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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarter Ended September, 30 1999
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________ to ___________.
Commission File Number 0-11370
CERPROBE CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 86-0312814
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1150 NORTH FIESTA BOULEVARD, GILBERT, ARIZONA 85233
(Address of principal executive offices) (Zip Code)
(480) 333-1500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
As of November 12, 1999, there were 7,897,995 shares of the registrant's
Common Stock outstanding.
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CERPROBE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
TABLE OF CONTENTS
Page
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets -
September 30, 1999 and December 31, 1998......................... 3
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended September 30, 1999 and 1998.......... 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1999 and 1998.................... 5
Notes to Condensed Consolidated Financial Statements............. 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS............................. 11
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS............................................... 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................ 18
SIGNATURE ................................................................ 19
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CERPROBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
ASSETS 1999 1998
------------ ------------
(UNAUDITED)
Current assets:
Cash $ 6,875,144 $ 4,753,696
Short-term investment securities 8,833,859 14,305,400
Accounts receivable, net of allowance of $336,645
in 1999 and $333,364 in 1998 9,122,115 8,951,680
Inventories, net 6,717,686 5,303,631
Accrued interest receivable 26,749 102,093
Prepaid expenses 1,207,405 869,382
Income taxes receivable 4,487,104 714,811
Deferred tax asset 428,685 446,092
Net assets of discontinued operations -- 1,481,903
------------ ------------
Total current assets 37,698,747 36,928,688
Property, plant, and equipment, net 23,301,099 22,698,509
Intangible assets, net 2,905,121 3,050,460
Other assets 894,217 1,007,917
------------ ------------
Total assets $ 64,799,184 $ 63,685,574
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,016,796 $ 2,534,997
Accrued expenses 3,156,825 3,075,894
Current portion of notes payable 1,026,090 138,985
Current portion of capital lease obligations 624,575 660,192
Net liabilities of discontinued operations 428,859 --
------------ ------------
Total current liabilities 8,253,145 6,410,068
Notes payable, less current portion 2,157,730 731,555
Capital lease obligations, less current portion 1,780,355 2,472,563
Other liabilities -- 7,073
------------ ------------
Total liabilities 12,191,230 9,621,259
------------ ------------
Minority interest 846,160 590,465
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.05 par value; authorized 10,000,000
shares; issued and outstanding none -- --
Common stock, $.05 par value; authorized 25,000,000
shares; issued 8,363,245 and outstanding 7,897,995 shares at
September 30, 1999 and issued 8,131,279 and outstanding 7,645,126
shares at December 31, 1998 418,162 406,564
Additional paid-in capital 56,659,487 55,271,200
Retained earnings 1,113,664 3,505,734
Accumulated other comprehensive loss:
Foreign currency translation (313,991) (188,131)
------------ ------------
57,877,322 58,995,367
Treasury stock, at cost, 465,250 shares at September 30, 1999
and 486,153 shares at December 31, 1998 (5,274,063) (5,521,517)
Notes receivable from officers and directors (841,465) --
------------ ------------
Total stockholders' equity 51,761,794 53,473,850
------------ ------------
Total liabilities and stockholders' equity $ 64,799,184 $ 63,685,574
============ ============
See accompanying notes to condensed consolidated financial statements.
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CERPROBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
Net sales $ 14,932,031 $ 20,107,096 $ 44,640,667 $ 61,199,104
Costs of goods sold 9,742,588 11,513,959 29,644,646 35,473,693
------------ ------------ ------------ ------------
Gross profit 5,189,443 8,593,137 14,996,021 25,725,411
------------ ------------ ------------ ------------
Expenses:
Selling, general, and administrative 5,073,263 4,714,758 15,038,943 14,370,299
Engineering and product development 1,186,108 955,978 3,248,051 2,301,671
Acquisition related expenses -- 1,568,000 -- 1,568,000
------------ ------------ ------------ ------------
Total expenses 6,259,371 7,238,736 18,286,994 18,239,970
------------ ------------ ------------ ------------
Operating income (loss) (1,069,928) 1,354,401 (3,290,973) 7,485,441
------------ ------------ ------------ ------------
Other income (expense):
Interest income 192,831 328,161 623,670 1,063,877
Interest expense (105,286) (59,546) (309,268) (182,133)
Other, net (80,087) 219,379 (81,163) 258,195
------------ ------------ ------------ ------------
Total other income 7,458 487,994 233,239 1,139,939
------------ ------------ ------------ ------------
Income (loss) from continuing operations before
minority interest and income taxes (1,062,470) 1,842,395 (3,057,734) 8,625,380
Minority interest (84,978) (86,147) (273,494) (111,540)
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income taxes (1,147,448) 1,756,248 (3,331,228) 8,513,840
Income tax (expense) benefit 269,310 (720,613) 944,480 (3,528,637)
------------ ------------ ------------ ------------
Income (loss) from continuing operations (878,138) 1,035,635 (2,386,748) 4,985,203
Discontinued operations:
Loss from operations of SVTR, Inc., net of taxes -- (785,097) (5,322) (1,922,457)
Loss on disposal of SVTR, Inc., net of taxes -- (3,807,740) -- (3,807,740)
------------ ------------ ------------ ------------
Loss from discontinued operations -- (4,592,837) (5,322) (5,730,197)
------------ ------------ ------------ ------------
Net loss $ (878,138) $ (3,557,202) $ (2,392,070) $ (744,994)
============ ============ ============ ============
Net income (loss) per common share:
Basic:
From continuing operations $ (0.11) $ 0.13 $ (0.31) 0.62
From discontinued operations 0.00 (0.59) (0.00) (0.71)
------------ ------------ ------------ ------------
Net loss per common share $ (0.11) $ (0.46) $ (0.31) $ (0.09)
============ ============ ============ ============
Weighted average number of common
shares outstanding 7,836,237 7,768,874 7,740,136 8,058,011
============ ============ ============ ============
Diluted:
From continuing operations $ (0.11) $ 0.13 $ (0.31) 0.62
From discontinued operations 0.00 (0.59) (0.00) (0.71)
------------ ------------ ------------ ------------
Net loss per common share $ (0.11) $ (0.46) $ (0.31) $ (0.09)
============ ============ ============ ============
Weighted average number of common and
common equivalent shares outstanding 7,836,237 7,768,874 7,740,136 8,058,011
============ ============ ============ ============
See accompanying notes to condensed consolidated financial statements.
