<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 13, 1997
REGISTRATION NO. 333-38057
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
CVC, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 35633821 16-1383279
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
525 LEE ROAD
ROCHESTER, NEW YORK 14606
(716) 458-2550
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
CHRISTINE B. WHITMAN
CHAIRMAN OF THE BOARD, PRESIDENT AND
CHIEF EXECUTIVE OFFICER
CVC, INC.
525 LEE ROAD
ROCHESTER, NEW YORK 14606
(716) 458-2550
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FREDERICK W. KANNER, ESQ. JOHN HESSION, ESQ.
DEWEY BALLANTINE LLP TESTA, HURWITZ & THIBEAULT, LLP
1301 AVENUE OF THE AMERICAS 125 HIGH STREET
NEW YORK, NEW YORK 10019 BOSTON, MASSACHUSETTS 02110
(212) 259-8000 (617) 248-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION,
NOVEMBER 13, 1997
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
3,900,000 SHARES
[LOGO]
COMMON STOCK
-----------
Of the 3,900,000 shares of common stock offered hereby (the "Common Stock"),
3,000,000 shares are being sold by CVC, Inc. ("CVC" or the "Company") and
900,000 shares are being sold by a Selling Stockholder ("the Offering"). See
"Principal and Selling Stockholders." The Company will not receive any proceeds
from the sale of the shares by the Selling Stockholder. Prior to the Offering,
there has been no public market for the Common Stock. It is currently estimated
that the initial public offering price will be between $12.00 and $14.00 per
share. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. Application has been made to list
the Common Stock on the Nasdaq National Market under the symbol "CVCI."
--------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS PROCEEDS
TO DISCOUNTS AND TO TO SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDER
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
Total(3)...................... $ $ $ $
</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities under the Securities Act of 1933,
as amended. See "Underwriting."
(2) Before deducting estimated expenses payable by the Company of $750,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 585,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that such option is exercised, the
Underwriters will offer the additional shares at the Price to Public shown
above. If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions, Proceeds to Company and Proceeds to
Selling Stockholder will be $ , $ , $ and $ ,
respectively. See "Underwriting."
--------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about ,
1997.
BT ALEX. BROWN
HAMBRECHT & QUIST
PAINEWEBBER INCORPORATED
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
[OUTSIDE FLAP]
CVC MAKES THE CONNEXION-REGISTERED TRADEMARK-
CVC's Connexion-Registered Trademark- Cluster Tool offers data storage and
semiconductor customers an integrated thin film process solution using Physical
Vapor Deposition (PVD), Metal-Organic Chemical Vapor Deposition (MOCVD) and
Rapid Thermal Chemical Vapor Deposition (RTCVD).
[Upper Right-hand Corner] Graphic of laptop computer with (i) magnified graphic
of semiconductor chip with accompanying text reading "Advanced semiconductors
for semiconductor industry"; and (ii) magnified graphics of magnetic recording
head and recording head reading/writing to disk drive with accompanying text
reading "MR and GMR read/write heads for data storage industry."
[Left Margin] Photo of two persons operating Connexion-Registered Trademark-800
cluster tool with accompanying text reading "Front view of Connexion-Registered
Trademark-800 with dual load-lock doors."
[Lower Right-hand Corner] Graphic representing overhead view of
Connexion-Registered Trademark-800 Cluster Tool with accompanying text reading
"Connexion-Registered Trademark-800 Cluster Tool configured for MOCUD process."
CONNEXION-Registered Trademark- is a registered trademark of the Company.
OPEN CONNEXION-TM- and INFINITY-TM- are trademarks of the Company.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN SUCH
SECURITIES AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERING.
SEE "UNDERWRITING."
[INSIDE FRONT COVER GATE #1]
<PAGE>
CVC PROVIDES WORLDWIDE SERVICE AND SUPPORT
CVC operates advanced product development, systems engineering, applications
engineering, customer service and technical support centers in New York,
California, Minnesota, Texas, Europe and Asia.
[Upper Right-hand Corner] Graphic of Connexion-Registered Trademark-800 Central
Wafer Handler with accompanying text reading "Connexion-Registered Trademark-800
Central Wafer Handler supports six process modules and a high throughput robot."
[Upper-Middle Left margin] Software image graphic of overhead view of
Connexion-Registered Trademark-800' cluster tool with accompanying text reading
"CVC Open Connexion-Registered Trademark-Plug and Play Software Application."
[Middle of Page] Graphic of globe with sites of CVC, Inc.'s manufacturing
facilities highlighted.
[Lower-Middle Left Margin] Graphic of semiconductor chip on transport
superimposed over a bed of semiconductor chips.
[Lower Left-hand Corner] Graphic depicting Fremont, California facilities with
accompanying text reading "Fremont, California Facilities."
[Lower-Middle Right Margin] Graphic depicting rows of cluster tool modules in
process of assembly with accompanying text reading "Manufacturing facilities --
sub-assembly."
[Lower Right-hand Corner] Graphic depicting CVC headquarters in Rochester, New
York with accompanying text reading "CVC headquarters in Rochester, NY."
[INSIDE FRONT COVER GATE #2]
We deliver thin film
CVC's Connexion-Registered Trademark- Cluster Tool Technology for Semiconductor
Integrated Circuits and Advanced Metal Interconnect Processes
[Upper Left Hand Corner] Graphic representing wafer.
[Center of Page] Graphic representing MOCVD .13 micro meter 10:1 Aspect Ratio
Copper Gap Fill SEM with accompanying text reading "MOCVD .13 micro meter 10:1
Aspect Ratio Copper Gap Fill SEM."
[Lower-Middle Left Margin] Graphic representing side view of
Connexion-Registered Trademark-MOCVD copper process module with accompanying
text reading "Connexion-Registered Trademark-MOCVD copper process module, side
view."
[Lower Left-hand Corner] Graphic representing semiconductor chip.
[Lower Right-hand Corner] Graphic representing Connexion-Registered
Trademark-800 with attached process modules with accompanying text reading
"Connexion-Registered Trademark-800 accommodates six process modules and two
load-locks."
[INSIDE BACK COVER]
Process Solutions
CVC's Connexion-Registered Trademark- Cluster Tool Technology for Data Storage
MR and GMR Head Thin Film Deposition
[Upper Right-hand Corner] Graphic of Connexion-Registered Trademark-GMR process
module with six 12-inch [cathodes] with accompanying text reading
"Connexion-Registered Trademark-GMR process module with six 12-inch [cathodes]."
<PAGE>
[Middle Left Margin] Graphic of Connexion-Registered Trademark-GMR multi-station
process module with 12-inch targets with accompanying text reading
"Connexion-Registered Trademark-GMR multi-station process modules with 12-inch
targets."
[Middle Right Margin] Graphic of Connexion-Registered Trademark-600 with
attached process modules with accompanying text reading "Connexion 600
accommodating process modules and two load locks."
[Lower Left] Graphic of magnetoresistive head with accompanying text reading
"Magnetoresistive Head."
[Lower Right-hand Corner] Graphic of recording head and hard disk drive.
[Lower Center] Graphic of Infinity-Registered Trademark-Magnetron Plasma with
accompanying text reading "Infinity-Registered Trademark-Magnetron Plasma."
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO,
APPEARING ELSEWHERE IN THIS PROSPECTUS.
THE COMPANY
CVC is a leading worldwide supplier of deposition equipment for the
fabrication of thin film recording heads for the data storage industry. The
Company also has made significant advances in the development and initial
delivery of copper deposition equipment for the semiconductor industry. The
Company has leveraged key innovations in integrated process development, vacuum
technology, materials science, chemical and physical vapor deposition
technologies, and software applications to develop process equipment solutions
for the manufacture of both disk drive recording heads and advanced
semiconductor devices. These integrated solutions are optimized for the precise,
highly uniform, repetitive steps required for the deposition of thin film
materials.
The fabrication of disk drive recording heads and semiconductor devices
involves a sequential series of complex but, in many cases, similar processing
steps. Both recording heads and semiconductor devices are formed by building up
a succession of extremely thin, uniform layers of conducting or insulating films
onto substrates or wafers. The need to increase storage density and boost
performance of disk drives has led to the development of smaller device features
and the transition to more advanced recording heads with multiple layers of
different materials and surface structures. In order to increase speed and
performance of semiconductor devices, semiconductor manufacturers are shrinking
the geometries and line widths of integrated circuits, while at the same time
adding multiple, thin film layers of insulating or conducting materials. These
developments in disk drive recording heads and semiconductor devices are being
made possible in large part by significant advancements in the equipment and
processes involved in the deposition of thin films.
The Company's principal product offerings are its CONNEXION Cluster Tool
system and integrated process modules for depositing thin film materials onto
substrates. CVC's CONNEXION Cluster Tool is a modular system with stations for
locating up to six process modules around a central wafer handling system. Each
module is equipped to deposit materials using specified deposition methods and
processes in a precise, integrated, vacuum-controlled environment. The Company
currently offers advanced process modules for physical vapor deposition,
metal-organic chemical vapor deposition, inductively-coupled-plasma soft clean
and rapid thermal processing. CVC's CONNEXION Cluster Tool utilizes a
distributed open architecture design platform and industry-standard
specifications which enable the integration of either Company-supplied or
third-party process modules. Principal applications for the Company's systems
include advanced, magnetoresistive ("MR") and giant magnetoresistive ("GMR")
thin film recording heads for the data storage industry, and high performance,
multi-level interconnect technology for semiconductor device fabrication. The
Company believes that its cluster-oriented approach offers its customers a low
cost of ownership with optimal manufacturing process control, and the
flexibility to extend, with enhanced process capabilities, various deposition
methods across multiple generations of fabrication technologies.
The Company's strategy is to continue its leadership in thin film process
solutions for the data storage industry by focusing its resources on the
advancement of integrated thin film process technology that enables the
fabrication of advanced recording heads used in hard disk drives. The Company
intends to leverage its strategic partnerships with industry-leading data
storage and semiconductor manufacturing customers and research and development
centers. In addition, the Company is targeting copper and other advanced
metallization opportunities in the semiconductor industry. The Company is
committed to providing worldwide customer service and support as it expands its
existing sales and service activities to address on a global basis the advanced
device manufacturing priorities of its customers.
3
<PAGE>
The Company sells its products in the United States and Europe through a
direct sales force supported by its marketing and sales organization. In Japan,
Malaysia, Singapore and Thailand, the Company utilizes a foreign distributor to
sell and service its products, and markets its products in China, Korea and
Taiwan through independent sales representatives. Among the Company's most
significant customers are many of the leading manufacturers of thin film
recording heads for the data storage industry, including Applied Magnetics,
Fujitsu, IBM, Quantum, Read-Rite, Seagate Technology, Inc. ("Seagate
Technology") and TDK, as well as manufacturers of semiconductor devices,
including Analog Devices, General Semiconductor, Sharp and Texas Instruments.
Seagate Technology is the Company's largest customer, representing approximately
47% of the Company's revenues for the year ended September 30, 1997, and is also
the Company's largest stockholder, holding approximately 41% of the Company's
voting stock prior to the Offering.
The Company was incorporated in 1990 in connection with its acquisition of
CVC Products, Inc. CVC Products, Inc. was founded in 1934 as the experimental
vacuum processing group of Eastman Kodak. In 1997, the Company changed its name
to CVC, Inc. The Company's executive offices are located at 525 Lee Road,
Rochester, New York 14606, and its telephone number at that location is (716)
458-2550.
RISK FACTORS
The Common Stock offered hereby involves a high degree of risk. See "Risk
Factors."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................ 3,000,000 shares
Common Stock offered by the Selling Stockholder.... 900,000 shares
Common Stock to be outstanding after the
Offering......................................... 11,947,410 shares(1)
For general corporate purposes,
including working capital, capital
expenditures and repayment of debt. See
"Use of Proceeds."
Use of proceeds....................................
Proposed Nasdaq National Market symbol............. CVCI
</TABLE>
- ------------------------
(1) Includes 7,673,520 shares of Common Stock to be issued upon conversion of
outstanding shares of Series A and Series B Convertible Preferred Stock
concurrently with the consummation of the Offering. See "Principal and
Selling Stockholders." Excludes 2,630,160 shares issuable upon exercise of
outstanding stock options with a weighted average exercise price of $1.41
per share and 1,186,140 shares issuable upon the exercise of outstanding
warrants at an exercise price of $3.72 per share as of September 30, 1997.
4
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................. $ 12,851 $ 13,915 $ 21,358 $ 48,378 $ 62,588
Cost of goods sold........................................................ 8,239 11,795 15,630 33,755 41,286
--------- --------- --------- --------- ---------
Gross margin.............................................................. 4,612 2,120 5,728 14,623 21,302
Operating expenses
Research and development................................................ 909 1,271 1,214 4,346 9,055
Sales and marketing..................................................... 2,342 2,354 2,924 4,777 5,613
General and administrative.............................................. 1,459 1,248 1,447 2,124 2,539
--------- --------- --------- --------- ---------
Total................................................................... 4,710 4,873 5,585 11,247 17,207
--------- --------- --------- --------- ---------
Income (loss) from operations............................................. (98) (2,753) 143 3,376 4,095
Interest income (expense), net............................................ (430) (533) (559) (197) (593)
--------- --------- --------- --------- ---------
Income (loss) before income taxes......................................... (528) (3,286) (416) 3,179 3,502
Income taxes (benefit).................................................... 4 36 (546) -- 1,457
--------- --------- --------- --------- ---------
Net income (loss)......................................................... $ (532) $ (3,322) $ 130 $ 3,179 $ 2,045
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share(1)......................................... $ 0.02 $ 0.29 $ 0.19
Weighted average common and common equivalent shares outstanding(1)(2).... 8,502 11,217 12,493
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(3)
--------- -------------
BALANCE SHEET DATA:
Cash and cash equivalents................................................................ $ 2,161 $ 21,477
Working capital.......................................................................... 9,259 30,829
Total assets............................................................................. 43,833 75,149
Short-term borrowings and current portion of long-term debt.............................. 2,295 41
Long-term debt, less current portion..................................................... 5,309 3,359
Total stockholders' equity............................................................... 11,428 46,948
</TABLE>
- ------------------------
(1) Pro forma historical earnings per share has been omitted for each of the
fiscal years ended September 30, 1993 and 1994 since net losses existed in
each of those years and, therefore, pro forma earnings per share information
is not considered meaningful in light of the conversion of outstanding
preferred stock which would have a material anti-dilutive effect on pro
forma earnings per share in such years. See Notes to Consolidated Financial
Statements for further discussion of the computation of pro forma earnings
per share.
(2) See Notes to Consolidated Financial Statements for information concerning
weighted average common and common equivalent shares used in computing pro
forma earnings per share.
(3) Adjusted to give effect to the sale of the 3,000,000 shares of Common Stock
offered by the Company hereby (at an assumed initial public offering price
of $13.00 per share) and the application of the estimated net proceeds
thereof as set forth under "Use of Proceeds."
------------------------------
EXCEPT AS OTHERWISE INDICATED, ALL INFORMATION IN THIS PROSPECTUS (I) GIVES
RETROACTIVE EFFECT TO AN INCREASE IN THE NUMBER OF AUTHORIZED SHARES OF THE
COMMON STOCK ON OCTOBER 15, 1997 AND A 3-FOR-1 SPLIT OF THE COMMON STOCK ON
OCTOBER 31, 1997 AND (II) ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION. SEE "UNDERWRITING."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, THE
FOLLOWING RISK FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS. CERTAIN
STATEMENTS IN THIS PROSPECTUS ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE
"EXCHANGE ACT"). SUCH FORWARD-LOOKING STATEMENTS MAY BE FOUND IN THE MATERIAL
SET FORTH UNDER THE HEADINGS "PROSPECTUS SUMMARY," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND "BUSINESS," AS
WELL AS ELSEWHERE IN THIS PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT
OF CERTAIN FACTORS, INCLUDING THOSE DISCUSSED BELOW AND ELSEWHERE IN THIS
PROSPECTUS. ANY FORWARD-LOOKING STATEMENTS ARE MADE AS OF THE DATE OF THIS
PROSPECTUS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS OR TO UPDATE THE FACTORS WHICH COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS.
FLUCTUATIONS IN OPERATING RESULTS. The Company derives a substantial
portion of its revenue from a relatively small number of systems which typically
range in price from approximately $1.0 million to $3.0 million. As a result, the
timing of significant orders or a reduction in the number of systems shipped in
a quarter could have a material effect on the Company's revenue and results of
operations for that quarter. The Company's quarterly and annual results have in
the past significantly varied and may in the future vary significantly due to a
number of factors, including: market acceptance of the Company's products; the
timing, seasonality, cancellation or delay of customer orders; the loss of a
significant customer; increased research, development or marketing expenses
associated with new product introductions, and the Company's ability to
introduce new products and technologies successfully and on a timely basis; the
introduction of new products or enhancements by competitors; changes in the
Company's pricing policies or those of its competitors; customer order deferrals
in anticipation of upgrades and new products; the level of utilization of the
Company's production capacity; the ability of the Company to manufacture, test
and deliver products in a timely and cost-effective manner; the sufficiency of
personnel and capital resources to support operations; the publication of
opinions by industry analysts about the Company and its products, or its
competitors or their products; and other factors, such as levels of expenses
relative to revenue levels, personnel changes and general conditions in the data
storage and semiconductor industries. Due to all of the foregoing factors, in
some future quarter the Company's operating results may be below the
expectations of public market analysts and investors. In such event, the price
of the Common Stock would likely be materially adversely affected. The impact of
these and other factors on the Company's revenues and operating results in any
future period cannot be forecasted with certainty.
The Company's expense levels are based, in part, on its expectations as to
future revenues. Because the Company's sales are generally made pursuant to
purchase orders that are subject to cancellation, modification, quantity
reduction or rescheduling on short notice and without significant penalties, the
Company's backlog as of any particular date may not be indicative of sales for
any future period, and such changes could cause the Company's net sales to fall
below expected levels. If revenue levels are below expectations, operating
results are likely to be materially and adversely affected. Net income, if any,
and gross margins may be disproportionately affected by a reduction in net sales
because a proportionately smaller amount of the Company's expenses varies with
its revenues.
Due to potential fluctuations in quarterly operating results, the Company
believes that quarter-to-quarter comparisons of its results of operations should
not be relied upon as indicators of future performance.
DEPENDENCE ON DATA STORAGE AND SEMICONDUCTOR MARKETS. The Company's
business depends upon the capital expenditures of manufacturers of data storage
systems and semiconductors which, in turn, depend upon the current and
anticipated market demand for computer disk drives and for products utilizing
semiconductor devices. Those markets are highly cyclical and have historically
experienced periodic
6
<PAGE>
downturns which have had a material adverse effect on the demand for the type of
capital equipment and process technology offered by the Company. In addition,
the need for continued investment in research and development, substantial
capital equipment requirements and extensive ongoing customer service and
support requirements worldwide will limit the Company's ability to reduce
expenses in response to any such downturn or slowdown. The Company's revenue,
gross margins and results of operations would likely be materially and adversely
affected if downturns or slowdowns in the rate of capital investment in the data
storage or semiconductor industries occur in the future. Moreover, although the
data storage and semiconductor industries may experience growth that causes
significant growth in the data storage and semiconductor capital equipment
industries, there can be no assurance that such growth can be sustained or that
the Company will be positioned to benefit from such growth. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON THE COMPANY'S CONNEXION CLUSTER TOOL SYSTEM. The Company's
principal product is a line of capital equipment, known as the CONNEXION Cluster
Tool, which together with its associated process modules is used to manufacture
thin film recording heads and semiconductor devices. Through September 30, 1997,
the Company had shipped more than 60 of such tools, along with over 200 such
modules. The Company's CONNEXION Cluster Tool systems accounted for 45%, 71% and
85% of its net sales for fiscal 1995, 1996 and 1997, respectively. The Company
believes that its future growth depends in large part upon its ability to gain
customer acceptance of its CONNEXION Cluster Tool and related technology. Market
acceptance of the Company's CONNEXION Cluster Tool system depends upon numerous
factors, including cost of ownership, throughput, process flexibility,
performance and reliability and availability of customer support. The Company
intends periodically to develop and introduce enhanced versions of its CONNEXION
Cluster Tool system. Failure to enhance continually the Company's CONNEXION
Cluster Tool system may impact its future market acceptance. There can be no
assurance that the Company will be successful in obtaining broad market
acceptance of the CONNEXION Cluster Tool system or any future enhanced version
of the system. Any technical or manufacturing difficulties with the CONNEXION
Cluster Tool (or subsequent enhancements of the CONNEXION Cluster Tool system),
or the failure to gain customer acceptance thereof, would have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON NEW PRODUCTS AND PROCESSES. The
data storage and semiconductor equipment manufacturing industries are subject to
rapid technological change and new product introductions, as well as evolving
industry standards. The development of more complex data storage systems and
semiconductor devices and the increased overall demand for such products has
driven the need for new facilities, equipment and processes to produce such
systems and devices at an acceptable cost. As a result of these factors, the
Company believes that data storage systems and semiconductor device
manufacturers are increasingly relying on equipment manufacturers like the
Company to design and develop more efficient equipment, design and implement
improved processes, and integrate their equipment with that of other equipment
manufacturers. Therefore, the Company believes that its future success will
depend, in part, upon its ability to continue to meet such evolving industry
standards by enhancing its existing products and their process capabilities and
by designing and developing new technologies, processes and products which
compete effectively on the basis of price and performance and which adequately
address customer requirements.
There can be no assurance that the Company will be successful in the
introduction and volume manufacture of new products or that the Company will be
able to develop and introduce, in a timely manner, new products or enhancements
to its existing products and processes which satisfy customer needs or achieve
market acceptance. The failure of the Company to accomplish any of the above
would adversely affect the Company's business, financial condition and results
of operations. The success of the Company in developing, introducing and selling
new and enhanced equipment depends upon a variety of factors, including product
selection, timely and efficient completion of product design and development,
timely
7
<PAGE>
and efficient implementation of manufacturing and assembly processes, product
performance in the field and effective sales and marketing.
The Company has committed significant resources to the development of
advanced copper deposition technology for high performance integrated circuit
fabrication for the semiconductor market. The development of this technology is
emerging and highly complex. Recently, several semiconductor device
manufacturers have announced that they have made advancements in copper-based
technology, and other competitors with substantially greater resources than the
Company's can be expected to invest in research and development of similar
technologies. There can be no assurance that the Company's efforts in this area
will be technologically successful or, even if technologically successful, will
be commercially accepted by the marketplace. Failure by the Company to achieve
commercial success in its pursuit of copper-based technology for the
semiconductor industry could have a material adverse effect on the Company's
prospects. See "Business--Industry Background," "Business--Strategy," and
"Business--Research, Development and Engineering."
CONCENTRATION OF CUSTOMERS. The Company's customer base is highly
concentrated among a limited number of large customers, primarily because the
data storage and the semiconductor industries are dominated by a limited number
of large companies. In fiscal 1995, 1996 and 1997, revenues from the Company's
five largest customers represented approximately 72%, 81% and 78%, respectively,
of the Company's total revenues. In fiscal year 1995, three customers each
accounted for more than 10% of the Company's revenues, and in fiscal years 1996
and 1997, two customers each accounted for more than 10% of the Company's
revenues. The Company generally does not have continuing purchase agreements
with its customers and does not have any written agreements that require
customers to purchase fixed minimum quantities of products. The Company's sales
to specific customers tend to vary significantly from year to year depending
upon customers' budgets for capital expenditures and new product introductions.
The Company anticipates that its revenue will continue to depend on a limited
number of major customers, although the companies considered to be major
customers and the percentage of the Company's revenue represented by each major
customer may vary from quarter to quarter.
The loss of, or reduced demand for products or related services from, any of
the Company's major customers could have a material adverse effect on the
Company's business, financial condition and results of operations. The Company's
future success will depend, in part, upon its ability to obtain orders from new
customers, as well as the financial condition of its customers and industry
conditions in the data storage and semiconductor markets. See
"Business--Customers" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
RELATIONSHIP WITH SEAGATE TECHNOLOGY. A significant portion of the
Company's revenues for the last three years has been attributable to one
customer, Seagate Technology. In fiscal 1995, 1996 and 1997, revenues derived
from sales of products to Seagate Technology accounted for 27%, 57% and 47%,
respectively, of the Company's total revenues. The Company has no marketing,
distribution, technology licensing, guaranteed purchase or any other type of
collaborative agreement or commitment with Seagate Technology. The loss of
Seagate Technology as a customer, any material reduction in orders by Seagate
Technology, including reductions due to market or competitive conditions or the
determination by Seagate Technology not to adopt the Company's next generation
of products, would have a material adverse effect on the Company's business,
financial condition and results of operations.
Seagate Technology is also the Company's largest stockholder and two of its
representatives are members of the Company's Board of Directors. Following
completion of the Offering, Seagate Technology will own 3,629,520 shares
representing approximately 30.4% of the Company's outstanding Common Stock
(29.0% of such stock if the Underwriters' over-allotment option is exercised in
full). In addition, pursuant to a warrant acquired by Seagate Technology in
1995, Seagate Technology has the right to acquire 1,186,140 shares of Common
Stock at an exercise price of $3.72 per share. Assuming full exercise of such
warrant (and no other change in the Company's outstanding Common Stock), Seagate
Technology would
8
<PAGE>
own an aggregate of approximately 36.7% of the Company's outstanding Common
Stock (35.1% of such stock if the Underwriters' over-allotment option is
exercised in full). As a result, Seagate Technology may be in a position to
influence the election of the Company's directors and the outcome of corporate
actions. This concentration of ownership may have the effect of delaying or
preventing a change in control of the Company and of influencing the business
and affairs of the Company. See "Business--Relationship with Seagate
Technology," "Management" and "Certain Transactions."
HIGHLY COMPETITIVE INDUSTRIES. The data storage and semiconductor equipment
industries are highly competitive. The Company faces substantial competition in
the markets in which it competes from both established competitors and potential
new entrants. In the data storage market, principal competitors for the
Company's products include Balzers Process Systems ("Balzers"), Sputtered Films,
Inc. ("Sputtered Films"), Nordiko Ltd. ("Nordiko") and Veeco Instruments. In the
semiconductor market, the Company's competitors include Applied Materials and
Novellus Systems ("Novellus"). Certain of the Company's major competitors have
more experience with high volume manufacturing, have broader product lines and
name recognition, have substantially larger customer bases and greater customer
service capabilities and have substantially greater financial and marketing
resources than the Company. The Company may also face future competition from
new market entrants.
The Company expects its competitors to continue to improve the design and
performance of their products. There can be no assurance that the Company's
competitors will not develop enhancements to, or future generations of,
competitive products that will offer superior price or performance features. In
addition, a substantial investment is required by customers to install and
integrate capital equipment into a production line. As a result, once a
manufacturer has selected a particular supplier's capital equipment, the Company
believes that the manufacturer will be generally reliant upon that equipment for
the specific production line application. Accordingly, the Company may
experience difficulty in selling a product to a particular customer for a
significant period of time if that customer selects a competitor's product.
Increased competitive pressure could lead to lower prices for the Company's
products, thereby adversely affecting the Company's operating results. There can
be no assurance that the Company will be able to compete successfully in the
future. See "Business--Competition."
LENGTHY SALES CYCLE. Sales of the Company's systems depend, in significant
part, upon the decision of a prospective customer to add new manufacturing
capacity or to expand existing manufacturing capacity, both of which typically
involve a significant capital commitment. The Company may experience delays in
finalizing system sales following initial system qualification while the
customer evaluates and receives approvals for the initial purchase of the
Company's systems and completes a sales cycle of 12 to 18 months, during which
the Company may expend substantial funds and management effort. Lengthy sales
cycles subject the Company to a number of significant risks, including inventory
obsolescence and fluctuations in operating results over which the Company has
little or no control. See "Business--Marketing, Sales and Service."
DEPENDENCE ON CERTAIN SUPPLIERS. Certain of the components and
subassemblies included in the Company's systems are purchased from a limited
number of suppliers. Although the Company seeks to reduce its dependence on
these suppliers, disruption or termination of certain of these sources could
occur and such disruptions could have at least a temporary adverse effect on the
Company's operations. A prolonged inability to obtain certain components could
have a material adverse effect on the Company's business and results of
operations. See "Business--Manufacturing."
RISKS ASSOCIATED WITH INTERNATIONAL SALES. In fiscal 1995, 1996 and 1997,
sales to customers located outside of the United States accounted for 13%, 19%
and 31%, respectively, of the Company's revenues in each such period. The
Company intends to expand its operations outside the United States and enter
additional international markets, which will require significant management
attention and financial
9
<PAGE>
resources. The Company's international business may be affected by factors such
as the risk of government-financed competition, changes in trade policies,
tariff regulations and difficulties in obtaining U.S. export licenses.
Most international sales are made through several independent sales
representatives and a third party distributor. There can be no assurance that
they will continue to market and distribute the Company's products successfully.
