipates that international sales will continue to account for a significant portion of net sales, although the percentage of international sales is expected to fluctuate from period to period. The proportion of the Company's total net sales represented by international sales has been lower during fiscal 1999 than it had been historically. RESULTS OF OPERATIONS The following table sets forth certain financial data for the periods indicated, expressed as a percentage of net sales.
Three Month Period Nine Month Period Ended Ended July 31, July 31, ------------------------- ------------------------ 1999 1998 1999 1998 ------------ ------------ ----------- ----------- Net sales 100.0% 100.0% 100.0% 100.0% Gross profit (loss) 37.0% (23.1)% 32.3% 31.2% Research, development and engineering 25.9% 61.0% 34.3% 31.0% Selling, general and administrative 50.1% 92.4% 56.9% 48.6% Loss from operations (39.1)% (176.5)% (58.9)% (48.4)% Loss before income taxes (36.1)% (165.5)% (53.9)% (43.5)% Net Loss (23.8)% (115.8)% (35.6)% (30.5)%
9 Net Sales. Net sales for the three month period ended July 31, 1999 of $9.6 million increased 154% from $3.8 million in the corresponding period in fiscal 1998. International sales represented 40.1% and 90.7% of total net sales for the three months ended July 31, 1999 and 1998, respectively. Net sales in the second quarter of fiscal 1999 were $6.7 million. The increase in net sales for the third quarter of 1999 was the result of improved business conditions in the semiconductor industry. The corresponding period of 1998 was impacted by the broad semiconductor industry downturn caused by general over-capacity in the semiconductor and FPD manufacturing industries and exacerbated by the Asian economic and currency situation. For the nine months ended July 31, 1999, net sales of $22.4 million decreased 18.9% from $27.6 million during the nine months ended July 31, 1998. International sales represented 36.8% and 36.9% of total net sales for the nine months ended July 31, 1999 and 1998, respectively. The decline in net sales for nine months ended July 31, 1999, is primarily the result of the commencement of the broad semiconductor industry downturn in the second fiscal quarter of 1998. Gross Profit (Loss). Gross profit (loss) as a percentage of net sales improved from a negative 23.1% for the three-month period ended July 31, 1998 to 37.0% for the same corresponding period in fiscal 1999. Gross profit for the third quarter of fiscal 1998 was adversely affected by a very low rate of production as a result of the low sales rate, and include the impact of costs associated with slowed inventory turnover and unabsorbed production costs. Gross profit was 36.5% in the second quarter of fiscal 1999. During the first nine months of fiscal 1999, gross profit increased to 32.3% from 31.0% for the corresponding nine months of fiscal 1998. This increase was the result of production efficiencies realized from the Company's new manufacturing facility which was occupied in February 1999. The Company's gross margins have varied significantly from quarter to quarter and will continue to be affected by a variety of factors. These factor include sales volumes, the mix and average selling prices of systems, sales of OEM automation equipment which yield relatively lower gross margins and the customization of systems. Research, Development and Engineering. Research, development and engineering expenses for the quarter ended July 31, 1999 increased by 8% to $2.5 million from $2.3 million recorded in the corresponding period during fiscal 1998. Research, development and engineering expenses were $2.7 million in the second quarter of 1999. The Company anticipates that research, development and engineering spending in the coming quarters will continue at recent levels. Research, development and engineering expenses for the nine months ended July 31, 1999 decreased to $7.7 million, or 34.3% of net sales, from $8.6 million, or 31.1% of net sales, for the corresponding period during fiscal 1998. During the nine month period ended July 31, 1999, work continued, but at a reduced rate, on the Company's joint development project with Semiconductor 300 (a joint venture of Infineon and Motorola) in Dresden, Germany. As part of this joint development program, Semiconductor 300 and the Company have qualified the CFM system's performance for a broad spectrum of production processes using 300mm silicon wafers. The Company continues to develop new processes for existing and new equipment and to invest in its applications laboratory, which is used for process development and demonstrations. Selling, General and Administrative. Selling, general and administrative expenses increased from $3.5 million or 92.4% of net sales in the quarter ended July 31, 1998 to $4.8 million or 50.1% of net sales in the quarter ended July 31, 1999. Selling, general and administrative expenses were $4.4 million for the second quarter of 1999. Selling, general and administrative expenses for the third quarter of fiscal 1999 reflect higher patent litigation costs compared to the same period in the prior year. The Company anticipates that selling, general and administrative expenses will increase in the fourth quarter of 1999 due to further increases in patent litigation costs. 