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CERPROBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------
1999 1998
------------ ------------
Cash flows from operating activities:
Income (loss) from continuing operations $ (2,386,748) $ 4,985,203
Adjustments to reconcile net income (loss) from continuing operations
to net cash provided by (used in) continuing operations:
Depreciation and amortization 4,279,538 3,378,441
Acquisition related expenses -- 1,568,000
(Gain) loss on sale of equipment (3,176) 435,996
Loss on disposal of discontinued operations, net of taxes -- 3,807,740
Tax benefit from exercise of nonqualified stock options 71,000 106,000
Deferred income taxes (17,168) (717,555)
Provision for losses on accounts receivable 4,000 19,920
Provision for obsolete inventory 180,000 315,000
Income applicable to minority interest 273,494 111,540
Changes in working capital of continuing operations
Accounts receivable (174,435) (1,323,031)
Inventories (1,594,055) (730,671)
Prepaid expenses and other assets (293,052) (175,710)
Income taxes receivable (1,963,188) 157,955
Accounts payable and accrued expenses 562,730 (317,706)
Accrued income taxes -- (108,648)
Other liabilities (7,073) (7,100)
------------ ------------
Net cash provided by (used in) continuing operations (1,068,133) 11,505,374
------------ ------------
Net cash provided by (used in) discontinued operations 96,335 (5,293,953)
------------ ------------
Net cash provided by (used in) operating activities (971,798) 6,211,421
------------ ------------
Cash flows from investing activities:
Purchase of property, plant, and equipment (4,745,100) (7,128,764)
Redemption of investment securities 5,471,541 11,399,209
Distribution from CRPB Investors, L.L.C 178,649 --
Investment in CRPB Investors, L.L.C -- 47,656
Purchase of Upsys-Cerprobe, L.L.C -- (376,366)
Purchase of Cerprobe Europe S.A.S., net of cash acquired -- (3,230,230)
Proceeds from sale of equipment 11,487 --
------------ ------------
Net cash provided by investing activities 916,577 711,505
------------ ------------
Cash flows from financing activities:
Issuance of notes payable 3,000,000 1,661,310
Payments on notes payable (1,414,546) (701,247)
Issuance of notes receivable (841,465) --
Expenses from issuance of common stock -- (245,093)
Purchase of treasury stock -- (4,781,107)
Net proceeds from employee stock purchase plan 177,674 238,164
Net proceeds from exercise of stock options 1,398,665 184,763
------------ ------------
Net cash provided by (used in) financing activities 2,320,328 (3,643,210)
------------ ------------
Effect of exchange rates on cash (143,659) (147,228)
------------ ------------
Net increase in cash 2,121,448 3,132,488
Cash, beginning of period 4,753,696 2,715,490
------------ ------------
Cash, end of period $ 6,875,144 $ 5,847,978
============ ============
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CERPROBE CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
----------- -----------
Supplemental disclosures of cash flow information from continuing operations:
Interest paid $ 309,268 $ 182,133
=========== ===========
Income taxes paid $ 371,619 $ 2,049,282
=========== ===========
Supplemental disclosures of non-cash investing activities:
The Company made acquisitions for $3.6 million in the nine months ended
September 30, 1998
The purchase prices were allocated to the assets acquired and
liabilities assumed based on their fair values as indicated in the notes
to the consolidated financial statements. A summary of the acquisitions
is as follows:
Purchase price $ -- $ 3,626,366
Less cash acquired -- (19,770)
Common stock issued -- --
----------- -----------
Cash invested $ -- $ 3,606,596
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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CERPROBE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PREPARATION
The accompanying condensed consolidated financial statements as of
September 30, 1999 and for the three and nine months ended September 30,
1999 and 1998 are unaudited, but reflect all adjustments (consisting only
of normal recurring adjustments) that are, in the opinion of management,
necessary for a fair presentation of financial position and operating
results for the interim periods. The condensed consolidated balance sheet
as of December 31, 1998 was derived from the audited consolidated
financial statements at such date.