The implementation of new distribution and sales arrangements could result in
delays and disruptions in the Company's international sales and customer support
efforts, which could reduce sales and have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that these factors will not have a material adverse effect on the
Company's future international sales and, consequently, on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Strategy" and "Business--Marketing, Sales and Service."
DEPENDENCE ON KEY PERSONNEL. The Company's future operating results depend
in significant part upon the continued contributions of its officers and
personnel, many of whom would be difficult to replace. Many of the Company's
employees are not bound by noncompetition agreements, and competitors may
attempt to recruit the Company's key employees. The loss of its officers or
other key personnel, who are critical to the Company's success, could have a
material adverse effect on the business, financial condition and results of
operations of the Company. Among the competitive factors in attracting personnel
are compensation and benefits, equity incentives and geographic location. There
can be no assurance that the Company will be successful in attracting or
retaining such personnel. The loss of the services of existing personnel, as
well as the failure to recruit additional personnel, could materially and
adversely affect the Company's business, financial condition and results of
operations. See "Business--Employees," "Management--Directors and Executive
Officers," and "Management--Key Employees."
MANAGEMENT OF GROWTH. The Company is experiencing a period of rapid growth
and expansion which has placed, and is expected to continue to place,
significant demands on the Company's resources. The management of such growth
will require the Company to continue to improve and expand its management,
operational and financial systems, manufacturing procedures and controls, and
other internal management systems, quality control, production and service
capabilities. The failure to manage growth effectively, including delays or
difficulties in implementing new products, procedures and controls in a timely
manner and without disruption of the Company's operations, could have a material
adverse effect on the Company's business, financial condition and results of
operations.
The recent growth in the Company's product offerings has required the
Company to invest in additional equipment, personnel, physical facilities and
other infrastructure to meet current and anticipated manufacturing demands. The
Company has hired, and expects that it will need to continue to hire, a number
of new employees, particularly personnel with technical backgrounds for the
Company's engineering and technical support staffs. The future success of the
Company also will depend on its ability to attract and retain qualified
technical, marketing and management personnel, particularly highly skilled
design, process and test engineers, for whom competition is intense. In
particular, the current availability of qualified engineers is limited, and
competition among companies for experienced engineering personnel is very
strong. The market for such personnel has become increasingly competitive,
particularly in California where there has been a significant increase in the
business activities of other companies in the data storage systems and
semiconductor device manufacturing sectors. Because of this competition for
qualified labor, the Company has occasionally experienced delays in meeting its
staffing requirements. Protracted inability of the Company to recruit and train
adequate numbers of qualified personnel on a timely basis could adversely affect
the Company's ability to manufacture, sell and support its products. The Company
has significantly expanded its infrastructure to support increased revenues,
including the hiring of additional personnel, and has made and expects to
continue to make substantial investments in research, development and
engineering, sales and marketing and business information systems. There can be
no assurance that the Company will be able to achieve a rate of growth or level
of sales in any future period
10
<PAGE>
commensurate with its increased level of expenses. There can be no assurance
that the Company will be able to adequately increase its manufacturing
facilities and capacity to meet demand for its products or that, in the event of
a downturn or slowdown in such demand, the Company will be able to reduce its
production activities or absorb its increased overhead and outsourcing costs.
The Company expects that its operating expenses will continue to increase. There
can be no assurance that the Company's future sales will increase in an amount
necessary to cover planned increases in operating expenses. Continued expansion
of the Company's operations could significantly strain the Company's management,
financial and other resources. See "Business--Marketing, Sales and Service" and
"Business--Employees."
PATENTS AND OTHER INTELLECTUAL PROPERTY. The Company believes that the
success of its business depends more on such factors as the technical expertise
and innovative skills of its employees than on patents, copyrights, trade
secrets or other intellectual property rights. Nevertheless, the success of the
Company may depend in part on patents. As of September 30, 1997, the Company had
obtained two U.S. patents and had 15 U.S. patent applications pending on its
behalf. In addition, the Company had eight foreign patent applications pending
on its behalf as of that date. There can be no assurance that the Company's
pending patent applications or any future applications will be approved, that
any patents will provide it with competitive advantages or will not be
challenged by third parties, or that the patents of others will not have an
adverse effect on the Company's ability to do business. Because foreign patents
may afford less protection under foreign law than is available under U.S. patent
law, there can be no assurance that any such patents issued to the Company will
adequately protect the Company's proprietary information. There can be no
assurance that others will not independently develop similar products, duplicate
the Company's products or, if patents are issued to the Company, design around
the patents issued to the Company. In addition to patent protection, the Company
also relies upon trade secret protection, employee and third-party nondisclosure
agreements and other intellectual property protection methods to protect its
confidential and proprietary information. Despite these efforts, there can be no
assurance that others will not independently develop substantially equivalent
proprietary information and techniques or otherwise gain access to the Company's
trade secrets or disclose such technology or that the Company can meaningfully
protect its trade secrets.
There has been substantial litigation regarding patent and other
intellectual property rights in the semiconductor, data storage and related
industries. The Company has in the past been, and may in the future be, notified
of allegations that it may be infringing intellectual property rights possessed
by others. No assurance can be given that infringement claims by third parties
will not be asserted. In the future, protracted litigation may be necessary to
defend the Company against alleged infringement of third party rights. Any such
litigation, even if ultimately successful in defense of the Company, could
result in substantial cost and diversion of time and effort by management, which
by itself could have a material adverse effect on the Company's business,
financial condition and results of operations. Adverse determinations in such
litigation could result in the Company's loss of proprietary rights, subject the
Company to significant liabilities (including treble damages under certain
circumstances), require the Company to seek licenses from third parties, or
prevent the Company from manufacturing or selling its products, any of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Further, there can be no assurance that any
such third party license will be available on reasonable terms or at all. See
"Business--Patents and Other Intellectual Property."
ENVIRONMENTAL REGULATION. The Company is subject to a variety of
governmental regulations related to the use, storage, handling, discharge or
disposal of toxic, volatile or otherwise hazardous chemicals used in the
manufacturing process. The Company believes that it is currently in compliance
in all material respects with these regulations and that it has obtained all
necessary environmental permits to conduct its business, which permits generally
relate to the discharge of hazardous waste. Any failure by the Company to comply
with regulations or to control the use, disposal or storage of, or adequately
restrict the discharge of, hazardous substances could subject the Company to
future liabilities. See "Business--Manufacturing."
11
<PAGE>
ABSENCE OF PUBLIC MARKET; VOLATILITY OF STOCK PRICE. Prior to the Offering,
there has been no public market for the Common Stock and there can be no
assurance that an active trading market will develop or be sustained upon the
completion of the Offering, or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public offering
price of the Common Stock offered hereby has been determined by negotiations
among the Company, the Selling Stockholder and the Underwriters. The market
price for shares of the Common Stock may be highly volatile depending on news
announcements of the Company, its competitors, customers or other entities
related to quarterly operating results or other matters, general trends in the
Company's industry, changes in general market conditions and other factors. In
addition, in recent years the stock market in general and the market for shares
of small capitalization and semiconductor industry-related companies in
particular, have experienced extreme price fluctuations which have often been
unrelated to the operating performance of affected companies. Any such
fluctuations in the future could adversely affect the market price of the Common
Stock. See "Underwriting."
DILUTION. The public offering price is substantially higher than the book
value per share of the currently outstanding Common Stock. Investors purchasing
shares of Common Stock in the Offering will therefore suffer immediate and
substantial dilution of $9.07 per share in the net tangible book value of the
Common Stock from the assumed initial public offering price of $13.00 per share.
See "Dilution."
ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER PROVISIONS. The Company's Restated
Certificate of Incorporation and Restated By-laws, as well as the Delaware
General Corporation Law, contain provisions that may make it more difficult for
a third party to acquire, or may discourage acquisition bids for, the Company.
These provisions could limit the price that certain investors might be willing
to pay in the future for shares of the Common Stock. In addition, shares of the
Company's preferred stock may be issued in the future without further
stockholder approval and upon such terms and conditions, and having such rights,
privileges and preferences, as the Board of Directors may determine. The rights
of the holders of Common Stock will be subject to, and may be materially and
adversely affected by, the rights of any holders of preferred stock that may be
issued in the future, including preferential rights with respect to voting,
payment of dividends or distributions upon liquidation. The issuance of
preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to acquire, or discourage a third
party from acquiring, a majority of the outstanding voting stock of the Company.
The Company has no present plans to issue any shares of preferred stock. See
"Description of Capital Stock."
SHARES ELIGIBLE FOR FUTURE SALE. Upon consummation of the Offering, there
will be 11,947,410 outstanding shares of Common Stock. The shares sold in the
Offering will be freely tradable without restriction under the Securities Act,
except to the extent acquired by affiliates of the Company. The executive
officers, directors and certain employees of the Company, and certain
stockholders, who in the aggregate will hold approximately 8,044,935 shares of
Common Stock, have agreed that for a period of 180 days following the date of
this Prospectus, they will not offer, pledge, sell, contract to sell, or
otherwise transfer or dispose of, Common Stock without the prior written consent
of BT Alex. Brown Incorporated. Upon expiration of the 180-day period, at least
7,852,260 shares of Common Stock will be eligible for sale pursuant to Rule 144
under the Securities Act, subject in some cases to compliance with Rule 144
volume limitations, of which 6,665,460 shares are held by officers, directors
and affiliates of the Company. Sales of a substantial amount of such shares, or
the perception that such sales will occur, could have a significant adverse
effect on the market price of the Common Stock. See "Shares Eligible for Future
Sale."
CONTROL BY EXISTING STOCKHOLDERS. The Company's principal stockholders and
the Company's executive officers and directors will beneficially own
approximately 64.8% of the Company's outstanding shares of Common Stock (67.9%
if Seagate Technology exercises in full its warrant to purchase Common Stock)
immediately following the Offering (assuming no exercise of currently
exercisable stock options). Accordingly, these stockholders will be able to
elect all of the Company's directors, control the management and
12
<PAGE>
affairs of the Company and determine the outcome of corporate actions requiring
stockholder approval, such as mergers and acquisitions, regardless of how other
stockholders of the Company may vote. Such a concentration of ownership by such
persons or entities may have a significant effect in delaying, deferring or
preventing a change in control of the Company and may adversely affect the
voting and other rights of other holders of Common Stock. See
"Management--Executive Officers and Directors," "Certain Transactions" and
"Principal and Selling Stockholders."
ABSENCE OF DIVIDENDS. The Company has never paid cash dividends on its
Common Stock. The Company currently intends to retain earnings to finance the
growth and development of its business and does not anticipate paying cash
dividends in the foreseeable future. In addition, the Company is currently
restricted under the terms of certain of its credit agreements from paying any
dividends to stockholders without the prior written consent of the lenders. See
"Dividend Policy."
13
<PAGE>
THE COMPANY
The Company's principal executive offices are located at 525 Lee Road,
Rochester, New York 14606, and its telephone number at that address is (716)
458-2550. References in this Prospectus to the "Company" refer collectively to
CVC, Inc. and its subsidiary, CVC Products, Inc. ("CVC Products"). The Company's
operations are conducted through such subsidiary.
USE OF PROCEEDS
The net proceeds from the sale of the 3,000,000 shares of Common Stock being
sold by the Company hereby (assuming an initial public offering price of $13.00
per share) are estimated to be $35.5 million ($42.6 million if the Underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discounts and commissions and estimated offering expenses. The Company will not
receive any proceeds from the sale of shares by the Selling Stockholder. See
"Principal and Selling Stockholders."
The principal purposes of the Offering are to increase the Company's equity
capital, to create a public market for the Common Stock and to facilitate future
access by the Company to public equity markets. The Company intends to use the
proceeds of the Offering for general corporate purposes, including approximately
$12.0 million for capital expenditures relating to facility expansion and
manufacturing and demonstration equipment, $4.2 million for the repayment of
debt and the balance for additional working capital. The amounts actually
expended by the Company for working capital purposes will vary significantly
depending upon a number of factors, including future revenue growth, the amount
of cash generated by the Company's operations and the progress of the Company's
product development efforts.
A portion of the net proceeds may also be used for the acquisition of
businesses, products and technologies that are complementary to those of the
Company. The Company has no plans, commitments or agreements with respect to any
such acquisition as of the date of this Prospectus. The Company has not yet
identified specific uses for such proceeds and will have discretion over their
use and investment. Pending such uses, the Company intends to invest the net
proceeds from the Offering in short-term, investment grade, interest-bearing
securities.
DIVIDEND POLICY
The Company has never paid or declared cash dividends on its Common Stock.
The Company currently intends to retain all future earnings for its business and
does not anticipate paying cash dividends in the foreseeable future. The Company
is currently restricted under the terms of certain of its credit agreements from
paying any dividends to stockholders without the prior written consent of the
lenders. Future dividends, if any, will depend on, among other things, the
Company's results of operations, capital requirements, restrictions in loan
agreements and on such other factors as the Company may, in its discretion,
consider relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the
capitalization of the Company and (ii) such capitalization, as adjusted to
reflect the issuance and sale of 3,000,000 shares of Common Stock by the
Company, at an assumed initial public offering price of $13.00 per share, and
after deducting underwriting discounts and commissions and estimated offering
expenses, and the application of the estimated net proceeds thereof as set forth
under "Use of Proceeds," as well as the conversion of all the outstanding shares
of the Company's Series A and Series B Convertible Preferred Stock into an
aggregate of 7,673,520 shares of Common Stock upon consummation of the Offering.
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------------
<S> <C> <C>
ACTUAL AS ADJUSTED(2)
--------- --------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Short-term borrowings and current portion of long-term debt............................ $ 2,295 $ 41
Long-term debt, less current portion(1)................................................ 5,309 3,359
Stockholders' equity:
Preferred stock, $.01 par value, 102,500 shares authorized; shares issued and
outstanding:
Series A - 1,685 shares (none as adjusted)........................................... 1,685 --
Series B - 60,492 shares (none as adjusted).......................................... 8,355 --
Common stock, $.01 par value per share; 50,000,000 shares authorized; 1,273,890
shares issued and outstanding; 11,947,410 shares issued and outstanding (as
adjusted).......................................................................... 4 119
Additional paid-in capital........................................................... 776 46,221
Unamortized deferred compensation.................................................... (254) (254)
Retained earnings.................................................................... 949 949
Minimum pension liability............................................................ (87) (87)
--------- -------
Total stockholders' equity........................................................... 11,428 46,948
--------- -------
Total capitalization............................................................... $ 19,032 $ 50,348
--------- -------
--------- -------
</TABLE>
- ------------------------
(1) For information concerning the Company's long-term debt, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and Notes to Consolidated
Financial Statements.
(2) Gives effect as of September 30, 1997 to the increase in authorized shares
of Common Stock and the issuance of Common Stock as a dividend to effect a
3-for-1 split of the Common Stock on October 31, 1997. See Notes to
Consolidated Financial Statements.
15
<PAGE>
DILUTION
The net tangible book value of the Company, as of September 30, 1997, was
$11,428,288, or $1.28 per share of Common Stock. Net tangible book value per
share represents the amount of total tangible assets of the Company reduced by
the amount of its total liabilities divided by the total number of shares of
Common Stock outstanding (which assumes the conversion of Series A and Series B
Convertible Preferred Stock upon consummation of the Offering). Without taking
into account any other change in such net tangible book value after September
30, 1997, other than to give effect to the receipt by the Company of the
estimated net proceeds of $35,520,000 (assuming an initial public offering price
of $13.00 per share) from the sale of the 3,000,000 shares of Common Stock
offered by the Company hereby (after deducting the estimated underwriting
discounts and commissions and estimated offering expenses), the pro forma net
tangible book value of the Company as of September 30, 1997, would have been
$46,948,288, or $3.93 per share. This represents an immediate increase in such
net tangible book value of $2.65 per share to existing stockholders and an
immediate dilution of $9.07 per share to new investors purchasing shares in the
Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $ 13.00
Net tangible book value per share before the Offering... $ 1.28
Increase per share attributable to new investors........ 2.65
-----------
Pro forma net tangible book value per share after the
Offering................................................ 3.93
---------
Dilution per share to new investors....................... $ 9.07
---------
---------
</TABLE>
The following table sets forth on a pro forma basis, as of September 30,
1997, the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price per share paid by the
existing stockholders (which assumes the conversion of Series A and Series B
Convertible Preferred Stock upon consummation of the Offering) and by the
purchasers of the shares of Common Stock offered by the Company hereby (before
deduction of estimated underwriting discounts and commissions and estimated
offering expenses), assuming an initial public offering price of $13.00 per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- -------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)........................... 8,947,410 74.9% $ 11,203,859 22.3% $ 1.25
New investors...................................... 3,000,000 25.1 39,000,000 77.7 13.00
------------ ----- ------------- -----
Total............................................ 11,947,410 100.0% $ 50,203,859 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
(1) The sale by the Selling Stockholder in the Offering will reduce the number
of shares held by existing stockholders to 8,047,410 shares, or 67% of the
total number of shares of Common Stock to be outstanding after the Offering
and will increase the number of shares held by the new investors to
3,900,000 shares, or 33% of the total number of shares of Common Stock to be
outstanding after the Offering. See "Principal and Selling Stockholders."
The foregoing discussion and tables assume no exercise of any outstanding
stock options or warrants. As of September 30, 1997, an aggregate of 2,630,160
shares of Common Stock were issuable upon the exercise of outstanding options to
purchase Common Stock at a weighted average exercise price of $1.41 per share
(of which options to purchase 1,929,360 shares were then exercisable). At that
date, there was an outstanding warrant to purchase 19,769 shares of the
Company's Series B Convertible Preferred Stock at an exercise price of $223.17
per share. Upon completion of the Offering, such warrant will be converted into
a warrant to purchase 1,186,140 shares of Common Stock at an exercise price of
$3.72 per share. To the extent such options and warrant are exercised, there
will be further dilution to the new investors.
16
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected financial data of the Company for
and as of the fiscal years ended September 30, 1993, 1994, 1995, 1996 and 1997.
The selected financial data as of September 30, 1996 and 1997 and for the three
years ended September 30, 1997 have been derived from the Company's audited
consolidated financial statements which appear elsewhere in this Prospectus. The
selected financial data as of September 30, 1993, 1994 and 1995 and for the two
years ended September 30, 1994 have been derived from the Company's consolidated
financial statements. The selected financial data should be read in conjunction
with Management's Discussion and Analysis of Financial Condition and Results of
Operations and the Consolidated Financial Statements and Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................................................................. $ 12,851 $ 13,915 $ 21,358 $ 48,378 $ 62,588
Cost of goods sold........................................................ 8,239 11,795 15,630 33,755 41,286
--------- --------- --------- --------- ---------
Gross margin.............................................................. 4,612 2,120 5,728 14,623 21,302
Operating expenses:
Research and development................................................ 909 1,271 1,214 4,346 9,055
Sales and marketing..................................................... 2,342 2,354 2,924 4,777 5,613
General and administrative.............................................. 1,459 1,248 1,447 2,124 2,539
--------- --------- --------- --------- ---------
Total................................................................... 4,710 4,873 5,585 11,247 17,207
--------- --------- --------- --------- ---------
Income (loss) from operations............................................. (98) (2,753) 143 3,376 4,095
Interest income (expense), net............................................ (430) (533) (559) (197) (593)
--------- --------- --------- --------- ---------
Income (loss) before income taxes......................................... (528) (3,286) (416) 3,179 3,502
Income taxes (benefit).................................................... 4 36 (546) -- 1,457
--------- --------- --------- --------- ---------
Net income (loss)......................................................... $ (532) $ (3,322) $ 130 $ 3,179 $ 2,045
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Pro forma net income per share(1)......................................... $ 0.02 $ 0.29 $ 0.19
Weighted average common and common equivalent shares outstanding(1)(2).... 8,502 11,217 12,493
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER
SEPTEMBER 30, 30, 1997
------------------------------------------ ---------
<S> <C> <C> <C> <C> <C>
1993 1994 1995 1996 ACTUAL
--------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 505 $ 2 $ 3,157 $ 730 $ 2,161
Working capital............................................ 1,259 (2,312) 5,429 8,816 9,259
Total assets............................................... 14,635 11,425 23,554 31,837 43,833
Short term borrowings and current portion of long-term
debt..................................................... 2,489 2,229 188 894 2,295
Long-term debt, less current portion....................... 4,117 3,935 3,528 5,635 5,309
Total stockholders' equity................................. 933 (2,363) 6,183 9,319 11,428
<CAPTION>
<S> <C>
AS ADJUSTED(3)
---------------
BALANCE SHEET DATA:
Cash and cash equivalents.................................. $ 21,477
Working capital............................................ 30,829
Total assets............................................... 75,149
Short term borrowings and current portion of long-term
debt..................................................... 41
Long-term debt, less current portion....................... 3,359
Total stockholders' equity................................. 46,948
</TABLE>
- ------------------------
(1) Pro forma historical earnings per share has been omitted for each of the
fiscal years ended September 30, 1993 and 1994 since net losses existed in
each of those years and therefore, pro forma earnings per share information
is not considered meaningful in light of the conversion of outstanding
preferred stock which would have a material anti-dilutive effect on pro
forma earnings per share in such years. See Notes to Consolidated Financial
Statements for further discussion of the computation of pro forma earnings
per share.
(2) See Notes to Consolidated Financial Statements for information concerning
weighted average common and common equivalent shares used in computing pro
forma earnings per share.
(3) Adjusted to give effect to the sale of the shares of Common Stock offered
hereby (at an assumed initial public offering price of $13.00 per share) and
the application of the estimated net proceeds thereof as set forth under
"Use of Proceeds."
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
In 1990, the Company acquired CVC Products, Inc. in a transaction (the
"Acquisition") led by the current Chief Executive Officer of the Company,
Christine Whitman. CVC Products, Inc. had been founded in 1934 in Rochester, New
York as the experimental vacuum processing group of Eastman Kodak. Since the
Acquisition, the management of the Company has restructured the operations
formerly conducted by CVC Products and refocused its product direction on
development of the CONNEXION Cluster Tool system for the thin film recording
head equipment market and semiconductor device market. The Company established a
commercial production equipment research, development and engineering ("RD&E")
effort with the goal of creating a modular, multi-process, single wafer cluster
tool deposition system designed for commercial production of thin film recording
heads and semiconductor devices. The result of this effort was the 1993
introduction of CVC's CONNEXION Cluster Tool system. In order to accelerate its
growth, in 1995 the Company acquired additional equity capital through a private
placement to one of its major customers, Seagate Technology.
Since the introduction of the CONNEXION Cluster Tool, the Company has
invested aggressively in the introduction of new systems and technologies.
Specifically, the Company has developed a number of process modules, including
physical vapor deposition ("PVD"), metal-organic chemical vapor deposition
("MOCVD"), inductively-coupled-plasma soft clean ("ICP"), and rapid thermal
process/rapid thermal chemical vapor deposition ("RTP/RTCVD").
During the past fiscal year approximately 75% of the Company's revenue was
derived from sales made to thin film recording head manufacturers, approximately
15% from sales to manufacturers of semiconductor devices, with the remainder of
the revenue derived from ancillary products and services. The Company derives a
substantial portion of its revenue from a relatively small number of high value
orders for Company systems. These orders range in price from approximately $1.0
million to $3.0 million. As a result, the timing of significant orders or a
reduction in the number of systems shipped in a quarter could have a material
effect on the Company's revenue and results of operations for that quarter. See
"Risk Factors-- Fluctuations in Operating Results."
Since 1993, the Company has invested in RD&E at a rate of approximately 6%
to 14% of its annual revenues. The Company funds its RD&E requirements through a
combination of internal funds, U.S. government contracts and joint development
programs with certain of its customers. The Company's RD&E efforts have
benefited in the past from the receipt of research and development program
grants from the U.S. Department of Defense Advanced Research Project Agency
("DARPA"). In 1994, the Company was awarded a two-year, $3.6 million RD&E
program from the DARPA to refine its universal thermal and plasma modules and to
establish advanced metallization and silicide formation cluster tool products
for state-of-the-art semiconductor technologies.
The Company also derives ancillary revenues from sales of vacuum gauges,
vacuum pump fluids and its thin film coating services to magnetic head
producers, and sales of its HYGE shock testing systems used in the automobile
industry for non-destructive vehicle testing.
18
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the percentage of revenues for certain items
in the Company's consolidated statement of operations data for the years ended
September 30, 1995, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
-------------------------------
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues........................................................................ 100.0% 100.0% 100.0%
Cost of goods sold.............................................................. 73.2 69.8 66.0
--------- --------- ---------
Gross margin.................................................................... 26.8 30.2 34.0
Operating expenses
Research and development...................................................... 5.7 9.0 14.5
Sales and marketing........................................................... 13.7 9.9 9.0
General and administrative.................................................... 6.8 4.4 4.1
--------- --------- ---------
Total......................................................................... 26.2 23.3 27.5
Income from operations.......................................................... 0.6 6.9 6.5
Interest income (expense), net.................................................. (2.6) (0.4) (0.9)
--------- --------- ---------
Income (loss) before income taxes............................................... (2.0) 6.5 5.6
Income taxes (benefit).......................................................... (2.6) 0.0 2.3
--------- --------- ---------
Net income...................................................................... 0.6 6.5 3.3
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO YEAR ENDED SEPTEMBER 30, 1996
REVENUES. Revenues increased by 29.4% to $62.6 million in fiscal 1997 from
$48.4 million in fiscal 1996. The increase in revenues is attributable to a 55%
increase in cluster tool revenues due to higher volumes shipped in both the
United States and overseas data storage markets, as well as an initial launch
into the semiconductor market. This increase was offset, in part, by reduced
sales of 600 Series systems and HYGE shock testing systems.
GROSS MARGIN. Gross margin increased to 34.0% in fiscal 1997 from 30.2% in
fiscal 1996. This margin improvement was attributable to manufacturing
efficiencies driven by higher volumes of cluster tools and cost reductions
resulting from improved processes in the 1997 period, offset, in part, by the
initial sale to SEMATECH (a non-profit research and development consortium of 11
major U.S. semiconductor manufacturers and the U.S. Government) of an advanced
copper MOCVD CONNEXION Cluster Tool for research and development purposes and
thus at a price not intended to produce a profit.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$9.1 million in fiscal 1997 from $4.3 million in fiscal 1996, an increase of
108.4%. As a percentage of revenues, research and development expenses increased
to 14.5% in fiscal 1997 compared to 9.0% in fiscal 1996. This increase was
driven by hiring a significant number of experienced engineers in fiscal 1997
and the fourth quarter of fiscal 1996 to support technological advancements in
the data storage market for next generation magnetic recording heads, as well as
the Company's commitment to advanced copper deposition technology for high
performance semiconductor device fabrication. The Company believes that research
and development expenditures are essential to maintaining its competitive
position in the data storage and semiconductor equipment market and expects
these expenditure levels to increase in terms of absolute dollars for the
foreseeable future.
19
<PAGE>
SALES AND MARKETING. Sales and marketing expenses increased to $5.6 million
in fiscal 1997 from $4.8 million in fiscal 1996, an increase of 17.5%. As a
percentage of revenues, sales and marketing expenses decreased to 9.0% in fiscal
1997 from 9.9% in fiscal 1996. Functions directly related to revenue, such as
sales and field service, grew at a combined pace of 22.4%, on a consistent basis
with the rate of revenue growth in this period. Marketing expenses increased
9.7%, as a result of additional staffing requirements to support new market
opportunities. The Company expects expenditure levels to support the growth of
its worldwide sales and support organizations to continue for the foreseeable
future at or above current levels reflecting the Company's commitment to further
penetrate both U.S. and international markets.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 19.5% to $2.5 million in fiscal 1997 from $2.1 million in fiscal 1996. This
increase in general and administrative expenses is a result of increased
personnel to support the rate of revenue growth in this period. As a percentage
of revenues, general and administrative expenses decreased to 4.1% in fiscal
1997 from 4.4% in fiscal 1996.
NET INTEREST INCOME (EXPENSE). Net interest expense increased to $0.6
million in fiscal 1997 from $0.2 million in fiscal 1996, reflecting an increase
in borrowings on a credit line and a $3.0 million term loan obtained in
September 1996. Reduced interest income resulted from lower available cash
balances.
INCOME TAXES (BENEFIT). Income tax expense amounted to $1.5 million in
fiscal 1997, compared to no such expense in fiscal 1996. During 1996, net
operating loss carryforwards and state investment tax credits were recognized as
a result of the Company's return to profitability and management's assessment
that the realizability of these loss carryforwards was more likely than not. No
similar benefits were available in fiscal 1997 as the net operating loss
benefits had been previously recognized in fiscal 1996. The effective tax rate
of 41.6% for fiscal 1997 is more representative of the expected tax rate for the
Company in future periods.
YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO YEAR ENDED SEPTEMBER 30, 1995
REVENUES. Revenues increased by 126.5% to $48.4 million in fiscal 1996 from
$21.4 million in fiscal 1995. The increase in revenues is primarily attributable
to a 256.0% increase in cluster tool sales which were the result of higher
volumes shipped for customers in the data storage market. Higher sales volumes
for 600 Series systems also contributed to the increase in revenues. These
increases were offset, in part, by a decline in revenue resulting from the
completion of the DARPA contract in fiscal 1995 and lower revenues from sales of
HYGE shock testing systems.
GROSS MARGIN. Gross margin increased to 30.2% in fiscal 1996 from 26.8% in
fiscal 1995. This margin improvement was attributable to manufacturing
efficiencies resulting from higher volumes of cluster tools and increased sales
volumes of higher margin spare parts. Also contributing to the improvement in
gross margin was the completion of a lower margin DARPA contract in fiscal 1995.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$4.3 million in fiscal 1996 from $1.2 million in fiscal 1995, an increase of
258%. As a percentage of revenues, research and development expenses increased
to 9.0% in fiscal 1996 compared to 5.7% in fiscal 1995. The increase in research
and development expense was primarily attributable to increased salaries and
related employee benefits due to significant increases in the engineering staff
to support the development of new technologies. Also contributing to the
increase was the costs of engineers dedicated to new product development in
fiscal 1996 who previously had been assigned to the DARPA contract in fiscal
1995.
SALES AND MARKETING. Sales and marketing expenses increased to $4.8 million
in fiscal 1996 from $2.9 million in fiscal 1995, an increase of 63.4%. As a
percentage of revenues, sales and marketing expenses decreased to 9.9% in fiscal
1996 from 13.7% in fiscal 1995. Functions more directly related to revenues such
as sales and field service increased at an aggregate rate of 73.6% over fiscal
1995 due to increased salaries, commissions and travel expenses. Marketing
expenses increased 49.3% due to increased salary costs and costs to develop
marketing programs for new product introductions.
20
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
by 46.8% to $2.1 million in fiscal 1996 from $1.4 million in fiscal 1995. As a
percentage of revenues, general and administrative expenses decreased to 4.4% in
fiscal 1996 compared to 6.8% in fiscal 1995, as revenue growth exceeded the
increase in administrative costs.
NET INTEREST INCOME (EXPENSE). Net interest expense decreased to $0.2
million in fiscal 1996 from $0.6 million in fiscal 1995, reflecting lower
average outstanding debt balances during fiscal 1996 as compared to fiscal 1995.
Higher interest income in fiscal 1996 compared to fiscal 1995 is the result of
higher average balances of cash and cash equivalents during fiscal 1996. Both
the lower debt balance and the higher average cash balance resulted from the
funds received upon the sale of convertible preferred stock in May 1995.
INCOME TAXES (BENEFIT). During fiscal 1996 and 1995, benefits for net
operating loss carryforwards were recognized based upon management's assessment
as to the extent to which it was more likely than not that the Company would be
able to realize these net operating losses for each of the respective years.
Management expects that the effective tax rate in the future will be more
consistent with a normalized combined US federal and state tax rate.
QUARTERLY OPERATING RESULTS
The following tables set forth the Company's operating results for each of
the eight quarters ended September 30, 1997. The information for each of these
quarters is unaudited but has been prepared on the same basis as the audited
consolidated financial statements appearing elsewhere in this Prospectus and
includes all adjustments, consisting only of normal recurring adjustments, that
the Company considers necessary to present fairly this information when read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and Management's Discussion and Analysis of Financial Condition and
Results of Operations included elsewhere in this Prospectus. The Company's
operating results for any one quarter are not necessarily indicative of results
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
--------------------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30,
1995 1996 1996 1996 1996 1997 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues.............................. $ 8,303 $ 13,402 $ 12,917 $ 13,756 $ 13,403 $ 9,528 $ 20,693 $ 18,964
Cost of goods sold.................... 6,116 9,722 8,679 9,238 8,972 7,378 12,859 12,077
--------- --------- --------- --------- --------- --------- --------- ---------
Gross margin.......................... 2,187 3,680 4,238 4,518 4,431 2,150 7,834 6,887
Operating expenses
Research and development............ 1,080 801 1,294 1,171 1,878 2,095 2,570 2,512
Sales and marketing................. 773 1,022 1,346 1,636 1,278 1,251 1,566 1,518
General and administrative.......... 410 642 626 446 587 581 715 656
--------- --------- --------- --------- --------- --------- --------- ---------
Total............................... 2,263 2,465 3,266 3,253 3,743 3,927 4,851 4,686
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) from operations......... (76) 1,215 972 1,265 688 (1,777) 2,983 2,201
Interest income (expense), net........ (49) (73) (32) (43) (146) (147) (138) (162)
--------- --------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes..... (125) 1,142 940 1,222 542 (1,924) 2,845 2,039
Income taxes (benefit)................ -- -- -- -- 225 (800) 1,184 848
--------- --------- --------- --------- --------- --------- --------- ---------
Net income (loss)..................... $ (125) $ 1,142 $ 940 $ 1,222 $ 317 $ (1,124) $ 1,661 $ 1,191
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1996 1996 1996 1996 1997
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUE:
Revenues.................................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin................................ 26.3 27.5 32.8 32.8 33.1 22.6
Operating expenses
Research and development.................. 13.0 6.0 10.0 8.5 14.0 22.0
Sales and marketing....................... 9.3 7.6 10.4 11.9 9.5 13.1
General and administrative................ 4.9 4.8 4.8 3.2 4.4 6.1
----- ----- ----- ----- ----- -----
Total..................................... 27.2 18.4 25.2 23.6 27.9 41.2
----- ----- ----- ----- ----- -----
Income (loss) from operations............... (0.9) 9.1 7.5 9.2 5.1 (18.7)
Interest income (expense), net.............. (0.6) (0.5) (0.2) (0.3) (1.1) (1.5)
Net income (loss)........................... (1.5) 8.5 7.3 8.9 2.4 (11.8)
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
<CAPTION>
JUNE 30, SEPT. 30,
1997 1997
----------- -----------
<S> <C> <C>
PERCENTAGE OF REVENUE:
Revenues.................................... 100.0% 100.0%
Gross margin................................ 37.9 36.3
Operating expenses
Research and development.................. 12.4 13.2
Sales and marketing....................... 7.6 8.0
General and administrative................ 3.5 3.5
----- -----
Total..................................... 23.5 24.7
----- -----
Income (loss) from operations............... 14.4 11.6
Interest income (expense), net.............. (0.7) (0.9)
Net income (loss)........................... 8.0 6.3
----- -----
----- -----
</TABLE>
The Company's quarterly and annual operating results are affected by a wide
variety of factors that could materially and adversely affect net sales and
profitability from period to period, including: competitive pressures on selling
prices; the timing and cancellation of customer orders; changes in product mix;
the Company's ability to introduce new products and process technologies on a
timely basis; introduction of products and technologies by the Company's
competitors; market acceptance of the Company's and its customers' products; the
level of orders received which can be shipped in a quarter; the timing of
investments in research and development, process improvements and production
capability; and the cyclical nature of the data storage and semiconductor
industries. Because the Company is continuing to increase its operating expenses
for personnel and new product development and for inventory in anticipation of
increasing sales levels, operating results would be adversely affected if
increased sales are not achieved. In addition, the Company is limited in its
ability to reduce costs quickly in response to any revenue shortfalls.
Historically, the Company has also experienced quarterly fluctuations in net
sales and gross profit, principally arising from the amount and timing of
orders. Should sales of products decline more rapidly than the Company
anticipates in the near future, such decline could have the effect of causing
further fluctuations in quarterly or annual operating results. As a result of
the foregoing or other factors, the Company may experience material fluctuations
in future operating results on a quarterly or annual basis which could
materially and adversely affect its business, financial condition and results of
operations. See "Risk Factors--Fluctuations in Operating Results."
Due to potential quarterly fluctuations in operating results, the Company
believes that quarter-to-quarter comparisons of its results of operations should
not be relied upon as indicators of future performance. Further, in the event
that in some future quarter the Company's net sales or operating results were to
be below the expectations of public market securities analysts and investors,
the price of the Common Stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $9.3 million,
including cash and cash equivalents of $2.2 million, compared to working capital
of $8.8 million at September 30, 1996, including $0.7 million of cash and cash
equivalents. During 1997, the Company's operating activities provided $3.1
million of operating cash flow. Net income provided $2.0 million, depreciation
and amortization another $1.3 million, and increases in accounts payable,
advances from customers and other liabilities provided $4.6 million, $3.0
million and $1.3 million, respectively. Increases in accounts receivable and
inventories used $3.4 million and $5.8 million of operating cash flow in 1997.
In, 1997, the Company invested $2.8 million in capital expenditures. The
capital expenditures primarily consisted of $1.3 million for facilities,
machinery and equipment, $0.6 million for computers and for related equipment
and $0.9 million for demonstration system tools. Although the Company currently
22
<PAGE>
has no significant capital commitments, it expects to spend in excess of $12.0
million on capital expenditures over the next 12 months. A portion of the
planned capital expenditures are for the selection and implementation of a new
business information system. As a result of implementing this new system, which
will be year 2000 compliant, the Company does not believe that year 2000 issues
will have an impact on the Company's operations.
As of September 30, 1997, the Company's principal sources of liquidity
consisted of $2.2 million in cash and cash equivalents, and a $10.0 million line
of credit from Manufacturers and Traders Trust Company under which there were
$0.5 million in borrowings. At September 30, 1997, the Company also had
indebtedness of $2.5 million in promissory notes that require quarterly interest
payments. In August 1997, the Company renegotiated $1.5 million of such notes
and extended the term to November 1998. In October 1997, the Company repaid $1.0
million of such notes. At September 30, 1997, borrowings associated with amounts
due former stockholders of CVC Products, which require annual interest payments
of 9%, amounted to $0.1 million. Borrowings associated with a term loan from a
commercial bank as of September 30, 1997 amounted to $2.5 million. Such loan
requires monthly payments of principal and interest at prime plus 1/2%. In
September 1997, the Company paid off the remaining principal of an industrial
revenue bond with the proceeds of a new mortgage credit facility with a
principal of $2.0 million. The mortgage credit facility requires monthly
payments of principal and interest at 5.29% on the first $0.5 million of the
mortgage credit facility through October 1, 1999, after which the rate increases
to 8.29% through September 30, 2002, consistent with the interest rate on
$1,500,000 of the credit facility. Subsequent to September 30, 2002, the Company
may select the interest rate on the remaining principal from certain interest
rate alternatives specified in the mortgage credit facility agreement. During
fiscal years 1995 and 1996, the Company financed its operations and capital
expenditures primarily through the net proceeds of $8.4 million from the sale in
1995 of Series B Convertible Preferred Stock and a warrant to Seagate Technology
and a $3.0 million 5-year term bank loan in 1996.
The Company intends to use the proceeds of the Offering for general
corporate purposes, including approximately $12.0 million for capital
expenditures relating to facility expansion and manufacturing and demonstration
equipment, $4.2 million for repayment of debt and the balance for additional
working capital. See "Use of Proceeds." The Company believes that cash from
operations, and bank borrowings, together with the net proceeds of the sale of
Common Stock by the Company in the Offering, will be adequate to fund operations
for at least the next 12 months.
The Company's long-term capital requirements will be affected by many
factors, including the success of the Company's current product offerings, the
Company's ability to enhance its current products and to develop and introduce
new products that keep pace with technological developments and general trends
in the data storage and semiconductor industries. The Company plans to finance
its long-term capital needs with the net proceeds of the Offering, together with
borrowings and cash flow from operations. To the extent that such funds are
insufficient to finance the Company's activities, the Company will have to raise
additional funds through the issuance of additional equity or debt securities or
through other means. There can be no assurance that additional financing will be
available on acceptable terms.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which established standards for computing and presenting earnings per
share. See Notes to Consolidated Financial Statements for further discussion.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." See Notes to Consolidated Financial Statements for further
discussion.
23
<PAGE>
BUSINESS
INTRODUCTION
CVC is a leading worldwide supplier of deposition equipment for the
fabrication of thin film recording heads for the data storage industry. The
Company also has made significant advances in the development and initial
delivery of copper deposition equipment for the semiconductor industry. The
Company has leveraged key innovations in integrated process development, vacuum
technology, materials science, chemical and physical vapor deposition
technologies, and software applications to develop process equipment solutions
for the manufacture of both disk drive recording heads and advanced
semiconductor devices. These integrated solutions are optimized for the precise,
highly uniform, repetitive steps required for the deposition of thin film
materials.
INDUSTRY BACKGROUND
The worldwide markets for magnetic disk drives and semiconductor devices
have experienced rapid growth in recent years and are expected to continue to
experience significant growth. For example, according to International Data
Corporation ("IDC"), worldwide shipments of hard disk drives were 112 million
units in 1996 and are projected to be 231 million units in 2000. Growth in unit
volume of disk drives is being accompanied by rapid advancement in data storage
densities. Mean storage capacity per disk drive has increased from 213 megabytes
in 1993 to 2.7 gigabytes in 1997. At the same time, the market for semiconductor
devices is expected to grow from $138 billion in 1996 to over $343 billion in
2001, according to VLSI Research Inc.
This growth is due in large part to the ability of disk drive and
semiconductor manufacturers to deliver these devices with consistently enhanced
performance characteristics and functionality, improved reliability, higher
memory capacity and reduced size, weight, power consumption and cost. The rapid
advancement in the performance characteristics of disk drive recording heads and
of semiconductor devices has been made possible by significant advancements in
the fabrication processes involved in depositing the successive layers of thin
film materials on substrates and wafers.
The fabrication of thin film recording heads and semiconductor devices
involves a sequential series of complex but, in many cases, similar processing
steps including deposition. During deposition, both recording heads and
semiconductor devices are formed by building up a succession of extremely thin,
uniform layers of conducting, semiconducting or insulating films onto patterned
and unpatterned substrates. The basic deposition process consists of many
interrelated precise steps and requires a clean, vacuum environment. Minor
deviations in the process, minute impurities in materials used or particulate
contamination will result in product defects and manufacturing yield losses.
Precise surface and microstructure measurement devices, known as metrology
systems, are used to monitor the accuracy of the deposition process by measuring
critical dimensions and other physical, electrical and magnetic properties of
the various layers. These thin film layers can range from one-thousandth to
one-millionth of a millimeter in thickness. The composition, atomic scale
microstructure and surface/interface properties of these layers and the
subsequent patterning of the layered materials determine the magnetic and
electrical properties of the disk drive recording heads and electrical
properties of semiconductor devices. Different material layers produce different
performance characteristics and necessitate particular processes to deposit the
thin film layer.
The need to increase the storage capacity of disk drives has led to the
development of smaller device features and the transition from inductive
recording ("IR") heads towards more advanced magneto-resistive ("MR") and giant
magnetoresistive ("GMR") heads. MR heads consist of separate read and write
elements formed over each other and sharing common material layers. The write
element is a thin-film inductive head while the read element consists of an
alloy magneto resistive thin film that significantly improves performance. A
typical MR head may have 18 to 22 structured thin-film layers of several
24
<PAGE>
differing materials and surface structures which enable enhanced storage
capacity, while GMR heads can consist of 22 to 28 thin-film layers.
In addition, the market for non-volatile memory ("NVM") devices is expanding
in response to the growing consumer demand for consumer electronic equipment
that retains stored information in the absence of externally provided (E.G.,
battery) power sources. Although NVM technologies currently comprise only 4% of
the memory market, NVM technologies' share of such market should grow as
technologies emerge which eliminate the need for memory that is refreshed by an
external source of power. Electronic devices containing magnetoresistive random
access memory ("MRAM") data storage cells, which incorporate NVM technologies,
are considered by the industry to be superior to devices incorporating
conventional electrically programmable read only memory ("EPROM") cells with
respect to data storage memory requirements as EPROM storage cells have only a
limited number of write cycles.
In order to increase speed and performance, semiconductor device
manufacturers have continued to shrink geometries and line widths of
semiconductor devices, while at the same time adding multiple metal layers.
Semiconductor devices currently being manufactured use aluminum or aluminum
alloys as the interconnect, the "wires" that connect the integrated circuit
devices. However, manufacturers are beginning to consider other interconnect
metal conductor materials, such as copper, which provide less resistance to
electron flow and thus can provide increased circuit speed and performance. The
reduced resistance of copper may enable a fewer number of interconnect levels
and simpler fabrication process, resulting in improved performance and a
reduction in manufacturing cost. However, copper degrades the physical
properties of silicon and must, therefore, be completely isolated from the
transistors embedded in the silicon by use of a barrier layer. These critical
barrier layers are formed using similar deposition equipment and processes.
THE CVC SOLUTION
CVC has developed broad, technical expertise in thin film deposition
processes and technologies that enable the production of advanced thin film
recording heads and semiconductor devices in both the data storage and
semiconductor industries. Specifically, the Company has leveraged key
innovations in integrated process vacuum technology, materials science, chemical
and physical vapor deposition technologies and software applications to develop
process equipment solutions for data storage and semiconductor manufacturers.
CVC's solutions are optimized for the highly uniform, repetitive steps required
for both MR and GMR head manufacture, MRAM data storage cells and fabrication of
advanced semiconductor devices. The Company's principal product offerings are
its CONNEXION Cluster Tool and integrated process modules.
The CONNEXION Cluster Tool is an integrated modular system with stations for
locating up to six process modules clustered around a central wafer handling
system. Each module is equipped to deposit a thin film layer of material on a
substrate using a specified deposition method and process in an integrated,
vacuum controlled environment. CVC's Cluster Tool and process solutions employ
distributed control software applications which facilitate "plug and play"
reconfigurability, extensions to next generation cluster tool process solutions,
and integration with third-party fabrication technologies. The combination of
CVC's Cluster Tool system and multi-station process modules provide a number of
advanced process solutions which are rapidly transferable from research and
development to production across a range of applications. Based on this flexible
process module strategy, the Company has also developed an advanced process
module for deposition of copper and barrier layers for semiconductor device
manufacturing. The Company believes that this cluster-integrated approach offers
its customers optimal manufacturing process control, flexibility, extendibility
across multiple generations of fabrication technologies, and enhanced process
capabilities and manufacturing yields.
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<PAGE>
STRATEGY
CVC is a leading provider of deposition equipment for the fabrication of
thin film recording heads for the data storage industry. The Company believes
that it has also made significant advances in the development and initial
delivery of cluster-integrated copper deposition technologies for the
semiconductor industry. The Company's objective is to become one of the leading
suppliers of advanced thin film process solutions to both the data storage and
semiconductor industries. To meet this objective, the Company is pursuing the
following strategies:
EXTEND LEADERSHIP IN THIN FILM PROCESS SOLUTIONS FOR THE DATA STORAGE
INDUSTRY. Since 1990, the Company has focused on the advancement of integrated
thin film process technology that enables the fabrication of MR and
next-generation GMR recording heads used in hard disk drives. The Company
intends to continue to combine its expertise in thin film processing with the
open architecture, modular design of its CONNEXION Cluster Tool. The Company
believes that its CONNEXION Cluster Tool offers a high degree of operational
reliability, repeatability and throughput, as well as the ability to migrate
seamlessly from research and development to production using the same tool. The
Company intends to continue to broaden its product offerings with third-party
ion beam etch and deposition modules integrated with CVC's CONNEXION Cluster
Tool. The Company also plans to develop cluster-integrated metrology
capabilities that will allow precise measurement and testing functions to take
place in a process module without disrupting the production process and without
disturbing the tightly controlled vacuum environment.
LEVERAGE STRATEGIC PARTNERSHIPS WITH MARKET LEADERS. The Company has
established joint development programs and strategic relationships with a number
of industry-leading data storage and semiconductor manufacturing customers, as
well as research and development centers. By teaming with industry leaders in
the research and development stage, CVC can identify and develop customized
integrated process solutions that more precisely fit the customers' exact
requirements. Having met the specific needs of market leaders with innovative
integrated process solutions, the Company is then able to leverage the
experience gained to create product families that will meet the demands of an
expanded set of customers. The Company's ability to implement new process
solutions also helps the Company meet its customers' time-to-market demands and
advances the Company's goal of having products designed early into its
customers' planning cycles.
MAINTAIN AND LEVERAGE TECHNOLOGICAL LEADERSHIP. The Company has developed
expertise in the deposition of uniform layers of many different types of
materials over a wide range of material layer thicknesses on either planar or
patterned topography surfaces. The Company is committed to continuing its
investment in advanced engineering, research and development activities,
particularly in the development of thin film deposition processes for magnetic
data storage products and advanced metallization technologies for
next-generation data storage and semiconductor products. The Company intends to
continue to enhance and expand upon its technical expertise, proprietary
processes and equipment design to develop increasingly efficient and
cost-effective integrated process solutions for existing and new customers.
TARGET ADVANCED METALLIZATION OPPORTUNITIES IN THE SEMICONDUCTOR
INDUSTRY. The Company believes that as semiconductor manufacturing geometries
continue to shrink, copper will replace aluminum interconnect in many device
applications, offering improved performance and reliability with lower
manufacturing costs. Since 1993, the Company has committed significant resources
to the development of advanced copper deposition technology for high-performance
integrated circuit fabrication. The Company believes that its proprietary
metal-organic chemical vapor deposition ("MOCVD") and integrated barrier
technologies represent significant progress toward realization of the
opportunities that copper-based technology offer the semiconductor industry. The
Company has recently delivered integrated barrier and MOCVD copper deposition
tools, including one to SEMATECH (a non-profit research and development
consortium of 11 major U.S. semiconductor manufacturers and the U.S.
Government), which is being
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tested by members of the consortium. The Company has also delivered an
integrated MOCVD barrier and MOCVD copper tool to one of its strategic
customers. The Company intends to continue to address opportunities in the area
of emerging advanced metallization technology.
CONTINUE TO EMPHASIZE WORLDWIDE CUSTOMER SERVICE AND SUPPORT. The Company's
dedicated service staff and affiliated distributors in Japan, East Asia and
Europe provide timely and efficient customer service and support worldwide. The
Company believes that its worldwide sales and service organization is an
important competitive advantage. Approximately 31% of the Company's revenues for
1997 were from customers outside the United States, while revenues from such
customers for fiscal 1995 and 1996 were 13% and 19%, respectively. The Company
intends to continue to focus on expanding its existing sales and service
activities on a global basis to address the current and emerging manufacturing
priorities of its customers.
PRODUCTS
The Company's principal product line is its CONNEXION Cluster Tool system,
including its integrated process modules used in the manufacture of thin film
recording heads and semiconductor devices. Since the Company began delivering
its CONNEXION Cluster Tool in 1993, the Company has shipped more than 60
systems. Depending on the configuration, the process modules sell for
approximately $400,000 to $1.3 million each, and individual system sales range
from $1.0 million for substrate handling and stand-alone modules to in excess of
$3.0 million for fully integrated systems equipped with extensive process
controls. The Company believes its CONNEXION Cluster Tool configured with the
basic central wafer handling platform and one process module allows a customer
to purchase an advanced cluster tool system at a lower entry cost. The CONNEXION
Cluster Tool system incorporates the Company's thin film process technology and
provides improved process control and flexibility designed to result in lower
cost of ownership.
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<PAGE>
CONNEXION CLUSTER TOOL SYSTEM
The CONNEXION Cluster Tool utilizes a distributed open architecture design
and standard specifications established by the Modular Equipment Standards
Committee ("MESC") of the Semiconductor Equipment and Materials International
("SEMI"), the semiconductor industry's primary standard-setting organization.
This open platform design enables the use of either Company-supplied process
modules or other MESC-compatible process modules supplied by third parties and
allows for easy upgrades as process and throughput requirements change over
time. The integrated, modular design enables the deposition of several thin film
layers, using a different deposition technique in each process module, without
breaking vacuum. The CONNEXION Cluster Tool uses a standard wafer handling robot
and one or two cassette elevator loaders.
[LOGO]
The Company believes that the competitive advantages provided by its
CONNEXION Cluster Tool technology include the following:
OPTIMAL PROCESS SOLUTIONS. Thin film deposition places a premium on the
ability of the deposition equipment to ensure tight uniformity and quality, as
well as on the control of the composition materials, atomic microstructures and
surface/interface properties. The Company has developed an array of process
energy sources and components, such as its proprietary INFINITY direct-current
("DC") magnetron, radio frequency ("RF") magnetron and RF diode sputtering
sources, gas showerheads and substrate heating and cooling accessories to ensure
this uniformity and film properties over a wide range of substrate materials and
sizes, thereby enabling the fabrication of data storage MR and GMR heads, MRAM
devices and semiconductor devices.
IMPROVED PROCESS CONTROL. The Company's CONNEXION Cluster Tool system
offers the precision, repeatability and reliability required by the Company's
customers. Substrates and wafers are sequentially processed in a controlled,
integrated vacuum environment which enables improved manufacturing yields,
enhanced tool uptime and device reliability and performance. The CONNEXION
Cluster Tool system employs a distributed control software application called
OPEN CONNEXION. This software application facilitates the addition and deletion
of modules to meet deposition process requirements, the integration of third
party modules and extensions to next generation cluster tool products.
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<PAGE>
FLEXIBILITY. CVC's CONNEXION Cluster Tool's open architecture, modular
SEMI/MESC-compatible substrate handling platforms and process modules offer an
integrated process solution that can include a variety of process modules on the
same platform. Various RF and DC energy sources, substrate cooling and heating
accessories, and gas distribution methods are available as standard options. The
tool is designed for handling silicon wafers up to 200 millimeters in diameter
or thin film head substrates up to six inch square or eight inch round. New
processes may be developed on a stand-alone basis on a single process module and
easily integrated onto a production tool at any time. The Company is planning to
introduce in 1998 a tool capable of handling 300 millimeter wafers.
Selected applications and materials for data storage and semiconductor
markets deposited by CVC's CONNEXION Cluster Tool are shown in the following
tables:
<TABLE>
<CAPTION>
DATA STORAGE (MR, GMR, MRAM)
APPLICATION SPECIFIC MATERIALS
<S> <C> <C>
Conductors Copper Molybdenum
Tantalum Gold
Chromium
Magnetic Materials Nickel Iron Cobalt Platinum
Nickel Iron Rhodium Cobalt Chromium Platinum
Aluminum Silicon Iron Cobalt Iron
Iron Tantalum Nitride Iron Manganese
Cobalt Zirconium Iridium Manganese
Tantalum Nickel Manganese
Cobalt Zirconium Niobium
Insulators Aluminum Oxide Silicon Nitride
Aluminum Oxynitride Silicon Carbide
Silicon Dioxide Diamond-Like-Carbon
<CAPTION>
SEMICONDUCTOR DEVICES
<S> <C> <C>
<CAPTION>
APPLICATION SPECIFIC MATERIALS
<S> <C> <C>
Conductors Copper Nickel
Titanium Silicide Aluminum
Titanium Tungsten
Cobalt
Barrier/Liner/Glue/Layers Titanium Tantalum Nitride
Titanium Nitride Titanium Silicon Nitride
Tantalum Tantalum Silicon Nitride
High-k dielectrics Barium Strontium Tantalum Pentoxide
Titinate
Other Specialty Tantalum Nitride Nickel Chromium
Materials Silicon Chromium Blue Phosphor
</TABLE>
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<PAGE>
CVC PROCESS MODULES
The combination of CVC's CONNEXION cluster platform, single-wafer products
and multi-station modules and low-cost stand-alone handler provide a number of
advanced process solutions which are rapidly transferable from research and
development to production across a wide range of applications. The Company
currently offers modules for PVD, MOCVD, ICP soft clean and RTP/RTCVD, based on
its developed equipment and advanced process technologies.
PHYSICAL VAPOR DEPOSITION MODULE
PVD is used to deposit materials such as aluminum alloys, titanium, cobalt
alloys, nickel iron, and a wide range of magnetic, conductive and insulating
materials on various substrates and different topographies. PVD is performed in
a high vacuum chamber by applying a strong DC or RF electric field to create a
plasma of inert gas, usually argon. The electrically charged ions are
accelerated toward a target made of the material which is to be deposited. When
the ions hit the target, atoms are physically knocked off the target and are
scattered on the wafer or substrate, slowly building up a thin film layer.
CVC offers single-wafer and multi-station modules with improved vacuum
integrity and process capabilities for data storage and semiconductor
applications. The Company's MESC-compatible single wafer PVD modules provide
capabilities for RF and DC sputtering, collimation, substrate heating and
cooling, substrate bias and magnetic orientation. Standard process recipes are
available for a wide range of materials. The Company also offers multi-station
PVD modules for sequential deposition of various materials within a single
module.
