Exhibit 99.1
BE SEMICONDUCTOR INDUSTRIES N.V.
QUARTERLY REPORT FOR THE QUARTER ENDED
JUNE 30, 2006
INDEX
PART I. Financial Information..................................................1
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS..............1
Total liabilities and shareholders' equity.....................................3
Cash and cash equivalents at end of the period.................................5
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.........................................17
Results of Operations.........................................................19
PART II. OTHER INFORMATION....................................................31
PART I. FINANCIAL INFORMATION
ITEM 1 - UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
BE SEMICONDUCTOR INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------------------------------------------------------------
2005 2006 2006 2005 2006 2006
EURO EURO USD (1) EURO EURO USD (1)
(unaudited) (unaudited) (unaudited) (unaudited) (unaudited) (unaudited)
- --------------------------------------------------------------------------------------------------------------------------------
Net sales............................... 36,960 49,794 63,632 73,597 94,322 120,534
Cost of sales........................... 24,537 28,791 36,792 50,908 56,266 71,902
---------------------------------------------------------------------------------------
Gross profit ........................... 12,423 21,003 26,840 22,689 38,056 48,632
Selling, general and administrative
expenses.............................. 10,223 11,354 14,509 19,446 21,326 27,252
Research and development expenses....... 4,867 4,519 5,775 10,166 8,883 11,352
Restructuring charges................... 1,718 (15) (19) 1,718 (255) (326)
Amortization of intangible assets....... 931 752 961 2,154 1,507 1,926
---------------------------------------------------------------------------------------
Total operating expenses................ 17,739 16,610 21,226 33,484 31,461 40,204
Operating income (loss)................. (5,316) 4,393 5,614 (10,795) 6,595 8,428
Other income............................ -- 1,216 1,554 - 1,216 1,554
Interest expense, net................... (708) (772) (987) (1,280) (1,518) (1,940)
---------------------------------------------------------------------------------------
Income (loss) before taxes and
minority interest..................... (6,024) 4,837 6,181 (12,075) 6,293 8,042
Income tax expense (benefit)............ (1,506) (101) (129) (3,019) 297 380
---------------------------------------------------------------------------------------
Income (loss) before minority interest.. (4,518) 4,938 6,310 (9,056) 5,996 7,662
Minority interest....................... (15) (59) (75) (9) (80) (102)
---------------------------------------------------------------------------------------
Net income (loss)....................... (4,533) 4,879 6,235 (9,065) 5,916 7,560
=======================================================================================
Net income (loss) per share -- basic.... (0.14) 0.15 0.19 (0.28) 0.18 0.23
Page 1
Net income (loss) per share -- diluted.. (0.14) 0.13 0.17 (0.28) 0.17 0.22
Weighted average number of shares
used to compute net income (loss) per
share -- basic.......................... 32,728,502 32,762,932 32,762,932 32,685,765 32,750,638 32,750,638
- --------------------------------------------------------------------------------------------------------------------------------
Weighted average number of shares
used to compute net income (loss) per
share -- diluted........................ 32,728,502 41,883,956 41,883,956 32,685,765 41,838,703 41,838,703
- --------------------------------------------------------------------------------------------------------------------------------
1) See Note 1 of "Notes to Consolidated Financial Statements".
See accompanying notes to these condensed consolidated financial statements.
Page 2
BE SEMICONDUCTOR INDUSTRIES N.V.
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
2005 2006
---------------------------------------------
EURO EURO USD (1)
(UNAUDITED) (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents..................................... 72,950 70,523 90,122
Accounts receivable........................................... 31,456 39,662 50,684
Inventories................................................... 53,779 59,562 76,114
Other current assets.......................................... 12,737 15,077 19,267
---------------------------------------------
TOTAL CURRENT ASSETS.......................................... 170,922 184,824 236,187
Property, plant and equipment................................. 40,398 38,201 48,817
Goodwill...................................................... 68,864 66,356 84,796
Other intangible assets....................................... 14,619 12,945 16,543
Deferred tax assets........................................... 1,359 4,952 6,328
Other non-current assets...................................... 4,874 4,632 5,919
---------------------------------------------
TOTAL ASSETS.................................................. 301,036 311,910 398,590
===========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable to banks....................................... 5,693 2,964 3,788
Current portion of long-term debt and capital leases......... 15,457 17,364 22,189
Accounts payable............................................. 14,916 17,891 22,863
Accrued liabilities.......................................... 17,663 19,786 25,285
---------------------------------------------
TOTAL CURRENT LIABILITIES.................................... 53,729 58,005 74,125
Convertible notes............................................ 46,000 46,000 58,783
Other long-term debt and capital leases...................... 15,636 17,790 22,734
Deferred tax liabilities..................................... 821 715 914
Other non-current liabilities................................ 3,261 3,330 4,255
---------------------------------------------
TOTAL NON-CURRENT LIABILITIES................................ 65,718 67,835 86,686
MINORITY INTEREST............................................ 178 245 313
TOTAL SHAREHOLDERS' EQUITY................................... 181,411 185,825 237,466
---------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................... 301,036 311,910 398,590
===========================================================================================================
1) See Note 1 of "Notes to Consolidated Financial Statements".
See accompanying notes to these condensed consolidated financial statements.
Page 3
BE SEMICONDUCTOR INDUSTRIES N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30,
2005 2006 2006
EURO EURO USD(1)
(unaudited) (unaudited) (unaudited)
- ----------------------------------------------------------------------------------------------------------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)............................................... (9,065) 5,916 7,560
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation of property, plant and equipment................... 2,841 2,630 3,361
Amortization of intangible assets............................... 2,154 1,507 1,926
Deferred income tax benefits.................................... (1,881) (2,112) (2,699)
Loss (gain) on disposal of equipment............................ 95 (14) (18)
Translation of debt in foreign currency......................... (579) 466 596
Minority interest............................................... 11 79 101
Amortization of debt issuance costs............................. 135 170 217
Share based payments............................................ -- 129 165
Other non-cash items............................................ -- (1,216) (1,554)
Effects of changes in assets and liabilities:
Decrease (increase) in accounts receivable...................... 1,123 (8,629) (11,027)
Decrease (increase) in inventories.............................. 1,002 (7,009) (8,957)
Decrease (increase) in other current assets..................... 1,095 (2,472) (3,159)
Increase (decrease) in accrued liabilities...................... (5,655) 3,612 4,616
Increase (decrease) in accounts payable......................... (3,890) 3,332 4,258
--------------------------------------------
Net cash used in operating activities........................... (12,614) (3,611) (4,614)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................................ (4,490) (1,286) (1,643)
Proceeds from sale of assets and liabilities.................... - 1,000 1,278
Proceeds from sale of equipment................................. 640 340 434
Acquisition of subsidiaries, net of cash acquired............... (61,862) -- --
--------------------------------------------
Net cash provided by (used in) investing activities............. (65,712) 54 69
Page 4
CASH FLOW FROM FINANCING ACTIVITIES:
Payments of bank lines of credit................................ (12,585) (2,617) (3,344)
Payments on long-term debt and capital leases................... (5,448) (1,830) (2,339)
Proceeds from long-term debt and capital leases................. 11,658 6,031 7,707
Proceeds from issuance of convertible notes, net
of expenses .................................................. 43,726 -- --
--------------------------------------------
Net cash provided by financing activities....................... 37,351 1,584 2,024
Net decrease in cash and cash equivalents....................... (40,975) (1,973) (2,521)
Effect of changes in exchange rates on cash
and cash equivalents.......................................... 646 (454) (580)
Cash and cash equivalents at beginning of the
period........................................................ 106,573 72,950 93,223
--------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD.................. 66,244 70,523 90,122
================================================================================================================
1) See Note 1 of "Notes to Consolidated Financial Statements".
See accompanying notes to these condensed consolidated financial statements.
Page 5
BE SEMICONDUCTOR INDUSTRIES N.V.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company without audit and reflect all normal
recurring adjustments which are, in the opinion of management, necessary
to present fairly the financial position and the results of operations for
the interim periods presented. The statements have been prepared in
accordance with the regulations of the United States Securities and
Exchange Commission (the "SEC"), but omit certain information and footnote
disclosures necessary to present the statements in accordance with
generally accepted accounting principles in the United States ("US GAAP").
These unaudited condensed consolidated financial statements should be read
in conjunction with the Consolidated Financial Statements and Notes
thereto included in the Company's Annual Report on Form 20-F for the year
ended December 31, 2005, as filed with the SEC on April 3, 2006. The
results of operations for the three month period ended June 30, 2006 are
not necessarily indicative of the results to be expected for the year
ended December 31, 2006.
The accompanying unaudited condensed consolidated financial statements
are, solely for the convenience of the reader, also translated from Euros
into US dollars ("USD" or "US$") using the noon buying rate (rounded) in
New York City for cable transactions in foreign currencies as certified
for customs purposes by the Federal Reserve Bank of New York in effect on
June 30, 2006 (EURO 1.00 = US$ 1.2779). Such translations should not be
construed as representations that the Euro amounts could be converted into
US dollars at the rate indicated or at any other rate.
In the first quarter of 2004, the Company's Board of Management, in
consultation with the Company's Supervisory Board, evaluated its
functional and operational organization and determined that the Company is
engaged in one line of business, the design, manufacture, marketing and
servicing of assembly equipment for the semiconductor industry. Therefore,
the Company reports its financial results for only one segment, in
accordance with US GAAP.