10 For the nine months ended July 31, 1999, selling, general and administrative expenses were $12.7 million, or 56.9% of net sales, compared to $13.4 million, or 48.6% of net sales, for the nine months ended July 31, 1998. During the nine months ended July 31, 1999, selling, general and administrative expenses decreased due to lower sales commissions offset by an increase in legal expenses related to litigation undertaken to enforce the Company's patents and the recognition of an uncollectible account and commission expenses associated with sales in Asia in fiscal 1999. Interest (Income) Expense, Net. Interest income, net of interest expense, was $415,000 and $283,000 in the quarters ended July 31, 1998 and 1999, respectively. Such interest income was earned by the Company from investment of funds not immediately needed to support the Company's operations. Interest income, net of interest expense, for the nine months ended July 31, 1998 and 1999 was $1,357,000 and $1,106,000, respectively. The net interest income recorded during these periods was the result of interest income earned by the Company from investment of funds not immediately needed to support the Company's operations. These funds were raised in the Company's initial public offering completed in June 1996 and in a follow-on public offering completed in February 1997. The Company anticipates that the investment of these funds will continue to generate interest income, net of interest expense, during the remainder of fiscal 1999. Income Taxes. The Company's effective tax rate was 34% for the three and nine-month periods ended April 30, 1999, compared with 30% for the corresponding periods in 1998. The income tax benefit recorded in 1999 has been recorded as a deferred income tax asset. Based on an assessment of the Company's taxable earnings history and expected future taxable income, management has determined that it is more likely than not that the net deferred tax asset will be realized in future periods. The Company may be required to provide a valuation allowance for this asset in the future if it does not generate sufficient taxable income as anticipated. Additionally, the ultimate realization of this asset could be negatively impacted by market conditions and other variables not known or anticipated at this time. BACKLOG As of July 31, 1999, the Company's backlog of orders was $10.7 million, compared to $14.6 million as of July 31, 1998. Customer orders for the third quarter of fiscal 1999 were $12.7 million and $24.3 million for the first nine months of fiscal 1999. All orders recorded during the third quarter of fiscal 1999 were for semiconductor systems. Orders from Asia accounted for 62% of total orders for the third quarter, 35% were from the U.S. and the remainder were from Europe. It has been the experience of the Company that neither reported backlog at a particular date nor the pattern of receipt of orders is necessarily indicative of future orders or revenues. LIQUIDITY AND CAPITAL RESOURCES At July 31, 1999, the Company had $16.5 million in cash and cash equivalents, $8.5 million in short-term investments and $49.6 million in working capital. At October 31, 1998 the Company had $31.6 million in cash and cash equivalents, $9.7 million in short-term investments and $64.3 million in working capital. Approximately $11.6 million was used in operating activities during the nine months ended July 31, 1999, as compared with $1.0 million used in operating activities during the nine months ended July 31, 1998. The cash used in operating activities during the nine months ended July 31, 1999 was primarily the result of the net loss of $8.0 million and an increase in accounts receivable of $5.2 million. As of September 10, 1999, $8.3 million of the accounts receivable as of July, 31, 1999 had been collected, $4.3 million of which were from Asian customers. Cash provided by operating activities was derived from the receipt of income tax payments of $2.5 million related to the carry back of net operating losses to prior periods, additional accounts payable of $2.3 million and depreciation and amortization of $1.6 million. 