METAL-ORGANIC CHEMICAL VAPOR DEPOSITION MODULE
CVD is used to deposit insulators such as silicon dioxide and silicon
nitride and conductors such as copper and tungsten. The CVD process causes
heated gases that contain atoms of the material to be deposited to react at the
wafer surface resulting in the formation of the thin film layer of material on
the substrate or silicon wafer. In order for the chemical reactions to occur,
the CVD process can use either elevated temperatures as in thermal CVD and/or
electro-magnetic energy as in plasma enhanced CVD. Some of these methods require
a vacuum environment. MOCVD uses a metal organic compound to provide the
materials to be deposited. MOCVD technology is being considered where it is
necessary to deposit a highly uniform layer of copper in complex, structured
topographies to form fully embedded copper interconnect structures in advanced
semiconductor devices. The use of copper instead of aluminum should improve the
overall chip reliability and reduce manufacturing costs due to a reduction in
the required number of multi-level interconnect process steps. The Company
currently offers advanced MOCVD process modules for deposition of copper and
barrier layers for semiconductor device manufacturing.
INDUCTIVELY-COUPLED-PLASMA SOFT CLEAN MODULE
The Company offers a multi-zone inductively-coupled-plasma or MZ-ICP soft
clean module for surface preparation prior to material depositions. CVC's MZ-ICP
module technology employs the design features of the ICP system licensed by the
Company from Texas Instruments and enhanced by the Company through internal
developments. The MZ-ICP module design provides the capability for damage-free
cleaning of semiconductor surfaces in order to enable formation of low
resistivity interconnect structures such as with copper metallization and with
controlled device interfaces for enhanced interconnect reliability and
performance.
RAPID THERMAL PROCESS/RAPID THERMAL CHEMICAL VAPOR DEPOSITION MODULE
The Company's multi-zone axisymmetric RTP module with multi-zone temperature
control optimizes temperature and process uniformity and repeatability control.
The Company's RTP module has been designed for various thermal processing
applications including anneal, oxidation, and CVD processes. The
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<PAGE>
Company plans to offer its advanced RTP technology for integrated processing
applications (silicide deposition and thermal treatment) using a CONNEXION
Cluster Tool.
600 SERIES PHYSICAL VAPOR DEPOSITION SYSTEMS
Introduced in 1988, the 610 and 611 products are automated sputter
deposition systems, handling up to 6-inch diameter substrates. Systems sell for
$400,000 to $750,000, depending on configuration. The 611 system is equipped
with a loadlock and eight work stations which accept combinations of RF
magnetron, RF diode and DC magnetron planar sputtering cathodes enabling up to
eight materials to be deposited with sequential or co-sputter deposition
processes. The CVC 600 Series system is the basic design with many 611 features
but without the loadlock and less automated process control. A soft clean ion
source can be installed in any work station for low damage cleaning of
semiconductor surfaces.
OTHER PRODUCTS
Ancillary products of the Company include a line of vacuum gauges and vacuum
pump fluids that the Company manufactures and distributes. In addition, the
Company is a leading manufacturer of shock testing systems used in the
automotive industry for non-destructive vehicle testing. Collectively, these
products generated revenues of $1.9 million, or 3% of the Company's gross
revenues for fiscal 1997.
CUSTOMERS
The Company's customers include most of the leading manufacturers of thin
film recording heads for the data storage industry and certain manufacturers of
semiconductor devices in the United States and abroad. During the past fiscal
year, approximately 75% of the Company's revenues were derived from sales made
to thin film recording head manufacturers and approximately 15% of the Company's
revenues were derived from sales made to semiconductor device manufacturers.
Representative customers of the Company include the following:
<TABLE>
<CAPTION>
DATA STORAGE SEMICONDUCTOR
- ------------------------- -------------------------
<S> <C>
Alps Analog Devices
Applied Magnetics Bourns
DAS Devices General Semiconductor
Fujitsu SEMATECH
IBM Sharp Microelectronics
Quantum SRI
Read-Rite Texas Instruments
Samsung Electronics Viking
Sanyo
Seagate Technology
TDK
</TABLE>
Historically, a few large customers have accounted for a substantial portion
of the Company's revenues, primarily due to the fact that the data storage and
semiconductor industries are dominated by a limited number of large companies.
In fiscal 1995, 1996 and 1997, revenues from the Company's five largest
customers represented approximately 72%, 81% and 78%, respectively, of the
Company's total revenues. In fiscal 1995, three customers each accounted for
more than 10% of the Company's revenues and in fiscal 1996 and 1997, two
customers each accounted for more than 10% of the Company's revenues. The
Company has experienced and expects to continue to experience fluctuations in
its customer mix. The Company believes that sales to relatively few customers
will continue to account for a high percentage of the Company's revenues in
future periods. None of the Company's customers has entered into long-term
purchase agreements with the Company. The loss of, or a substantial reduction or
delay in, orders from
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<PAGE>
any significant customer could have a material adverse effect on the Company's
business, financial condition or results of operations. See "Risk
Factors--Concentration of Customers."
RELATIONSHIP WITH SEAGATE TECHNOLOGY
Seagate Technology, which provides products for storing, managing and
accessing digital information on computers and data communications systems, is
the Company's largest customer. For fiscal 1995, 1996 and 1997, Seagate
Technology accounted for 27%, 57% and 47%, respectively, of total Company
revenues. The Company and Seagate Technology currently are not parties to any
licensing, development, technology sharing, guaranteed purchase or any other
type of collaborative agreements. In addition, Seagate Technology is the
Company's largest stockholder. In 1995, Seagate Technology made an equity
investment of approximately $9.0 million in the Company. In connection with such
investment, Seagate Technology obtained the right to elect two members of the
Company's Board of Directors. That right will terminate upon consummation of the
Offering. See "Risk Factors--Relationship with Seagate Technology," "Shares
Eligible for Future Sale" and "Certain Transactions."
Following completion of the Offering, Seagate Technology will own shares
representing approximtely 30.4% of the Company's outstanding Common Stock (29.0%
of such stock if the Underwriters' over-allotment option is exercised in full).
In addition, pursuant to a warrant acquired by Seagate Technology in 1995,
Seagate Technology has the right to acquire 1,186,140 shares of Common Stock at
an exercise price of $3.72 per share. Assuming full exercise of such warrant
(and no other change in the Company's outstanding Common Stock), Seagate
Technology would own an aggregate of approximately 36.7% of the Company's
outstanding Common Stock (35.1% of such stock if the Underwriters'
over-allotment option is exercised in full).
BACKLOG
At September 30, 1997, the Company's backlog was approximately $29.2
million, as compared to a backlog of $24.0 million at September 30, 1996. The
Company schedules production based on firm customer commitments and anticipated
orders during the planning cycle. The Company includes in its backlog only those
customer orders for which it has accepted written purchase orders against which
it expects to ship within the following 12 months. All orders are subject to
cancellation or rescheduling by the customer with limited or no penalty. The
Company's backlog at any particular date is not necessarily a reliable indicator
of actual sales for any succeeding period.
MARKETING, SALES AND SERVICE
The Company sells its products in the United States and Europe through its
direct sales force that is supported by its 12-person marketing and sales
organization. In Japan, Malaysia, Singapore and Thailand, the Company utilizes a
distributor, Nikko Tecno Co., Inc. ("Nikko Tecno"), to distribute its products.
The Company markets its products in China, Korea and Taiwan through independent
sales representatives. International sales accounted for 31% of the Company's
total revenues for fiscal 1997 and 13% and 19% of the Company's total revenues
for fiscal years 1995 and 1996, respectively. The Company's sales and marketing
organization employs a consultative sales process, working closely with
customers to understand and define their deposition process and equipment needs
and to determine that those needs are addressed by the Company's process
technologies, as well as complementary technologies offered by other equipment
providers. The Company works closely with the senior management and research and
development personnel of its existing customer base to gain insight into their
industries and to focus on selling new process technologies tailored to their
customers' requirements.
The sales cycles for the Company's systems vary depending upon whether the
system is an initial purchase or a repeat order. New customer sales cycles are
typically 12 to 18 months, whereas repeat order sales cycles are typically four
to six months. The sales cycle for a new customer begins with the generation
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<PAGE>
of a sales lead, which is followed by qualification of the lead, an analysis of
the customer's particular applications needs and problems, one or more
presentations to the customer, frequently including extensive participation by
the Company's senior management, two to three product sample demonstrations,
followed by customer testing of the results and extensive negotiations regarding
the equipment's process and reliability specifications. New customer sales
cycles are monitored closely by senior management for correct strategy approach
and prioritization. See "Risk Factors--Lengthy Sales Cycles."
Prompt and effective field service and support is critical to the Company's
sales efforts, due to the substantial commitments made by customers that
purchase the Company's equipment. As of September 30, 1997, the Company had 26
full-time employees dedicated to customer service and support. The Company's
strategy of supporting its installed base through both customer support and
research and development groups has served to encourage the use of the Company's
equipment and process technologies in customer production applications. The
Company's process engineers and field support personnel work closely with
customers to help define their production and process requirements, and
customers often collaborate in trial production runs at the Company's Fremont,
California and Rochester, New York research and demonstration facilities. The
Company believes that its marketing efforts are enhanced by the technical
expertise of its process engineers who also provide customer process support and
participate in industry forums, conferences and user groups.
The Company generally warrants its new systems for 15 months from shipment.
Installation is included in the price of the system. The Company's field service
engineers provide customers with call-out repair and maintenance services for a
fee. Customers may also enter into repair and maintenance service contracts,
covering the Company's systems. For a fee, the Company trains its customers'
service engineers to perform routine services, and, in addition, the Company
provides its customers with 24-hour a day, seven day a week, telephone
consultation services. The Company has customer support centers located in New
York, California, Texas, Minnesota, Northern Ireland and Japan.
RESEARCH, DEVELOPMENT AND ENGINEERING
The data storage and semiconductor manufacturing industries are
characterized by rapid technological change and requirements for new product
introductions and enhancements. The Company's ability to remain competitive in
this market will depend in part upon its ability to develop new and enhanced
systems and to introduce these systems at competitive prices and on a timely and
cost-effective basis. Accordingly, the Company devotes a significant portion of
its personnel and financial resources to research, development and engineering
programs and seeks to maintain close relationships with its customers to remain
responsive to their equipment needs. The Company continuously conducts research
and development efforts in existing products to extend performance and process
capabilities as well as on next generation products. In the data storage market,
the Company is developing an advanced cluster-integrated metrology module to
enable precise, real-time measurements during the production process of thin
film structures for MR and GMR heads and MRAM storage devices. The Company is
also enhancing its magnetic orientation energy source to achieve more accurate
and programmable characteristics of magnetic thin films. In the area of advanced
interconnect technologies, the Company is developing programmable electrical
collimation capability for its PVD process module for tightly-controlled
deposition of liner and barrier layers and enhanced temperature and process
controls. In addition, the Company has already established state-of-the-art
class 100 clean room process development and applications engineering facilities
in New York and California with process and metrology capabilities for data
storage thin film recording head and semiconductor technologies.
As of September 30, 1997, the Company had 69 full-time employees dedicated
to its research, development and engineering programs. In fiscal years 1995,
1996 and 1997, the Company expended $1.2 million, $4.3 million and $9.1 million
on these programs, constituting 6%, 9% and 15% of revenues during those periods,
respectively. Research and development expenditures consist primarily of
salaries, project materials and other costs associated with the Company's
ongoing research and development efforts. The
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<PAGE>
Company expects in future years that research, development and engineering
expenditures will continue to represent a substantial percentage of revenues.
The Company augments its internal technology development efforts by licensing
technology from others and establishing strategic research and development
relationships with universities and various major customers. See "Risk
Factors--Rapid Technological Change; Dependence on New Products and Processes."
Trade, industry standards and development consortia organizations, such as
the SEMI, SEMATECH and SEMI/SEMATECH, help to define the methods, measurement
parameters, manufacturing requirements and specifications influencing commercial
transactions within the semiconductor industry. Christine Whitman, the Chief
Executive Officer of the Company, is on the Board of Directors of SEMI/
SEMATECH. The Company believes that its involvement with such organizations has
helped to ensure that the Company's new products conform to industry standards
and emerging requirements.
MANUFACTURING
The Company's manufacturing activities consist primarily of assembling and
testing components and subassemblies which are acquired from third party
suppliers and then integrated by the Company into finished systems. The
manufacturing operations are conducted in the Company's 90,000 square foot
headquarters facility in Rochester, New York. As of September 30, 1997, the
Company had 119 full-time employees dedicated to its manufacturing efforts. The
Company manufactures its systems in controlled clean environments which are
similar to the clean rooms used by data storage and semiconductor manufacturers.
All final assembly and systems tests are performed within the Company's
manufacturing facilities. Quality control of suppliers is maintained through
incoming verification of components, in-process inspection during equipment
assembly and final inspection and operation of all manufactured equipment prior
to shipment. The Company's customers frequently participate in systems testing
during the final assembly and inspection process. The Company's manufacturing
facilities recently were awarded designation as ISO 9001 certified.
The Company procures components and subassemblies included in its products
from a limited group of suppliers and occasionally from a single source. The
Company does not maintain long-term supply contracts with its key suppliers but
believes that alternative suppliers could be found if necessary. A prolonged
inability to obtain components or subassemblies, as well as difficulties or
delays shifting to alternative sources, could have a material adverse effect on
the Company's operations and could result in damage to existing customer
relationships.
The Company is subject to a variety of governmental regulations related to
the use, storage, handling, discharge or disposal of toxic, volatile or
otherwise hazardous chemicals used in the manufacturing process. The Company
believes that it is currently in compliance with these regulations and that it
has obtained all necessary environmental permits to conduct its business, which
permits generally relate to the discharge of hazardous wastes. Any failure by
the Company to comply with regulations or the use, disposal or storage of
hazardous substances could subject the Company to future liabilities. See "Risk
Factors-- Environmental Regulation."
COMPETITION
The data storage and semiconductor manufacturing equipment industries are
highly competitive. A substantial investment is required to install and
integrate capital equipment into a data storage or semiconductor production
line. The Company believes that once a device manufacturer has selected a
particular supplier's capital equipment, that manufacturer generally relies upon
that supplier's equipment for the specific production line application and, to
the extent possible, subsequent generations of similar systems. Accordingly, it
may be extremely difficult to achieve significant sales to a particular customer
once another supplier's manufacturing equipment has been selected by that
customer, unless there are compelling reasons to do so, such as significant
performance or cost advantages. Increased competitive pressure
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<PAGE>
could lead to lower prices for the Company's products, thereby adversely
affecting the Company's operating results.
The Company believes that its ability to compete in the data storage and
semiconductor manufacturing equipment markets depends on a number of factors,
including the ability to develop and introduce new products rapidly, product
innovation, product quality and reliability, product performance, breadth of its
product line, price, technical service and support, adequacy of manufacturing
quality and capacity and sources of raw materials, efficiency of production,
delivery capabilities and protection of the Company's products by intellectual
property laws. The Company competes in the data storage and semiconductor
manufacturing markets based on differentiated value-added process technologies,
system performance, customer support and the cost of ownership of its equipment.
In the data storage market, the Company's current competitors include
Balzers, Sputtered Films, Nordiko and Veeco Instruments. In the semiconductor
market, the Company's competitors include Applied Materials and Novellus.
Certain of the Company's competitors have substantially greater financial
resources, more extensive engineering, manufacturing, marketing and customer
service and support capabilities, larger installed bases of semiconductor
capital equipment and broader semiconductor process equipment offerings as well
as greater name recognition than the Company.
The Company expects its competitors in the data storage and semiconductor
process equipment industries to continue to improve the design and performance
of their current systems and processes and to introduce new systems and
processes with improved price and performance characteristics. No assurance can
be given that the Company will be able to compete successfully in the United
States or worldwide. See "Risk Factors--Highly Competitive Industries."
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark and
trade secret laws and non-disclosure agreements to protect its proprietary
process technology. While the Company believes that these patents may have
significant value, CVC also believes that due to the rapid technological changes
that characterize the data storage and semiconductor equipment industries, the
innovative skills, technical expertise and know-how of its personnel may be more
important than patent protection. As of September 30, 1997, the Company had
obtained two U.S. patents and had 15 U.S. patent applications pending on its
behalf. In addition, the Company had eight foreign patent applications pending
on its behalf as of that date. The Company's two U.S. patents expire July 29,
2012 and May 20, 2014.
There can be no assurance that the Company's pending patent applications
will be approved, that any patents will provide it with competitive advantages
or will not be challenged by third parties, or that the patents of others will
not have an adverse effect on the Company's business. There can be no assurance
that others will not independently develop similar products, duplicate the
Company's products or, if patents are issued to the Company, design around the
patents issued to the Company.
The Company also relies upon trade secret protection and employee and
third-party nondisclosure agreements to protect its confidential and proprietary
information. Despite these efforts, there can be no assurance that others will
not independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's trade secrets or disclose
such technology or that the Company can meaningfully protect its trade secrets.
The data storage and semiconductor industries are characterized by frequent
litigation regarding patent and other intellectual property rights. Although the
Company is not aware of any pending or threatened patent litigation, there can
be no assurance that third parties will not assert claims against the Company
with respect to existing or future products or technologies. In the event of
litigation to determine the validity of any third-party claims, such litigation,
whether or not determined in favor of the Company, could result in significant
expense to the Company and divert the efforts of the Company's technical and
35
<PAGE>
management personnel from productive tasks. In the event of an adverse ruling in
such litigation, the Company might be required to discontinue the use of certain
processes, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, or obtain licenses
to the infringing technology. In the event of a successful claim against the
Company and the Company's failure to develop or license a substitute technology
at a reasonable cost, the Company's business, financial condition and results of
operations would be materially and adversely affected. See "Risk
Factors--Patents and Other Intellectual Property."
EMPLOYEES
As of September 30, 1997, the Company had a total of 263 full-time employees
at all of its locations, consisting of 119 in manufacturing, 69 in research and
development, 22 in marketing and sales, 26 in customer service and support, 23
in administration and four in facilities maintenance.
Management believes that the Company's ongoing success depends in part on
its continued ability to attract and retain highly skilled employees, especially
employees with extensive technological backgrounds. This is particularly
important in the areas of product design and development, where competition for
skilled personnel is intense. There can be no assurance that the Company will be
successful in attracting or retaining such personnel.
As of September 30, 1997, 55 employees at the Company's site in Rochester,
New York were members of Local 342 of the International Union of Electronic,
Electrical, Salaried, Machine & Furniture Workers union and covered by a
collective bargaining agreement scheduled to expire in October 1998. The Company
believes that its relations with its employees, and the bargaining unit which
represents certain of them, are good.
FACILITIES
The Company's principal office is located in Rochester, New York and
consists of 90,000 square feet used for manufacturing, research and development
and administration. The Company entered into a financing agreement with the
County of Monroe Industrial Development Agency (the "Agency") in 1974 under
which such agency's bond proceeds were used to purchase the land and construct
such Rochester facility for lease to the Company. On September 29, 1997, the
Company entered into an amended lease agreement with the Agency that extended
the term of the original lease from the year 2000 to December 31, 2007. Upon the
expiration of such amended lease, the Company is obligated to purchase the
Rochester facility from the Agency for nominal consideration.
In addition, the Company leases 14,400 square feet in Fremont, California
for research and process development, product engineering and as a base for
regional sales and field service for the West Coast of the United States and
3,400 square feet in Dallas, Texas for engineering, equipment design, process
development, sales and customer support. The Company also leases space in
Minneapolis, Minnesota; Austin, Texas; Japan, Northern Ireland, Singapore and
Taiwan for sales and customer support. Although the Company believes that its
current facilities are adequate to meet its current requirements for the near
term, it may seek to lease or acquire additional facilities in the future.
LEGAL PROCEEDINGS
In the ordinary course of business, the Company may be involved in legal
proceedings from time to time. As of the date of this Prospectus, there are no
material legal proceedings pending against the Company.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------------- ----------- -------------------------------------------------------
<S> <C> <C>
Christine B. Whitman............................. 46 President, Chief Executive Officer and Chairman
Mehrdad M. Moslehi, Ph.D......................... 38 Senior Vice President and Chief Technical Officer
Christopher J. Mann.............................. 39 Senior Vice President, Data Storage Products
Emilio O. DiCataldo.............................. 46 Senior Vice President and Chief Financial Officer
Richard J. Chicotka, Ph.D........................ 56 Vice President, Operations
Robert C. Fink................................... 62 Director
James Geater..................................... 64 Director
Brendan C. Hegarty, Ph.D......................... 54 Director
Victor E. Mann................................... 72 Director
Seiya Miyanishi.................................. 51 Director
Andrew C. Peskoe................................. 40 Director
Donald L. Waite.................................. 64 Director
</TABLE>
Ms. Whitman joined CVC Products in 1978 and has served as President, Chief
Executive Officer and Chairman of the Company since its acquisition of CVC
Products in 1990. Ms. Whitman received a BA from Syracuse University and is a
member and Secretary of the Board of Directors of SEMI/SEMATECH. She also serves
as a member of the Board of Directors of Rochester Telephone Corp. and The M&T
Bank Rochester Advisory Council. Ms. Whitman serves on the Executive Committee
of the Board of Directors of the Industrial Management Council, the Board of
Trustees for the Greater Rochester Chamber of Commerce, the United Way Board of
Directors, the New York State International Business Council and is a member of
the Board of Trustees of Rochester Institute of Technology.
Dr. Moslehi joined the Company in 1994 as Senior Vice President and Chief
Technical Officer. From 1988 to 1994, Dr. Moslehi served in various positions at
Texas Instruments, a semiconductor manufacturer, most recently as Branch Manager
in their Semiconductor Process and Design Center where he developed process and
equipment technologies such as RTP, PVD and photochemical cleaning. Dr. Moslehi
is named as an inventor on over 80 U.S. patents and in 1993 he earned the
American Electronics Association's Technologist/Inventor of the Year. Dr.
Moslehi received a BS in Electrical Engineering at Arya-Mehr University of
Technology and a MS and Ph.D in Electrical Engineering from Stanford University.
Dr. Moslehi also serves on the consulting faculty of Stanford University.
Mr. Christopher Mann joined CVC Products in 1979 and now serves as Senior
Vice President, Data Storage Products. Mr. Mann has previously held the
positions of Field Service Manager, Engineering Services Manager and Vice
President, Marketing at the Company and CVC Products prior to the Acquisition.
Prior to joining CVC in 1979, Mr. Mann worked for CVC Scientific Products, Ltd.
in the United Kingdom.
Mr. DiCataldo joined the Company in 1995 as Senior Vice President and Chief
Financial Officer. From 1991 to 1995, Mr. DiCataldo served as Senior Vice
President, Finance and Administration of MedImmune, Inc., a therapeutic and
vaccine company. Prior to his employment at MedImmune, Mr. DiCataldo held Vice
President-level positions at Bausch & Lomb, Inc. and Praxis Biologics and worked
for the firm of Price Waterhouse LLP. Mr. DiCataldo is a Certified Public
Accountant and holds a BS in Accounting from St. John Fisher College.
Dr. Chicotka joined the Company in 1995 as Vice President, Operations. From
1994 to 1995, Dr. Chicotka served as Director of Development Engineering of
Conner Peripherals, a manufacturer of disk drives. From 1993 to 1994, Dr.
Chicotka served as Director of Process Engineering of Seagate
37
<PAGE>
Magnetics, a division of Seagate Technology. From 1962 to 1992, Dr. Chicotka
served in various positions at IBM, most recently as Manager of Head Process
Manufacturing and Engineering of Storage Products Development and Manufacturing
in San Jose, California. Dr. Chicotka received a BS and MS in Metallurgical
Engineering and a Ph.D in Materials Science from Polytechnic Institute of
Brooklyn.
Mr. Fink has been a director of the Company since 1997. In 1993, Mr. Fink
joined Lam Research Corporation, a manufacturer of semiconductor processing
equipment, and served as Vice President and Chief Operating Officer, following
the Company's acquisition of Drytek, Inc. Mr. Fink served as the President of
Drytek from 1983 to 1988. Prior to Drytek, Mr. Fink spent four years with ITT
Corporation's Semiconductor Division as Director of VLSI Operations for North
America and 12 years with General Instrument Corporation's Microelectronics
Division as Director of Worldwide Manufacturing Resources. Mr. Fink's career
also includes 13 years with General Electric Corporation. He received a BS
degree in Metallurgical Engineering from Polytechnical Institute of New York.
Mr. Geater has been a director of the Company since 1990. Since 1992, Mr.
Geater has served as President of Geater Associates, a management consulting
firm. He previously held the position of General Business Manager at Eastman
Kodak and was a faculty member of the Wm. E. Simon Graduate School of Business
Administration at the University of Rochester. Mr. Geater received a BA in
Economics from Miami University and an MBA from the University of Rochester.
Dr. Hegarty has been a director of the Company since 1995. Since 1989, Dr.
Hegarty has served in various positions for Seagate Technology, most recently as
Executive Vice President and Chief Operating Officer--Recording Heads. Dr.
Hegarty received a Ph.D in Solid State Physics from the University of Sussex in
England.
Mr. Victor Mann has been a director of the Company since 1990. Since 1990,
Mr. Mann has been a self-employed consultant to various businesses in the United
Kingdom as well as to the British Government. Mr. Mann has also served as a
Technical Director of Plessey.
Mr. Miyanishi has been a director of the Company since 1990. Since 1987, Mr.
Miyanishi has served as President and Chief Executive Officer of Nikko Tecno, a
company dealing in the import and export of capital equipment, which was founded
in 1946. Mr. Miyanishi has served as owner, President and Chief Executive
Officer of several other companies in Japan. Mr. Miyanishi received a BS of
managerial economics from Keio University.
Mr. Peskoe has been a director of the Company since 1990. Mr. Peskoe joined
the law firm of Golenbock, Eiseman, Assor & Bell in 1986, and currently serves
as a partner of such firm, concentrating on corporate finance and securities
matters. Mr. Peskoe received his undergraduate degree from Harvard College and a
JD from Harvard Law School.
Mr. Waite has been a director of the Company since 1995. Since 1983, Mr.
Waite has served in various positions for Seagate Technology, most recently as
Chief Administrative Officer, Chief Financial Officer and Executive Vice
President. Mr. Waite received a BS in Accounting from Creighton University and a
JD from Georgetown University Law Center. Mr. Waite is a Certified Public
Accountant.
All directors hold office until the next annual meeting of the stockholders
and until their successors have been elected and qualified. Executive officers
of the Company are elected by the Board of Directors on an annual basis and
serve until their successors are duly elected and qualified. There are no family
relationships among any of the executive officers or directors of the Company
(except for Victor Mann, a director, whose son Christopher Mann is Senior Vice
President, Data Storage Products).
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<PAGE>
KEY EMPLOYEES
Certain key employees of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------------------------- ----------- ----------------------------------------------------
<S> <C> <C>
Brian Chadwick, Ph.D................................ 42 Vice President, Semiconductor Sales
Phillip Chapados, Ph.D.............................. 35 Director of Control Systems Engineering
Judd C. Prozeller................................... 46 Director of Quality
Boris Relja......................................... 48 Director of Semiconductor Marketing
William Starks...................................... 56 Director of Systems Engineering
</TABLE>
Dr. Chadwick joined the Company in 1997 as Vice President, Semiconductor
Sales. From 1991 to 1997, Dr. Chadwick served in various positions at Materials
Research Corporation, a division of Sony and a manufacturer of fabrication
equipment for semiconductor products, most recently as Director of Global
Strategic Accounts. Dr. Chadwick received a BS and MS in Metallurgical
Engineering and a Ph.D in Materials Science and Engineering from the University
of Washington.
Dr. Chapados joined the Company in 1994, and currently serves as Director of
Control Systems Engineering. From 1985 to 1994, Dr. Chapados served in various
positions at Texas Instruments, most recently as a member of the Technical Staff
of the Semiconductor Process Development Center in Dallas, Texas. Dr. Chapados
received a BS in Electrical Engineering and Computer Science from The Johns
Hopkins University, an MS in Electrical Engineering from Southern Methodist
University and a Ph.D in Electrical Engineering from Southern Methodist
University.
Mr. Prozeller joined the Company in 1995 and currently serves as a Director
of Quality. From 1990 to 1995, Mr. Prozeller served as the Senior Program
Director for the Department of Training and Professional Development at the
Rochester Institute of Technology. From 1990 to 1995, Mr. Prozeller also served
as a total quality consultant for a number of large institutional clients. From
1979 to 1988, Mr. Prozeller served in various positions at the Xerox
Corporation, most recently as a Total Quality Consultant, providing consulting
services to various suppliers. Mr. Prozeller received a BS from New York State
University at Brockport, an MEd from Nazareth College of Rochester, and an MBA
from Rochester Institute of Technology.
Mr. Relja joined the Company in 1997 and currently serves as Director of
Semiconductor Marketing. From February 1990 to December 1993 and from July 1994
to 1997, Mr. Relja served in a number of positions with Varian Associates, most
recently as Product Marketing Manager, where he focused on process development
and marketing strategy. From January 1994 to June 1994, Mr. Relja served as
Director of Total Equipment Solutions of Materials Research Corporation. Mr.