2. ACQUISITION OF DATACON
On January 4, 2005, the Company completed the acquisition of all of the
outstanding ordinary shares of Datacon Technology AG ("Datacon") for total
consideration of EURO 72.6 million, of which EURO 65.0 million was paid in
cash and the remainder through the Company's issuance of 1,933,842
ordinary shares, valued at EURO 7.6 million at the date of the
acquisition. Acquisition costs incurred by the Company amounted to EURO
3.4 million. The results of Datacon are included in the Company's
consolidated financial statements from January 4, 2005, the date of
acquisition. The acquisition was accounted for using the purchase method
of accounting. The purchase price, including acquisition costs, was
allocated as follows:
Page 6
--------------------------------------------------------------------------
(Euro in thousands)
--------------------------------------------------------------------------
Net tangible assets........................................ 13,113
Patents.................................................... 297
Customer relationships..................................... 6,083
Product backlog............................................ 719
Goodwill................................................... 55,813
------------
76,025
==========================================================================
3. SHARES OUTSTANDING
As of December 31, 2005, the company's authorized capital consisted of
55,000,000 ordinary shares, nominal value EURO 0.91 per share, and
55,000,000 preference shares, nominal value EURO 0.91 per share. The
Company's authorized capital was increased in February 2006. As of
June 30, 2006, the Company's authorized capital consisted of 80,000,000
ordinary shares, nominal value EURO 0.91 per share, and 80,000,000
preference shares, nominal value EURO 0.91 per share. At December 31, 2005
and June 30, 2006, 32,736,502 and 32,762,932 ordinary shares were
outstanding, respectively. No preference shares were outstanding at each
of December 31, 2005 and June 30, 2006
4. INVENTORIES
Inventories consist of:
--------------------------------------------------------------------------
(in thousands) December 31, June 30,
2005 2006
EURO EURO
--------------------------------------------------------------------------
Raw materials................................ 19,583 21,153
Work in progress............................. 28,218 32,369
Finished goods............................... 5,978 6,040
---------------------------
53,779 59,562
==========================================================================
5. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the amounts at December 31, 2005 and June 30,
2006 for goodwill and other intangible assets:
--------------------------------------------------------------------------
(in thousands) December 31, June 30,
2005 2006
EURO EURO
--------------------------------------------------------------------------
Non amortizable:
Goodwill.................................. 68,864 66,356
Amortizable:
Patents................................... 8,674 7,303
Trademarks................................ 369 319
Customer relationships.................... 5,576 5,323
---------------------------
83,483 79,301
==========================================================================
Page 7
The above amounts are presented net of accumulated amortization of EURO
35.3 million at December 31, 2005 and EURO 36.4 million at June 30, 2006.
6. WARRANTY PROVISION
The Company records a liability for estimated warranty expense when
corresponding sales revenue is recognized. The amount recorded is based on
a history of actual costs incurred in connection with claims under
warranty provisions and on estimated probable costs related to such
current sales.
A summary of activity in the warranty provision is as follows:
--------------------------------------------------------------------------
(in thousands) 2005 2006
EURO EURO
--------------------------------------------------------------------------
Balance at January 1................................. 2,578 2,597
Addition due to acquisition of subsidiary............ 415 --
Provision for loss on warranty....................... 939 1,740
Cost for warranty.................................... (1,406) (1,380)
Foreign currency translation......................... 49 (32)
-------------------
Balance at June 30, 2,575 2,925
==========================================================================
7. RESTRUCTURING RESERVE
In December 2004, the Company announced a restructuring of its operations
focused principally on a workforce reduction at the Company's Dutch
packaging and tooling manufacturing operations in Duiven and Brunssum, the
Netherlands. As part of the restructuring the Company terminated 81
employees which amounted to approximately 10% of the Company's total fixed
headcount worldwide at that time. In addition, as part of the
restructuring the Company phased out approximately 50 temporary workers at
its Duiven facility. A component of the restructuring was the closing of
the Company's tooling facility in Brunssum, the Netherlands in the first
half of 2005. The Company recorded a restructuring charge of EURO 5.6
million in the fourth quarter ended December 31, 2004 to cover the
estimated costs of these workforce reductions.
In May 2005, the Company announced the further consolidation and
integration of its Fico packaging and tooling manufacturing operations in
Duiven, the Netherlands. The consolidation involved the termination of 32
employees in the third quarter of 2005 and the integration of production
and administrative personnel at the Company's Duiven facility. The Company
recorded a restructuring charge of EURO 1.7 million in the second quarter
of 2005 to cover the estimated costs of this workforce reduction.
Page 8
In the fourth quarter of 2005, the Company terminated 14 employees at its
Datacon subsidiary in Berlin, Germany in an effort to improve the
efficiency of its die bonding operations. The Company recorded a
restructuring charge of EURO 0.4 million in the fourth quarter of 2005 to
cover the estimated costs of this workforce reduction.
Changes in the restructuring reserve in the first six months of 2005 and
2006 were as follows:
--------------------------------------------------------------------------
(Euro in thousands) 2005 2006
--------------------------------------------------------------------------
Balance at January 1, 5,820 764
Additions (release) 1,718 (255)
Cash payments (4,990) (402)
------------------
Balance at June 30, 2,548 107
==========================================================================
Total remaining cash outlays for the restructuring activities announced at
the end of 2004 and in 2005 are expected to be EURO 0.1 million which the
Company expects will be paid during the second half of 2006.
8. CONVERTIBLE NOTES
In January 2005, the Company issued EURO 46 million principal amount of
5.5% convertible notes due 2012 (the "Notes"). The Notes pay interest
semi-annually. The first interest payment was made on July 28, 2005. The
Notes initially convert into ordinary shares at a conversion price of EURO
5.1250. If not converted, on the date beginning four years from the issue
date, the Company may redeem the outstanding Notes at their par value,
provided that on the date of conversion the market value of the Company's
ordinary shares exceeds 130% of the then effective conversion price.
The Notes were offered to institutional investors in the Netherlands and
internationally to professional investors through an international private
placement. Listing of the Notes on the official segment of the Stock
Market of Euronext Amsterdam N.V. took place on January 28, 2005.
The EURO 2.4 million of fees incurred for the issuance of
the Notes are included as debt issuance costs in other non-current assets
in the Company's Consolidated Balance Sheet as of June 30, 2006 and are
amortized using the interest method as interest cost over the life of the
Notes.
9. EARNINGS (LOSS) PER SHARE
The shares used in the computation of the Company's basic and diluted net
income (loss) per ordinary share are as follows:
Page 9
------------------------------------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------------------------------------------
2005 2006 2005 2006
----------------------------------------------------------------
Average shares outstanding at beginning of
the period................................. 32,728,502 32,758,430 30,794,660 32,736,502
Weighted average shares issued during the
period..................................... -- -- 1,891,105 --
Weighted average shares reissued from
treasury shares for the vesting of
performance stock awards................... -- 4,502 -- 14,136
----------------------------------------------------------------
Average shares outstanding -- basic........ 32,728,502 32,762,932 32,685,765 32,750,638
Dilutive shares contingently issuable
upon exercise of share options and
the vesting of performance stock awards.... -- 383,263 -- 316,742
Shares assumed to have been repurchased
for treasury with assumed proceeds
from the exercise of share options......... -- (237,849) -- (204,287)
Dilutive shares to be issued upon
conversion of the Company's 5.5%
outstanding convertible notes.............. -- 8,975,610 -- 8,975,610
----------------------------------------------------------------
Average shares outstanding -- assuming
dilution................................... 32,728,502 41,883,956 32,685,765 41,838,703
============================================================================================================
Average shares outstanding, assuming dilution, include the incremental
effect of ordinary shares that could be issued upon the exercise of
outstanding stock options and performance stock awards and the shares that
would be issued upon conversion of the Notes. For the three-month and
six-month periods ended June 30, 2005, all options to purchase ordinary
shares were excluded from the calculation of diluted net loss per share,
as the effect would be anti-dilutive due to the Company's loss for those
periods. For the three-month and six-month periods ended June 30, 2006,
967,089 and 967,589 options, respectively, to purchase ordinary shares
were excluded from the calculation of diluted net income per share,
because the exercise prices of these options were greater than or equal to
the average share price for the periods, and therefore their inclusion
would have been anti-dilutive.
Options to purchase ordinary shares could be dilutive in the future if the
average share price increases and is greater than the exercise price.
Page 10
10. COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) items include gains and losses that,
under US GAAP, are excluded from net income (loss) and are reflected as a
component of shareholders' equity. Comprehensive income (loss) includes
items such as foreign currency translation adjustments, minimum pension
liability adjustments and unrealized gains and losses on marketable
securities classified as available-for-sale. The Company's components of
comprehensive income (loss) for the three-month and six-month periods
ended June 30, 2005 and June 30, 2006 were net income (loss) and foreign
currency translation adjustments. Such components were as follows:
- ----------------------------------------------------------------------------------------------------------------
(in thousands) Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------------------------------------------------
2005 2006 2006 2005 2006 2006
EURO EURO USD EURO EURO USD
- ----------------------------------------------------------------------------------------------------------------
Net income (loss).............. (4,533) 4,879 6,235 (9,065) 5,916 7,560
Foreign currency
translation adjustment....... 941 (903) (1,154) 1,564 (1,109) (1,417)
-------------------------------------------------------------------------------
Comprehensive income (loss).... (3,592) 3,976 5,081 (7,501) 4,807 6,143
================================================================================================================
11. SHARE BASED COMPENSATION PLANS
In 1995, the Company established the BE Semiconductor Industries Incentive
Plan 1995 (the "Incentive Plan 1995"). The Company granted 1,101,236
options to purchase ordinary shares ("1995 Plan Shares") under the
Incentive Plan 1995. During the years from 1995 to 2001, the Company made
awards under the Incentive Plan 1995 to its executive officers and senior
employees. Options granted under the Incentive Plan 1995 are fully vested
and have exercise prices that were equal to the market price of the
Company's ordinary shares on the date of grant. The Incentive Plan 1995
expired in 2001.
In 2001, the Company established the BE Semiconductor Industries Incentive
Plan 2001 -- 2005 (the "Incentive Plan 2001"). The Company granted 700,183
options to purchase ordinary shares ("2001 Plan Shares") under the
Incentive Plan 2001. Until 2004, the Company made awards under the
Incentive Plan 2001 to its executive officers and employees. Options
granted under the Incentive Plan 2001 are fully vested and have exercise
prices that were equal to the market price of the Company's ordinary
shares on the date of grant. The Incentive Plan 2001 expired in 2005.
In 2005, the Company established the BE Semiconductor Industries Incentive
Plan 2005 -- 2009 (the "Incentive Plan 2005"). The total number of
ordinary shares ("2005 Plan Shares")
Page 11
that the Company may issue under the Incentive Plan 2005 may not exceed
1.5% of the total number of ordinary shares outstanding in the applicable
fiscal year, subject to adjustments for share splits, share dividends,
recapitalizations and similar events. 2005 Plan Shares may consist, in
whole or in part, of unauthorized and unissued ordinary shares or treasury
shares. The Company has made and anticipates that it will continue to
make, on an annual basis, annual and conditional performance stock awards
under the Incentive Plan 2005 to supervisory board members, executive
officers and senior employees of the Company. Receipt of annual awards in
the form of rights to receive ordinary shares of the Company are based on
defined targets ("Annual PSA Units"). Receipt of conditional awards in the
form of rights to receive ordinary shares of the Company ("Conditional PSA
Units") depends in any given year on whether the individual achieved
defined goals. One third of performance stock awards will vest in each of
the three years following the grant. For the performance stock awards
granted in 2005, an amount of EURO 75, net of tax, was recognized as
compensation cost in the year ended December 31, 2005 based on the market
value of the Company's ordinary shares on the date of grant. For the
performance stock awards granted in 2005 and 2006, an amount of EURO 61,
net of tax, was recognized as compensation cost in the quarter ended
June 30, 2006 for Annual and Conditional PSA Units based on the market
value of the Company's ordinary shares on the date of grant.