11 For the nine months ended July 31, 1998, approximately $1.0 million was used in operating activities. The net cash used was the result of a net loss of $8.4 million, a decrease in accounts payable and accrued expenses of $8.0 million, an increase in inventories, prepaid expenses and other assets of $3.4 million offset by a decrease in accounts receivable of $17.7 million. The Company had accounts receivable of $10.9 and $8.3 million due from Asian companies as of July 31, 1999 and 1998, respectively. Management performs an ongoing evaluation of the status of accounts receivable balances, including the effect of the economic and currency situation in certain Asian countries, in order to determine if any additional allowances or any writeoffs are necessary. Given the economic conditions, particularly in Asia, and the status of certain of the Company's receivables, the Company may be required to record significant additional allowances in future periods. Acquisitions of property, plant and equipment were $3.9 million for the first nine months of fiscal 1999 and $2.6 million for the first nine months of fiscal 1998. The Company commenced the lease of its new 60,000 square foot production facility during the first quarter of 1999 and its new 80,000 square foot administrative facility during the second quarter of 1999. Fiscal 1999 acquisitions included improvements to the Company's newly leased production and administrative facilities, added engineering test equipment, and new telephone and networking equipment for these facilities. On June 9, 1998, the Company announced the initiation of a stock repurchase program of up to 750,000 shares of its common stock. As of July 31, 1999, the Company had repurchased 167,100 shares at a cost of $1.4 million. The Company has a relationship with a commercial bank which includes a mortgage on one of the Company's manufacturing facilities in the amount of $0.7 million and a $7.5 million unsecured revolving demand line of credit with an interest rate equal to the bank's prime rate. The mortgage bears interest at an annual rate of 8.9%. As of July 31, 1999, no balance was outstanding under the Company's line of credit. The Company also has mortgage notes payable to the Pennsylvania Industrial Development Authority in the amount of $0.5 million bearing interest at 2.0% and to the Chester County Development Council in the amount of $0.1 million bearing interest at 5.0%. In addition, the Company has outstanding capital lease obligations in the amount of $1.1 million bearing interest at rates ranging from 7% to 12% per annum. The Company believes that existing cash, cash equivalents and short-term investment balances and its available line of credit will be sufficient to meet the Company's cash requirements during the next 12 months. The Board of Directors has authorized the repurchase of up to 750,000 shares of the Company's common stock (see Note 6 of the Notes to Consolidated Financial Statements). The repurchase of stock is not expected to have a material adverse affect on the Company's ability to meet its cash requirements during the next 12 months. However, depending upon its rate of growth and profitability, the Company may require additional equity or debt financing to meet its working capital requirements or capital expenditure needs. There can be no assurance that additional financing, if needed, will be available when required or, if available, will be on terms satisfactory to the Company. YEAR 2000 READINESS DISCLOSURE At midnight on December 31, 1999, all computer systems that use two digits to represent the year are at risk of malfunction or failure. Many systems will continue to run, but may interpret any date in the year '00 to be prior to any date in the year '99, posing potential data comparison problems, or may fail to recognize that the year 2000, unlike 1900, is a leap year. Businesses and systems that use a four-digit format to report and process dates later than December 31, 1999 are often denoted as "Year 2000 compliant". While many systems have no date comparison functions and operate in a date-independent mode, they may have a date function. If full system operation and correct display of dates subsequent to January 1, 2000 are possible, these systems may be denoted as "Year 2000 operationally ready". Many systems and subsystems using two digit dates will operate smoothly until the end of their technological or economic life without regard to the actual date. These systems are unaffected by whether it is 2000 or 1900, make no "real-time" date comparisons and have no date display features. At the other extreme are systems which will cease functioning or malfunction when an unacceptable date is perceived (which in some cases could be during 1999). 