Pursuant to accounting requirements of the Securities and Exchange
Commission applicable to quarterly reports on Form 10-Q, the accompanying
consolidated financial statements and notes do not include all
disclosures required by generally accepted accounting principles for
complete financial statements. Accordingly, these statements should be
read in conjunction with Cerprobe Corporation's (the "Company") annual
financial statements and notes thereto included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1998.
Results of operations for interim periods are not necessarily indicative
of those to be achieved for full fiscal years.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of
Cerprobe Corporation and its subsidiaries: Cerprobe Interconnect
Solutions, Inc. ("CIS"), SVTR, Inc. ("SVTR"), Cerprobe Europe Limited,
Cerprobe Europe S.A.S., Cerprobe Asia Holdings Pte Ltd, and Cerprobe
Japan Co., Ltd. All significant intercompany transactions have been
eliminated in consolidation.
Cerprobe Asia Holdings Pte Ltd is a 60% owner of Cerprobe Asia Pte Ltd;
the balance is owned by Asian investors. Cerprobe Asia Pte Ltd's wholly
owned subsidiaries, Cerprobe Singapore Pte Ltd and Cerprobe Taiwan Co.,
Ltd., operate full service sales and manufacturing plants.
In the third quarter of 1998, the Company discontinued operations of
SVTR, a company that refurbished, reconfigured, and serviced wafer
probing equipment. See Note 4.
In September 1998, the Company acquired France-based Cerprobe Europe
S.A.S. The Company designs, manufactures, and distributes probe cards at
its manufacturing plant near Marseilles.
In March 1999, the Company formed Cerprobe Japan Co., Ltd. to operate a
sales and distribution facility in Yokohama, Japan.
(2) COMMITMENTS AND CONTINGENCIES
In October 1998, the Company filed an action against the former
President, Director, and shareholders of Silicon Valley Test & Repair,
Inc. (renamed SVTR, Inc.), which was acquired by the Company, in January
1997. The suit seeks rescission of the acquisition and/or monetary
damages arising from failure of the defendants to disclose material facts
regarding the origins of
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certain software necessary for SVTR, Inc.'s business. In February 1999,
the defendants filed a counter claim against the Company alleging
conversion, interference with contractual relations, unfair business
practices, breach of contract, and specific performance allegedly arising
from the Company's actions to preclude the defendants from selling the
Company stock received by defendants as part of the purchase price of
Silicon Valley Test & Repair, Inc.; the Company seeks to recover this
stock through its claims for rescission. In March 1999, the Company and
SVTR filed an amended complaint. The defendants filed a motion to dismiss
the amended complaint, which was denied. At present the parties are
engaging in discovery. It is not anticipated that the suit will have a
material adverse impact on the Company's financial condition or results
of operations.
In April 1999, the Company received a Notice Letter from the United
States Environmental Protection Agency ("EPA") indicating that the EPA
considered the Company to be potentially responsible for costs associated
with the remediation of the Indian Bend Wash Superfund Site ("Superfund
Site") in Tempe, Arizona. The EPA claimed that such liability arose out
of the Company's operations at its former facility located at 600 S.
Rockford Drive, Tempe, Arizona. The Company had been named with four
other potentially responsible parties. In May 1999, the Company was
informed by the EPA that it had decided not to pursue the Company for
clean-up costs at this time. There is no guarantee the EPA will not
change its position.
The Company is involved in other legal actions arising in the ordinary
course of business. In the opinion of management, the disposition of
these actions would not have a material adverse effect on the Company.
(3) COMPREHENSIVE INCOME
Comprehensive income encompasses net income (loss) and "other
comprehensive income (loss)", which includes all other non-owner
transactions and events which change stockholders' equity. The Company
recognized comprehensive loss for the nine months ended September 30,
1999 and 1998 as follows:
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- -----------
Net loss $(2,392,070) $ (744,994)
Other comprehensive loss, net of tax:
Foreign currency translation
adjustment (209,767) (17,489)
Tax benefit from foreign currency
translation 83,907 6,996
----------- -----------
Net other comprehensive loss (125,860) (10,493)
----------- -----------
Comprehensive loss $(2,517,930) $ (755,487)
=========== ===========
(4) DISCONTINUED OPERATIONS
In the third quarter of 1998, the Company discontinued operations of
SVTR, a wafer prober refurbishing and upgrading subsidiary. The
discontinuance resulted from questions regarding the origins of certain
software necessary for SVTR's business.
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SVTR has been accounted for as a discontinued operation and, accordingly,
its results of operations and financial position are segregated for all
periods presented in the accompanying consolidated financial statements.