Prior to January 1, 2006, the Company measured compensation expense for
its employee equity-based compensation plans using the intrinsic value
method under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees ("APB 25") and related interpretations. As the
exercise price of all options granted under these plans were equal to or
below the fair market price of the underlying ordinary shares on the grant
date, no equity-based compensation cost was recognized in the consolidated
condensed statements of operations under the intrinsic value method.
On December 2004, the Financial Accounting Standards Board ("FASB"),
issued SFAS No. 123 (revised 2004), Share Based Payment, or SFAS No 123R,
which is a revision of Statement No. 123, Accounting for Stock-Based
Compensation, or SFA No. 123. SFAS No. 123R supersedes APB No. 25 and
amends SFAS No. 95, Statement of Cash Flows. Under SFAS No. 123R,
companies must calculate and record in the statements of operations the
cost of equity instruments, such as stock options or restricted stock,
awarded to employees for services received; pro forma disclosure is no
longer permitted. The cost of the equity instruments is to be measured
based on fair value of the instruments on the date they are granted (with
certain exceptions) and is required to be recognized over the period
during which the employees are required to provide services in exchange
for the equity instruments. On January 1, 2006, the Company adopted SFAS
No. 123R, using the modified prospective transition method. Using the
modified prospective transition method of adopting SFAS 123(R), the
Company began recognizing compensation expense for equity-based awards
granted after January 1, 2006 plus unvested awards granted prior to
January 1, 2006. Under this method of implementation, no restatement of
prior periods has been made.
Options granted to standard employees under the Incentive Plan 1995 and
the Incentive Plan 2001 receive variable accounting treatment due to the
cash settlement provisions of the plans. All other options granted by the
Company under the Incentive Plan 1995 and
Page 12
Incentive Plan 2001 to its executive officers and senior employees receive
fixed accounting treatment. For the stock options granted between 2001 and
2004 that receive variable accounting treatment, an amount of EURO 15, net
of tax, was recognized as compensation gain based on the market value of
the Company's ordinary shares for the quarter ended June 30, 2006. As of
June 30, 2006, there were outstanding options to purchase an aggregate of
945.943 ordinary shares at a weighted average exercise price of EURO 9.82
per share which receive fixed accounting treatment. As of June 30, 2006,
171,606 options to purchase ordinary shares that are subject to variable
accounting treatment were outstanding at a weighted average exercise
price of EURO 7.16 per share.
Summary of share based compensation plans.
Following is a summary of changes in the Company's options:
- ------------------------------------------------------------------------------------------
2005 Number of June 30, 2006
Number of Weighted options- Weighted
options- average Six months average
Year ended exercise ended exercise
December 31, 2005 price June 30, 2006 price
EURO EURO
- ------------------------------------------------------------------------------------------
Fixed options
- -------------
Outstanding, beginning of year 1,005,181 9.79 947,193 9.82
Options granted -- -- -- --
Options expired -- -- -- --
Options exercised (6,000) 3.22 -- --
Options forfeited (51,988) 10.00 (1,250) 3,94
---------------------------------------------------------
Outstanding, end of period 947,193 9,82 945,943 9.82
=========================================================
Exercisable, end of period 947,193 9.82 945,943 9.82
==========================================================================================
Variable options
- ----------------
Outstanding, beginning of year 229,079 7.06 174,981 7.13
Options granted -- -- -- --
Options exercised (2,000) 3.22 -- --
Options forfeited (52,098) 6.98 (3,375) 5.49
---------------------------------------------------------
Outstanding, end of period 174,981 7.13 171,606 7.16
=========================================================
Exercisable, end of period 174,981 7.13 171,606 7.16
==========================================================================================
==========================================================================================
Page 13
Stock options outstanding and exercisable at June 30, 2006:
- ---------------------------------------------------------------------------------------------------------------
Options outstanding and exercisable
- ---------------------------------------------------------------------------------------------------------------
Number Weighted Weighted
of options average average
remaining exercise
contractual price
Range of exercise price life (years) in euro
- ---------------------------------------------------------------------------------------------------------------
Fixed options
- -------------
EURO 3.22 - EURO 4.35 152,339 2.99 3.47
EURO 5.20 - EURO 7.70 100,313 3.72 5.89
EURO 8.94 - EURO 10.31 465,396 2.56 9.50
EURO 14.65 - EURO 17.90 227,895 2.76 16.47
===============================================================================================================
Variable options
- ----------------
EURO 3.22 31,521 2.75 3.22
EURO 5.95 50,682 3.75 5.95
EURO 8.94 - EURO 10.31 89,403 1.34 9.24
===============================================================================================================
The fair value of the option awards to employees was estimated using the
Black-Scholes option-pricing model assuming no dividends, vesting after three
years and the following weighted average assumptions:
- -------------------------------------------------------------------------------------------------------------
2003 2004
- -------------------------------------------------------------------------------------------------------------
Expected life (years) 5.2 5.1
Expected stock price volatility 55.0% 52.27%
Risk-free rate 3.7% 3.32%
=============================================================================================================
The per share weighted average fair value of options granted during 2003 and
2004 was EURO 1.85 and EURO 3.15, respectively.
Page 14
Summary of Outstanding PSA Units
Following is a summary of changes in performance stock awards:
- ---------------------------------------------------------------------------------------------------------
2005 2005 June 30, June 30,
Annual Conditional 2006 2006
PSA units PSA units Annual Conditional
PSA units PSA units
- ---------------------------------------------------------------------------------------------------------
Outstanding, beginning of year -- -- 90,188 17,000
PSA units granted 95,388 17,000 66,000 86,160
PSA units forfeited (5,200) -- -- (1,415)
PSA units vested (8,015) (18,415)
-------------------------------------------------------
Outstanding, end of period 90,188 17,000 148,173 83,330
=========================================================================================================
Following is a summary of changes in share based compensation plans:
(in thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------
2005 2006 2005 2006
EURO EURO EURO EURO
- ---------------------------------------------------------------------------------------------------------
Net income (loss) as reported..................... (4,533) 4,879 (9,065) 5,916
Deduct: Stock-based employee compensation
expense determined under fair value based method
of all awards, net of related tax effects......... (138) (49) (472) (47)
Add: Stock-based compensation expense included
in net income (loss), net of related tax effects.. 25 49 34 47
------------------------------------------------------
Pro forma net income (loss)....................... (4,646) 4,879 (9,503) 5,916
BASIC NET INCOME (LOSS) PER SHARE:
As reported....................................... (0.14) 0.15 (0.28) 0.18
Pro forma......................................... (0.14) -- (0.29) --
DILUTED NET INCOME (LOSS) PER SHARE:
As reported....................................... (0.14) 0.13 (0.28) 0.17
Pro forma......................................... (0.14) -- (0.29) --
=========================================================================================================
Page 15
12. SEGMENT DATA
The Company is engaged in one line of business, the design, manufacture,
marketing and servicing of assembly equipment for the semiconductor
industry.
In accordance with SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information," the Company's chief operating
decision-maker has been identified as the President and Chief Executive
Officer, who reviews operating results to make decisions about allocating
resources and assessing performance for the entire company. All material
operating units qualify for aggregation under SFAS 131 due to their
identical customer base and similarities in: economic characteristics;
nature of products and services; and procurement, manufacturing and
distribution processes. Since the Company operates in one segment and in
one group of similar products and services, all financial segment and
product line information required by SFAS 131 can be found in the
unaudited condensed consolidated financial statements.
Page 16
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information in this report contains certain forward-looking statements as
that term is defined in the Private Litigation Securities Reform Act of 1995.
For this purpose, any statements herein that are not statements of historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, any estimates of future business or financial results constitute
forward looking statements and any statements including those containing the
words "believes", "anticipates", "plans", "expects", "intends", "forecasts" and
similar expressions are intended to identify forward-looking statements. These
forward-looking statements represent the expectations of management as of the
date of the submission of this report. Actual results could differ materially
from those anticipated by the forward-looking statements due to a number of
important factors, including the risks and uncertainties faced by us which are
described elsewhere in this report and in other documents we have submitted to
the United States Securities and Exchange Commission. You should consider
carefully each of these risks and uncertainties in evaluating our financial
condition and results of operations. While we may elect to update the
forward-looking statements we specifically disclaim any obligation to do so,
even if our expectations change.
OVERVIEW
We design, develop, manufacture, market and service assembly equipment for the
semiconductor industry's back-end operations.
Our net sales and results of operations depend in significant part on the level
of capital expenditures by semiconductor manufacturers, which in turn depends on
the current and anticipated market demand for semiconductors and for products
utilizing semiconductors. Demand for semiconductor devices and expenditures for
the equipment required to assemble semiconductors is cyclical, depending in
large part on levels of demand worldwide for computing and peripheral equipment,
telecommunications devices and automotive and industrial components, as well as
the production capacity of global semiconductor manufacturers. Historically, as
demand for these devices has increased, semiconductor manufacturers have sought
to increase their capacity by increasing the number of wafer fabrication
facilities and equipment production lines, and installing equipment that
incorporates new technology to increase the number of semiconductor devices and
the amount of computing power per semiconductor device. As demand increases,
semiconductor prices also typically increase. Conversely, if the additional
capacity outstrips the demand for semiconductor devices, manufacturers
historically cancel or defer additional equipment purchases. Under such
circumstances, semiconductor prices typically fall.