12 The Company is committed to the operation of its business and the operation of its products without interruption. Certain changes in the Company's operating procedures may be needed to reduce risks or avoid complications relating to the Year 2000 issue to ensure that the Company and its customers will not be negatively impacted by Year 2000 issues. The Company's chief financial officer has been selected by the Company's senior management as the coordinator for the Company's Year 2000 compliance efforts. A team has been formed with active participation by the information systems, purchasing, software engineering, marketing and customer services departments and has been working since 1997 to enable the Company to meet its Year 2000 goals. The Company views Year 2000 issues in four categories of potential exposure: Products - This encompasses the Company's products offered for sale and the products that are currently in service at customer sites. Business applications and infrastructure - This includes all client/server, desktop and network hardware and software used in routine business operations. Business relationships and third parties - This includes the supply chain for the Company's products, customers and service providers, including banks, insurance companies, payroll and pension plan administrators, legal, accounting and consulting firms, as well as public utilities, long distance telecommunications providers, transportation and overnight delivery companies and local government services. Non-Information Technology ("Non-IT") - This includes embedded microprocessors used in building facilities, manufacturing equipment and systems and control systems and instrumentation. State of Readiness Products The Company believes it is aware of the potential Year 2000 exposure of its Full-Flow wet processing systems currently in production at customer sites or of models available for sale. The Company has made an assessment of its exposure using the Sematech Year 2000 Readiness Testing standard as the basis for its assessment. This standard is one of two standards used by the semiconductor equipment industry for assessing the Year 2000 readiness of the industry's equipment. Based on an assessment under this standard, the Company's current products available for sale and those shipped in the past year, with respect to both hardware and software, are considered to be "Ready Now". Systems shipped earlier will obtain the "Ready Now" standard once the on-board computer system date is reset at the beginning of the new millenium. While the products are "Ready Now" based on industry standards, customers may also elect to have their on-board computer systems upgraded, for a fee, to be in technical compliance (four-digit date representation). This upgrade is unnecessary in order to obtain full functional operation. The Company has successfully completed Year 2000 testing on a representative cross-section of its products in production at a customer site. While the Company believes it has undertaken all needed assessment, validation and implementation of product related Year 2000 issues, it intends to continue to search for any as yet unforeseen issues and develop action plans to resolve such issues. The Company maintains a website, available to its customers, that discusses Year 2000 issues related to its products including detailed testing results. Business applications and infrastructure The Company has completed an assessment of all of its internally used business applications (software) and the hardware on which such applications run. This assessment was conducted primarily by contacting developers of the systems and manufacturers of the hardware and obtaining statements regarding the Year 2000 readiness of the software and hardware presently in use. 13 The primary enterprise-wide system used for business operations, including order processing, systems design and documentation, procurement, manufacturing and accounting has been described as Year 2000 compliant by the manufacturer. The underlying hardware and operating system that the enterprise-wide system runs on are also compliant, as described by their respective manufacturers. Desktop computers in use throughout the Company vary in their Year 2000 compliance for both hardware and software. While the majority of the hardware is compliant, most of the non-compliant hardware may be upgraded with software from the manufacturer available free over the Internet. The Company has a few non-compliant machines that cannot be upgraded which are not currently in use for any date comparison functions, and which it may elect to replace at a cost of approximately $10,000. The Company is implementing Year 2000 compliant desktop software and expects to have all computers using a date comparison function upgraded by October 1999 at a cost to the Company of approximately $15,000. Year 2000 compliant network server software has been obtained and installed on all of the Company's network servers. Business relationships and third parties The Company has had varying success in assessing the Year 2000 readiness of companies with which it has business relationships. In each case, the Company has either contacted its vendors, customers or service providers or searched their websites for information regarding Year 2000 compliance. While the Company has received statements from many in this group, it has not yet obtained certification statements from certain critical vendors. Many of the