Relja received a BS in Material Science from IHK Munich.
Mr. Starks joined the Company in 1996 and currently serves as Director of
Systems Engineering. From 1971 to 1996, Mr. Starks served in various positions
at Varian Associates, most recently as Chief Technical Architect for Varian's
Thin Film Systems division. Mr. Starks received a BS in Electrical Engineering
from Iowa State University and an MS in Electrical Engineering from the
Massachusetts Institute of Technology.
DIRECTOR COMMITTEES AND COMPENSATION
DIRECTOR COMMITTEES
The Audit Committee of the Board of Directors (the "Audit Committee")
consists of Messrs. Victor Mann and Waite. The Audit Committee reviews with the
Company's independent accountants the scope and timing of their audit services
and any other services they are asked to perform, the accountants' report on the
Company's Consolidated Financial Statements following completion of their audit
and the Company's policies and procedures with respect to internal accounting
and financial controls. In addition,
39
<PAGE>
the Audit Committee makes annual recommendations to the Board of Directors for
the appointment of independent accountants for the ensuing year.
The Compensation Committee of the Board of Directors (the "Compensation
Committee") consists of Messrs. Fink, Geater and Peskoe. The Compensation
Committee reviews and evaluates the compensation and benefits of all officers of
the Company, reviews general policy matters relating to compensation and
benefits of employees of the Company and makes recommendations concerning these
matters to the Board of Directors. The Compensation Committee will also
administer the Company's 1997 Stock Option Plan (the "Plan"). See "--Stock
Plans."
DIRECTOR COMPENSATION
Directors who are employees of the Company will receive no additional
compensation for their services as members of the Board of Directors or as
members of Board committees. Directors who are not employees of the Company are
paid an annual retainer of $8,000, payable in shares of Common Stock, as well as
additional fees paid in cash of $1,500 for each meeting of the Board and $500
for each meeting of a Board committee attended by such Director. The Company's
Directors are reimbursed for their out-of-pocket expenses incurred in connection
with their service as Directors, including travel expenses.
The Company's 1997 Nonemployee Directors' Stock Option Plan (the "Directors'
Plan") contains provisions pursuant to which options for 10,000 shares of Common
Stock are granted to each nonemployee director upon commencement of service on
the Board, and options for 3,000 shares of Common Stock are granted to each
nonemployee director on March 31 of each year of continued service on the Board.
The Company has authorized and reserved 250,000 shares of Common Stock for
issuance under the Plan. At the time Mr. Fink was elected to the Board of
Directors in October 1997, he was granted an option to purchase 10,000 shares of
Common Stock pursuant to the Plan, subject to consummation of the Offering. The
exercise price of such option is equal to the initial public offering price.
40
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for fiscal 1997 of the
Chief Executive Officer and each of the other four most highly compensated
executive officers of the Company whose total salary and bonus for fiscal 1997
exceeded $100,000 (each, a "Named Executive Officer", and collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
-------------
ANNUAL COMPENSATION NUMBER OF
---------------------------------------------------- SECURITIES
OTHER UNDERLYING ALL
ANNUAL OPTIONS OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION(2) /SARS COMPENSATION(3)
- ----------------------------------------- --------- ---------- ----------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Christine B. Whitman..................... 1997 $ 167,250 -- -- 51,000 $ 2,325
President, Chief Executive Officer and
Chairman
Mehrdad M. Moslehi....................... 1997 140,078 -- -- 12,000 1,905
Senior Vice President and
Chief Technical Officer
Christopher J. Mann...................... 1997 122,406 -- $ 31,962(4) 22,500 2,506
Senior Vice President,
Data Storage Products
Emilio O. DiCataldo...................... 1997 142,551 -- 46,930(5) 48,000 1,330
Senior Vice President and
Chief Financial Officer
Richard J. Chicotka...................... 1997 127,266 -- -- 18,000 887
Vice President, Operations
</TABLE>
- ------------------------
(1) Bonus compensation for the fiscal year ended September 30, 1997 has not yet
been approved by the Board of Directors. Bonuses for fiscal 1996 were as
follows: Ms. Whitman, $46,600; Dr. Moslehi, $29,100; Mr. Mann, $28,500; Mr.
DiCataldo, $34,400; and Dr. Chicotka, $27,300.
(2) In accordance with the rules of the Securities and Exchange Commission,
other compensation in the form of perquisites and other personal benefits
has been omitted in those instances where such perquisites and other
personal benefits constituted less than the lesser of $50,000 or 10% of the
total annual salary and bonus for the Named Executive Officer for the fiscal
year.
(3) Represents matching contributions made by the Company on behalf of the Named
Executive Officer to the Company's 401(k) Plan.
(4) Represents auto allowance of $10,488 and commission of $21,474.
(5) Represents relocation expense of $17,500, relocation allowance of $26,670
and dues of $2,760.
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF STOCK
NUMBER OF TOTAL OPTIONS PRICE APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME OPTIONS FISCAL 1997 ($/SHARE) DATE 5% 10%
- ------------------------------------------- ----------- --------------- ----------- ----------- ----------- ----------
Christine B. Whitman....................... 36,000 5.90% $ 2.46 12/06/06 $ 113,027 $ 142,627
15,000 2.46 3.82 8/26/07 73,131 92,282
Mehrdad M. Moslehi......................... 12,000 1.97 3.82 8/26/07 58,505 73,826
Christopher J. Mann........................ 10,500 1.72 2.46 12/06/06 32,966 41,599
12,000 1.97 3.82 8/26/07 58,505 73,826
Emilio O. DiCataldo........................ 24,000 3.94 2.46 12/06/06 75,352 95,085
24,000 3.94 3.82 8/26/07 117,009 147,652
Richard J. Chicotka........................ 6,000 0.98 2.46 12/06/06 18,838 23,771
12,000 1.97 3.82 8/26/07 58,505 73,826
</TABLE>
41
<PAGE>
YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------------------------------------
<S> <C> <C> <C> <C>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR-END AT FISCAL YEAR-END(1)
---------------------------- ---------------------------
<CAPTION>
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Christine B. Whitman................................... 510,000 51,000 $ 6,417,500 $ 517,190
Mehrdad M. Moslehi..................................... 240,000 12,000 3,020,000 110,200
Christopher J. Mann.................................... 300,000 22,500 3,775,000 220,870
Emilio O. DiCataldo.................................... 155,000 88,000 1,782,644 908,416
Richard J. Chicotka.................................... 80,000 58,000 870,144 608,496
</TABLE>
- ------------------------
(1) The value of the unexercised, in-the-money options on September 30, 1997 is
based on the difference between the assumed initial public offering price of
the Common Stock ($13.00 per share), and the per share option exercise
price, multiplied by the number of shares of Common Stock underlying the
options.
STOCK OPTION PLAN
STOCK OPTION PROGRAM
Until June 1996, the Company had an informal stock option program under
which selected employees were granted non-qualified options to purchase shares
of Common Stock. The primary purpose of this program had been to provide
long-term incentives to the Company's selected employees and to further align
their interests with those of the Company. The selection of the participants,
the determination of the number of shares of Common Stock offered to each
participant, the terms of the repurchase rights for each participant and other
terms of sale had been made by the Compensation Committee and the Board of
Directors. Options granted under this informal plan generally vested over a
period of three years from the date of grant and were exercisable at the fair
market value of a share of Common Stock at the date of grant. Under this
program, options to purchase 2,012,760 shares of Common Stock have been granted,
of which options to purchase 150,000 shares of Common Stock have been exercised
and options to purchase 180,000 shares of Common Stock have been cancelled.
1996 STOCK OPTION PLAN
The Company's 1996 Stock Option Plan (the "1996 Plan") was adopted by the
Board of Directors effective June 30, 1996 under which selected employees were
granted nonqualified stock options and incentive stock options to purchase
shares of Common Stock. The primary purpose of the 1996 Plan was to provide
long-term incentives to the Company's selected employees and to further align
their interests with those of the Company. The selection of participants, the
determination of the form and number of shares of Common Stock offered to each
participant, the exercise period of each option, the terms of the repurchase
rights for each participant and other terms of sale were made by the
Compensation Committee. Options granted to employees under the 1996 Plan were
generally at fair market value as of the grant date based upon valuations
obtained contemporaneously from an independent appraiser. Options granted under
the 1996 Plan generally vested over a period of three-to-five years from the
date of grant and were exercisable, for incentive stock options, at the fair
market value of a share of Common Stock at the date of grant and, for
nonqualified stock options, at least 85% of the fair market value of a share of
Common Stock at the date of grant. As of September 30, 1997, options to purchase
1,037,700 shares of Common Stock have been granted under the 1996 Plan, of which
options to purchase 300 shares of Common Stock have been exercised and options
to purchase 73,500 shares have been cancelled.
1997 STOCK OPTION PLAN
The Board of Directors of the Company has adopted and the stockholders of
the Company have approved the Company's 1997 Stock Option Plan (the "Plan"),
under which stock options may be granted to employees of the Company and its
subsidiaries. The Plan permits the grant of stock options that qualify as
incentive stock options ("ISOs") under Section 422 of the Internal Revenue Code,
and nonqualified stock options ("NSOs"), which do not so qualify. The Company
has authorized and reserved 1,250,000
42
<PAGE>
shares of the Common Stock for issuance under the Plan. As of September 30,
1997, no options had been granted under the Plan. The shares may be unissued
shares or treasury shares. If an option expires or terminates for any reason
without having been exercised in full, the unpurchased shares subject to such
option will again be available for grant under the Plan.
The Plan is administered by the Compensation Committee. Subject to the
limitations set forth in the Plan, the Compensation Committee has the authority
to determine the persons to whom options will be granted, the time at which
options will be granted, the number of shares subject to each option, the
exercise price of each option (which may not be less than the fair market value
of the underlying Common Stock), the time or times at which the options will
become exercisable and the duration of the exercise period. The Compensation
Committee may provide for the acceleration of the exercise period of an option
at any time prior to its termination or upon the occurrence of specified events,
subject to limitations set forth in the Plan. The Compensation Committee has the
authority to cancel and replace stock options previously granted with new
options for the same or a different number of shares and having a higher or
lower exercise price, and may amend the terms of any outstanding stock option to
provide for an exercise price that is higher or lower than the current exercise
price.
All officers, employees and consultants of the Company and its subsidiaries
are eligible to receive grants of stock options under the Plan, as selected by
the Compensation Committee. The exercise price of shares of Common Stock subject
to options granted under the Plan may not be less than 100 percent of the fair
market value of the Common Stock on the date of grant. The maximum term of
options granted under the Plan is ten years from the date of grant. The maximum
number of shares of Common Stock that may be subject to Options granted to any
participant of the Plan during any one calendar year is 500,000. Options granted
under the Plan will generally become vested and exercisable over a five-year
period in equal annual installments, unless the Compensation Committee specifies
a different vesting schedule. In the event of a "change in control" of the
Company (as defined in the Plan), each option that was not then vested will
become fully and immediately vested and exercisable, unless such options are
assumed by the acquiring party in such transaction.
All options granted under the Plan are nontransferable by the optionee,
except for transfers approved by the Compensation Committee to certain permitted
transferees (such as immediate family members of the optionee and charitable
institutions) and transfers upon the optionee's death in accordance with his
will or applicable law. In the event of an optionee's death or permanent and
total disability, outstanding options that have become exercisable will remain
exercisable for a period of one year, and the Compensation Committee will have
the discretion to determine the extent to which any unvested options shall
become vested and exercisable in connection with death or disability. In the
case of any other termination of employment, outstanding options that have
previously become vested will remain exercisable for a period of 90 days, except
for a termination "for cause" (as defined in the Plan), in which case all
unexercised options will be immediately forfeited. Under the Plan, the exercise
price of an option is payable in cash or, in the discretion of the Compensation
Committee, in Common Stock or a combination of cash and Common Stock. An
optionee must satisfy all applicable tax withholding requirements at the time of
exercise.
The Plan has a term of ten years, subject to earlier termination or
amendment by the Board of Directors, and all options granted under the Plan
prior to its termination remain outstanding until they have been exercised or
are terminated in accordance with their terms. The Board may amend the Plan at
any time.
The Board of Directors of the Company has also adopted and the stockholders
of the Company have also approved the Directors' Plan, under which stock options
are granted to each member of the Company's Board of Directors who is not an
employee of the Company. See "--Director Committees and Compensation" and
"--Director Compensation."
PENSION PLAN
The Company maintains a defined benefit retirement plan for its employees
which provides retirement benefits based upon a formula that takes into account
the employees' compensation and length of
43
<PAGE>
service with the Company as well as benefits employees may be entitled to
receive under certain prior plans of the Company. Such plan was frozen effective
September 30, 1991 and no further benefits will be accrued under such plan. Mr.
Christopher Mann and Ms. Christine Whitman will receive $157.68 and $394.28,
respectively, on a monthly basis commencing at retirement at attainment of age
65.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Compensation Committee are Messrs. Fink, Geater
and Peskoe. None of these directors was at any time during the fiscal year ended
September 30, 1997, nor at any other time within the past five years, an officer
or employee of the Company. No executive officer of the Company serves as a
member of the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Company's Board of
Directors or the Compensation Committee.
EMPLOYMENT AGREEMENTS
The Company intends to enter into employment agreements (the "Agreements")
with each of its Named Executive Officers. The Agreements provide that the
employees will serve the Company in the respective offices listed in the Summary
Compensation Table for a term of three years (with automatic one-year renewals),
subject to earlier termination as provided in the Agreements. The Agreements set
forth the minimum base salary of each employee during the term of the
Agreements, subject to possible increase at the sole discretion of the
Compensation Committee. Each employee is also eligible to receive, at the sole
discretion of the Compensation Committee, an annual bonus based on the
contribution of its employee towards achievement of the annual business goals of
the Company. Under the Agreements, the employees are entitled to participate in
the employee benefit plans of the Company and are eligible for the grant of
stock options, in the sole discretion of the Compensation Committee.
The Agreements include provisions that are effective upon the termination of
employment of the employees under certain circumstances. In general, the
employees are entitled to severance upon termination by the Company without
"cause" or termination by the employee for "good reason" following a "change in
control" (each such term as defined in the Agreements). The severance shall be
for a specified number of months (24 months for Ms. Whitman, 18 months for Mr.
DiCataldo, 12 months for Drs. Moslehi and Chicotka and Mr. Christopher Mann) of
the employee's base salary as in effect immediately prior to the termination.
Upon a "change in control," all options to purchase shares of Common Stock held
by the employees that were not then vested will become fully and immediately
vested and exercisable, unless such options are assumed by the acquiring party
in such transaction. An employee terminated after a "change in control" shall
retain the right to exercise any options to purchase shares of Company stock for
12 months following the date of such termination (or, if earlier, the expiration
of the original term of the option).
The Agreements include certain restrictive covenants for the benefit of the
Company relating to non-disclosure by the employee of the Company's confidential
business information, the Company's right to inventions and technical
improvements of the employee and noncompetition by the employee with the
Company's business for a period of one year following termination of employment.
44
<PAGE>
CERTAIN TRANSACTIONS
Seagate Technology, a Delaware corporation, is a principal stockholder and
major customer of the Company. Mr. Waite, a director of the Company, is the
Executive Vice President, Chief Administrative Officer and Chief Financial
Officer of Seagate Technology. Dr. Hegarty, a director of the Company, is the
Executive Vice President and Chief Operating Officer for the Recording Heads
division of Seagate Technology. See "Principal and Selling Stockholders."
In May 1995, the Company sold 60,492 shares of Series B Convertible
Preferred Stock for a price of $148.78 per share and a warrant to purchase
19,769 shares of Series B Convertible Preferred Stock (the "Warrant") to Seagate
Technology in a private placement. The Warrant is exercisable by Seagate
Technology for $223.17 per share during the seven-year period commencing on the
warrant issuance date (May 22, 1995). Following the closing of the Offering, the
Warrant will become exercisable for 1,186,140 shares of Common Stock at an
exercise price of $3.72 per share of Common Stock. See "Description of Capital
Stock."
In connection with such issuance, the Company also entered into a
Registration Rights Agreement with Seagate Technology and certain executive
officers and stockholders of the Company. Such agreement grants certain demand
and piggy-back registration rights to Seagate Technology with respect to shares
of Common Stock issuable upon conversion of all outstanding shares of the Series
B Convertible Preferred Stock, and also grants certain piggy-back registration
rights to certain executive officers and stockholders of the Company. See
"Shares Eligible for Future Sale--Registration Rights."
Nikko Tecno, a Japanese corporation, is a principal stockholder and a
distributor of the Company's products in Japan. Mr. Miyanishi, a director of the
Company, is the President and Chief Executive Officer of Nikko Tecno. See
"Principal and Selling Stockholders." At September 30, 1997, the Company had
borrowings of $2.5 million from Nikko Tecno. Of the $2.5 million, the Company
had borrowed $1.5 million in November of 1990 and the remaining $1.0 million in
December of 1991. These borrowings are evidenced by notes, which are unsecured
and require quarterly interest payments calculated at an annual rate of 9%. The
principal of the $1.0 million note was paid in October of 1997; the principal of
the $1.5 million note is due in November 1998. See Notes to Consolidated
Financial Statements.
In connection with the private placement of Series B Convertible Preferred
Stock to Seagate Technology, the Company entered into an Amended and Restated
Stockholders' Agreement with Seagate Technology, Nikko Tecno and certain
executive officers and stockholders of the Company providing for voting and
pre-emptive rights with respect to the acquisition and sale of shares by the
Company and certain matters affecting corporate governance. These rights will
terminate when the Series A and Series B Convertible Preferred Stock are
converted into Common Stock upon the consummation of the Offering.
Andrew Peskoe, a director of the Company, is a partner in the law firm of
Golenbock, Eiseman, Assor & Bell, which has provided legal services to the
Company in connection with a variety of business and organizational matters.
45
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of September 30, 1997, giving effect as of that
date to the conversion of all shares of the Company's Series A and Series B
Convertible Preferred Stock into Common Stock, which will occur upon the closing
of the Offering, and to the issuance of shares of Common Stock as a dividend to
effect a 3-for-1 split of the Company's Common Stock on October 31, 1997, by (i)
each person or entity known to the Company to own beneficially more than 5% of
the outstanding shares of Common Stock, (ii) each of the Company's directors and
officers, (iii) the Selling Stockholder and (iv) all directors and executive
officers as a group. Unless otherwise indicated below, to the knowledge of the
Company, all persons listed below have sole voting and investment power with
respect to their shares of Common Stock, except to the extent authority is
shared by spouses under applicable law.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES TO OWNED AFTER THE
OFFERING(1)(2) BE OFFERING(1)(2)
------------------------ SOLD IN THE ------------------------
BENEFICIAL OWNER NUMBER PERCENT OFFERING NUMBER PERCENT
- --------------------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Seagate Technology(3).............................. 4,815,660 47.5% -- 4,815,660 36.7%
920 Disc Drive
Scotts Valley, CA 95066-4544
Nikko Tecno(4)..................................... 2,112,000 23.6 -- 2,112,000 17.7
P.O. Box 139
Central Tokyo, Japan
Anne G. Whitman(5)................................. 1,836,000 20.5 900,000 936,000 7.8
Christine B. Whitman(5)............................ 1,062,000 11.2 -- 1,062,000 8.5
Mehrdad M. Moslehi(5).............................. 456,000 5.0 -- 456,000 3.7
Christopher J. Mann................................ 383,940 4.2 -- 383,940 3.1
Emilio O. DiCataldo................................ 155,000 1.7 -- 155,000 1.3
Richard J. Chicotka................................ 80,000 * -- 80,000 *
Robert C. Fink..................................... 0 * -- 0 *
James Geater....................................... 50,475 * -- 50,475 *
Brendan C. Hegarty(6).............................. 2,475 * -- 2,475 *
Victor E. Mann..................................... 26,475 * -- 26,475 *
Seiya Miyanishi(7)................................. 2,114,475 23.6 -- 2,114,475 17.7
Andrew C. Peskoe(8)................................ 197,475 2.2 -- 197,475 1.6
Donald L. Waite(9)................................. 2,475 * -- 2,475 *
All directors and executive officers as
a group (12 persons)(10)......................... 2,418,790 23.5 -- 2,418,790 18.2
</TABLE>
- ------------------------
* Less than one percent.
(1) The number of shares of Common Stock shown in the table above as
beneficially owned includes shares issuable pursuant to options and warrants
that may be exercised within 60 days after September 30, 1997. Shares
issuable pursuant to such options and warrants are deemed outstanding for
computing the percentage of beneficial ownership of the person holding such
options and warrants but are not deemed outstanding for computing the
percentage of beneficial ownership of any other person.
(2) Includes shares of Common Stock issuable upon exercise of options, as
follows: Christine B. Whitman--510,000 shares; Mehrdad M. Moslehi--240,000
shares; Christopher J. Mann--300,000
46
<PAGE>
shares; Emilio O. DiCataldo--155,000 shares; Richard Chicotka--80,000
shares; and Andrew C. Peskoe--75,000 shares.
(3) Includes 3,629,520 shares of Common Stock issuable upon conversion of
outstanding shares of Series B Convertible Preferred Stock and 1,186,140
additional shares of Common Stock issuable upon exercise of the Warrant. See
"Certain Transactions."
(4) Includes 2,088,000 shares of Common Stock issuable upon conversion of Series
A Convertible Preferred Stock.
(5) The stockholders' address is: c/o CVC, Inc., 525 Lee Road, Rochester, New
York, 14606.
(6) Excludes 4,815,660 shares of Common Stock beneficially owned by Seagate
Technology. Mr. Hegarty is an executive officer and stockholder of Seagate
Technology. Mr. Hegarty disclaims beneficial ownership of the shares of
Common Stock owned by Seagate Technology except to the extent of his
indirect pecuniary interest therein as a stockholder of Seagate Technology.
(7) Includes 2,112,000 shares of Common Stock beneficially owned by Nikko Tecno
of which Mr. Miyanishi is a director, officer and principal stockholder. Mr.
Miyanishi disclaims beneficial ownership of the shares of Common Stock owned
by Nikko Tecno except to the extent of his indirect pecuniary interest
therein as a stockholder of Nikko Tecno. Mr. Miyanishi's address is: c/o
Nikko Tecno, P.O. Box 139, Central Tokyo, Japan.
(8) Includes 96,000 shares of Common Stock, and 75,000 additional shares of
Common Stock issuable upon exercise of an option, beneficially owned by
Julie Peskoe, Mr. Peskoe's wife, as to which Mr. Peskoe disclaims beneficial
ownership.
(9) Excludes 4,815,660 shares beneficially owned by Seagate Technology. Mr.
Waite is an executive officer and stockholder of Seagate Technology. Mr.
Waite disclaims beneficial ownership of the shares of Common Stock owned by
Seagate Technology except to the extent of his indirect pecuniary interest
therein as a stockholder of Seagate Technology.
(10) Includes 96,000 shares of Common Stock and 75,000 additional shares of
Common Stock issuable upon exercise of an option beneficially owned by the
wife of a director of CVC and excludes 2,112,000 shares held of record by
Nikko Tecno, the ownership of which is attributed to a director of the
Company.
------------------------
Anne G. Whitman is not related to Christine B. Whitman.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED STOCK; ISSUED AND OUTSTANDING SHARES
Upon the completion of the Offering, the authorized capital stock of the
Company will consist of 50,000,000 shares of Common Stock, par value $0.01 per
share, and 5,000,000 shares of new Preferred Stock, par value $0.01 per share.
As of September 30, 1997, 1,273,890 shares of Common Stock, 1,685 shares of
Series A Convertible Preferred Stock and 60,492 shares of Series B Convertible
Preferred Stock were outstanding. Simultaneously with the closing of the
Offering, the outstanding shares of Series A and Series B Convertible Preferred
Stock will automatically be converted into an aggregate of 7,673,520 shares of
Common Stock.
COMMON STOCK
Assuming conversion of all outstanding Series A and Series B Convertible
Preferred Stock, at September 30, 1997 there were 8,947,410 shares of Common
Stock outstanding held by approximately 20 stockholders of record. Holders of
Common Stock are entitled to one vote for each share held of record on any
matters voted upon by stockholders and do not have any cumulative voting rights.
Subject to preferences that may be applicable to any outstanding Preferred
Stock, holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor. In the event of a liquidation, dissolution or winding up of the
Company, holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities and the liquidation preferences of any
outstanding Preferred Stock. Holders of Common Stock have no preemptive rights
and no right to convert their Common Stock into any other securities. There are
no redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are, and all shares of Common Stock to be
outstanding upon completion of the Offering will be, validly issued, fully paid
and nonassessable. The rights, preferences and privileges of holders of Common
Stock are subject to, and may be adversely affected by, the rights of the
holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
PREFERRED STOCK
Upon the closing of the Offering, the conversion of the outstanding Series A
and Series B Convertible Preferred Stock and the filing of a Certificate of
Amendment to the Company's Restated Certificate of Incorporation removing the
designation of those series, the Company's Restated Certificate of Incorporation
will authorize the issuance of up to 5,000,000 shares of new Preferred Stock,
and none of those shares will be outstanding or designated into any series.
Under the terms of the Restated Certificate of Incorporation, the Board of
Directors is authorized, subject to any limitations prescribed by law, without
further stockholder approval, to issue such shares of Preferred Stock in one or
more series. Each such series of Preferred Stock shall have such rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
48
<PAGE>
WARRANTS
The Company has issued the Warrant to purchase 19,769 shares of Series B
Convertible Preferred Stock at an exercise price of $223.17 per share of Series
B Convertible Preferred Stock during the seven-year period commencing on the
warrant issuance date (May 22, 1995). Upon the consummation of the Offering, the
Warrant will become exercisable for 1,186,140 shares of Common Stock at an
exercise price of $3.72 per share of Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
a stockholder became an interested stockholder, unless (i) the corporation has
elected in its original certificate of incorporation not to be governed by
Section 203 (the Company did not make such an election); (ii) the business
combination was approved by the Board of Directors of the corporation before the
other party to the business combination became an interested stockholder; (iii)
upon consummation of the transaction that made it an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the commencement of the transaction (excluding voting stock owned
by directors who are also officers or held in employee benefit plans in which
the employees do not have a confidential right to tender or vote stock held by
the plan); or (iv) the business combination was approved by the Board of
Directors of the corporation and ratified by two-thirds of the voting stock
which the interested stockholder did not own. The three-year prohibition also
does not apply to certain business combinations proposed by an interested
stockholder following the announcement or notification of certain extraordinary
transactions involving the corporation and a person who had not been an
interested stockholder during the previous three years or who became an
interested stockholder with the approval of the majority of the corporation's
directors. The term "business combination" is defined generally to include
mergers or consolidations between a Delaware corporation and an interested
stockholder, transactions with an interested stockholder involving the assets or
stock of the corporation or its majority-owned subsidiaries and transactions
which increase an interested stockholder's percentage ownership of stock. The
term "interested stockholder" is defined generally as a stockholder who,
together with affiliates and associates, owns (or, within three years prior, did
own) 15% or more of a Delaware corporation's voting stock. Section 203 could
prohibit or delay a merger, takeover or other change in control of the Company
and therefore could discourage attempts to acquire the Company.
49
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 11,947,410 shares of
Common Stock outstanding. Of these shares, the 3,900,000 shares of Common Stock
sold in the Offering will be freely tradable without restriction under the
Securities Act, except that any shares purchased by "affiliates" of the Company
("Affiliates"), as that term is defined in Rule 144 ("Rule 144") under the
Securities Act, generally may be sold only in compliance with the limitations of
Rule 144 described below.
SALES OF RESTRICTED SECURITIES
The remaining shares of Common Stock outstanding upon completion of the
Offering are deemed "Restricted Shares" under Rule 144. Of the Restricted
Shares, up to 1,186,800 shares will be eligible for sale in the public market
after the Offering pursuant to Rule 144(k) under the Securities Act; all of
these shares are subject to the 180-day Lock-up Agreements described below, but
will be eligible for sale in the public market beginning 180 days after the
closing of the Offering. An additional 1,744,302 Restricted Shares will be
eligible for sale in the public market in accordance with Rule 701 under the
Securities Act beginning 90 days after the date of this Prospectus; 1,557,003 of
these shares are subject to the 180-day Lock-up Agreements. Of the remaining
Restricted Shares outstanding, 6,665,460 shares will be eligible for resale
under Rule 144 commencing 90 days after the date of this Prospectus; 6,662,985
of these shares are subject to the 180-day Lock-up Agreements.