Capital expenditures by our customers for semiconductor manufacturing equipment
depend on the current and anticipated market demand for semiconductors and
products using semiconductors. The semiconductor industry has suffered
significant economic downturns at various times in the past. These downturns
have involved periods of production overcapacity, oversupply, reduced prices and
lower net sales, and have regularly been associated with substantial reductions
in capital expenditures for semiconductor facilities and equipment. Due to the
lead times associated with the production of semiconductor equipment, a fall or
rise in the level of sales of semiconductor equipment typically lags any
downturn or recovery in the
Page 17
semiconductor market by approximately nine to twelve months. The cyclicality of
the semiconductor industry has had, and is expected to continue to have, a
direct effect on our net sales, results of operations and backlog. Downturns in
the industry can be severe and protracted and any such downturn would adversely
affect our net sales, results of operations and backlog. Our results of
operations historically have fluctuated significantly, both on an annual and
quarterly basis, depending on overall levels of global semiconductor demand and
the specific production requirements of our principal customers.
Our sales are generated primarily by shipments to the Asian manufacturing
operations of leading United States and European semiconductor manufacturers
and, to a lesser extent, Korean and other Asian manufacturers and
subcontractors. Most of our principal competitors on a worldwide basis are
Japanese entities, which historically have dominated the Japanese market,
because Japanese semiconductor manufacturers typically purchase equipment from
domestic suppliers. To date, our sales to Japanese customers have been limited.
Our sales to specific customers tend to vary significantly from year to year
depending on our customers' capital expenditure budgets, new product
introductions, production capacity and packaging requirements. For the quarter
ended June 30, 2006, Infineon accounted for more than 10% of our net sales. In
addition, we derive a substantial portion of our sales from products that have
an average selling price in excess of EURO 300,000 and that have significant
lead times between the initial order and delivery of the product. The timing and
recognition of revenue from customer orders can cause significant fluctuations
in operating results from quarter to quarter.
EVALUATION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations
are based upon our unaudited condensed consolidated financial statements, which
are included elsewhere in this report and which have been prepared in accordance
with U.S. GAAP. The preparation of these financial statements requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting periods. Areas
where significant judgments are made include, but are not limited to, revenue
recognition, inventories, long-lived assets and goodwill and intangible assets.
Actual results could differ materially from these estimates.
For a more detailed explanation of our critical accounting policies and
estimates, please refer to "Evaluation of Critical Accounting Policies and
Estimates" included in Item 5 of our Annual Report on Form 20-F for the year
ended December 31, 2005. Since December 31, 2005, there have been no material
changes to our critical accounting policies and estimates.
Page 18
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005
- -------------------------------------------------------------------------------------------------------------------------
(amounts in thousands, except share and per share data) THREE MONTHS ENDED JUNE 30,
------------------------------------------------------------
2005 2006
EURO EURO
(UNAUDITED) % (UNAUDITED) %
- -------------------------------------------------------------------------------------------------------------------------
Net sales................................................. 36,960 100.0 49,794 100.0
Cost of sales............................................. 24,537 66.4 28,791 57.8
------------------------------------------------------------
Gross profit ............................................. 12,423 33.6 21,003 42.2
Selling, general and administrative expenses.............. 10,223 27.7 11,354 22.8
Research and development expenses......................... 4,867 13.2 4,519 9.1
Restructuring charges..................................... 1,718 4.6 (15) (0.0)
Amortization of intangible assets......................... 931 2.5 752 1.5
------------------------------------------------------------
Total operating expenses.................................. 17,739 48.0 16,610 33.4
Operating income (loss)................................... (5,316) (14.4) 4,393 8.8
Other income.............................................. -- -- 1,216 2.4
Interest expense, net..................................... (708) (1.9) (772) (1.5)
------------------------------------------------------------
Income (loss) before taxes and minority interest.......... (6,024) (16.3) 4,837 9.7
Income taxes (benefit).................................... (1,506) (4.1) (101) (0.2)
------------------------------------------------------------
Income (loss) before minority interest.................... (4,518) (12.2) 4,938 9.9
Minority interest......................................... (15) (0.1) (59) (0.1)
------------------------------------------------------------
Net income (loss)......................................... (4,533) (12.3) 4,879 9.8
=========================================================================================================================
Net income (loss) per share
- - Basic............................................ (0.14) 0.15
- - Diluted.......................................... (0.14) 0.13
Number of shares used in calculating net income (loss)
per share:
- - Basic............................................ 32,728,502 32,762,932
- - Diluted.......................................... 32,728,502 41,883,956
- -------------------------------------------------------------------------------------------------------------------------
Page 19
THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THREE MONTHS ENDED JUNE 30, 2005.
ACQUISITION OF DATACON
On January 4, 2005, we completed our acquisition of Datacon. In connection with
the transaction, certain preliminary purchase accounting adjustments were
recorded. Such preliminary adjustments included goodwill in an amount of
approximately EURO 57.0 million, which will not be amortized, but will continue
to be evaluated in accordance with SFAS 142 "Goodwill and Other Intangible
Assets", and approximately EURO 7.1 million of other intangible assets that will
be amortized annually over their respective estimated useful lives. Furthermore,
in accordance with purchase accounting rules, we made an upward adjustment of
Datacon's inventories by EURO 3.3 million in the opening balance sheet to its
estimated fair value resulting in an increase in our cost of sales by EURO 0.9
million in the second quarter of 2005. The results of Datacon are included in
our financial statements from the date of acquisition. The final purchase price
allocation is reported under note 2 of the notes to the condensed financial
statements.
NET SALES
Our net sales consist of sales of die sorting systems, or die sorting equipment,
flip chip and multi-chip die bonding systems, or die bonding equipment, molding,
trim and form integration and singulation systems and plating systems, or
plating equipment.
As a result of the Datacon acquisition, we changed our financial presentation to
better reflect our business strategy and to better communicate the development
of our operations. We present our net sales as per end use customer application,
as opposed to a disclosure by individual product line. We analyse our net sales
and gross margins for our array connect assembly applications and leadframe
assembly applications as set forth in the tables presented below. In the array
connect category, we include flip chip and multi-chip die bonding products made
by Datacon in Austria and Hungary, die sorting and flip chip die bonding
products made in the United States by Laurier and singulation and certain
molding products made by Fico in the Netherlands. In the leadframe category, we
include molding and trim form systems made by Fico in the Netherlands, Malaysia
and China and plating equipment made by Meco in the Netherlands.
Our net sales and gross margins per end use customer application for the
quarters ended June 30, 2005 and 2006, respectively, were as follows:
- -----------------------------------------------------------------------------------------------
Three Months Ended June 30, % change
(Euro in millions) 2005 2006 2006
compared to
2005
- -----------------------------------------------------------------------------------------------
Leadframes 10.8 29.2% 17.7 35.5% 63.9%
Array Connect 26.2 70.8% 32.1 64.5% 22.5%
-----------------------------------------------------------
Total net sales 37.0 100.0% 49.8 100.0% 34.6%
===========================================================
Net sales increased by 34.6% from EURO 37.0 million in the second quarter of
2005 to EURO 49.8 million in the second quarter of 2006. The increase in net
sales in the second quarter of 2006 as
Page 20
compared to the second quarter of 2005 was principally due to increased
shipments of our assembly equipment for both leadframe and array connect
applications. Primarily due to increased demand of semiconductors and
semiconductor equipment. On a product basis, the increase was principally due to
increased sales of molding systems, trim and form integration systems and die
bonding equipment.
BACKLOG
Backlog increased by 21.0% from EURO 56.8 million at December 31, 2005 to EURO
68.7 million at June 30, 2006. Orders for array connect and leadframe
applications represented approximately 74% and 26%, respectively, of backlog at
June 30, 2006.
New orders for the second quarter of 2006 amounted to EURO 46.5 million as
compared to EURO 38.1 million in the second quarter of 2005, an increase of
22.0%. The book-to-bill ratio was 0.93 for the second quarter of 2006 as
compared to a book-to-bill ratio of 1.03 for the second quarter of 2005.
The increase in bookings in the second quarter of 2006 compared to the second
quarter of 2005 was due to a 23.6% increase in orders for array connect
applications (principally die bonding and packaging equipment) and an 18.4%
increase in orders for leadframe applications (principally packaging equipment).
We include in backlog only those orders for which we have received a completed
purchase order. Such orders are subject to cancellation by the customer with
payment of a negotiated charge. Because of the possibility of customer changes
in delivery schedules, cancellation of orders and potential delays in product
shipments, our backlog as of any particular date may not be representative of
actual sales for any succeeding period.
GROSS PROFIT
Cost of sales includes materials, purchased components and subassemblies from
subcontractors, direct labor and manufacturing overhead. It also includes costs
relating to the pre-production and customization of new equipment once a product
has advanced beyond the prototype stage. Changes in cost of sales typically lag
changes in net sales due to our manufacturing lead times.
Our gross profit as a percentage of net sales per end use customer application
for the quarters ended June 30, 2005 and 2006, respectively, were as follows:
- ------------------------------------------------------------------------------------------
Three Months Ended June 30,
2005 2006
- ------------------------------------------------------------------------------------------
Array connect 38.4% 42.9%
Leadframes 30.2% 40.5%
Fair value adjustment in the opening balance sheet
of Datacon (2.4%) --
------------------------------------
Gross profit as a percentage of net sales 33.6% 42.2%
==========================================================================================
Page 21
Gross profit increased by 69.4% from EURO 12.4 million in the second quarter of
2005 to EURO 21.0 million in the second quarter of 2006. Cost of sales for the
second quarter of 2005 included a EURO 0.9 million purchase accounting
adjustment relating to an upward fair value inventory adjustment in the opening
balance sheet of Datacon. As a percentage of net sales, gross profit increased
from 33.6% in the second quarter of 2005 to 42.2% in the second quarter of 2006,
due to (i) a significant increase in leadframe assembly gross margins related
primarily to the restructuring of our packaging equipment operations in 2005 and
improved gross margins realized on sales of plating equipment, (ii) improved
gross margins for array connect applications, principally die bonding equipment,
resulting from effeciencies realized by the company as well as increased sales
level, and (iii) the absence of charges in the 2006 period related to the
Datacon acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses consist of expenses related to
sales of products and services, administrative and other corporate level
expenses not related to the production of products and all expenses associated
with ongoing customer support.
Selling, general and administrative expenses increased by 11.8% from EURO 10.2
million in the second quarter of 2005 to EURO 11.4 million in the second quarter
of 2006, primarily related to increased warranty expense, higher general and
administrative expenses, mainly caused by increased level of activities, and
increased commission expense. As a percentage of net sales, selling, general and
administrative expenses decreased from 27.7% in the second quarter of 2005 to
22.8% in the second quarter of 2006.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development spending patterns vary each year depending on the
system produced and the new product development cycle per array connect and
leadframe application. In general, as research and development expenses do not
include pre-production and customization costs, which are included as cost of
sales, our research and development expenses decrease as products move from
prototype development to production and final customer acceptance.