statements received, including those from public utilities, stated intentions to become compliant during 1999. The Company is pursuing additional discussions with critical vendors to assess the potential impact, if any, on its operations. The Company has begun to prepare operational contingency plans, assuming a disruption of business operations occurs for each supplier not reporting readiness. These plans will be completed and implemented prior to year-end. Non-IT A special effort has been made to identify embedded microprocessors with date functions in any part, assembly, subsystem or OEM component used in or distributed in conjunction with the Company's products. No such embedded microprocessors have been discovered to date. Non-IT embedded microprocessors may also be present in elevators, heating and air-conditioning systems, telecommunications devices and manufacturing equipment. Costs to Address Year 2000 Issues Costs to address Year 2000 issues have primarily been incurred internally. As the Company does not have a project tracking system, past and future Year 2000 costs can only be estimated. Past costs are estimated to be $45,000 and future costs for internal labor are expected to be approximately $10,000. Costs to replace desktop computers are estimated to be $10,000 and software upgrades for the desktop computers are estimated to be $15,000. The new telecommunications equipment, heating and air-conditioning systems, and elevators in the Company's new facilities in Exton, Pennsylvania were acquired in connection with the result of moving to newly built facilities and not a result of Year 2000 issues. There may be additional costs incurred for unforeseen Year 2000 issues. All costs will be funded out of general operating funds and are not expected to be material. Risks of the Company's Year 2000 Issues Although not expected, the most likely worst case scenario includes the inability of vendors to supply product on a timely basis and/or the inability of customers to take delivery of currently ordered equipment, order additional equipment or pay the Company for products already purchased. 14 Management will, in conjunction with its customers, continue to evaluate currently identified and as yet unforeseen potential Year 2000 issues in its products that could adversely affect customers' production capabilities. Commercially available software capable of finding date comparison programs and databases on desktop computers will be executed to minimize the risk of date comparison errors. The Company will continue to seek readiness certification from critical suppliers and customers. Contingency Plans The Company is currently seeking alternate suppliers or obtaining in-house capabilities for vendors that it deems to be both critical to the Company's success and unable to adequately demonstrate Year 2000 readiness. As a part of the Company's continuing customer service efforts, the Company is working with its customers to encourage Year 2000 testing that includes the Company's products. The current status of the Company's efforts to deal with Year 2000 issues has been posted on the Company's Internet site which may be viewed at HTTP://WWW.CFMTECH.COM. There can be no assurances that the Company will not experience serious unanticipated negative consequences and/or material costs caused by undetected errors or defects in technology used in its products or internal systems, which are comprised predominantly of third party software and hardware, or by the inability of third parties to adequately disclose and correct their Year 2000 issues. While the Company presently believes that the ultimate outcome of its efforts to be Year 2000 ready will not have a material effect on the Company's financial position, liquidity or operations, there can be no assurance that unanticipated increased costs will not have a material effect on the Company's results of operations. LITIGATION In the United States, the Company has asserted its U.S. Patent No. 4,911,761 (the "`761 patent")for Direct Displacement(TM) drying against defendants in two actions alleging infringement, inducement of infringement, and contributory infringement of the patent. The Company also is both a defendant and a counterclaim plaintiff in a third proceeding where the plaintiff seeks a declaratory judgment of non-infringement and that the `761 patent is invalid. The Company has counterclaimed, alleging infringement, inducement of infringement, and contributory infringement of both the `761 patent and U.S. Patent Nos. 4,778,532 (the "`532 patent") and 4,917,123 (the "`123 patent"). The Company has also asserted it U.S. Patent Nos. 4,778,532 and 4,917,123 against one of the defendants involved in an action over the `761 patent. On July 10, 1995, the Company filed an action against STEAG Microtech, Inc. ("STEAG"), captioned CFMT, Inc. and CFM Technologies, Inc. v. STEAG Microtech, Inc., Civil Action