Net sales, related losses, and income taxes associated with the
discontinued operations are as follows:
Nine Months Ended September 30,
-------------------------------
1999 1998
----------- -----------
Net sales $ -- $ 3,070,479
----------- -----------
Loss from operations $ (8,869) $(3,204,095)
Income tax benefit 3,547 1,281,638
----------- -----------
Loss from operations, net $ (5,322) $(1,922,457)
=========== ===========
Loss on disposal $(6,346,233)
Income tax benefit 2,538,493
===========
Loss on disposal, net $(3,807,740)
===========
The effective tax rate used in calculating the income tax benefit from
discontinued operations is approximately the same as the Company's
effective tax rate for continuing operations.
The net assets (liabilities) of SVTR, as reclassified in the accompanying
consolidated balance sheets, include the following:
September 30, 1999 December 31, 1998
----------- -----------
Current assets $ 854,383 $ 3,445,737
Other assets 63,011 46,865
Current liabilities (1,337,878) (1,990,852)
Long-term debt (8,375) (19,847)
----------- -----------
$ (428,859) $ 1,481,903
=========== ===========
(5) RELATED PARTY TRANSACTIONS
In August 1999, the Company and certain of its Directors and Officers
entered into Secured Promissory Notes and Stock Pledge Agreements, which
totaled $841,465. The purpose of the loans was to exercise stock options
scheduled to expire. Interest on the notes is at 6% per annum with note
maturities in August 2002. The notes are fully recourse to the borrowers
and are also collateralized by Cerprobe Corporation Common Stock.
(6) SEGMENT INFORMATION
The Company operates principally in one industry segment: the design,
development, manufacture, and market of semiconductor integrated circuit
test products and services. The Company's principal customers are North
American, European, and Asian semiconductor manufacturing companies.
Two of the Company's customers exceeded 10% of net sales. The first
customer accounted for 15.5% and 18.3% of net sales for the nine months
ended September 30, 1999 and 1998, respectively. The accounts receivable
from that customer were $893,638 and $1,112,152 at
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September 30, 1999 and 1998, respectively. The second customer accounted
for 12.1% and 11.6% of net sales for the nine months ended September 30,
1999 and 1998, respectively, with accounts receivable of $169,771 and
$31,622 at September 30, 1999 and 1998, respectively.
International sales represented 21.7% and 18.5% of the Company's net
sales for the nine months ended September 30, 1999 and 1998,
respectively.
The following is a summary of the Company's geographic operations for the
nine months ended September 30:
NORTH AMERICA EUROPE & ASIA ELIMINATIONS CONSOLIDATED
----------- ----------- ----------- -----------
1999
Customer sales $34,948,903 $ 9,691,764 $ -- $44,640,667
Intercompany sales 362,944 2,093,333 (2,456,277) --
----------- ----------- ----------- -----------
Total sales $35,311,847 $11,785,097 $(2,456,277) $44,640,667
=========== =========== =========== ===========
Long-lived assets $30,232,886 $ 3,644,668 $(6,199,326) $27,678,228
=========== =========== =========== ===========
1998
Customer sales $51,606,927 $ 9,592,177 $ -- $61,199,104
Intercompany sales 392,403 2,329,829 (2,722,232) --
----------- ----------- ----------- -----------
Total sales $51,999,330 $11,922,006 $(2,722,232) $61,199,104
=========== =========== =========== ===========
Long-lived assets $25,187,992 $ 3,995,069 $(6,101,651) $23,081,410
=========== =========== =========== ===========
(7) SUBSEQUENT EVENT
In October 1999, the Company entered into a $1,500,000 lease line of
credit agreement, which matures on February 29, 2000, with Banc One
Arizona Leasing Corporation. The maximum term for each lease schedule may
not exceed 60 months. Pricing is indexed to the Bank's internal cost of
funds. Advances are collateralized by the underlying leased manufacturing
equipment, furniture, and fixtures.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Selected Consolidated Financial Data and the Consolidated Financial
Statements and related Notes thereto of the Company appearing in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.
OVERVIEW
Cerprobe offers comprehensive solutions for semiconductor test integration
and is a leading manufacturer of probe cards, ATE interface assemblies, and ATE
test boards. The Company's products address critical functions to assure
integrated circuit ("IC") quality, reduce manufacturing costs, improve the
accuracy of manufacturing yield data, and identify repairable memory ICs.
The Company has historically grown from worldwide market share gains and
strategic acquisitions. Net sales increased from $14.3 million for 1994 to $76.2
million for 1998, representing an average annualized growth rate of
approximately 52%. Similarly, the Company's net income increased from $1.2
million for 1994 to $6.2 million for 1998 (before a one-time charge for
purchased research and development of $1.6 million, resulting in a tax benefit
of $627,000 and the loss from discontinued operations of SVTR of $5.7 million,
net of taxes, which together reduced net income by $6.7 million). Until 1995,
substantially all of the Company's growth was from its existing probe card
product line.