In general, under Rule 144 as currently in effect, a holder of Restricted
Shares who beneficially owns shares that were not acquired from the Company or
an Affiliate within the previous two years would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of one
percent of the then outstanding shares of Common Stock (approximately 119,474
shares immediately after the Offering) or the average weekly trading volume of
the Common Stock in the over-the-counter market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Securities and
Exchange Commission. Sales under Rule 144 are subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed an affiliate of the
Company at any time during the three months preceding a sale and who
beneficially owns shares that were not acquired from the Company or an Affiliate
within the previous two years is entitled to sell such shares under Rule 144(k)
without regard to volume limitations, manner of sale provisions, notice
requirements or the availability of current public information concerning the
Company.
Any employee, officer or director of or consultant to the Company who
received his or her shares pursuant to a written compensatory plan or contract
is entitled to rely on the resale provisions of Rule 701, which, beginning 90
days after the date of this Prospectus, permit persons, other than Affiliates,
to sell their Rule 701 shares without having to comply with the
public-information, holding period, volume limitation or notice provisions of
Rule 144 and permit Affiliates to sell their Rule 701 shares without having to
comply with Rule 144's holding-period restrictions.
OPTIONS
Upon completion of the Offering, 1,744,302 shares of Common Stock issuable
upon exercise of stock options will become eligible for sale in the public
market subject to compliance with Rule 701 beginning 90 days after the Offering;
1,557,003 of these shares underlying these options are subject to the 180-day
Lock-up Agreements. An additional 1,490,000 shares of Common Stock are available
for future grants under the Company's stock option plans.
The Company intends to file one or more registration statements on Form S-8
under the Securities Act to register all shares of Common Stock subject to
outstanding stock options and Common Stock issuable pursuant to the Company's
stock option plans that do not qualify for an exemption under Rule 701 from the
registration requirements of the Securities Act. The Company has agreed with the
Underwriters
50
<PAGE>
not to file these registration statements earlier than 180 days following the
date of this Prospectus, and any such registration statements are expected to
become effective upon filing. Shares covered by these registration statements
will thereupon be eligible for sale in the public markets, subject to the
Lock-up Agreements, to the extent applicable.
REGISTRATION RIGHTS
At the time of the Offering, the holders of 8,009,235 shares of Common Stock
(the "Registrable Securities") are entitled to certain rights with respect to
the registration of such shares under the Securities Act. Those registration
rights have been waived with respect to the Offering. Under the terms of an
agreement between the Company and the holders of the Registrable Securities, if
the Company proposes to register any of its securities under the Securities Act,
either for its own account or the account of other security holders exercising
registration rights, those holders are entitled to notice of registration and
are entitled to include shares of Registrable Securities in the Offering,
provided that the managing underwriters have the right to limit the number of
such shares included in the registration. Holders of 3,629,520 Registrable
Securities may also require the Company to file a registration statement under
the Securities Act at its expense with respect to their Registrable Securities,
and the Company is required to use its best efforts to effect that registration,
subject to, among other things, the right of the Company not to effect any
registration within the earlier of May 22, 1998 or six months following the
Offering made hereby. Further, stockholders may require the Company to file
additional registration statements on Form S-3 when such form becomes available
to the Company, subject to certain conditions and limitations. All expenses
incurred in connection with such registrations must be borne by the Company,
other than underwriting discounts and commissions.
EFFECT OF SALES OF SHARES
No prediction can be made as to the effect, if any, that future sales of
shares of Common Stock or the availability of shares for future sale will have
on the prevailing market price for the Common Stock. Sales of substantial
amounts of Common Stock, or the perception that such sales could occur, could
adversely affect prevailing market prices for the Common Stock and could impair
the Company's future ability to raise capital through an offering of equity
securities.
51
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives BT
Alex. Brown Incorporated, Hambrecht & Quist LLC and PaineWebber Incorporated,
have severally agreed to purchase from the Company and the Selling Stockholder
the following respective number of shares of Common Stock at the initial public
offering price less the underwriting discounts and commissions set forth on the
front cover of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
BT Alex. Brown Incorporated......................................................
Hambrecht & Quist LLC............................................................
PaineWebber Incorporated.........................................................
----------
Total.......................................................................... 3,900,000
----------
----------
</TABLE>
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent, and that the Underwriters will
purchase all shares of Common Stock offered hereby, if any such shares are
purchased.
The Company and the Selling Stockholder have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain other dealers at such
price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share to certain other dealers. After the public offering, the
public offering price and other selling terms may be changed by the
Representatives of the Underwriters.
The Company has granted the Underwriters an option, exercisable not later
than 30 days after the date of this Prospectus, to purchase up to 585,000
additional shares of Common Stock at the initial public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent such option is exercised, each of the Underwriters
will have a firm commitment, to purchase approximately the same percentage
thereof that the number of shares of Common Stock to be purchased shown in the
above table bears to 3,900,000 and the Company will be obligated, pursuant to
the option, to sell such shares to the Underwriters. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of Common Stock hereby. If purchased, the Underwriters will offer such
additional shares on the same terms as those on which the 3,900,000 shares are
being offered.
The Underwriters have reserved up to 150,000 shares of the Common Stock
offered hereby for sale at the public offering price to certain employees,
consultants and other persons associated with the Company. The number of shares
of Common Stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares not so
purchased will be offered by the Underwriters to the general public on the same
basis as the other shares offered hereby.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act.
The Company, the Selling Stockholder and all executive officers, directors
and certain employees of the Company, and certain stockholders, who in the
aggregate will hold approximately 8,044,935 shares of Common Stock, have agreed
that for a period of 180 days following the date of this Prospectus, they will
not offer, pledge, sell, contract to sell, grant any option to purchase,
purchase any option to sell, or
52
<PAGE>
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock without the prior written consent of BT Alex. Brown Incorporated.
In connection with the Offering, the Underwriters may purchase and sell
Common Stock in the open market. These transactions may include over-allotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offering. The Underwriters also may impose
penalty bids, whereby selling concessions allowed to syndicate members or other
broker-dealers in respect of the Common Stock sold in the Offering for their
account may be reclaimed by the syndicate if such securities are repurchased by
the syndicate in stabilizing or short-covering transactions. These activities
may stabilize, maintain or otherwise affect the market price of Common Stock,
which may be higher than the price that might otherwise prevail in the open
market. These transactions may be effected on the Nasdaq National Market or
otherwise and these activities, if commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
Prior to the Offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price was determined through
negotiation among the Company, representatives of the Selling Stockholder and
the Representatives of the Underwriters. Among the factors considered in such
negotiations were the prevailing market conditions, the results of operations of
the Company in recent periods, the market capitalizations and stages of
development of other companies that the Company, the Selling Stockholder and the
Representatives of the Underwriters believe to be comparable to the Company,
estimates of the business potential of the Company, the present state of the
Company's development and other factors deemed relevant.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Dewey Ballantine LLP, New York, New York and for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements as of September 30, 1997 and 1996 and
for the three years in the period ended September 30, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all of thc information set forth in the Registration
Statement and the exhibits and schedules thereto. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
the Registration Statement and the exhibits and schedules filed therewith.
Statements contained in this Prospectus as to the contents of any contract or
any other document referred to are not necessarily complete, and in each
instance reference is made to the copy of such contract or other document filed
as an exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may be
inspected without charge at the offices of the Commission in Washington, D.C.
20549, and copies of all or any part of the Registration Statement may be
obtained from the Public Reference Section of the Commission, Washington, D.C.
20549 upon the payment of the fees prescribed by the Commission.
53
<PAGE>
CVC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Operations................................................. F-4
Consolidated Statements of Stockholders' Equity....................................... F-5
Consolidated Statements of Cash Flows................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CVC, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of CVC, Inc.
(the "Company") and its subsidiary at September 30, 1997 and 1996 and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1997 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 8, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 106, "Accounting for Postretirement Benefits
Other than Pensions," in 1996.
Price Waterhouse LLP
Rochester, New York
October 24, 1997, except as to the stock split described in Note 1, which is as
of October 31, 1997
F-2
<PAGE>
CVC, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
-------------------- PRO FORMA
(IN THOUSANDS, EXCEPT SHARE DATA) 1996 1997 (NOTE 1)
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 730 $ 2,161 $ 2,161
Accounts receivable:
Trade (includes related party receivables of $2,224 and $3,485 in 1996 and
1997, respectively) less allowance for doubtful accounts of $92 and $149
in 1996 and 1997, respectively........................................... 4,882 8,288 8,288
Inventories.................................................................. 16,304 22,360 22,360
Deferred income taxes........................................................ 1,693 1,153 1,153
Other current assets......................................................... 338 651 651
--------- --------- -----------
23,947 34,613 34,613
Property, plant and equipment, net............................................. 7,886 9,130 9,130
Other assets................................................................... 4 90 90
--------- --------- -----------
Total assets............................................................. $ 31,837 $ 43,833 $ 43,833
--------- --------- -----------
--------- --------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt (includes related
party notes of $1,000 in 1997)............................................. $ 894 $ 2,295 $ 2,295
Accounts payable............................................................. 5,437 9,993 9,993
Advances from customers (includes related party advances of $3,817 and $1,691
in 1996 and 1997, respectively)............................................ 5,617 8,652 8,652
Other current liabilities.................................................... 3,183 4,414 4,414
--------- --------- -----------
15,131 25,354 25,354
Long-term debt (includes related party notes of $2,500 and $1,500 in 1996 and
1997, respectively).......................................................... 5,635 5,309 5,309
Deferred income taxes.......................................................... 1,483 1,403 1,403
Other liabilities.............................................................. 269 339 339
--------- --------- -----------
Total liabilities........................................................ 22,518 32,405 32,405
Commitments
Stockholders' equity:
Preferred stock, $.01 par value per share; 102,500 shares authorized; shares
issued and outstanding:
Series A--1,685 shares in 1996 and 1997 (liquidation preference of
$1,685,000).............................................................. 1,685 1,685 --
Series B--60,492 shares in 1996 and 1997 (liquidation preference of
$9,000,000).............................................................. 8,355 8,355 --
Common stock, $.01 par value per share; 7,500,000 shares authorized;
1,102,740 shares issued and outstanding in 1996 and 1,273,890 in 1997...... 4 4 89
Additional paid-in capital................................................... 457 776 10,731
Unamortized deferred compensation............................................ -- (254) (254)
Retained earnings (accumulated deficit)...................................... (1,096) 949 949
Minimum pension liability.................................................... (86) (87) (87)
--------- --------- -----------
Total stockholders' equity............................................... 9,319 11,428 11,428
--------- --------- -----------
Total liabilities and stockholders' equity............................... $ 31,837 $ 43,833 $ 43,833
--------- --------- -----------
--------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CVC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA) 1995 1996 1997
--------- --------- ---------
Revenues
Trade (includes sales to related party of $5,827, $27,795 and $29,244 in 1995,
1996 and 1997, respectively)................................................ $ 18,200 $ 48,378 $ 62,588
Contract...................................................................... 3,158 -- --
--------- --------- ---------
21,358 48,378 62,588
Cost of goods sold
Trade (includes cost of goods sold to related party of $4,002, $16,162 and
$17,352 in 1995, 1996 and 1997, respectively)............................... 13,089 33,755 41,286
Contract...................................................................... 2,541 -- --
--------- --------- ---------
15,630 33,755 41,286
Gross margin.................................................................... 5,728 14,623 21,302
Operating expenses
Research and development...................................................... 1,214 4,346 9,055
Sales and marketing........................................................... 2,924 4,777 5,613
General and administrative.................................................... 1,447 2,124 2,539
--------- --------- ---------
5,585 11,247 17,207
--------- --------- ---------
Income from operations.......................................................... 143 3,376 4,095
Interest income................................................................. 86 102 11
Interest expense................................................................ (645) (299) (604)
--------- --------- ---------
Income (loss) before income taxes............................................... (416) 3,179 3,502
Income taxes (benefit).......................................................... (546) -- 1,457
--------- --------- ---------
Net income...................................................................... $ 130 $ 3,179 $ 2,045
--------- --------- ---------
--------- --------- ---------
Pro forma net income per share.................................................. $ 0.02 $ 0.29 $ 0.19
--------- --------- ---------
--------- --------- ---------
Weighted average common and common equivalent shares............................ 8,502 11,217 12,493
--------- --------- ---------
--------- --------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CVC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A PREFERRED STOCK SERIES B PREFERRED STOCK COMMON STOCK
------------------------ ------------------------ -----------------------------------
(IN THOUSANDS, EXCEPT SHARE NUMBER NUMBER NUMBER PAR PAID-IN
DATA) OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES VALUE CAPITAL
- ------------------------------- ----------- ----------- ----------- ----------- --------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1994......................... 1,685 $ 1,685 911,940 $ 3 $ 378
Issuance of common stock....... 190,800 1 79
Issuance of Series B preferred
stock........................ 60,492 $ 8,355
Minimum pension liability......
Net income.....................
--
----------- ----------- ----------- ----------- --------- -----
Balance at September 30,
1995......................... 1,685 1,685 60,492 8,355 1,102,740 4 457
Minimum pension liability......
Net income.....................
--
----------- ----------- ----------- ----------- --------- -----
Balance at September 30,
1996......................... 1,685 1,685 60,492 8,355 1,102,740 4 457
Issuance of common stock....... 171,150 -- 58
Minimum pension liability......
Deferred compensation.......... 261
Amortization of deferred
compensation.................
Net income.....................
--
----------- ----------- ----------- ----------- --------- -----
Balance at September 30,
1997......................... 1,685 $ 1,685 60,492 $ 8,355 1,273,890 $ 4 $ 776
--
--
----------- ----------- ----------- ----------- --------- -----
----------- ----------- ----------- ----------- --------- -----
<CAPTION>
RETAINED
UNAMORTIZED EARNINGS MINIMUM
(IN THOUSANDS, EXCEPT SHARE DEFERRED (ACCUMULATED PENSION
DATA) COMPENSATION DEFICIT) LIABILITY
- ------------------------------- --------------- ------------- -------------
<S> <C> <C> <C>
Balance at September 30,
1994......................... $ (4,405) $ (23)
Issuance of common stock.......
Issuance of Series B preferred
stock........................
Minimum pension liability...... (19)
Net income..................... 130
------ ------------- ---
Balance at September 30,
1995......................... (4,275) (42)
Minimum pension liability...... (44)
Net income..................... 3,179
------ ------------- ---
Balance at September 30,
1996......................... (1,096) (86)
Issuance of common stock.......
Minimum pension liability...... (1)
Deferred compensation.......... $ (261)
Amortization of deferred
compensation................. 7
Net income..................... 2,045
------ ------------- ---
Balance at September 30,
1997......................... $ (254) $ 949 $ (87)
------ ------------- ---
------ ------------- ---
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CVC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
(IN THOUSANDS) 1995 1996 1997
- ---------------------------------------------------------------------------------- --------- --------- ---------
Cash flows from operating activities:
Net income...................................................................... $ 130 $ 3,179 $ 2,045
Adjustments to reconcile net income to net cash provided (used) by operating
activities:
Depreciation and amortization................................................... 431 937 1,285
Provision for deferred taxes.................................................... (561) (452) 460
Changes in operating assets and liabilities -
Accounts receivable (including related party)................................. (2,978) (579) (3,406)
Inventories................................................................... (5,758) (6,433) (5,767)
Other assets.................................................................. (265) 212 (405)
Accounts payable.............................................................. (823) 3,198 4,556
Advances from customers (including related party)............................. 6,397 (2,585) 3,035
Other liabilities............................................................. 1,281 1,004 1,300
--------- --------- ---------
Total adjustments........................................................... (2,276) (4,698) 1,058
--------- --------- ---------
Net cash provided (used) by operating activities............................ (2,146) (1,519) 3,103
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures............................................................ (524) (3,680) (2,805)
--------- --------- ---------
Net cash used in investing activities....................................... (524) (3,680) (2,805)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from line of credit................................................ -- -- 527
Proceeds from notes payable (including related party)........................... 1,050 -- --
Payments on notes payable (including related party)............................. (3,200) -- --
Proceeds from long-term debt.................................................... -- 3,000 2,000
Payments on long-term debt and capital lease obligations........................ (458) (229) (1,452)
Proceeds from issuance of common stock and sale of preferred stock.............. 8,434 -- 58
--------- --------- ---------
Net cash provided by financing activities................................... 5,826 2,771 1,133
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents.............................. 3,156 (2,428) 1,431
Cash and cash equivalents, beginning of year...................................... 2 3,158 730
--------- --------- ---------
Cash and cash equivalents, end of year............................................ $ 3,158 $ 730 $ 2,161
--------- --------- ---------
--------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest........................................................................ $ 590 $ 346 $ 542
Income taxes.................................................................... $ 3 $ 147 $ 782
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
THE COMPANY
In 1990, CVC, Inc. (CVC or the Company) acquired CVC Products, Inc. (CVC
Products) at which time the Company was incorporated under the laws of the State
of Delaware. CVC Products had been originally founded in 1934 in Rochester, New
York as the experimental vacuum processing group of Eastman Kodak Company. The
Company maintains offices in Rochester, New York, Fremont, California, Dallas,
Texas and Minneapolis, Minnesota. Technical support and sales offices are
located in Europe and Japan.
CVC is engaged in the design, development, manufacturing and marketing of
thin film fabrication and processing equipment for the data storage and
semiconductor industries worldwide. The Company's products are focused on the
thin film recording head equipment market and semiconductor integrated circuit
market. In particular, the Company designs and manufactures modular,
multi-process, single wafer cluster tool deposition systems for commercial
production of thin film recording heads and semiconductor integrated circuits.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include its subsidiary,
CVC Products, after elimination of all significant intercompany balances and
transactions.
UNAUDITED PRO FORMA BALANCE SHEET
The Company's Series A and Series B Non-Cumulative Convertible Preferred
Stock automatically converts into Common Stock concurrent with the closing of an
initial public offering (Note 9). Accordingly, the unaudited pro forma balance
sheet has been presented on a basis to give effect to the automatic conversion
of such stock as of the closing date of the initial public offering which is
assumed to have been converted as of September 30, 1997.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
year-end as well as the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially expose the Company to significant
concentrations of credit risk consist principally of bank deposits, temporary
investments and accounts receivable (including related party receivables--Note
10). Cash is placed primarily in high quality short-term interest bearing
financial instruments.
The Company performs ongoing credit evaluations of its customers' financial
condition and the Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable.
F-7
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
and cash equivalents and accounts receivable approximates their fair value at
September 30, 1997 and 1996 as the maturity of these instruments are all short
term. Due to differences in the stated interest rates on certain short and long-
term debt obligations compared to prevailing rates, the fair value of these
instruments does vary from their carrying amounts; however, such differences are
immaterial.
REVENUE RECOGNITION
Revenue from the sale of equipment is recognized upon shipment. A provision
for estimated product warranty cost is recorded at the time revenue is
recognized. Amounts received from customers in advance of product shipment are
classified as advances from customers. Contract revenue for a research and
development program is recognized as services are performed in accordance with
such cost-plus-fixed-fee arrangement.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less.
INVENTORIES
Inventories, which include materials, labor and overhead, are recorded at
the lower of cost, determined by the first-in, first-out method, or market
value. The Company provides inventory reserves for excess, obsolete or
slow-moving inventory based on changes in customer demand, technology
developments, and other economic factors.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation is provided
on a straight-line basis over the estimated useful lives of 3 to 10 years for
equipment, furniture and fixtures and 40 years for buildings. Building
improvements are depreciated over the shorter of 10 years or the remaining life
of the building or the useful life of the improvement. Maintenance and repairs
are expensed as incurred. Improvements which extend the useful life of property,
plant and equipment are capitalized. Upon retirement or disposal of an asset,
the asset and the related accumulated depreciation are eliminated from the
accounts with gains and losses recorded in the statement of operations.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach
which requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax basis of such assets and liabilities.
F-8
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
This method utilizes enacted statutory tax rates in effect for the year in
which the temporary differences are expected to reverse and gives immediate
effect to changes in income tax rates upon enactment. Deferred tax assets are
recognized, net of any valuation allowance, for deductible temporary differences
and net operating loss and tax credit carryforwards.
CHANGE IN ACCOUNTING ESTIMATE
Effective October 1, 1995, the Company decreased the estimated service lives
of certain depreciable assets. The Company believes that the revised lives more
accurately reflect the estimated period of benefit of such assets. The change
resulted in a decrease in pre-tax income of $191,000 for the year ended
September 30, 1996.
NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which established standards for computing and presenting earnings per
share. The new standard replaces the presentation of primary earnings per share
prescribed by Accounting Principles Board Opinion (APB) No. 15, "Earnings per
Share," with a presentation of basic earnings per share and also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of operations for all entities with complex capital structures. Basic
earnings per share excludes dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share is computed similarly to
fully diluted earnings per share pursuant to APB 15. The Company will be
required to implement SFAS 128 in the first quarter of fiscal 1998 and to
restate all prior periods. The Company believes that adoption of SFAS 128 will
not have a significant impact on its earnings per share disclosures.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income"
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information." The Company will implement SFAS 130 and SFAS 131 as required in
fiscal 1999, which will require the Company to report and display certain
information related to comprehensive income and operating segments,
respectively. Adoption of SFAS 130 and SFAS 131 will not impact the Company's
financial position or results of operations.
PRO FORMA EARNINGS PER SHARE
Pro forma earnings per share is computed using the weighted average number
of common and common equivalent shares outstanding during the period. Common
equivalent shares consist of stock options, stock warrants and non-cumulative
convertible preferred stock as computed using the modified treasury stock
method, based upon the midpoint of the estimated initial public offering price
of $13.00. Pursuant to the Securities and Exchange Commission Staff Accounting
Bulletin, common and common equivalent shares issued by the Company during the
twelve month period prior to the initial filing of the registration statement
relating to the initial public offering through the effective date, have been
included in the computation using the treasury stock method, as if they were
outstanding for all periods prior to the initial public offering.
F-9
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
STOCK SPLIT
On October 14, 1997 the Company declared a 3-for-1 stock split in the form
of a stock dividend to stockholders of record at the close of business on
October 31, 1997. This increased the number of common shares outstanding by
849,260. All references in the consolidated financial statements referring to
share prices, conversion rates, per share amounts, stock option plans and common
shares issued and outstanding have been adjusted retroactively for the 3-for-1
stock split.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2--INVENTORIES
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Component parts............................................................................. $ 10,962 $ 14,954
Work-in-process............................................................................. 4,838 5,879
Finished goods.............................................................................. 954 1,812
--------- ---------
16,754 22,645
Less-Reserve for obsolescence........................................................... (450) (285)
--------- ---------
$ 16,304 $ 22,360
--------- ---------
--------- ---------
</TABLE>
NOTE 3--PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Land......................................................................................... $ 625 $ 625
Buildings and improvements................................................................... 3,924 4,490
Machinery and equipment...................................................................... 5,140 6,862
--------- ---------
9,689 11,977
Less-Accumulated depreciation............................................................ (1,803) (2,847)
--------- ---------
$ 7,886 $ 9,130
--------- ---------
--------- ---------
</TABLE>
Fixed assets include $2,326,000 and $2,220,000 of buildings and equipment
held under capital lease agreements at September 30, 1996 and 1997,
respectively. Related accumulated amortization at September 30, 1996 and 1997
was $339,000 and $347,000, respectively.
Total depreciation and amortization expense on fixed assets was $219,000,
$727,000 and $1,215,000 in 1995, 1996 and 1997, respectively. Total depreciation
expense on assets under capital leases was $68,000, $83,000 and $56,000 in 1995,
1996 and 1997, respectively.
F-10
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accrued payroll and benefits................................................................... $ 1,133 $ 1,176
Other current liabilities...................................................................... 2,050 3,238
--------- ---------
$ 3,183 $ 4,414
--------- ---------
--------- ---------
</TABLE>
NOTE 5--NOTES PAYABLE AND LONG-TERM DEBT
In August 1974, the Company entered into an agreement with a local
government agency under which the agency's bond proceeds of $2,400,000 were used
to purchase land and construct an operating facility for lease to the Company.
The industrial revenue bond obligation requires monthly payments of principal
and interest at 8% of approximately $19,000. In September 1997, the Company paid
off the remaining principal of the industrial revenue bond with the proceeds of
a new mortgage credit facility with a principal of $2,000,000. The lease term
extends to December 31, 2007, at which time title to the property passes, upon
payment of nominal consideration by the Company, to CVC. The new mortgage credit
facility requires monthly payments of approximately $16,000 through October 1,
2007, calculated based upon an amortization period of twenty years. In addition,
on October 1, 2007, the Company will pay a final installment equal to the
outstanding principal and interest on the credit facility based upon the actual
term of this facility which is ten years. The interest rate on $500,000 of the
mortgage credit facility is 5.29% until October 1, 1999, after which the rate
increases to 8.29% through September 30, 2002, consistent with the interest rate
on $1,500,000 of the credit facility. Beginning October 1, 2002, the Company
will elect to pay interest on the remaining principal at the then prime rate
plus one-half percent, or a rate equal to 225 basis points above the yield on
U.S. Treasury Bonds. The obligation is secured by certain land and buildings
with a net book value of $2,498,000 at September 30, 1997.
In December 1990, the Company borrowed $254,000 from former stockholders of
CVC Products, Inc. The obligation requires annual interest payments at 9%
through December 1997.
In November 1990, the Company borrowed $1,500,000 from a company whose
president is a director and shareholder of the Company. In December 1991, the
Company borrowed an additional $1,000,000 from this company. The borrowings are
evidenced by notes, which are unsecured and require quarterly interest payments
at an annual rate of 9%. In August 1997, the Company renegotiated the $1,500,000
note and extended the term to November 1998. The $1,000,000 note is due in
November 1997, however, the Company repaid this note in October 1997. Interest
expense on these notes totaled approximately $225,000 in 1995, 1996 and 1997.
In September 1996, the Company borrowed $3,000,000 from a commercial bank.
The five year term loan requires monthly payments of principal and interest at
prime plus 1/2% through October 1, 2001. The obligation is secured by certain
equipment and capital assets with a net book value of $2,450,000 at September
30, 1997.
The term loan contains financial covenants requiring the Company to maintain
certain debt to equity, capital, and current ratios, as well as certain customer
order, income, and operating cash flow levels. The agreement also imposes
limitations on the incurrence of additional debt. The Company is in compliance
with all covenants at September 30, 1997.
F-11
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
In connection with this term loan, the Company entered into an interest rate
cap contract in October 1996 to hedge the risk associated with rising interest
rates and capping the rate on this loan at 10 1/2%. The cost of the contract was
$29,000, which is being amortized over the term of the loan.
Bank lines of credit at September 30, 1997 aggregated $10,000,000.
Borrowings under the agreements are at an interest rate of prime plus 1/2%.
There was $527,000 outstanding under the lines of credit at September 30, 1997.
A summary of the notes payable and long-term debt outstanding is as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Term loan...................................................................................... $ 3,000 $ 2,450
Notes payable due former stockholders.......................................................... 254 127
Notes payable due related party................................................................ 2,500 2,500
Mortgage credit facility....................................................................... 775 2,000
Borrowings on line of credit................................................................... -- 527
--------- ---------
6,529 7,604
Less--Current portion...................................................................... 894 2,295
--------- ---------
$ 5,635 $ 5,309
--------- ---------
--------- ---------
</TABLE>
The aggregate maturities for debt over the next five years and thereafter
are as follows: 1998-- $2,295,000, 1999--$2,148,000, 2000--$652,000,
2001--$656,000 and 2002 and thereafter--$1,853,000.
NOTE 6--INCOME TAXES
The components of income taxes (benefit) are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal............................................................................ -- $ 145 $ 604
State.............................................................................. $ 15 307 392
--------- --------- ---------
15 452 996
Deferred:
Federal............................................................................ (874) (145) 475
State.............................................................................. (129) (307) (14)
--------- --------- ---------
(1,003) (452) 461
--------- --------- ---------
Benefit of acquired loss carryforwards used to reduce goodwill....................... 442 -- --
--------- --------- ---------
$ (546) -- $ 1,457
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-12
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--INCOME TAXES (CONTINUED)
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................................................ $ 1,382 $ 228
Inventories................................................................................. 230 266
State and federal tax credits............................................................... 176 100
Allowance for doubtful accounts............................................................. 37 59
Accrued compensation and benefits........................................................... 117 182
Other accruals.............................................................................. 188 707
--------- ---------
2,130 1,542
--------- ---------
Deferred tax liabilities:
Unamortized inventory accounting change..................................................... (1,008) (805)
Property, plant and equipment............................................................... (757) (832)
--------- ---------
(1,765) (1,637)
--------- ---------
Deferred tax asset valuation allowance........................................................ (155) (155)
--------- ---------
Net deferred tax asset (liability)............................................................ $ 210 $ (250)
--------- ---------
--------- ---------
</TABLE>
The differences between income taxes (benefit) at the U.S. statutory rate
and the effective rate are summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Provision (benefit) at federal statutory rate......................................... $ (141) $ 1,081 $ 1,191
State taxes, net of federal benefit................................................... (11) 228 213
Meals and entertainment............................................................... 22 31 53
Recognition of loss carryforwards..................................................... (433) (1,459) --
Other................................................................................. 17 119 --
--------- --------- ---------
$ (546) -- $ 1,457
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1996, the valuation allowance, which relates to net operating loss
carryforwards and state investment tax credits, was reduced by $1,459,000.