No. 95-CV442, in the United States District Court for the District of Delaware. The Company sought damages and a permanent injunction to prevent further infringement. STEAG denied infringement and asserted, among other things, that the '761 patent is invalid and unenforceable. On December 12, 1997, following a two-week trial, the jury returned a verdict that STEAG willfully infringed the '761 patent and that the patent was not invalid. The jury awarded the Company damages of $3,105,000. The District Court subsequently upheld the jury's verdict and entered final judgment and a permanent injunction in the Company's favor. STEAG appealed the verdict and various rulings to the United States Court of Appeals for the Federal Circuit ("CAFC"). On May 13, 1999, the CAFC affirmed the judgment of the District Court in all aspects except one. With respect to infringement, the CAFC vacated the judgment and remanded the case to the District Court for reconsideration of its holding of literal infringement, instructing the court to consider whether there was substantial evidence in the record to support one aspect of the jury's infringement finding. The Company petitioned for rehearing of this CAFC decision. The CAFC denied the rehearing and remanded the case to the District Court. Steag and the Company each filed motions asking the District Court to resolve the issue in its favor. The District Court has not yet ruled on the issue. 15 On September 11, 1995, the Company filed an action against YieldUP International Corp. ("YieldUP"), captioned CFMT, Inc. and CFM Technologies, Inc. v. YieldUP International Corp., Civil Action No. 95-549-RRM, in the United States District Court for the District of Delaware. The Company sought damages and a permanent injunction to prevent further infringement. YieldUP denied infringement and asserted, among other things, that the subject patent is invalid and unenforceable. On October 14, 1997, the District Court issued a decision granting summary judgment in favor of YieldUP on the grounds that the process used in YieldUP's processing equipment does not infringe the '761 patent. The District Court subsequently granted the Company's request for reargument of the decision, and the Company and YieldUP have submitted additional briefs on the issue. The District Court has not issued a decision on the reargued summary judgment motion. In March 1997, Dainippon Screen Mfg. Co. Ltd. and DNS Electronics LLC (collectively, "DNS") filed an action against the Company captioned Dainippon Screen Manufacturing Co., Ltd. and DNS Electronics, LLC v. CFMT, Inc. and CFM Technologies, Inc., Civil Action No. 97-20270 JW, in the United States District Court for the Northern District of California. In this action, DNS requested the Court to declare that DNS does not infringe the '761 patent and that the patent is invalid and unenforceable. DNS sought monetary damages and injunctive relief for alleged violations of the Lanham Act, unfair competition, tortious interference with prospective economic advantage, and unfair advertising. The Court dismissed this action on the grounds of lack of personal jurisdiction and absence of an indispensable party. DNS appealed this ruling, and the appellate court reversed the district court decision as to the patent causes of action on April 29, 1998. The case has been returned to the United States District Court for the Northern District of California, although the causes of action relating to the Lanham Act, unfair competition, tortious interference with prospective economic advantage, and unfair advertising have been dismissed. The Company has answered the complaint brought by DNS and has counterclaimed, alleging infringement by DNS of the `532, `123, and `761 patents. Discovery is presently ongoing with a claims construction hearing set for October 22, 1999, and trial currently set to begin no earlier than May 1, 2000. On December 30, 1998, the Company filed an additional action against YieldUP, Civil Action No. 98-790-RRM, in the United States District Court for the District of Delaware. The Company alleges patent infringement of the `123 and `532 patents by YieldUP and seeks a permanent injunction to prevent YieldUP from using, making or selling equipment that violates these patents. In addition, the Company is seeking damages for past infringement. YieldUP recently has amended its answer to the Company's complaint, asserting counterclaims for alleged tortious interference with prospective economic advantage and defamation, and seeking compensatory and punitive damages. Discovery is presently ongoing and trial is currently set to begin May 1, 2000. There can be no assurance that when any of the foregoing litigation is final, any of the claims of the patents in suit will be found to encompass use of the competitors' products or that the subject patents will not be found to be unenforceable or invalid. A finding of invalidity