Beginning with the April 1995 acquisition of Fresh Test Technology
Corporation ("Fresh Test"), acquisitions, joint ventures, and technology
licensing have contributed to the Company's growth. Fresh Test expanded the
Company's product line to include ATE interface assemblies. The Company acquired
Cerprobe Interconnect Solutions ("CIS") in December 1996, which enabled the
Company to offer ATE test boards. In May 1997, the Company established an
international joint development agreement with Mitsubishi Materials Corporation
to develop next generation probe card products based upon the Company's
proprietary P4(TM) technology. In September 1998, the Company acquired
France-based Cerprobe Europe S.A.S. which expanded the Company's presence in the
European market. In November 1998, the Company acquired an exclusive license to
design, manufacture, and distribute Vertical integrated Probe (ViProbe(R))
products worldwide, except Europe.
The Company participates in the semiconductor industry, which is
characterized as cyclical, with capacity boom cycles followed by bust cycles
that lead to significantly reduced demand for products and substantial pricing
pressures throughout the supply chain. From 1996 through 1998, the semiconductor
industry has been in the worst recession in its history.
The IC test segment of the semiconductor industry generally lags the cycle by
six months or more. Because of this lag and market share gains by the Company,
its business was not significantly impacted by the recession until the second
quarter of 1998. During 1998, certain customers of the Company began processing
a portion of their ICs in a manner that required vertical probing products that
were not manufactured by the Company. This exacerbated the already difficult
business conditions the Company was experiencing and the Company reported a loss
from continuing operations before income taxes of $2.5 million in the second
quarter of 1999. This was the first such quarterly loss by the Company
(excluding acquisition related costs) in 29 consecutive quarters. In the third
quarter of 1999, the Company began to experience some positive signs of a
gradual recovery. Sales for the third quarter were $14.9 million, a 6% increase
over the second quarter of 1999. The net loss for the third quarter of 1999 was
$781,000 less than the net loss for the second quarter of 1999 or a 47%
improvement. The Company's order backlog was $8.2 million, the highest level
since mid-1998.
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Additionally, the Company's newly licensed ViProbe(R), (a vertical probing
product) is currently being evaluated by several of the Company's customers, and
it is progressing on schedule to begin ramping to volume production during the
first quarter of next year.
The Company believes that it is positioned to recover from the recent downturn
as a result of its strength in designing, producing, and delivering, on a timely
and cost-efficient basis, a broad range of custom or customized, high quality
test products and services for semiconductor manufacturers in North America,
Europe, and Asia. The Company maintains regional full service facilities in
Arizona, California, and Texas as well as sales offices in Colorado, Florida,
Massachusetts, and Oregon to service the U.S. market for its products and
services. The Company continues to expand into international markets, including
Europe and Asia. The Company maintains full service facilities in France and
Scotland and a sales office in Germany to serve the European market. The Company
also maintains full service facilities in Taiwan and Singapore to serve the
Southeast Asian market, and a sales and distribution facility in Japan. Each of
the Company's facilities is located in proximity to semiconductor manufacturing
centers.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended September
30, 1998.
Net Sales. Net sales for the three months ended September 30, 1999 were
$14.9 million, a decrease of 25.7% over net sales of $20.1 million for the three
months ended September 30, 1998. The decrease was primarily a result of effects
of the semiconductor industry's downturn, including reduced unit production,
pricing pressures, and excess probe card capacity. Additionally, some of the
Company's customers have begun using vertical probing products to test some of
their more complex ICs and to test memory ICs in parallel. The Company's
ViProbe(R) (vertical probing product) is currently not in production. However,
ViProbe(R) is being evaluated by several of the Company's customers and it is
progressing on schedule to begin ramping to volume production during the first
quarter of next year. In addition, the Company's P4(TM) product is positioned to
address emerging requirements for fine pitch and high frequency probing.
Gross Profit. The gross profit for the three months ended September 30,
1999 was $5.2 million, a decrease of 39.6% from the gross profit of $8.6 million
for the three months ended September 30, 1998. The decrease in gross profit is
primarily a result of reduced sales. Gross margin decreased from 42.7% of net
sales in the three months ended September 30, 1998 to 34.8% in 1999. The
decrease in gross margin is a result of the Company's production infrastructure
capable of higher production run rates, resulting in over capacity and
under-absorption of overhead and efforts to increase or at least maintain market
share resulting in aggressive pricing, particularly to the Company's largest
customers.
Selling, General, and Administrative. Selling, general, and administrative
expenses were $5.1 million, or 34.0% of net sales, for the three months ended
September 30, 1999, compared to $4.7 million, or 23.4% of net sales, for the
three months ended September 30, 1998. This represents an increase of $358,505,
or 7.6%, primarily from increases in depreciation related to the Company's
Enterprise Resource Planning ("ERP") system and start-up costs associated with
the Company's new facility in Japan.
Engineering and Product Development. Engineering and product development
expenses were $1.2 million or 7.9% of net sales, for the three months ended
September 30, 1999, an increase of 24.1% over $955,978, or 4.8% of net sales,
for the three months ended September 30, 1998. The Company has added substantial
resources to its product development team to address emerging and next
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generation probing requirements for grid array, multi-chip testing, very high
frequency ICs, and those that have pad pitch architecture of less than 60
microns.