Research and development expenses decreased by 8.2% from EURO 4.9 million in the
second quarter of 2005 to EURO 4.5 million in the second quarter of 2006 mainly
due to lower expenses for trim and form and molding systems. As a percentage of
net sales, research and development expenses were 13.2% and 9.1% in the second
quarters of 2005 and 2006, respectively.
RESTRUCTURING CHARGES
In December 2004, we announced a restructuring of our operations focused
principally on a workforce reduction at our Dutch packaging and tooling
manufacturing operations in Duiven and Brunssum, the Netherlands. As part of the
restructuring we, terminated 81 employees, or approximately 10% of the total
fixed headcount worldwide at that time. In addition, as part of the
restructuring we phased out approximately 50 temporary workers at our Duiven
facility. A component of the restructuring was the closing of our tooling
facility in Brunssum, the
Page 22
Netherlands in the first half of 2005. We recorded a restructuring charge of
EURO 5.6 million in the fourth quarter ended December 31, 2004 to cover the
estimated costs of our workforce reductions.
In May 2005, we announced the further consolidation and integration of our Fico
packaging and tooling manufacturing operations in Duiven, the Netherlands. The
consolidation involved the termination of 32 employees in the third quarter of
2005 and the integration of production and administrative personnel at our
Duiven facility. We recorded a restructuring charge of EURO 1.7 million in the
second quarter of 2005 to cover the estimated costs of this workforce reduction.
In the fourth quarter of 2005, we terminated 14 employees at our Datacon
subsidiary in Berlin, Germany in an effort to improve the efficiency of our die
bonding operations. We recorded a restructuring charge of EURO 0.4 million in
the fourth quarter of 2005 to cover the estimated costs of this workforce
reduction.
Changes in the restructuring provision were as follows:
- ------------------------------------------------------------------------------
(Euro in thousands) 2005 2006
- ------------------------------------------------------------------------------
Balance at January 1, 5,820 764
Additions (release) 2,231 (255)
Cash payments (7,287) (402)
------------------
Balance at December 31, 2005 and June 30, 2006,
respectively 764 107
==============================================================================
Total remaining cash outlays for the restructuring activities announced at the
end of 2004 and in 2005 are expected to be EURO 0.1 million which we expect will
be paid during the second half of 2006.
OPERATING INCOME (LOSS)
Our operating income increased from an operating loss of EURO 5.3 million in the
second quarter of 2005 to operating income of EURO 4.4 million in the second
quarter of 2006. The operating loss for the second quarter of 2005 included
purchase accounting adjustment, relating to the Datacon acquisition of EURO 0.9
million and restructuring charges of EURO 1.7 million associated with the
further consolidation of our Dutch packaging and tooling manufacturing
operations. The increase in our operating income in the second quarter of 2006
as compared to the second quarter of 2005 was due to increased net sales and
gross margins, the absence of purchase accounting adjustments recorded in 2005
related to the Datacon acquisition and lower restructuring expenses, partially
offset by increased selling, general and administrative expenses.
OTHER INCOME
In the second quarter of 2006, we sold certain assets of Eurotec, a
Datacon subsidiary, to a third party for a total consideration of EURO 2.0
million, of which EURO 1.0 million was received on the transaction date. The
remaining EURO 1.0 million is expected to be received in the fourth quarter of
2006 and is
Page 23
secured by a bank guarantee. The transaction resulted in a gain of EURO 1.2
million which was reported in other income on our income statement.
INTEREST EXPENSE, NET
Interest expense, net amounted to EURO 0.7 million in the second quarter of 2005
as compared to interest expense, net of EURO 0.8 million in the second quarter
of 2006.
INCOME TAX (BENEFIT)
Income taxes (benefit) were EURO 1.5 million in the second quarter of 2005 as
compared to an income tax benefit of EURO 0.1 million in the second quarter of
2006. On an actual basis, the effective tax rate decreased from 25.0% in the
second quarter of 2005 to (2.1%) in the second quarter of 2006.
Our effective tax rate in the second quarter of 2006 was influenced by a variety
of factors. In connection with the sale of our Datacon Eurotec subsidiary, we
recorded a tax benefit of EURO 2.4 million. In connection with the sale, a
valuation allowance of EURO 1.8 million that was recorded as part of the
purchase price allocation of Datacon was also released and reduced the value of
goodwill recorded in connection with the Datacon acquisition by such amount. In
addition, the Company recorded a deferred tax valuation allowance of EURO 1.1
million as of June 30, 2006 primarily due to tax-deductible currency losses on
long term USD loans to subsidiaries in the first half year of 2006.
MINORITY INTEREST
Minority interest relates to our investment in Tooling Leshan Company Ltd. in
Leshan, China of which we own 87%.
NET INCOME (LOSS)
Our net income increased by EURO 9.4 million from a net loss of EURO 4.5 million
in the second quarter of 2005 to net income of EURO 4.9 million in the second
quarter of 2006. The net loss for the second quarter of 2005 included after tax
purchase accounting adjustments relating to the Datacon acquisition of EURO 0.7
million and restructuring charges, net of income tax of EURO 1.2 million
associated with the further consolidation of our Dutch packaging and tooling
manufacturing operations. The increase in net income in the second quarter of
2006 was primarily due to higher net sales and gross margins, lower operating
expenses as a percentage of net sales, the EURO 1.2 million gain on the sale of
Datacon's Eurotec subsidiary and net tax benefits of EURO 1.4 million recognized
during the period.
Page 24
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2006 COMPARED TO SIX MONTHS ENDED JUNE 30, 2005
- -------------------------------------------------------------------------------------------------------------------------
(amounts in thousands, except share and per share data) SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------
2005 2006
EURO EURO
(UNAUDITED) % (UNAUDITED) %
- -------------------------------------------------------------------------------------------------------------------------
Net sales............................................ 73,597 100.0 94,322 100.0
Cost of sales........................................ 50,908 69.2 56,266 59.7
------------------------------------------------------------
Gross profit......................................... 22,689 30.8 38,056 40.3
Selling, general and administrative expenses......... 19,446 26.4 21,326 22.6
Research and development expenses.................... 10,166 13.8 8,883 9.4
Restructuring charges................................ 1,718 2.3 (255) (0.3)
Amortization of intangible assets.................... 2,154 2.9 1,507 1.6
------------------------------------------------------------
Total operating expenses............................. 33,484 45.4 31,461 33.3
Operating income (loss).............................. (10,795) (14.6) 6,595 7.0
Other income......................................... -- -- 1,216 1.3
Interest expense, net................................ (1,280) (1.8) (1,518) (1.6)
------------------------------------------------------------
Income (loss) before taxes and minority interest..... (12,075) (16.4) 6,293 6.7
Income tax expense (benefit)......................... (3,019) (4.1) 297 0.3
------------------------------------------------------------
Income (loss) before minority interest............... (9,056) (12.3) 5,996 6.4
Minority interest.................................... (9) 0.0 (80) 0.1
------------------------------------------------------------
Net income (loss).................................... (9,065) (12.3) 5,916 6.3
=========================================================================================================================
Net income (loss) per share
- - Basic............................................ (0.28) 0.18
- - Diluted.......................................... (0.28) 0.17
Number of shares used in calculating net income (loss)
per share:
- - Basic............................................ 32,685,765 32,750,638
- - Diluted.......................................... 32,685,765 41,838,703
=========================================================================================================================
Page 25
FIRST SIX MONTHS 2005 COMPARED TO FIRST SIX MONTHS 2006
NET SALES
Our net sales increased from EURO 73.6 million in the first six months of 2005
to EURO 94.3 million in the same period of 2006, an increase of 28.1%. The
increase in net sales was principally due to increased shipments of Besi's
assembly equipment for both array connect (up 26.7%) and leadframe applications
(up 30.8%).
- ---------------------------------------------------------------------------------------------------
(Euro in million) Six Months Ended June 30, % change
2005 2006 2006
compared to
2005
- ---------------------------------------------------------------------------------------------------
Array connect 48.3 65.6% 61.2 64.9% 26.7%
Leadframes 25.3 34.4% 33.1 35.1% 30.8%
--------------------------------------------------------------------------
Total net sales 73.6 100.0% 94.3 100.0% 28.1%
===================================================================================================
GROSS PROFIT
Our gross profit as a percentage of net sales per end use customer application
for the six months ended June 30, 2005 and 2006, respectively, were as follows:
- --------------------------------------------------------------------------------------------------
Six Months Ended June 30,
2005 2006
- --------------------------------------------------------------------------------------------------
Array connect 37.0% 41.5%
Leadframes 31.1% 38.2%
Fair value adjustment in the opening balance sheet
of Datacon (4.1%) --
--------------------------------------------
Gross profit as a percentage of net sales 30.8% 40.3%
==================================================================================================
Gross profit increased by 67.8% from EURO 22.7 million in the first six months
of 2005 to EURO 38.1 million in the first six months of 2006. Cost of sales for
the six months ended June 30, 2005 included a EURO 3.0 million purchase
accounting adjustment relating to an upward fair value inventory adjustment in
the opening balance sheet of Datacon. As a percentage of net sales, gross profit
increased from 30.8% in the six months ended June 30, 2005 to 40.3% in the same
period of 2006. The gross margin improvement was primarily due to (i) a
significant increase in leadframe assembly gross margins related primarily to
the restructuring of our packaging equipment operations in 2005 and improved
gross margins realized on sales of plating equipment, (ii) improved gross
margins for array connect applications, principally die bonding and singulation
equipment resulting from effeciencies realized as well as increased sales
levels, and (iii) the absence of charges in the 2006 period related to the
Datacon acquisition.
Page 26
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses for the six months ended June
30, 2005 totaled EURO 19.4 million and represented 26.4% of net sales, compared
to EURO 21.3 million or 22.6% of net sales in the six months ended June 30,
2006. Such expenses increased by 9.8% in the six months ended June 30, 2006 as
compared to the six months ended June 30, 2005 primarily due to higher general
and administrative expenses and higher warranty expenses related to higher unit
volume.