or unenforceability could result in the Company's competitors being able to develop products using the Company's proprietary technology, which in turn could have a material adverse effect on the Company. Further, there can be no assurance that any rights granted under any of the Company's patents will provide adequate protection to the Company, or that the Company will have sufficient resources to continue to prosecute its rights in the current actions or others. STEAG has filed nullification proceedings against the Company's drying patents in Germany (DE68921757.8), UK (EP428,784), France (EP428,784), Netherlands (23184), Ireland (66389), and Japan(2,135,270). The Company is proceeding to defend these patents. These proceedings could result in the nullification of the subject patents in some or all of the respective countries. The Company chose to abandon the UK patent (EP 428,784) because in the Company's judgement, the anticipated costs of defending the nullity action are not warranted in view of the patent's limited added value to CFM's existing patent portfolio in the UK. The Company may choose to abandon patents in other foreign countries if the anticipated costs of defending the nullity action are not warranted in view of the patent's added value to CFM's existing patent portfolio in that country. Decisions, if any, to abandon additional patents will be made on a country-by-country basis. 16 In Japan, the Company filed an Invalidation Appeal of Japanese Patent No. 2634350 against Dainippon Screen Manufacturing K.K. Although there are no other pending lawsuits against the Company regarding infringement of any existing patents or other intellectual property rights or any claims that the Company is infringing intellectual property rights of others, there can be no assurance that such infringement claims will not be asserted by parties in the future. Also, there can be no assurance in the event of such claims of infringement that the Company will be able to obtain licenses on reasonable terms. The Company's involvement in any patent dispute or other intellectual property dispute or action to protect trade secrets and know-how could result in a material adverse effect on the Company's business. Adverse determinations in current litigation or any other litigation in which the Company may become involved could subject the Company to significant liabilities to third parties, require the Company to grant licenses to or seek licenses from third parties, and prevent the Company from manufacturing and selling its products. Any of these situations could have a material adverse effect on the Company. FORWARD LOOKING STATEMENTS Statements in this Quarterly Report on Form 10-Q, including those concerning the Company's expectations of future sales, gross profits, research, development and engineering expenses, selling, general and administrative expenses, product introductions, cash requirements and Year 2000 compliance, include certain forward-looking statements. As such, actual results may vary materially from such expectations. Factors which could cause actual results to differ from expectations include variations in the level of orders which can be affected by general economic conditions and growth rates in the semiconductor and FPD manufacturing industries and in the markets served by the Company's customers, the international economic and political climates, difficulties or delays in product functionality or performance, the delivery performance of sole source vendors, the timing of future product releases, failure to respond adequately to either changes in technology or customer preferences, changes in pricing by the Company or its competitors, ability to manage growth, risk of nonpayment of accounts receivable, changes in budgeted costs, ability to evaluate, identify and correct date recognition problems in software used by the Company, its customers or suppliers or failure to realize a successful outcome to pending patent litigation, all of which constitute significant risks. There can be no assurance that the Company's results of operations will not be adversely affected by one or more of these factors. 17 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27 Financial Data Schedule (b) Reports on Form 8-K None. 18 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Dated: September 14, 1999 CFM Technologies, Inc. (Registrant) By: /s/ ROGER A. CAROLIN ------------------------------ Roger A. Carolin Chief Executive Officer By: /s/ LORIN J. RANDALL ------------------------------ Lorin J. Randall Chief Financial Officer 19 EXHIBIT INDEX EXHIBIT 27 Financial Data Schedule. 20 EX-27 2 FINANCIAL DATA SCHEDULE
5 9-MOS OCT-31-1999 JUL-31-1999 16500 8490 19236 0 14989 62058 21410 (7975) 83640 12445 0 0 0 81260 (11833) 83640 22396 22396 15169 20412 0 0 (1106) (12079) (4107) 0 0 0 0 (7972) (1.01) (1.01)
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