Interest Income. Interest income was $192,831 for the three months ended
September 30, 1999, compared to $328,161 for the three months ended September
30, 1998. This decrease is attributable to the investment of a lower average
cash balance.
Minority Interest. The minority interest share of income of $84,978 for the
three months ended September 30, 1999 and $86,147 for the three months ended
September 30, 1998 represented the Company's joint venture partners' share of
income from the Company's Asian operations (40%).
Income Taxes. Income taxes decreased to a benefit of $269,310, which
represented an effective tax benefit rate of 23.5% for the three months ended
September 30, 1999, as compared to an expense of $720,613, which represented an
effective tax rate of 41.0% for the three months ended September 30, 1998.
Discontinued Operations. The Company recorded $4.6 million in losses net of
income taxes from discontinued operations from the disposal of its wafer prober
refurbishing and upgrading subsidiary, SVTR, Inc. for the three months ended
September 30, 1998. The Company disposed of the operations of SVTR through the
sale of equipment, inventory, and technology in March 1999.
Net Loss. Net loss for the three months ended September 30, 1999 was
$878,138 or (5.9)% of sales, compared to the net loss of $3.6 million or (17.7)%
of sales for the three months ended September 30, 1998. Prior to acquisition
costs and discontinued operations, net income for the three months ended
September 30, 1998 was $2.0 million. The net loss was primarily caused by the
quarter's lower gross profit coupled with the Company's increased engineering
and development expenses. The Company has maintained its operating cost
structure during the down cycle in its business because it believes that its
global infrastructure will be an important competitive advantage as the industry
recovers.
Nine Months Ended September 30, 1999, Compared to Nine Months Ended September
30, 1998.
Net Sales. Net sales for the nine months ended September 30, 1999 were
$44.6 million, a decrease of 27.1% over net sales of $61.2 million for the nine
months ended September 30, 1998. The decrease was primarily a result of effects
of the semiconductor industry's downturn, including reduced unit production,
pricing pressures, and excess probe card capacity. Additionally, some of the
Company's customers have begun using vertical probing products to test some of
their more complex ICs and to test memory ICs in parallel. The Company's
ViProbe(R) (vertical probing product) is currently not in production. However,
ViProbe(R) is being evaluated by several of the Company's customers and it is
progressing on schedule to begin ramping to volume production during the first
quarter of next year. In addition, the Company's P4(TM) product is positioned to
address emerging requirements for fine pitch and high frequency probing.
Gross Profit. Gross profit for the nine months ended September 30, 1999 was
$15.0 million, a decrease of 41.7% of net sales from the gross profit of $25.7
million for the same period in 1998. Gross margin decreased to 33.6% of sales
for the nine months ended September 30, 1999, from 42.0% for the same period of
1998. The decrease in gross margin primarily resulted from the Company's
production infrastructure capable of higher production run rates, resulting in
over capacity and under-
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absorption of overhead and efforts to increase or at least maintain market share
resulting in aggressive pricing, particularly to the Company's largest
customers.
Selling, General, and Administrative. Selling, general, and administrative
expenses were $15.0 million, or 33.7% of net sales, for the nine months ended
September 30, 1999, as compared to $14.4 million, or 23.5% of net sales, for the
same period of 1998. This represents an increase of $668,644 or 4.7% primarily
from increases in depreciation related to the Company's Enterprise Resource
Planning ("ERP") system and start-up costs associated with the Company's new
facility in Japan.
Engineering and Product Development. Engineering and product development
expenses were $3.2 million for the nine months ended September 30, 1999, an
increase of 41.1% over $2.3 million for the same period of 1998. The Company has
added substantial resources to its product development team to address emerging
and next generation probing requirements for gird array, multi-chip testing,
very high frequency ICs, and those that have pad pitch architectures of less
than 60 microns.
Interest Income. Interest income was $623,670 for the nine months ended
September 30, 1999, as compared to $1.1 million for the same period in 1998. The
decrease is attributable to the investment of a lower average cash balance.
Minority Interest. The minority interest share of income of $273,494 for
the nine months ended September 30, 1999 and $111,540 for the nine months ended
September 30, 1998, represented the Company's joint venture partners' share of
the income from the Company's Asian operations (40.0%) and the Upsys Joint
Venture which has been terminated.
Income Taxes. Income tax benefit was $944,480, which represented an
effective tax benefit rate of 28.4% for the nine months ended September 30,
1999, as compared to income taxes for the nine months ended September 30, 1998
of $3.5 million, which represented an effective tax rate of 41.4%.
Discontinued operations. The Company recorded $5,322 and $5.7 million in
losses net of taxes from discontinued operations from the disposal of its wafer
prober refurbishing and upgrading subsidiary, SVTR, Inc. for the nine months
ended September 30, 1999 and 1998, respectively. The Company disposed of the
operations of SVTR, Inc. through the sale of equipment, inventory, and
technology in March 1999.