During 1995, the valuation allowance was reduced by $875,000. This recognition
of the net operating loss was accounted for as a reduction of the remaining
$442,000 of goodwill recorded on the acquisition of CVC Products by CVC and a
reduction of income tax expense of $433,000.
The net operating tax loss carryforwards of approximately $570,000 expire at
various times through 2010. Their use is limited to approximately $135,000 per
year; however, the annual limitation may be increased by any unused amount from
the prior year.
F-13
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--EMPLOYEE BENEFIT PLANS
The Company maintains a 401(k) profit sharing plan covering substantially
all employees who meet certain age and length of service requirements. The
Company contributes a percentage of the amount of salary deferral contributions
made by each participating employee. Any additional contributions by the Company
are discretionary. The amounts charged to expense related to this plan were
approximately $34,000, $80,000 and $92,000 in 1995, 1996 and 1997, respectively.
The Company had a noncontributory defined benefit pension plan. The Company
froze this plan effective September 30, 1991 at which time all benefits became
fully vested. Benefits were based on historical compensation levels and years of
service. The Company's funding policy is to contribute annually an amount, based
on actuarial computations, which would satisfy the Internal Revenue Service's
funding standards.
Net pension expense includes the following components:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Service cost........................................................... $ 10 $ 10 $ 9
Interest cost on projected benefit obligation.......................... 146 148 147
Actual return on plan assets........................................... (143) (144) (193)
Net amortization and deferral.......................................... (10) (6) 42
--- --- ---
Net pension expense.................................................... $ 3 $ 8 $ 5
--- --- ---
--- --- ---
</TABLE>
The funded status of the Plan was as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Actuarial present value of benefit obligations:
Accumulated benefit obligation........................................... $ 2,071 $ 2,059
--------- ---------
Projected benefit obligation............................................... 2,024 2,002
Plan assets at fair value.................................................. 1,901 1,936
--------- ---------
Projected benefit obligation in excess of plan assets...................... (123) (66)
Unrecognized net loss...................................................... (19) (21)
Unrecognized net transition asset.......................................... 77 68
Minimum pension liability.................................................. (143) (145)
--------- ---------
Accrued pension liability.................................................. $ (170) $ (122)
--------- ---------
--------- ---------
</TABLE>
The projected benefit obligation at September 30, 1996 and 1997 was
determined using a discount rate of 7.5%. The expected long-term rate of return
on plan assets was 8.5% in 1996 and 1997. Plan assets are maintained in group
annuity contracts with an insurance company.
The unamortized transition asset is being amortized over the remaining
service lives of the participants which approximates seven years.
The Company has recorded an additional minimum pension liability
representing the excess of the unfunded accumulated benefit obligation over plan
assets. The additional minimum liability was charged to stockholders' equity,
net of income taxes.
F-14
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides health care benefits to all retirees and life insurance
benefits to retired hourly employees. The Company adopted the provisions of SFAS
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions," as of October 1, 1995. As permitted under SFAS No. 106, the Company
has elected to amortize the unfunded accrued postretirement benefit obligation
at adoption over a 20-year period.
Details of costs for retiree benefits are as follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Service cost for benefits earned.............................................. $ 31 $ 68
Interest cost on benefit obligation........................................... 81 82
Amortization.................................................................. 56 56
--------- ---------
Retiree health care cost...................................................... $ 168 $ 206
--------- ---------
--------- ---------
</TABLE>
An analysis of amounts shown in the consolidated balance sheet is as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................. $ 879 $ 852
Active participants...................................................... 272 346
--------- ---------
1,151 1,198
Unrecognized net gain...................................................... -- 18
Unrecognized transition obligation......................................... (1,055) (1,000)
--------- ---------
Retirement benefit liability............................................... $ 96 $ 216
--------- ---------
--------- ---------
</TABLE>
The funding policy for retiree health care and life insurance benefits is
generally to pay covered expenses as they are incurred.
The actuarial calculation assumes a health care average inflation assumption
of 6.1% in 1997 and grades down uniformly to 4% in 2004 and remains level
thereafter. The health care cost trend rate has an effect on the amounts
reported. Increasing the health care inflation rate by 1% would increase the
September 30, 1997 accumulated postretirement benefit obligation by $150,000,
and the 1997 net postretirement health care cost by $34,000. The weighted
average rate of compensation increase and discount rate used in determining the
accumulated postretirement benefit obligation was 3% and 7.5%, respectively.
NOTE 9--STOCKHOLDERS' EQUITY
In 1990, the Company issued 1,685 shares of 8% Series A Non-Cumulative
Convertible Preferred Stock (Series A Preferred Stock). The Series A Preferred
Stock is convertible at any time at the option of the holder into common stock
at the rate of 2,400 shares of common stock for each share of Series A Preferred
Stock. The liquidation preference of each share of Series A Preferred Stock is
$1,000 and all declared but unpaid dividends. Preferred voting rights are one
vote for each share of common stock into which the preferred shares may be
converted. The Series A Preferred Stock will be automatically
F-15
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
converted to 4,044,000 shares of common stock upon the closing of an initial
public offering with a net price per share in excess of $8.33 and aggregate
gross proceeds of $10,000,000.
In May 1995, the Company issued 60,492 shares of Series B Non-Cumulative
Convertible Preferred Stock (Series B Preferred Stock). The Series B Preferred
Stock is convertible at any time at the option of the holder into common stock
at the rate of 60 shares of common stock for each share of Series B Preferred
Stock. Preferred voting rights are one vote for each share of common stock into
which the preferred shares may be converted. The Series B Preferred Stock will
be automatically converted to 3,629,520 shares of common stock upon the closing
of an initial public offering with a net price per share in excess of $8.33 and
aggregate gross proceeds of $10,000,000.
In connection with the issuance of Series B Preferred Stock, the holder was
granted a seven-year warrant to purchase 19,769 shares of Series B Preferred
Stock at an exercise price of $223.17 per share of Series B Preferred Stock.
Expenses directly associated with this issuance of approximately $645,000 were
netted against proceeds. The liquidation preference of each share of Series B
Preferred Stock is $148.78 and all declared but unpaid dividends. Upon the
automatic conversion of the Company's then outstanding shares of Series B
Preferred Stock coincident to the closing of an initial public offering, the
Company will execute a new warrant to the holder, with terms similar to the
original Series B warrant, to purchase 1,186,140 shares of the Company's Common
Stock at an exercise price of $3.72 per share in lieu of Series B Preferred
Stock.
On October 14, 1997, the Company filed a Certificate of Amendment to the
Certificate of Incorporation which increased total authorized common stock to
50,000,000 shares, $.01 par value.
The Company grants options to key employees to purchase its common stock,
generally at fair market value as of the date of grant, based upon valuations
obtained contemporaneously from an independent appraiser. Such valuations have
been obtained by the Company, primarily on a quarterly basis, since June 30,
1995. The Company recognizes compensation expense in accordance with APB Opinion
No. 25, "Accounting for Stock Issued to Employees," which requires compensation
cost to be recognized based on the fair market value of options on the grant
date. Options vest over a 3 to 5 year period and expire after 10 years from the
date of grant.
During fiscal 1997, approximately 305,000 options were granted to employees
at an amount which was less than the fair market value as of the grant date.
Accordingly, the Company recorded unamortized deferred compensation expense for
such options which vest over a 3-to-5 year period. Compensation expense will be
amortized over the vesting period and unamortized compensation expense has been
recorded as a reduction in stockholders' equity.
F-16
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--STOCKHOLDERS' EQUITY (CONTINUED)
Stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE PER
SHARES SHARE
---------- --------------
<S> <C> <C>
Outstanding at September 30, 1995................................ 2,162,760 $ .42 - $2.12
Granted...................................................... 291,300 $ 2.69
Canceled..................................................... 76,500 $ .42 - $2.69
----------
Outstanding at September 30, 1996................................ 2,377,560 $ .42 - $2.69
Granted...................................................... 609,900 $ 2.00 - $3.82
Canceled..................................................... 177,000 $ .42 - $3.23
Exercised.................................................... 180,300 $ .42 - $2.69
----------
Outstanding at September 30, 1997................................ 2,630,160 $ .42 - $3.82
</TABLE>
At September 30, 1997, options for 1,929,360 shares were exercisable and
420,300 shares were available for grant.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This new standard encourages, but does not require, recognition
of compensation expense based on a fair value method of accounting for stock
options. The standard requires additional disclosure if the fair value method
materially differs from that calculated under APB Opinion No. 25. The Company
has elected to continue to account for its employee stock plans in accordance
with the provisions of APB Opinion No. 25 based on the fair market value of
options at the grant date. The Company has not disclosed pro forma information
under SFAS No. 123 as the effect of this pronouncement prior to the initial
public offering of the Company's common stock is not significant.
In October 1997, the Board of Directors and stockholders approved a new
stock option plan, the 1997 Stock Option Plan (the "Plan"), under which options
may be granted to employees of the Company. The Plan permits the grant of stock
options that qualify as incentive stock options under Section 422 of the
Internal Revenue Code, and nonqualified stock options, which do not so qualify.
The Company has authorized and reserved 1,250,000 shares of common stock for
issuance under the Plan. The Board of Directors and Stockholders have also
approved in October 1997, the Nonemployee Directors' Stock Option Plan, under
which options for 10,000 shares of common stock are granted to each nonemployee
director upon commencement of service on the Board, and options for 3,000 shares
of common stock are granted to each nonemployee director on March 31 of each
year of continued service on the Board. The Company has authorized and reserved
250,000 shares of common stock for issuance under such plan.
NOTE 10--TRANSACTIONS WITH RELATED PARTIES
At September 30, 1996 and 1997, the Company had borrowings of $2,500,000
from a company whose president is a director and shareholder of the Company
(Note 5). In addition to these borrowings, the Company borrowed and subsequently
repaid approximately $1,000,000 at 9% from this company during 1995. In August
1997, the Company renegotiated $1,500,000 of these borrowings and extended the
term to November 1998. In October 1997, the Company repaid $1,000,000 of the
aggregate $2,500,000 borrowings. Borrowings from this related party are reported
as such in the balance sheets.
Seagate Technology (Seagate), which provides products for storing, managing
and accessing digital information on computers and data communications systems,
is the Company's largest customer (Note 11)
F-17
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
and a significant stockholder. In 1995, the Company sold 60,492 shares of its
Series B Preferred Stock to Seagate, a previously unrelated party (Note 9).
Revenues, cost of goods sold, accounts receivable and customer advances
associated with transactions between the Company and Seagate are reported as
related party in the statements of operations and balance sheets. Management
believes the selling prices and sales terms of such transactions are
substantially consistent with those for unrelated third parties.
NOTE 11--SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
For the year ended September 30, 1995, sales to the Company's three largest
customers comprised 27%, 15% and 15% of revenues, respectively. For the year
ended September 30, 1996 sales to the Company's two largest customers comprised
57% and 13% of revenues, respectively. For the year ended September 30, 1997
sales to the Company's two largest customers comprised 47% and 11% of revenues,
respectively.
Export sales to customers (including related party sales) outside the United
States represent 13%, 19% and 31% of the Company's revenues for the years ended
September 30, 1995, 1996 and 1997, respectively. These export sales were made to
the following geographic regions:
<TABLE>
<CAPTION>
EUROPE ASIA-PACIFIC CANADA TOTAL
------------ ------------- ---------- -------------
<S> <C> <C> <C> <C>
1995................................... $ 890,000 $ 1,775,000 $ 19,000 $ 2,684,000
1996................................... 6,238,000 3,013,000 33,000 9,284,000
1997................................... 5,746,000 13,209,000 507,000 19,462,000
</TABLE>
NOTE 12--COMMITMENTS
The Company leases various equipment and facilities under operating lease
agreements. Rental expense under operating lease agreements was approximately
$99,000, $237,000 and $289,000 in 1995, 1996 and 1997, respectively. The future
minimum lease payments under non-cancelable lease agreements are $298,000 in
1998, $258,000 in 1999, $207,000 in 2000, $76,000 in 2001 and $12,000 in 2002.
F-18
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDER OR ANY
UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED
HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY DATE SUBSEQUENT TO THE DATE HEREOF.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 3
Risk Factors.................................... 6
The Company..................................... 14
Use of Proceeds................................. 14
Dividend Policy................................. 14
Capitalization.................................. 15
Dilution........................................ 16
Selected Consolidated Financial Data............ 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 18
Business........................................ 24
Management...................................... 37
Certain Transactions............................ 45
Principal and Selling
Stockholders.................................. 46
Description of Capital Stock.................... 48
Shares Eligible for Future Sale................. 50
Underwriting.................................... 52
Legal Matters................................... 53
Experts......................................... 53
Additional Information.......................... 53
Index to Consolidated Financial
Statements.................................... F-1
</TABLE>
--------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
3,900,000 SHARES
[LOGO]
COMMON STOCK
--------------
PROSPECTUS
--------------
BT ALEX. BROWN
HAMBRECHT & QUIST
PAINEWEBBER INCORPORATED
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Common Stock offered hereby, other than underwriting discounts and commissions:
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission.............. $ 19,027
NASD Filing Fee................................................... 50,000
Blue Sky fees and expenses........................................ 10,000
Accountants' fees and expenses.................................... 160,000
Legal fees and expenses........................................... 200,000
Printing and engraving expenses................................... 120,000
Transfer agent and registrar fees................................. 10,000
Miscellaneous..................................................... 180,973
---------
Total......................................................... $ 750,000
---------
---------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or enterprise,
against expenses, judgments, fines and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding if
he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses actually
and reasonably incurred by him in connection with the defense or settlement of
such action or suit if he acted under similar standards, except that no
indemnification may be made in respect of any claim, issue or matter as to which
such person shall have been adjudged to be liable to the corporation unless and
only to the extent that the court in which such action or suit was brought shall
determine that despite the adjudication of liability, such person is fairly and
reasonably entitled to be indemnified for such expenses which the court shall
deem proper.
Section 145 of the DGCL further provides that to the extent a director or
officer of a corporation has been successful in the defense of any action, suit
or proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue, or matter therein, he shall be indemnified against any expenses
actually and reasonably incurred by him in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of any
rights to which the indemnified party may be entitled; and that the corporation
may purchase and maintain insurance on behalf of a director or officer of the
corporation against any liability asserted against him or incurred by him in any
such capacity or arising out of his status as such whether or not the
corporation would have the power to indemnify him against such liabilities under
Section 145.
II-1
<PAGE>
Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for breach of a director's fiduciary duty.
However, no such provision may eliminate or limit the liability of a director
for breaching his duty of loyalty, failing to action good faith, engaging in
intentional misconduct or knowingly violating a law, paying a dividend or
approving a stock repurchase which was illegal, or obtaining an improper
personal benefit. A provision of this type has no effect on the availability of
equitable remedies, such as injunction or rescission, for breach of fiduciary
duty. The Company's Restated Certificate of Incorporation contains such a
provision.
The Company's Certificate of Incorporation and By-Laws provide that the
Company shall indemnify officers and directors and, to the extent permitted by
the Board of Directors, employees and agents of the Company, to the full extent
permitted by and in the manner permissible under the laws of the State of
Delaware. In addition, the By-Laws permit the Board of Directors to authorize
the Company to purchase and maintain insurance against any liability asserted
against any director, officer, employee or agent of the Company arising out of
his capacity as such.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Registrant has issued securities to a
limited number of persons, as described below. No underwriter or underwriting
discounts or commissions were involved. There was no public offering in such
transaction and the Company believes that such transaction was exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by reason of Section 4(2) thereof based on the private nature
of the transactions and the sophistication of the purchasers, all of whom had
access to information concerning the Registrant and acquired the securities for
investment and not with a view to the distribution thereof.
In May 1995, the Company issued and sold 60,492 shares of Series B
Convertible Preferred Stock to Seagate Technology, Inc. for a price of $148.78
per share. Upon completion of the Offering, these shares are convertible into
3,629,520 shares of such Common Stock. The Company also sold to Seagate
Technology a warrant to purchase 19,769 shares of Series B Convertible Preferred
Stock at an exercise price of $223.17 per share of Series B Convertible
Preferred Stock during the seven-year period commencing on the warrant issuance
date (May 22, 1995). Upon consummation of the Offering, such warrant will become
exercisable for 1,186,140 shares of Common Stock at an exercise price of $3.72
per share of Common Stock. See "Certain Transactions" and "Description of
Capital Stock."
The following figures give effect to a 20-1 stock split in December 1995 and
a 3-1 stock split in October 1997.
On October 18, 1994, Victor Mann purchased 24,000 shares of Common Stock for
$10,000.
On November 29, 1994, Lino Velo purchased 28,800 shares of Common Stock for
$12,000.
On December 5, 1994, Phillip Chapados purchased 24,000 shares of Common
Stock for $12,500.
On December 5, 1994, Yong Jin Lee purchased 30,000 shares of Common Stock
for $10,000.
On December 7, 1994, Thomas Omstead purchased 12,000 shares of Common Stock
for $5,000.
On December 30, 1994, Mehrdad Moslehi, Senior Vice President and Chief
Technical Officer, purchased 48,000 shares of Common Stock for $20,000.
During the fiscal year ended September 30, 1995, the Company granted options
to acquire an aggregate of 414,000 shares of Common Stock at exercise prices
ranging from $0.42 to $2.12. During this period, options to acquire an aggregate
of 120,000 shares of Common Stock at an exercise price of $0.42 were cancelled.
During the fiscal year ended September 30, 1996, the Company granted options
to acquire an aggregate of 291,300 shares of Common Stock at an exercise price
of $2.69 to various directors, officers, employees and/or consultants. During
this period, options to acquire an aggregate of 76,500 shares of Common Stock at
exercise prices ranging from $0.42 to $2.69 were cancelled.
II-2
<PAGE>
On March 18, 1997, Mehrdad Moslehi, Senior Vice President and Chief
Technical Officer, purchased 30,000 shares of Common Stock for $12,500.
On March 18, 1997, Patrick Borrelli purchased 300 shares of Common Stock for
$808.
On April 1, 1997, the Company issued 14,850 shares of Common Stock to
various non-employee directors as payment of their annual retainer.
On June 6, 1997, Mehrdad Moslehi, Senior Vice President and Chief Technical
Officer, purchased 90,000 shares of Common Stock for $37,500.
On August 11, 1997, Yong Jin Lee purchased 30,000 shares of Common Stock for
$12,500.
On September 15, 1997, Cecil Davis purchased 30,000 shares of Common Stock
for $25,000.
During the fiscal year ended September 30, 1997, the Company granted options
to acquire an aggregate of 609,900 shares of Common Stock at exercise prices
ranging from $2.00 to $3.82 to various directors, officers, employees and/or
consultants; during the same period, options to acquire an aggregate of 177,000
shares of Common Stock at exercise prices ranging from $0.42 to $3.23 were
cancelled and options to acquire an aggregate of 180,300 shares of Common Stock
at exercise prices ranging from $0.42 to $2.69 were exercised.
II-3
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<S> <C>
1.1 -- Underwriting Agreement*
3.1 -- Restated Certificate of Incorporation of the Registrant+
3.2 -- Restated By-Laws of the Registrant+
4.1 -- Specimen Certificate for Common Stock of the Registrant*
5.1 -- Opinion of Dewey Ballantine LLP*
10.1 -- 1997 Stock Option Plan*
10.3 -- Nonemployee Directors' Stock Option Plan*
10.4 -- Form of Employment Agreement*
10.5 -- Union Agreement, dated August 25, 1995, between the Registrant and Local 342,
International Union of Electronic, Electrical, Salaried, Machine & Furniture
Workers**
10.6 -- Securities Purchase Agreement, dated May 22, 1995, between the Registrant and
Seagate Technology, Inc.**
10.7 -- Registration Rights Agreement, dated May 22, 1995, among the Registrant, Seagate
Technology, Inc. and certain stockholders of the Registrant**
10.8 -- Series B Preferred Stock Purchase Warrant, dated May 22, 1995, between the
Registrant and Seagate Technology, Inc.**
10.9 -- U.S. $1,000,000 Subordinated Promissory Note, dated November 14, 1990, between the
Registrant and Nikko Tecno Co., Inc.**
10.10 -- U.S. $500,000 Subordinated Promissory Note, dated November 14, 1990, between the
Registrant and Nikko Tecno Co., Inc.**
10.11 -- Letter extending repayment of U.S. $1,000,000 and U.S. $500,000 Subordinated
Promissory Notes, dated August 18, 1997, by Nikko Tecno Co., Inc.**
10.12 -- Mortgage Note, dated September 29, 1997, between Registrant and M&T Real Estate,
Inc.**
10.13 -- Mortgage, dated September 29, 1997, between Registrant and M&T Real Estate, Inc.**
10.14 -- Continuing Guaranty, dated September 29, 1997, between Registrant and M&T Real
Estate, Inc.**
10.15 -- General Assignment of Rights, dated September 29, 1997, between Registrant and M&T
Real Estate, Inc.**
10.16 -- Amendment No. 1 to General Security Agreement, dated September 29, 1997, by and
among the Registrant, M&T Trust Company and M&T Real Estate, Inc.**
10.17 -- Amended and Restated Lease Agreement, dated September 29, 1997, between Registrant
and M&T Real Estate, Inc.**
10.18 -- Bill of Sale, dated September 29, 1997, executed by Registrant**
10.19 -- Lease Agreement, dated October 19, 1995, between Registrant and SCI Limited
Partnership - I+
10.20 -- $3,000,000 Term Loan Note Agreement, dated September 30, 1996, by Registrant and
M&T Company**
10 .21 -- Letter of Credit Reimbursement Agreement**
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.22 -- Continuing Guaranty of CVC Holdings, dated September 30, 1996, by Registrant**
10.23 -- Continuing Guaranty of CVC Products, dated February 2, 1996, by Registrant**
10.24 -- General Security Agreement of CVC Products, dated September 30, 1996, by
Registrant**
10.25 -- General Security Agreement of CVC Holdings, dated September 30, 1996, by
Registrant**
10.26 -- U.S. $1,000,000 subordinated Promissary Note, dated December 20, 1991, between the
Registrant and Nikko Tecno Co., Inc.+
11.0 -- Computation of Earnings Per Share+
21.1 -- List of Subsidiary**
23.1 -- Consent of Price Waterhouse LLP+
23.3 -- Consent of Dewey Ballantine LLP (contained in Exhibit 5.1)
24.1 -- Power of Attorney (included on page II-5)**
27.1 -- Financial Data Schedule+
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed
+ Filed herewith
(b) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Consolidated Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester,
State of New York, on November 13, 1997.
CVC, INC.
By: /s/ CHRISTINE B. WHITMAN
-----------------------------------------
Christine B. Whitman
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement has been signed by the following persons
on November 13, 1997 in the capacities indicated:
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Chairman of the Board, November 13, 1997
/s/ CHRISTINE B. WHITMAN Chief Executive Officer and
- ------------------------------ President (principal
Christine B. Whitman executive officer)
Senior Vice President and November 13, 1997
/s/ EMILIO O. DICATALDO Chief Financial Officer
- ------------------------------ (principal accounting and
Emilio O. DiCataldo financial officer)
Director November , 1997
- ------------------------------
Robert C. Fink
/s/ JAMES GEATER* Director November 13, 1997
- ------------------------------
James Geater
/s/ BRENDAN C. HEGARTY* Director November 13, 1997
- ------------------------------
Brendan C. Hegarty
II-6
<PAGE>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
Director November , 1997
- ------------------------------
Victor E. Mann
/s/ SEIYA MIYANISHI* Director November 13, 1997
- ------------------------------
Seiya Miyanishi
/s/ ANDREW C. PESKOE* Director November 13, 1997
- ------------------------------
Andrew C. Peskoe
Director November , 1997
- ------------------------------
Donald L. Waite
*By: /s/ EMILIO O. DICATALDO
-------------------------
Emilio O. DiCataldo
(ATTORNEY IN FACT)
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit Page No.
- ----------- ---------------------------------------------------------------------------- -----------
<S> <C> <C>
1.1 -- Underwriting Agreement*
3.1 -- Restated Certificate of Incorporation of the Registrant+
3.2 -- Restated By-Laws of the Registrant+
4.1 -- Specimen Certificate for Common Stock of the Registrant*
5.1 -- Opinion of Dewey Ballantine LLP*
10.1 -- 1997 Stock Option Plan*
10.3 -- Nonemployee Directors' Stock Option Plan*
10.4 -- Form of Employment Agreement*
10.5 -- Union Agreement, dated August 25, 1995, between the Registrant and Local
342, International Union of Electronic, Electrical, Salaried, Machine &
Furniture Workers**
10.6 -- Securities Purchase Agreement, dated May 22, 1995, between the Registrant
and Seagate Technology, Inc.**
10.7 -- Registration Rights Agreement, dated May 22, 1995, among the Registrant,
Seagate Technology, Inc. and certain stockholders of the Registrant**
10.8 -- Series B Preferred Stock Purchase Warrant, dated May 22, 1995, between
the Registrant and Seagate Technology, Inc.**
10.9 -- U.S. $1,000,000 Subordinated Promissory Note, dated November 14, 1990,
between the Registrant and Nikko Tecno Co., Inc.**
10.10 -- U.S. $500,000 Subordinated Promissory Note, dated November 14, 1990,
between the Registrant and Nikko Tecno Co., Inc.**
10.11 -- Letter extending repayment of U.S. $1,000,000 and U.S. $500,000
Subordinated Promissory Notes, dated August 18, 1997, by Nikko Tecno Co.,
Inc.**
10.12 -- Mortgage Note, dated September 29, 1997, between Registrant and M&T Real
Estate, Inc.**
10.13 -- Mortgage, dated September 29, 1997, between Registrant and M&T Real
Estate, Inc.**
10.14 -- Continuing Guaranty, dated September 29, 1997, between Registrant and M&T
Real Estate, Inc.**
10.15 -- General Assignment of Rights, dated September 29, 1997, between
Registrant and M&T Real Estate, Inc.**
10.16 -- Amendment No. 1 to General Security Agreement, dated September 29, 1997,
by and among the Registrant, M&T Trust Company and M&T Real Estate, Inc.**
10.17 -- Amended and Restated Lease Agreement, dated September 29, 1997, between
Registrant and M&T Real Estate, Inc.**
10.18 -- Bill of Sale, dated September 29, 1997, executed by Registrant**
10.19 -- Lease Agreement, dated October 19, 1995, between Registrant and SCI
Limited Partnership - I+
10.20 -- $3,000,000 Term Loan Note Agreement, dated September 30, 1996, by
Registrant and M&T Company**
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
10.21 -- Letter of Credit Reimbursement Agreement**
10.22 -- Continuing Guaranty of CVC Holdings, dated September 30, 1996, by
Registrant**
10.23 -- Continuing Guaranty of CVC Products, dated February 2, 1996, by
Registrant**
10.24 -- General Security Agreement of CVC Products, dated September 30, 1996, by
Registrant**
10.25 -- General Security Agreement of CVC Holdings, dated September 30, 1996, by
Registrant**
10.26 -- U.S. $1,000,000 Subordinated Promissory Note, dated December 20, 1991,
between the Registrant and Nikko Tecno. Co., Inc.+
11.0 -- Computation of Earnings Per Share+
21.1 -- List of Subsidiary**
23.1 -- Consent of Price Waterhouse LLP+
24.1 -- Power of Attorney (included on page II-5)**
27.1 -- Financial Data Schedule+
</TABLE>
- ------------------------
* To be filed by amendment.
** Previously filed
+ Filed herewith
<PAGE>
Exhibit 3.1
PAGE 1
STATE OF DELAWARE
OFFICE OF THE SECRETARY OF STATE
--------------------------------
I, EDWARD J. FREEL, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO
HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF
AMENDMENT OF "CVC HOLDINGS, INC.", CHANGING ITS NAME FROM "CVC HOLDINGS,
INC." TO "CVC, INC.", FILED IN THIS OFFICE ON THE FIFTEENTH DAY OF OCTOBER,
A.D. 1997, AT 12 O'CLOCK P.M.
A CERTIFIED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE
COUNTY RECORDER OF DEEDS FOR RECORDING.
/s/ Edward J. Freel
---------------------------------------
EDWARD J. FREEL, SECRETARY OF STATE
[SEAL]
AUTHENTICATION: 8704832
DATE: 10-16-97
<PAGE>
CERTIFICATE OF AMENDMENT TO
RESTATED CERTIFICATE OF
INCORPORATION OF
CVC HOLDINGS, INC.
CVC Holdings, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is CVC Holdings, Inc.
2. The original Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on October 19, 1990,
and was amended pursuant to a Restated Certificate of Incorporation of the
Corporation filed with the Secretary of State of the State of Delaware on May
18, 1995.