RESEARCH AND DEVELOPMENT EXPENSES
Our research and development expenses decreased from EURO 10.2 million in the
six months ended June 30, 2005 to EURO 8.9 million in the same period of 2006.
As a percentage of net sales, research and development expenses were 13.8% and
9.4% during the six months ended June 30, 2005 and 2006, respectively, a
decrease of 12.7%. The decrease in research and development expenses in the
first six months of 2006 was mainly due to decreased spending for die handling,
die bonding and packaging equipment as new products were completed and released
to the market in the first half of 2006.
RESTRUCTURING CHARGES
In May 2005, we announced the further consolidation and integration of our Fico
packaging and tooling manufacturing operations in Duiven, the Netherlands. The
consolidation involved the termination of 32 employees in the third quarter of
2005 and the integration of production and administrative personnel at our
Duiven facility. We recorded a restructuring charge of EURO 1.7 million in the
second quarter of 2005 to cover the estimated costs of this workforce reduction.
In the fourth quarter of 2005, we terminated 14 employees at our Datacon
subsidiary in Berlin, Germany in an effort to improve the efficiency of our die
bonding operations. We recorded a restructuring charge of EURO 0.4 million in
the fourth quarter of 2005 to cover the estimated costs of this workforce
reduction.
Total remaining cash outlays for the restructuring activities announced at the
end of 2004 and in 2005 are expected to be EURO 0.1 million which we expect will
be paid during the second half of 2006.
OPERATING INCOME (LOSS)
Our operating income increased from an operating loss of EURO 10.8 million in
the first six months of 2005 to operating income of EURO 6.6 million in the
first six months of 2006. Operating loss in the first half of 2005 includes
restructuring charges of EURO 1.7 million and the fair value inventory
adjustment of EURO 3.0 million related to the Datacon acquisition. The increase
in our operating income in the first six months of 2006 as compared to the first
six months of 2005, was due to increased net sales and increased gross margins,
the absence of purchase accounting adjustments and restructuring charges and
lower research and development expenses, partially offset by increased selling,
general and administrative expenses.
Page 27
OTHER INCOME
In the second quarter of 2006, we sold certain assets of Eurotec, a Datacon
subsidiary, to a third party for a total consideration of EURO 2.0 million, of
which EURO 1.0 million was received on the transaction date. The remaining EURO
1.0 million is expected to be received in the fourth quarter of 2006 and is
secured by a bank guarantee. The transaction resulted in a gain of EURO 1.2
million which was reported in other income on our income statement.
INTEREST EXPENSE, NET
Our interest expense, net increased from EURO 1.3 million in the first six
months of 2005 to EURO 1.5 million in the first six months of 2006. The increase
was due to the Notes being outstanding for the full 2006 period.
INCOME TAX (BENEFIT)
We had an income tax benefit of EURO 3.0 million in the first six months of 2005
as compared to an income tax expense of EURO 0.3 million in the first six months
of 2006. The effective tax rate was 25.0% in the first six months of 2005 and
4.7% in the first six months of 2006.
Our effective tax rate in the first six months of 2006 was influenced by a
variety of factors. In connection with the sale of certain assets of the Eurotec
subsidiary of Datacon, we recorded a tax benefit of EURO 2.4 million. In
connection with the sale, a valuation allowance of EURO 1.8 million that was
recorded as part of the purchase price allocation related to the acquisition of
Datacon was also released and reduced the value of goodwill recorded in
connection with the Datacon acquisition by such amount. In addition, we recorded
a deferred tax valuation allowance of EURO 1.1 million as of June 30, 2006
primarily due to tax-deductible currency losses on long term USD loans to
subsidiaries in the first half year of 2006.
NET INCOME (LOSS)
Our net loss for the first six months of 2005 amounted to EURO 9.1 million as
compared to net income of EURO 5.9 million in the first six months of 2006. The
net loss for the first half of 2005 included after tax purchase accounting
adjustments relating to the Datacon acquisition of EURO 2.3 million and
restructuring charges, net of income tax of EURO 1.2 million associated with the
further consolidation of our Dutch packaging and tooling manufacturing
operations. The increase in our net income in the first half of 2006 as compared
to the first half of 2005 was due to increased net sales, increased gross
margins, the absence of purchase accounting adjustments and restructuring
charges recorded in 2005, lower research and development expenses, the EURO 1.2
million gain on sale of certain assets of the Eurotec subsidiary of Datacon, and
net tax benefits of EURO 1.4 million recognized during the period.
LIQUIDITY AND CAPITAL RESOURCES
We had EURO 73.0 million and EURO 70.5 million in cash and cash equivalents at
December 31, 2005 and June 30, 2006, respectively. At June 30, 2006, our total
debt and capital lease obligations totaled EURO 84.1 million and shareholders'
equity stood at EURO 185.8 million.
Page 28
In general, we fund our operations through cash generated from operations and,
in some instances, through intercompany loans to our subsidiaries. Furthermore,
to meet local financing needs, our subsidiaries maintain lines of credit with
various local commercial banks. The credit lines for our Dutch subsidiaries are
on a stand-alone basis without recourse to the parent company and are currently
unsecured, except for pledges on the bank accounts of these subsidiaries with
the banks that provide the facilities. Relating to these facilities, a
positive\negative pledge agreement is in place. The principal restrictive
covenant contained in each Dutch line of credit is a solvency ratio, which
generally is based on a ratio of each subsidiary's equity to its assets.
Consistent with past practice, Datacon utilizes short-term bank lines of credit,
long-term loans and government granted loans for export and research and
development activities. Fico Tooling Leshan Company Ltd. in China, of which we
own 87%, is partly financed by long-term loans issued by a local bank. Some of
these loans are secured by a pledge of real property.
At June 30, 2006, BE Semiconductor Industries N.V. and our subsidiaries had
available lines of credit aggregating EURO 27.7 million, under which EURO 3.0
million of short-term borrowings and EURO 10.3 million of long-term borrowings
(including current portion of long-term debt of EURO 2.5 million) were
outstanding. Amounts available to be drawn under the lines were further reduced
by (i) EURO 0.2 million in outstanding bank guarantees and (ii) EURO 0.2 million
for foreign exchange contracts. Interest is charged at the lenders' base lending
rates plus an increment of 0.5 -- 0.75% except for certain borrowings of
Datacon, for which interest rates vary between 1.50% and 4.50%, depending on the
type of credit facility and currency utilized. All our credit facility
agreements include covenants requiring us to maintain certain financial ratios.
We, and all of our applicable subsidiaries, are in compliance with all loan
covenants at June 30, 2006.
On January 12, 2006, we replaced a EURO 7.5 million line of credit at Fico with
a new line of credit of EURO 5.0 million and a loan of EURO 6.0 million with an
interest rate of 4.08% and maturity date of January 1, 2009. In July 2006, Meco
replaced its existing credit line of EURO 6.0 million with a new EURO 3.0
million credit line and a EURO 5.0 million three year term loan, of which EURO
2.0 million carries an interest rate of 4.63% and EURO 3.0 million carries an
interest rate of 4.72%. Both the Fico and Meco credit and loan arrangements are
on a stand-alone basis without recourse to the parent company.
The working capital requirements of our subsidiaries are affected by the receipt
of periodic payments on orders from their customers. Although our subsidiaries
occasionally receive partial payments prior to final installation, initial
payments generally do not cover a significant portion of the costs incurred in
the manufacturing of such systems.
Net cash used in operating activities was EURO 12.6 million and EURO 3.6 million
for the first half of 2005 and 2006, respectively. The primary use of cash in
operations in the first half of 2006 was increased working capital requirements
of EURO 11.2 million to finance increased receivables and inventories, partially
offset by net income of EURO 5.9 million and non-cash charges primarily for
depreciation and amortization.
Our capital expenditures were EURO 4.5 million and EURO 1.3 million in the first
six months of 2005 and 2006, respectively. Approximately EURO 2.1 million of our
capital expenditures in 2005 were related to the purchase of land at our Radfeld
facility.
In the second quarter of 2006, we sold certain assets of Eurotec, a Datacon
subsidiary, to a third party for a total consideration of EURO 2.0 million, of
which EURO 1.0 million was received on the transaction date. The
Page 29
remaining EURO 1.0 million is expected to be received in the fourth quarter of
2006 and is secured by a bank guarantee. The transaction resulted in a gain of
EURO 1.2 million which was reported in other income on our income statement. In
addition, approximately EURO 2.4 million of tax benefits were generated in
connection with this sale.
In January 2005, we issued the Notes. The Notes pay interest semi-annually on
January 28 and July 28 of each year. The Notes initially convert into ordinary
shares at a conversion price of EURO 5.1250. If the Notes are not converted, we
may redeem them at their principal amount at anytime after the date beginning
four years from the date of issue provided that on the date of redemption the
market value of our ordinary shares exceeds 130% of the then effective
conversion price. The net proceeds from the issuance of the Notes were used for
general corporate purposes, including working capital and capital expenditures.
On February 6, 2004, we sold land and buildings in Duiven, the Netherlands in a
sale and lease-back transaction for EURO 14.5 million in cash. At the date of
the transaction, the net book value of the real estate sold was approximately
equal to the selling price of the real estate. We granted the buyer a EURO 1.5
million loan which is payable in December 2006. The loan bears interest at a
rate of 4.5% per annum and is secured by a second mortgage on the land and
buildings which were the subject of the sale and lease back transaction. The
transaction will be accounted for as a financing until the buyer repays the
loan. Once the buyer repays the loan, our capital lease obligations and the
related real estate assets will be eliminated from our financial statements.
Settlement of this financial obligation will not result in a cash outflow from
the company.
We believe that our cash position, internally generated funds and available
lines of credit will be adequate to meet our levels of capital spending,
research and development and working capital requirements for at least the next
twelve months.
MATERIAL DIFFERENCES BETWEEN US GAAP AND IFRS
Beginning in 2005, the European Commission began to require companies that are
quoted on a European stock market to publish their financial statements in
accordance with the International Financial Reporting Standards, or IFRS.
Accordingly, while we continue to publish U.S. GAAP financial statements, we
also publish our consolidated financial statements in accordance with IFRS. Our
unaudited consolidated financial statements included herein have been prepared
in accordance with U.S. GAAP, which differ in certain significant respects from
IFRS.
Page 30
PART II.
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 1 A - RISK FACTORS
The following important factors, among others, could cause our actual
results to differ materially from those contained in forward-looking
statements made in this report or presented elsewhere by management
from time to time.