Net Loss. Net loss for the nine months ended September 30, 1999, was
$2.4 million or (5.4)% of sales compared to net loss of $744,994 or (1.2)% of
sales for the same period of 1998. The net loss was primarily caused by the
quarter's lower gross profit coupled with the Company's increased engineering
and development expenses. The Company has maintained its operating cost
structure during the down cycle in its business because it believes that its
global infrastructure will be an important competitive advantage as the industry
recovers.
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations and capital requirements primarily
through cash flows from operations, equipment lease financing arrangements, and
sales of equity securities. At September 30, 1999, cash and short-term
investment securities were $15.7 million compared to $19.1 million at December
31, 1998.
The Company used $1.1 million of cash to support its operating activities
for the nine months ended September 30, 1999. Accounts receivable increased by
$170,435, net of allowance, or 1.9%, to $9.1 million at September 30, 1999
compared to the balance at December 31, 1998. Inventories
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increased $1.4 million, net of reserve, or 26.7%, over December 31, 1998, to
$6.7 million at September 30, 1999. Income taxes receivable increased $3.8
million, or 527.7%, at September 30, 1999 over December 31, 1998. Approximately
$1.7 million of the increase was due to the current recognition of previously
recorded deferred losses associated with the sale of equipment and inventory
from discontinued operations of SVTR. The remaining amount was a result of
losses from current operations. Accounts payable and accrued expenses increased
$562,730, or 10.0%, to $6.2 million at September 30, 1999.
Working capital decreased $1.1 million, or 3.6%, to $29.4 million at
September 30, 1999. The current ratio decreased from 5.8 at December 31, 1998,
to 4.6, at September 30, 1999. This decrease was due primarily to the increase
in current portion long-term obligations from financing the Company's recently
implemented Oracle based ERP system and the use of cash for operating
activities.
Cerprobe increased its investment in property, plant, and equipment during
the nine months ended September 30, 1999 by $602,590, or 2.7%, to $23.3 million.
This increase was primarily attributable to facilitizing of the Company's new
manufacturing space for interface products and for new probe card products
expected to be ramped into production during the year 2000, and additional costs
associated with the Company's recently implemented Oracle based ERP system.
These capital expenditures were funded primarily with cash.
Cerprobe believes that its working capital and anticipated cash flows from
operations will provide adequate sources to fund operations for at least the
next 12 months. The Company anticipates that any additional cash requirements
for operations or capital expenditures will be financed through cash flows from
operations, by borrowing from the Company's primary lender, by lease financing
arrangements, or by sales of equity securities. There can be no assurance that
any such financing will be available on acceptable terms and that any additional
equity financing, if available, would not result in additional dilution to
existing investors.
YEAR 2000 COSTS
The Company is in the process of performing a comprehensive review of its
Year 2000 issues and has completed its review of internal systems (information
technology ("IT") and non-IT). Most of the Company's application software
programs have been replaced with Oracle applications which are Year 2000
compliant. The Oracle based ERP System , including software, hardware, and
implementation, was approximately $3.5 million. The Company estimates the status
of progress on these internal systems as of September 30, 1999 was as follows:
IT Systems 100%
Non-IT Systems 95%
The Company presently believes that with modifications and updates to
existing software and the recent implementation of the Oracle applications, the
Year 2000 problem will not pose significant operational problems for the
Company's internal systems. The Company also believes that additional
remediation costs to become Year 2000 compliant are not material.
The Company is also continuing to verify the Year 2000 readiness of third
parties (vendors and customers) with whom the Company has material
relationships. The Company is not able to determine the effect on its results of
operations, liquidity, and financial condition in the event the Company's
material vendors and customers are not Year 2000 compliant. The Company will
continue to monitor the
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progress of its material vendors and customers and formulate a contingency plan
at the point in time when the Company believes a material vendor or customer
will not be compliant.
INFLATION AND CHANGING PRICES
The Company is impacted by inflationary trends and business trends within
the semiconductor industry and by the general condition of the worldwide
semiconductor markets. Market price pressures are exerted on semiconductor
manufacturers by the global marketplace and global competition. Such pressures
mandate that semiconductor manufacturers closely scrutinize the prices they pay
for goods and services purchased from the Company and other suppliers.
Accordingly, the price structure for the Company's products must be competitive.
Changes in the Company's supplier prices did not have a significant impact
on cost of sales during the third quarter of 1999 or for the same period in
1998.
As a result of the Company's facilities in Europe and Asia, the Company's
foreign transactions may be denominated in currencies other than the U.S.
dollar. Such transactions may expose the Company to exchange rate fluctuations
for the period of time from inception of the transaction until it is settled.
The Company monitors its foreign currency exposure and from time to time enters
hedging transactions to manage this exposure. There can be no assurance that
fluctuations in the currency exchange rate in the future will not have an
adverse impact on the Company's foreign operations.