OUR NET SALES AND RESULTS OF OPERATIONS DEPEND IN SIGNIFICANT PART ON
ANTICIPATED DEMAND FOR SEMICONDUCTORS WHICH IS HIGHLY CYCLICAL.
Capital expenditures of our customers for semiconductor manufacturing
equipment depend on the current and anticipated market demand for
semiconductors and products using semiconductors. The semiconductor
industry is highly cyclical and has suffered significant economic
downturns at various times. These downturns have involved periods of
production overcapacity, oversupply, reduced prices and low net
sales, and have regularly been associated with substantial reductions
in capital expenditures for semiconductor facilities and equipment.
Due to the lead times associated with the production of semiconductor
equipment, a fall or rise in the level of sales of semiconductor
equipment typically lags any downturn or recovery in the
semiconductor market by approximately nine to twelve months. This
cyclicality has had, and is expected to continue to have, a direct
effect on our net sales, results of operations and backlog. Downturns
in the industry can be severe and protracted and could continue to
adversely affect our net sales, results of operations and backlog.
OUR QUARTERLY NET SALES AND OPERATING RESULTS FLUCTUATE SIGNIFICANTLY
Our quarterly net sales and operating results have varied in the past
and may continue to fluctuate in the future. We believe that
period-to-period comparisons of our operating results are not
necessarily indicative of future operating results. Factors that have
caused our operating results to fluctuate in the past and which are
likely to affect our operations in the future include the following:
o the volatility of the semiconductor industry;
o the length of sales cycles and lead-times associated with our
product offerings;
o the timing, size and nature of our transactions;
o the market acceptance of new products or product enhancements by
us or our competitors;
o the timing of new personnel hires and the rate at which new
personnel become productive;
o the changes in pricing policies by our competitors;
o the changes in our operating expenses;
o the success of our research and development projects;
o our ability to integrate acquisitions;
Page 31
o our ability to adjust production capacity on a timely basis to
meet customer demand; and
o the fluctuation of foreign currency exchange rates.
Because of these factors, investors should not rely on
quarter-to-quarter comparisons of our results of operations as an
indication of future performance. In future periods, our results of
operations could differ from estimates of public market analysts and
investors. Such discrepancies could cause the market price of our
securities to decline.
OUR BACKLOG AT ANY PARTICULAR DATE MAY NOT BE INDICATIVE OF OUR
FUTURE OPERATING RESULTS
Our backlog amounted to EURO 68.7 million at June 30, 2006. The
backlog at June 30, 2006 increased by 21.0% compared to backlog as of
December 31, 2005. The orders in our backlog are subject to
cancellation by the customer at any time upon payment of a negotiated
charge. Because of the possibility of changes in delivery schedules,
cancellations of orders and potential delays in product shipments,
our backlog at any particular date may not be representative of
actual sales for any succeeding period.
Our current and future dependence on a small number of customers
increases the revenue impact of each customer's delay or deferral
activity. Our expense levels in future periods will be based, in
large part, on our expectations regarding future revenue sources and,
as a result, our operating results for any given period in which
material orders fail to occur, are delayed or deferred could vary
significantly.
BECAUSE OF THE LENGTHY AND UNPREDICTABLE SALES CYCLE ASSOCIATED WITH
OUR TRANSACTIONS, WE MAY NOT SUCCEED IN CLOSING TRANSACTIONS ON A
TIMELY BASIS, IF AT ALL, WHICH COULD ADVERSELY AFFECT OUR NET SALES
AND OPERATING RESULTS
Transactions for our products often involve large expenditures, as
the average selling price for a substantial portion of the equipment
we offer exceeds EURO 300,000. The sales cycles for these
transactions are often lengthy and unpredictable. Factors affecting
the sales cycle include:
o customers' capital spending plans and budgetary constraints;
o the timing of customers' budget cycles; and
o customers' internal approval processes.
These lengthy sales cycles may cause our net sales and results of
operations to vary from period to period and it may be difficult to
predict the timing and amount of any variations.
We may not succeed in closing large transactions on a timely basis or
at all, which could cause significant variability in our net sales
and results of operations for any particular period.
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A LIMITED NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR A SIGNIFICANT
PERCENTAGE OF OUR NET SALES, AND OUR FUTURE NET SALES COULD DECLINE
IF WE CANNOT KEEP OR REPLACE THESE CUSTOMER RELATIONSHIPS
Historically, a limited number of our customers has accounted for a
significant percentage of our net sales. In 2005, our three largest
customers accounted for approximately 27% of our net sales, with the
largest customer accounting for approximately 10.6% of our net sales.
In the first half of 2006 our three largest customers accounted for
approximately 25% of our net sales, with the largest customer
accounting for approximately 12% of our net sales. We anticipate that
our results of operations in any given period will continue to depend
to a significant extent upon revenues from a small number of
customers. In addition, we anticipate that the identity of such
customers will continue to vary from year to year, so that the
achievement of our long-term goals will require the maintenance of
relationships with our existing clients and obtaining additional
customers on an ongoing basis. Our failure to enter into, and realize
revenue from a sufficient number of contracts during a particular
period could have a significant adverse effect on our net sales.
WE MAY FAIL TO COMPETE EFFECTIVELY IN OUR MARKET
We face substantial competition from established companies, based
primarily in Japan, various other Pacific Rim countries and the
United States, many of which have greater financial, engineering,
research and development, manufacturing and marketing resources than
we do. We believe that once a semiconductor manufacturer has decided
to buy semiconductor assembly equipment from a particular vendor, the
manufacturer often continues to use that vendor's equipment in the
future. Accordingly, it is often difficult to achieve significant
sales to a particular customer once another vendor's products have
been installed. Furthermore, some companies have historically
developed, manufactured and installed back-end assembly equipment
internally, and it may be difficult for us to sell our products to
these companies.
Most of our principal competitors on a worldwide basis are Japanese,
which historically have dominated the Japanese market because
Japanese semiconductor manufacturers typically purchase equipment
from domestic suppliers. To date, our sales to Japanese customers
have been limited. We believe that the limited growth of the Japanese
semiconductor industry in recent years has caused our Japanese
competitors to intensify their efforts to export their products to
other areas of the world, particularly other countries in Asia. As a
result, competition in these markets has become increasingly intense.
We believe that Japanese suppliers will be our most significant
competitors for the foreseeable future due to their strength in the
supply of equipment for high-volume, low cost production and their
high levels of excess capacity relative to other suppliers.
We believe that a decrease in the value of the Japanese yen or the
U.S. dollar and U.S. dollar-linked currencies in relation to the euro
could lead to intensified price-based competition in our markets
resulting in lower prices and margins and could have a negative
impact on our business and results of operations.
Page 33
We believe that our ability to compete successfully in our markets
depends on a number of factors both within and outside our control,
including:
o price, product quality and system performance;
o ease of use and reliability of our products;
o manufacturing lead times, including the lead times of our
subcontractors;
o cost of ownership;
o success in developing or otherwise introducing new products; and
o market and economic conditions.
COMPLIANCE WITH INTERNAL CONTROLS, PROCEDURES AND EVALUATIONS AND
ATTESTATION REQUIREMENTS MAY BE VERY COSTLY AND RESULT IN THE
IDENTIFICATION OF SIGNIFICANT DEFICIENCIES OR MATERIAL WEAKNESSES
Beginning with the fiscal year ended December 31, 2006, pursuant to
Section 404 of the Sarbanes-Oxley Act of 2002, we will be required,
as a foreign private issuer, to perform an evaluation of our internal
controls over financial reporting. We are establishing procedures in
order to comply with Section 404 in the timeframe permitted under the
regulations of the Securities and Exchange Commission, although as of
the date of this filing we have not yet finalized these procedures.
We expect that establishing procedures and ensuring compliance with
these requirements will be expensive and time-consuming. If we fail
to complete these procedures and the required evaluation in a timely
manner, we could be subject to regulatory review and penalties which
may result in a loss of public confidence in our internal controls.
In addition, we may uncover significant deficiencies or material
weaknesses in our internal controls. Measures taken by us to remedy
these issues may require significant effort and expense, as well as
the commitment of significant managerial resources. Each of these
circumstances may have an adverse impact on our business, financial
condition and results of operations or on our share price.
WE MUST INTRODUCE NEW PRODUCTS IN A TIMELY FASHION AND WE ARE
DEPENDENT UPON MARKET ACCEPTANCE OF THESE PRODUCTS
Our industry is subject to rapid technological change and new product
introductions and enhancements. The success of our business strategy
and results of operations are largely based upon accurate
anticipation of customer and market requirements. Our ability to
implement our overall strategy and remain competitive will depend in
part upon our ability to develop new and enhanced products and to
introduce them at competitive price levels. We must also accurately
forecast commercial and technical trends in the semiconductor
industry so that our products provide the functions required by our
customers and are configured for use in their facilities. We may not
be able to respond effectively to technological changes or to
specific product announcements by competitors. As a result, the
introduction of new products embodying new technologies or the
emergence of new industry standards could render our existing
products uncompetitive from a pricing standpoint, obsolete or
unmarketable.
Although we expect to continue to introduce new products in each of
our product lines and enhance our existing products, we cannot assure
you that we will be successful in developing new or enhanced products
in a timely manner or that any new or enhanced
Page 34
products that we introduce will achieve market acceptance, which
could have an adverse impact on our business and results of
operations.
WE ARE LARGELY DEPENDENT UPON OUR INTERNATIONAL OPERATIONS
We have manufacturing and/or sales and service facilities and
personnel in, amongst others, the Netherlands, Austria, Germany,
Hungary, Malaysia, Korea, Hong Kong, Singapore, Japan, China,
Philippines and the United States, and our products are marketed,
sold and serviced worldwide. Our operations are subject to risks
inherent in international business activities, including, in
particular:
o general economic and political conditions in each country;
o the overlap of different tax structures;
o management of an organization spread over various countries;
o currency fluctuations, which could result in increased operating
expenses and reduced revenues;
o greater difficulty in accounts receivable collection and longer
collection periods;
o unexpected changes in regulatory requirements, compliance with a
variety of foreign laws and regulations; and
o import and export licensing requirements, trade restrictions and
changes in tariff and freight rates.
In addition, each region in the global semiconductor equipment market
exhibits unique characteristics that can cause capital equipment
investment patterns to vary significantly from period to period.
WE ARE DEPENDENT ON NET SALES FROM CUSTOMERS IN VARIOUS PACIFIC RIM
COUNTRIES WHO HAVE EXPERIENCED ECONOMIC DIFFICULTIES IN THE PAST
A substantial portion of our net sales are derived from customers in
various Pacific Rim countries. Many Pacific Rim countries experienced
banking and currency difficulties that have led to economic
recessions at times in the recent past. Specifically, fluctuations in
the value of Korean and Southeast Asian currencies, together with
difficulties in obtaining credit, has resulted periodically in a
decline in the purchasing power of our Korean and Southeast Asian
customers and has resulted in the cancellation or delay of orders for
our products from Korean and Southeast Asian customers. In addition,
if Japan's economy were to weaken again, investments by Japanese
customers may be negatively affected with potential negative
implications for the economies of other Pacific Rim countries.
OUR RESULTS OF OPERATIONS HAVE IN THE PAST AND COULD IN THE FUTURE BE
AFFECTED BY CURRENCY EXCHANGE RATE FLUCTUATIONS
For the year ended December 31, 2005, the percentage of our
consolidated net sales denominated in euro was approximately 47%
whereas the percentage of our consolidated net sales represented by
U.S. dollars or U.S. dollar-linked currencies was approximately 53%.
Approximately 75% of our costs and expenses were denominated in euro
for such year. For the quarter ended June 30, 2006, the percentage of
our consolidated net sales denominated in euro was approximately 54%
whereas the
Page 35
percentage of our consolidated net sales represented by U.S. dollars
or U.S. dollar-linked currencies was approximately 46%. As a result,
our results of operations could be adversely affected by fluctuations
in the value of the euro against the U.S. dollar. In recent periods,
the value of the U.S. dollar has declined significantly in comparison
with the euro. We seek to manage our exposure to such fluctuations in
part by hedging firmly committed sales contracts denominated in U.S.
dollars. While management will continue to monitor our exposure to
currency fluctuations and may use financial hedging instruments to
minimize the effect of these fluctuations, we cannot assure you that
exchange rate fluctuations will not have an adverse effect on our
results of operations or financial condition.
IF WE FAIL TO CONTINUE TO ATTRACT AND RETAIN QUALIFIED PERSONNEL, OUR
BUSINESS MAY BE HARMED
Our future operating results depend in significant part upon the
continued contribution of our senior executive officers and key
employees, including a number of specialists with advanced university
qualifications in engineering, electronics and computing. In
addition, our business and future operating results depend in part
upon our ability to attract and retain other qualified management,
technical, sales and support personnel for operations. We believe
that our ability to increase our manufacturing capacity and that of
our subsidiaries has from time to time been constrained by the
limited number of such skilled personnel. Competition for such
personnel is intense, and we may not be able to continue to attract
and retain such personnel. The loss of any key executive or employee
or the inability to attract and retain skilled executives and
employees as needed could adversely affect our business, financial
condition and results of operations.
WE MAY NOT BE ABLE TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH
COULD MAKE US LESS COMPETITIVE AND CAUSE US TO LOSE MARKET SHARE
Although we seek to protect our intellectual property rights through
patents, trademarks, copyrights, trade secrets and other measures, we
cannot assure you that we will be able to protect our technology
adequately, that our competitors will not be able to develop similar
technology independently, that any of our pending patent applications
will be issued, or that intellectual property laws will protect our
intellectual property rights. In addition, we operate internationally
and intellectual property protection varies among the jurisdictions
in which we conduct business. Litigation may be necessary in order to
enforce our patents, copyrights or other intellectual property
rights, to protect our trade secrets, to determine the validity and
scope of the proprietary rights of others or to defend against claims
of infringement. Litigation could result in substantial costs and
diversion of resources and could have a material adverse effect on
our business and operating results. In addition, third parties may
seek to challenge, invalidate or circumvent any patent issued to us,
the rights granted under any patent issued to us may not provide
competitive advantages and third parties may assert that our products
infringe patent, copyright or trade secrets of such parties.
Furthermore, third parties may independently develop similar products
or duplicate our products. If any party is able to successfully claim
that our creation or use of proprietary technology infringes upon
their intellectual property rights, we may be forced to pay damages.
In addition to any damages we may have to pay, a court could require
us to stop the infringing activity or
Page 36
obtain a license which may not be available on terms which are
favorable to us or may not be available at all.
WE ARE SUBJECT TO ENVIRONMENTAL RULES AND REGULATIONS IN A VARIETY OF
JURISDICTIONS
We are subject to a variety of governmental regulations relating to
the use, storage, discharge and disposal of chemical by-products of,
and water used in, our manufacturing processes. Environmental claims
or the failure to comply with any present or future regulations could
result in the assessment of damages or imposition of fines against
us, suspension of production or a cessation of operations. New
regulations could require us to acquire costly equipment or to incur
other significant expenses. Any failure by us to control the use or
adequately restrict the discharge of hazardous substances could
subject us to future liabilities.
WE MAY ACQUIRE OR MAKE INVESTMENTS IN COMPANIES OR TECHNOLOGIES, ANY
OF WHICH COULD DISRUPT OUR ONGOING BUSINESS, DISTRACT OUR MANAGEMENT
AND EMPLOYEES, INCREASE OUR EXPENSES AND ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS
As part of our future growth strategy, we may from time-to-time
acquire or make investments in companies and technologies. We could
face difficulties in integrating personnel and operations from the
acquired businesses and in retaining and motivating key personnel
from these businesses. In addition, these acquisitions may disrupt
our ongoing operations, divert management resources and attention
from day-to-day activities, increase our expenses and adversely
affect our results of operations. In addition, these types of
transactions often result in charges to earnings for items such as
the amortization of intangible assets or in-process research and
development expenses. Any future acquisitions or investments in
companies or technologies could involve other risks, including the
assumption of additional liabilities, dilutive issuances of equity
securities, the utilization of our cash and the incurrence of debt.
WE ARE SUBJECT TO PROVISIONS OF DUTCH LAW, WHICH MAY RESTRICT THE
ABILITY OF OUR SHAREHOLDERS TO PARTICIPATE IN SOME DECISIONS
We are subject to provisions of Dutch law applicable to large
companies that, together with some provisions of our Articles of
Association, have the effect of concentrating control over
significant corporate decisions and transactions in the hands of the
Supervisory Board. Under this regime, the Supervisory Board has the
power to appoint and dismiss the members of the Board of Management.
The members of the Supervisory Board are appointed by the General
Meeting of Shareholders, but the Supervisory Board may provide
binding nominations for the majority of the members to be appointed.
Consequently, this regime may have the effect of delaying or
preventing a takeover attempt, including a takeover attempt that
might result in a premium over the market price for our ordinary
shares.
Page 37
ANTI-TAKEOVER PROVISIONS COULD DELAY OR PREVENT A CHANGE OF CONTROL,
INCLUDING A TAKEOVER ATTEMPT THAT MIGHT RESULT IN A PREMIUM OVER THE
MARKET PRICE FOR OUR ORDINARY SHARES
Our Articles of Association provide for the possible issuance of
preference shares. Such shares may be issued pursuant to a resolution
of the General Meeting of Shareholders. The General Meeting of
Shareholders granted the Board of Management the right to issue
preference shares. In April 2000, we established the foundation
"Stichting Continuiteit BE Semiconductor Industries", which we refer
to as the Foundation, whose board consists of five members, four of
whom are independent of BE Semiconductor Industries N.V. We have
granted the Foundation a call option pursuant to which the Foundation
may purchase a number of preference shares up to a maximum of the
total number of outstanding ordinary shares. As of June 30, 2006 this
maximum number amounts to 80,000,000 preference shares. If the
Foundation were to exercise the call option, it may result in
delaying or preventing a takeover attempt, including a takeover
attempt that might result in a premium over the market price for our
ordinary shares.
WE MAY IN THE FUTURE BE CONSIDERED A PASSIVE FOREIGN INVESTMENT
COMPANY
The U.S. Internal Revenue Code of 1986, as amended, contains special
rules relating to passive foreign investment companies, or PFICs. A
U.S. holder who owns stock in a PFIC generally is subject to adverse
tax consequences under these rules. These rules do not apply to
non-U.S. holders. A company is treated as a PFIC if at least 75% of
its gross income for a taxable year consists of "passive income",
defined generally as income from passive investments, as opposed to
operating income. A company is also treated as a PFIC if the average
percentage of the value of its assets that produce or are held for
the production of passive income, including cash balances, is at
least 50%. There can be no assurance that we will in future years
have sufficient revenues from product sales or sufficient non-passive
assets to avoid becoming a PFIC.
If we were classified as a PFIC, unless a U.S. holder made a timely
specific election, a special tax regime would apply to any "excess
distribution", which would be the U.S. holder's share of
distributions in any year that are greater than 125% of the average
annual distributions received by the U.S. holder in the three
preceding years or the U.S. holder's holding period, if shorter, and
any gain realized on the sale or other disposition of the ordinary
shares. Under this regime, any excess distribution and realized gain
would be treated as ordinary income and would be subject to tax as if
the excess distribution or gain had been realized ratably over the
U.S. holder's holding period for the ordinary shares. A U.S. holder
will generally be required to pay taxes on the amount allocated to a
year at the highest marginal tax rate and pay interest on the prior
year's taxes. A U.S. holder may be able to ameliorate the tax
consequences somewhat by making a mark-to-market election, or QEF
election, that is, an election to have us treated as a qualified
electing fund for U.S. federal income tax purposes. You should
consult your tax advisor regarding the tax consequences of our
classification as a PFIC.
Page 38
PRICE VOLATILITY OF THE ORDINARY SHARES
The current market price of our ordinary shares may not be indicative
of prices that will prevail in the trading market in the future. In
particular, since our initial public offering in December 1995, the
market price of our ordinary shares has experienced significant
appreciation and, more recently, significant depreciation, as have
price levels for equity securities generally and price levels for
equity securities of companies associated with the semiconductor
industry and other high-technology fields. In addition, since our
initial public offering, the market price of our ordinary shares has
experienced significant fluctuations, including fluctuations that are
unrelated to our performance. We expect that market price
fluctuations will continue in the future.
Page 39
ITEM 2 - SALES OF UNREGISTERED SECURITIES AND USE OF PROCEEDS
None
ITEM 3 - DEFAULTS ON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Page 40
ITEM 5 - OTHER INFORMATION
None
Page 41