In addition, the Company may purchase a substantial portion of its raw
materials and equipment from foreign suppliers and will incur labor costs in a
foreign currency. The foreign manufacture and sale of products and the purchase
of raw material and equipment from foreign suppliers may be adversely affected
by political and economic conditions abroad. Protective trade legislation in
either the United States or foreign countries, such as a change in the current
tariff structures, export compliance laws, or other trade policies, could
adversely affect the Company's ability to manufacture or sell its products in
foreign markets and purchase materials or equipment from foreign suppliers. In
countries in which the Company conducts business in local currency, currency
exchange rate fluctuations could adversely affect the Company's net sales or
costs.
BUSINESS OUTLOOK
The Company's business depends substantially on both the volume of IC
production by semiconductor manufacturers as well as new IC designs, which in
turn depend on the demand of ICs and products utilizing ICs. The semiconductor
industry is highly cyclical and historically has experienced periods of
oversupply, resulting in reduced demand for IC testing products, including the
products manufactured by the Company. The Company continues to analyze its
current cost structure to bring its production and overhead costs in line with
the anticipated industry demand for its products for the rest of this year.
However, the Company's need to invest in engineering and product development,
marketing, and customer service and support capabilities will limit its ability
to reduce expenses in response to such downturns or slow downs.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Statements in this section regarding the Company's prospects for growth,
adequacy of sources of capital, and business out look are forward-looking
statements. Words such as "believes," "expects," "anticipates," "intends,"
"may," "estimates," "should," "will likely," and similar expressions are
intended to identify such forward-looking statements. Actual results, however,
could differ materially
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from those anticipated for a number of reasons, including product demand and
development, ability to maintain customer diversity and relationships,
technological advances, impact of competitive products and pricing, growth in
targeted markets and other factors identified under "Special Considerations" of
the Company's 1998 Form 10-K which has been filed with the Securities and
Exchange Commission. Additional risk factors are identified from time to time in
the Company's financial press releases. The cautionary statements made in this
Report should be read as being applicable to all related forward-looking
statements wherever they appear in this Report.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no change since the Form 10-K for the year ended December
31, 1998, see Part II Item 7A, Quantitative and Qualitative Disclosures About
Market Risk, in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
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PART II - OTHER INFORMATION
Item 1 Legal Proceedings
In October 1998, the Company filed an action against the
former President, Director, and shareholders of Silicon Valley
Test & Repair, Inc. (renamed SVTR, Inc.), which was acquired
by the Company, in January 1997. The suit seeks rescission of
the acquisition and/or monetary damages arising from failure
of the defendants to disclose material facts regarding the
origins of certain software necessary for SVTR, Inc.'s
business. In February 1999, the defendants filed a counter
claim against the Company alleging conversion, interference
with contractual relations, unfair business practices, breach
of contract, and specific performance allegedly arising from
the Company's actions to preclude the defendants from selling
the Company stock received by defendants as part of the
purchase price of Silicon Valley Test & Repair, Inc.; the
Company seeks to recover this stock through its claims for
rescission. In March 1999, the Company and SVTR filed an
amended complaint. The defendants filed a motion to dismiss
the amended complaint, which was denied. At present the
parties are engaging in discovery. It is not anticipated that
the suit will have a material adverse impact on the Company's
financial condition or results of operations.
In April 1999, the Company received a Notice Letter from the
United States Environmental Protection Agency ("EPA")
indicating that the EPA considered the Company to be
potentially responsible for costs associated with the
remediation of the Indian Bend Wash Superfund Site ("Superfund
Site") in Tempe, Arizona. The EPA claimed that such liability
arose out of the Company's operations at its former facility
located at 600 S. Rockford Drive, Tempe, Arizona. The Company
had been named with four other potentially responsible
parties. In May 1999, the Company was informed by the EPA that
it had decided not to pursue the Company for clean-up costs at
this time. There is no guarantee the EPA will not change its
position.
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
10(ppp) Form of Secured Promissory Note and Stock
Pledge Agreement entered into on August 16,
1999 between Cerprobe Corporation as Lender
and Pledgee and each of the following as
Borrower and Pledgor: Kenneth W. Miller
($115,000), Donald Walter ($86,250), C. Zane
Close ($345,000), and Michael Bonham
($287,500).
11 Computation of Net Income Per Share.
27.1 Financial Data Schedule - September 30, 1999
27.2 Financial Data Schedule - September 30, 1998
b. Reports on Form 8-K
No reports on Form 8-K were filed by the Company during
the quarter ended September 30, 1999.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigning
thereunto duly authorized.
CERPROBE CORPORATION
/s/ Randal L. Buness
Randal L. Buness
Senior Vice President -
Chief Financial Officer
November 12, 1999
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EXHIBIT INDEX
10(ppp) Form of Secured Promissory Note and Stock
Pledge Agreement entered into on August 16,
1999 between Cerprobe Corporation as Lender
and Pledgee and each of the following as
Borrower and Pledgor: Kenneth W. Miller
($115,000), Donald Walter ($86,250), C. Zane
Close ($345,000), and Michael Bonham
($287,500).
11 Computation of Net Income Per Share.
27.1 Financial Data Schedule - September 30, 1999
27.2 Financial Data Schedule - September 30, 1998