3. This Restated Certificate of Incorporation is hereby further
amended as follows:
A. Article I shall be deleted and replaced in its entirety with the
following:
ARTICLE I
The name of the Corporation is CVC, Inc.
B. The second and third sentences of Article IV(a) shall be deleted
and replaced in their entirety by the following:
The total number of shares which the Corporation is authorized to
issue is 50,102,500. The total number of shares of Common Stock which the
Corporation is authorized to issue is 50,000,000, par value $.01 per share.
C. The first sentence of Section 5(b) of Article IV shall be deleted
and replaced in its entirety by the following:
The Board of Directors of the Corporation shall consist of not less
than three (3) members, the exact number to be fixed from time to time solely by
resolution of the Board of Directors acting by not less than a majority of the
directors then in office.
4. The amendments to the Restated Certificate of Incorporation as
hereinabove set forth have been duly adopted in accordance with Section 242 of
the General Corporation Law of the State of Delaware.
<PAGE>
IN WITNESS WHEREOF, CVC Holdings, Inc. has caused this Certificate to be
signed by Christine B. Whitman, its President, this 15th day of October, 1997.
CVC HOLDINGS, INC.
/s/ Christine B. Whitman
----------------------------
Christine B. Whitman,
President
2
<PAGE>
Exhibit 3.2
RESTATED BY-LAWS
OF
CVC HOLDINGS, INC.
(A Delaware Corporation)
ARTICLE I
STOCK AND
STOCKHOLDERS
1. CERTIFICATES REPRESENTING STOCK. Every holder of stock in the
corporation shall be entitled to have a certificate signed by, or in the name
of, the corporation by the President or a Vice-President and by the Treasurer or
an Assistant Treasurer or the Secretary or an Assistant Secretary of the
corporation certifying the number of shares owned by him in the corporation. Any
and all signatures on any such certificate may be facsimiles. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue.
Whenever the corporation shall be authorized to issue more than one
class of stock or more than one series of any class of stock, and whenever the
corporation shall issue any shares of its stock as partly paid stock, the
certificate representing shares of any such class or series or of any such
partly paid stock shall set forth thereon the statements prescribed by the
General Corporation Law. Any restrictions on the transfer or registration of
transfer of any shares of stock of any class or series shall be noted
conspicuously on the certificate representing such shares.
The corporation may issue a new certificate of stock in place of any
certificate theretofore issued by it, alleged to have been lost, stolen, or
destroyed, and the Board of Directors may require the owner of any lost, stolen,
or destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify the corporation against any claim
<PAGE>
that may be made against it on account of the alleged loss, theft, or
destruction of any such certificate or the issuance of any such new certificate.
2. FRACTIONAL SHARE INTERESTS. The corporation may, but shall not be
required to, issue fractions of a share of stock. If the corporation does not
issue fractions of a share, it shall (1) arrange for the disposition of
fractional interests by those entitled thereto, (2) pay in cash the fair value
of fractions of a share of stock as of the time when those entitled to receive
such fractions are determined, (3) issue scrip or warrants in registered or
bearer form which shall entitle the holder to receive a certificate for a full
share upon the surrender of such scrip or warrants aggregating a full share. A
certificate for a fractional share shall, but such scrip or warrants shall not
unless provided therein, entitle the holder to exercise voting rights, to
receive dividends thereon, and to participate in any of the assets of the
corporation in the event of liquidation. The Board of Director's may cause scrip
or warrants to be issued subject to the condition that they shall become void if
not exchanged for certificates representing full shares of stock before a
specified date, or subject to the condition that the shares of stock for which
scrip or warrants are exchangeable may be sold by the corporation and the
proceeds thereof distributed to the holders of scrip or warrants, or subject to
any other conditions which the Board of Directors may determine.
3. STOCK TRANSFERS. Upon compliance with provisions restricting the
transfer or registration of transfer of shares of stock, if any, transfers or
registration of transfers of shares of stock of the corporation shall be made
only on the stock ledger of the corporation by the registered holder thereof, or
by his attorney thereunder authorized by power of attorney duly executed and
filed with the Secretary of the corporation or with a transfer agent or a
registrar, if any, and on surrender of the certificate or certificates for such
shares of stock properly endorsed and the payment of all taxes due thereon.
4. RECORD DATE FOR STOCKHOLDERS. For the purpose of determining the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to or dissent from any corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or the allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion, or exchange of stock,
or for the purpose of any other lawful action, the directors may fix, in
advance, a date as the record date for any such determination of stockholders.
Such date shall not be more than sixty days nor less than ten days
-2-
<PAGE>
before the date of such meeting, nor more than sixty days prior to any other
action. If no record date is fixed, the record date for the determination of
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day next preceding the day on which notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held; the record date for determining
stockholders entitled to express consent to corporate action in writing without
a meeting, when no prior action by the Board of Directors is necessary, shall be
the day on which the first written consent is expressed; and the record date for
determining stockholders for any other purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto. When a determination of stockholders of record entitled to notice of or
to vote at any meeting of stockholders has been made as provided in this
paragraph, such determination shall apply to any adjournment thereof; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
5. STOCKHOLDER MEETINGS.
- TIME. The annual meeting shall be held on the date and at the time
fixed from time to time by the Board of Directors, provided, that the first
annual meeting shall be held on a date within thirteen months after the
organization of the corporation, and each successive annual meeting shall be
held on date within thirteen months after the date of the preceding annual
meeting. A special meeting shall be held on the date and at the time fixed by
the Board of Directors.
- PLACE. Annual meetings and special meetings shall be held at such
place, within or without the State of Delaware, as the Board of Directors may
from time to time fix. Whenever the Board of Directors shall fail to fix such
place, the meeting shall be held at the principal executive office of the
corporation.
- CALL. Annual meetings and special meetings may be called by the
Board of Directors, the President, or any two or more directors, and shall be
called by the President or a Vice President or the Secretary at the written
demand of the holders of at least one-fourth of all outstanding shares entitled
to vote on the action proposed to be taken at such meeting, which demand shall
state the purpose or purposes of the proposed meeting.
- NOTICE OR WAIVER OF NOTICE. Written notice of all meetings shall
be given, stating the place, date, and hour of the meeting and stating the place
within the city or other municipality or community at which the list of
stockholders of
-3-
<PAGE>
the corporation may be examined. The notice of an annual meeting shall state
that the meeting is called for the election of directors and for the transaction
of other business which may properly come before the meeting, and shall (if any
other action which could be taken at a special meeting is to be taken at such
annual meeting) state the purpose or purposes. The notice of a special meeting
shall in all instances state the purpose or purposes for which the meeting is
called. The notice of any meeting shall also include, or be accompanied by, any
additional statements, information or documents prescribed by the General
Corporation Law. Except as otherwise provided by the General Corporation Law, a
copy of the notice of any meeting shall be given, personally or by mail, not
less than ten days nor more than sixty days before the date of the meeting,
unless the lapse of the prescribed period of time shall have been waived, and
directed to each stockholder at his record address or at such other address
which he may have furnished by request in writing to the Secretary of the
corporation. Notice by mail shall be deemed to be given when deposited, with
postage thereon prepaid, in the United States mail. If a meeting is adjourned to
another time, not more than thirty days hence, and/or to another place, and if
an announcement of the adjourned time and place is made at the meeting, it shall
not be necessary to give notice of the adjourned meeting unless the directors,
after adjournment, fix a new record date for the adjourned meeting. Notice need
not be given to any stockholder who submits a written waiver of notice signed
by him before or after the time stated therein. Attendance of a person at a
meeting of stockholders shall constitute a waiver of notice of such meeting,
except when the Stockholder attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders need be specified in any written waiver of notice.
- STOCKHOLDER LIST. The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city or other
municipality or community where the meeting is to be held, which place shall be
specified in the notice of the meeting, or if not so specified, at the place
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the
-4-
<PAGE>
meeting during the whole time thereof, and may be inspected by any stockholder
who is present. The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
section or the books of the corporation, or to vote in person or by proxy at any
meeting of stockholders.
- CONDUCT OF MEETING. Meetings of the stockholders shall be presided
over by one of the following officers in the order of seniority and if present
and acting - the President, a Vice-President, or, if none of the foregoing is in
office and present and acting, by a chairman to be chosen by the stockholders.
The Secretary of the corporation, or in his absence, an Assistant Secretary,
shall act as secretary of every meeting, but if neither the Secretary nor an
Assistant Secretary is present the chairman of the meeting shall appoint a
secretary of the meeting.
- PROXY REPRESENTATION. Each stockholder entitled to vote at a
meeting of stockholders, or to express consent or dissent to corporate action
without a meeting, may authorize another person or persons to act for him by
proxy. Every proxy must be signed by the stockholder or by his
attorney-in-fact. No Proxy shall be voted or acted upon after three years from
its date unless such proxy provides for a longer period. A duly executed proxy
shall be irrevocable if it states that it is irrevocable and, if, and only as
long as, it is coupled with an interest sufficient in law to support an
irrevocable power. A Proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the corporation generally.
- INSPECTORS AND JUDGES. The Board of Directors, in advance of any
meeting, may, but need not, appoint one or more inspectors of election or judges
of the vote, as the case may be, to act at the meeting or any adjournment
thereof. If an inspector or inspectors or judge or judges are not appointed, the
person presiding at the meeting may, but need not, appoint one or more
inspectors or judges. In case any person who may be appointed as an inspector or
judge fails to appear or act, the vacancy may be filled by appointment made by
the directors in advance of the meeting or at the meeting by the person
presiding thereat. Each inspector or judge, if any, before entering upon the
discharge of his duties, shall take and sign an oath faithfully to execute the
duties of inspector or judge at such meeting with strict impartiality and
according to the best of his ability. The inspectors or judges, if any, shall
determine the number of shares of stock outstanding and the voting power of
each, the shares of stock represented at the meeting, the existence of a quorum
and the validity and effect of proxies, and
-5-
<PAGE>
shall receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do such acts as are proper
to conduct the election or vote with fairness to all stockholders. On request of
the person presiding at the meeting, the inspector or inspectors or judge or
judges, if any, shall make a report in writing of any challenge, question or
matter determined by him or them and execute a certificate of any fact found by
him or them.
- QUORUM. The holders of a majority of the outstanding shares of
stock entitled to vote, present in person or represented by proxy, shall
constitute a quorum at a meeting of stockholders for the transaction of any
business. The stockholders present may adjourn the meeting despite the absence
of a quorum.
- VOTING. Except as otherwise provided by the General Corporation
Law or by the Certificate of Incorporation, each share of stock entitled to vote
shall entitle the holder thereof to one vote. In the election of directors, a
plurality of the votes cast shall elect. Directors shall be elected by
cumulative voting, if and as provided in the Certificate of Incorporation. Any
other action shall be authorized by a majority of the votes cast except where
the General Corporation Law or these by-laws or the Certificate of
Incorporation prescribes a different percentage of votes and/or a different
exercise of voting power. In the election of directors, voting need not be by
ballot. Voting by ballot shall not be required for any other corporate action
except as otherwise provided by the General Corporation Law.
6. STOCKHOLDER ACTION WITHOUT A MEETING. Any action required by the
General Corporation Law to be taken or which may be taken at any annual or
special meeting of stockholders may be taken without a meeting, without prior
notice and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by the holders of outstanding stock having not less than
the minimum number of votes that would be necessary to authorize or take such
action at a meeting at which all shares entitled to vote thereon were present
and voted. Prompt notice of the taking of the corporate action without a meeting
by less than unanimous written consent shall be given to those stockholders who
have not consented in writing.
-6-
<PAGE>
ARTICLE II
DIRECTORS
1. FUNCTIONS AND DEFINITION. The business of the corporation shall
be managed by or under the direction of the Board of Directors of the
corporation. The use of the phrase "whole Board" herein refers to the total
number of directors which the corporation would have if there were no vacancies.
2. QUALIFICATIONS AND NUMBER. A director need not be a stockholder,
a citizen of the United States, or a resident of the State of Delaware. The
initial Board of Directors shall consist of one person. On each subsequent Board
of Directors, the number of directors shall be no less than one, nor more than
seven, such number to be fixed from time to time by action of the stockholders
or of the directors, or, if the number is not fixed, the number shall be one.
The number of directors may be increased or decreased by action of the
stockholders or of the Board.
3. ELECTION AND TERM. The first Board of Directors, unless the
members thereof shall have been named in the Certificate of Incorporation,
shall be elected by the incorporator or incorporators and shall hold office
until the first annual meeting of stockholders and until their successors
have been elected and qualified or until their earlier resignation or
removal. Thereafter, directors who are elected at an annual meeting of
stockholders, and directors who are elected in the interim to fill vacancies
and newly created directorships, shall hold office until the next annual
meeting of stockholders and until their successors have been elected and
qualified or until their earlier resignation or removal. In the interim
between annual meetings of stockholders or of special meetings of
stockholders called for the election of directors and/or for the removal of
one or more of the directors and for the filling of any vacancy in that
connection, newly created directorships and any vacancies in the Board of
Directors, including vacancies resulting from the removal of directors for
cause or without cause, may be filled only by the vote or written consent in
lieu of meeting of the class of stockholders entitled to elect such director.
At any meeting held for the purpose of electing a director or directors, the
presence in person or by proxy of the holders of the majority of shares then
outstanding of the class entitled to vote for the election of such director
or directors shall constitute a quorum for the purpose of electing a director
or directors by the stockholders of such class.
-7-
<PAGE>
4. MEETINGS.
- TIME. Meetings shall be held at such time as the Board shall fix,
except that the first meeting of a newly elected Board shall be held as soon
after its election as the directors may conveniently assemble.
- PLACE. Meetings shall be held at such place within or without the
State of Delaware as shall be fixed by the Board.
- CALL. No call shall be required for regular meetings for which the
time and place have been fixed. Special meetings may be called by or at the
direction of the President, or any two (2) of the directors in office.
- NOTICE OR ACTUAL OR CONSTRUCTIVE WAIVER. No notice shall be
required for regular meetings for which the time and place have been fixed.
Written, oral, or any other mode of notice of the time and place shall be given
for special meetings in sufficient time for the convenient assembly of the
directors thereat. The notice of any regular or special meeting shall specify
the business to be transacted at the meeting and/or the purpose or purposes for
which such meeting is being called, and no other business or purpose may be
conducted or considered at such meeting. Notice need not be given to any
director who submits a written waiver of notice signed by him before or after
the time of the meeting. Attendance of any such person at a meeting shall
constitute a waiver of notice of such meeting, except when he attends a meeting
for the sole purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting need be specified in any written waiver of notice.
- QUORUM AND ACTION. A majority of the whole Board shall constitute
a quorum except when a vacancy or vacancies prevents such majority, whereupon a
majority of the directors in office shall constitute a quorum, provided, that
such majority shall constitute at least one-third of the whole Board, except
that if the number of directors constituting the whole Board is one, then one
director shall constitute a quorum. A majority of the directors present, whether
or not a quorum is present, may adjourn a meeting to another time and place.
Except as herein otherwise provided, and except as otherwise provided by the
General Corporation Law and the Certificate of Incorporation, the act of the
Board shall be the act by vote of a majority of the directors present at a
meeting at which a quorum is present.
-8-
<PAGE>
- CHAIRMAN OF THE MEETING. The President shall preside at all
meetings. If, for any reason, the President is not present at any meeting, any
director chosen by the Board shall preside.
5. REMOVAL OF DIRECTORS. Except as may otherwise be provided by
the General Corporation Law or the Certificate of Incorporation, any or all
of the directors elected by a class of stockholders may only be removed by
the vote of the holders of not less than a majority of the shared of such
class voting thereon, provided, however, that in case of the corporation
having cumulative voting, no director may be removed without cause if the
votes against his removal would be sufficient to elect him if voted
cumulatively at an election of directors at which the same number of votes
were cast and the whole Board were then being elected. At any meeting held
for the purpose of removing a director or directors, the presence in person
or by proxy of the holders of the majority of shares then outstanding of the
class entitled to vote for the removal of such director or directors shall
constitute a quorum for the purpose of removing a director or directors by
the stockholders of such class.
6. COMMITTEES. The Board may, by resolution passed by a majority of
the whole Board, designate one or more committees, each committee to consist of
one or more of the directors of the corporation. The Board may designate one or
more directors as alternate members of any committee who may replace any absent
or disqualified member at any meeting of the committee. Any such committee, to
the extent provided in the resolution of the Board and except as hereinafter
provided, shall have and may exercise the powers of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it. No
such committee shall have the power or authority to amend the Certificate of
Incorporation, adopt an agreement of merger or consolidation, recommend to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommend to the stockholders a dissolution
of the corporation or a revocation of a dissolution, declare a dividend,
authorize the issuance of stock, elect or remove any officer, amend or repeal
any resolution adopted by the Board or take any action prohibited by the General
Corporation Law. The notice provisions of these By-Laws pertaining to
directors' meetings shall also apply to all committee meetings.
7. ACTION IN WRITING. Any action required or permitted to be taken
at any meeting of the Board of Directors or any committee thereof may be taken
without a meeting if all members of the Board or committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board or committee.
-9-
<PAGE>
8. PARTICIPATION BY CONFERENCE PHONE. Members of the Board, or any
committee designated by the Board, may participate in a meeting of the Board or
committee, as the case may be, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
provision shall constitute presence in person at such meeting.
9. COMPENSATION OF DIRECTORS. The Board, by the affirmative vote of
a majority of directors in office and regardless of any personal interest of any
of them, may establish reasonable compensation of all directors and of the
President.
ARTICLE III
OFFICERS
1. DESIGNATION. The directors shall elect a President and a
Secretary, and may elect one or more Vice Presidents (including Executive,
Senior and/or Assistant Vice Presidents), a Treasurer, Assistant Secretaries,
Assistant Treasurers, and such other officers and agents as are desired. The
President may but need not be a director. Any number of offices may be held by
the same person, except that no officer shall, in more than one capacity,
execute, acknowledge or verity any instrument required by the General
Corporation Law or these By-Laws to be executed, acknowledged or verified by two
or more officers.
2. TERMS OF OFFICE. Unless otherwise provided in the resolution of
election or appointment, each officer shall hold office until the meeting of the
Board following the next annual meeting of stockholders and until his successor
has been elected and qualified.
3. PRESIDENT. The President shall be the chairman of the Board of
Directors and chief executive officer of the corporation shall preside at all
meetings of the Board and of the stockholders, and shall be a member ex officio
of all committees of the Board. The President shall also be the chief operating
officer of the corporation, and shall have general and active management,
direction and supervision over the business and affairs of the corporation and
over its several subordinate officers.
4. VICE PRESIDENTS. Each Vice President shall have such powers and
perform such duties as the Board or the President may prescribe. In the absence
or inability of the President to act, the Vice Presidents (in the order
determined by the
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President or by the Board, or if there be no such determination, in the order of
the election of Executive Vice Presidents, then of Senior Vice Presidents, then
of Vice Presidents, and finally of Assistant Vice Presidents, may perform all
the duties and may exercise any of the powers of the President. The performance
of any such duty by a Vice President shall be conclusive evidence of his power
to act.
5. SECRETARY. The Secretary shall have charge of the minutes of all
proceedings of the shareholders and of the Board. He shall attend to the giving
of all notices to shareholders and directors. He shall have charge of the seal
of the corporation and shall attest the same by his signature whenever required.
He shall have charge of the record of shareholders of the corporation, and of
such other books and papers as the Board may direct. He shall have all such
powers and duties as generally are incident to the position of Secretary or as
may be assigned to him by the President or the Board.
6. TREASURER. The Treasurer shall have charge of all funds and
securities of the Corporation, shall endorse the same for deposit or collection
when necessary and shall deposit the same to the credit of the corporation in
such banks or depositaries as the President may authorize. He may endorse all
commercial documents requiring endorsements for or on behalf of the corporation
and may sign all receipts and vouchers for payments made to the corporation. He
shall have all such powers and duties as generally are incident to the position
of Treasurer or as may be assigned to him by the President or by the Board.
7. ASSISTANT SECRETARIES. In the absence or inability of the
Secretary to act, any Assistant Secretary may perform all the duties and
exercise all the powers of the Secretary. The performance of any such duty shall
be conclusive evidence of his power to act. An Assistant Secretary shall also
perform such other duties as the President, the Secretary or the Board may
assign to him.
8. ASSISTANT TREASURERS. In the absence or inability of the
Treasurer to act, an Assistant Treasurer may perform all the duties and exercise
all the powers of the Treasurer. The performance of any such duty shall be
conclusive evidence of his power to act. An Assistant Treasurer shall also
perform such other duties as the President, the Treasurer or the Board may
assign to him.
9. REMOVAL. The Board may remove any officer for cause or without
cause.
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ARTICLE IV
INDEMNIFICATION
1. LIMITATION OF CERTAIN LIABILITY OF DIRECTORS. To the fullest
extent permitted by the Delaware General Corporation Law as the same exists or
may hereafter be amended, a director of the corporation shall not be liable to
the corporation or its stockholders for monetary damages for breach of fiduciary
duty as director.
2. INDEMNIFICATION AND INSURANCE. (a) Each person who was or is made
a party or is threatened to be made a party to or is involved in any action,
suit or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding") by reason of the fact that he or she, or a person
of whom he or she is the legal representative, is or was a director or officer
of the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, including service with respect to
employee benefit plans, whether the basis of such proceeding is alleged action
in an official capacity as a director, officer, employee or agent or in any
other capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the corporation to provide broader indemnification
rights than said law permitted the corporation to provide prior to such
amendment) against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid
in settlement) reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person who has ceased
to be a director, officer, employee or agent and shall inure to the benefit of
his or her heirs, executors and administrators; provided, however, that, except
as provided in paragraph (b) hereof, the corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such Proceeding (or part thereof) was
authorized by the Board of Directors of the corporation. The right to
indemnification conferred in this Section 2 shall be a contract right and shall
include the right to be paid by the corporation the expenses incurred in
defending any such proceeding in advance of its final
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disposition; provided, however, that if the Delaware General Corporation Law
requires, the payment of such expenses incurred by a director or officer in his
or her capacity as a director or officer (and not in any other capacity in which
service was or is rendered by such person while a director or officer, including
without limitation service to an employee benefit plan) in advance of the final
disposition of a proceeding shall be made only upon delivery to the corporation
of an undertaking, by or on behalf of such director or officer, to repay all
amounts so advanced if it shall ultimately be determined that such director or
officer is not entitled to be indemnified under this Section 2 or otherwise. The
corporation may, by action of its Board of Directors, provide indemnification to
employees and agents of the corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
(b) If a claim under paragraph (a) of this Section 2 is not paid in
full by the corporation within ninety days after a written claim has been
received by the corporation, the claimant may at any time thereafter bring suit
against the corporation to recover the unpaid amount of the claim and, if
successful in whole or in part, the claimant shall be entitled to be paid also
the expense of prosecuting such claim. It shall be a defense to any such action
(other than an action brought to enforce a claim for expenses incurred in
defending any proceeding in advance of its final disposition where the required
undertaking, if any is required, has been tendered to the corporation) that the
claimant has not met the standards of conduct which make it permissible under
the Delaware General Corporation Law for the corporation to indemnify the
claimant for the amount claimed, but the burden of proving such defense shall be
on the corporation. Neither the failure of the corporation (including its Board
of Directors, independent legal counsel, or its stockholders) to have made a
determination prior to the commencement of such action that indemnification of
the claimant is proper in the circumstances because he or she has met the
applicable standard of conduct set forth in the Delaware General Corporation
Law, nor an actual determination by the corporation (including its Board of
Directors independent legal counsel, or its stockholders) that the claimant has
not met such applicable standard of conduct, shall be a defense to the action or
create a presumption that the claimant has not met the applicable standard of
conduct.
3. EXCLUSIVITY OF RIGHTS. The right to indemnification and the
payment of expenses conferred in this Article shall not be deemed exclusive of
any other right to which any person seeking indemnification or payment of
expenses may be entitled under any statute, provision the Certificate of
Incorporation, by-law, agreement, vote of stockholders or
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disinterested directors or otherwise, both as to action in such person's
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
4. INSURANCE. The corporation may maintain insurance, at its
expense, to protect itself and any director, officer, employee or agent of the
corporation or another corporation, partnership, joint venture, trust or other
enterprise against any such expense, liability or loss, whether or not the
corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
ARTICLE V
CONTRACTS, LOANS, CHECKS, NOTES, DRAFTS, ETC.
Contracts, checks, notes, drafts, acceptances, bills of
exchange and other instruments, orders or obligations for the payment of
money shall be signed by the President or by such officer or officers or
person or persons as the Board or the President shall from time to time
determine.
ARTICLE VI
CORPORATE SEAL
The corporate seal shall be in such form as the Board shall
prescribe.
ARTICLE VII
FISCAL YEAR
The fiscal year of the corporation shall be fixed, and shall
be subject to change, by the Board.
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ARTICLE VIII
AMENDMENTS
The Board of Directors shall have the power to make, alter or repeal
the By-Laws of the corporation subject to the power of the stockholders to alter
or repeal the By-Laws made or altered by the Board of Directors. The
stockholders shall also have the power to make, alter or repeal the By-Laws of
the corporation.
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EXHIBIT 10.19
[California Net Lease]
LEASE AGREEMENT
THIS LEASE AGREEMENT is made this 7 day of November, 1995, between SCI
Limited Partnership - I ("Landlord"), and the Tenant named below.
Tenant: CVC Holdings, Inc., a Delaware
Corporation
Tenant's representative, Thomas Kandris
address, and phone no.: CVC Holdings, Inc.
47061 Warm Springs Blvd
Fremont, CA 94539
Premises: An approximately 14,400 square foot
portion of a 48,400 square foot
building located at 3100 Laurelview
Court, Fremont, CA, as shown on
Exhibit A.
Project: Gateway Corporation Center II
Building: H
Tenant's Proportionate Share
of Project: 7.96%
Tenant's Proportionate Share
of Building: 29.75%
Lease Term: Beginning on the Commencement Date
and ending on the last day of the 60th
full calendar month thereafter,
subject to possible extension in
accordance with .
Commencement Date: Estimated to be November 15, 1995,
contingent upon substantial completion
by Landlord of Initial Improvement as
set forth in Addendum 3.
Initial Monthly Base Rent: $10,368.00 as adjusted pursuant to
Addendum 1.
Initial Estimated Monthly 1. Utilities: N/A
Operating Expense Payments:
(estimates only and subject 2. Common Area Charges: $576.00
to adjustment to actual
costs and expenses according 3. Taxes: $1,540.80
to the provisions of this
Lease) 4. Insurance: $43.20
5. Others: N/A
Initial Estimated Monthly
Operating Expense Payments: $2,160.00
Initial Monthly Base Rent and
Operating Expense Payments: $12,528.00
Security Deposit: $10,656.00
Broker: Tony Long, Spectrum Interests
Addenda: Addendum 1,2,3,4, and 5; Exhibits A,
B, and C
1. Granting Clause. In consideration of the obligation of Tenant to pay
rent as herein provided and in consideration of the other terms, covenants, and
conditions hereof, Landlord leases to Tenant, and Tenant takes from Landlord,
the Premises, to have and to hold for the Lease Term, subject to the terms,
covenants and conditions of this Lease.
2. Acceptance of Premises. Tenant shall accept the Premises in its
condition as of the Commencement Date, subject to Addendum 3 and to all
applicable laws, ordinances, regulations, covenants and
<PAGE>
restrictions. Landlord has made no representation or warranty as to the
suitability of the Premises for the conduct of Tenant's business, and Tenant
waives any implied warranty that the Premises are suitable for Tenant's intended
purposes. Except as provided in Paragraph 10, Paragraph 3 (as to Landlord's
construction and delivery of the Initial Improvements in compliance with all
Legal Requirements), and Addendum 3 (as to latent defects only), in no event
shall Landlord have any obligation to repair any defects in the Premises or
remedy any limitation on its use. The taking of possession of the Premises shall
be conclusive evidence that Tenant accepts the Premises and that the Premises
were in good condition at the time possession was taken except for items that
are Landlord's responsibility under Paragraph 10 and any punchlist items agreed
to in writing by Landlord and Tenant.
3. Use. The Premises shall be used only for the purpose of receiving,
storing, shipping and selling (but limited to wholesale sales) products,
materials and merchandise made and/or distributed by Tenant, and, subject to
local law, for administrative offices, and for such other lawful purposes as may
be incidental thereto, and for product and process demonstration, light
applications development, and moderate manufacturing uses which will be
permitted to Tenant upon Tenant's receipt from the City of Fremont of a Class
H-6 Hazardous Materials permit, in each case, in connection with its business of
manufacturing and selling semiconductor processing equipment and other
technology product, and for such other uses as shall be both permitted by law
and agreed to in writing by Landlord. Tenant shall not conduct or give notice of
any auction, liquidation, or going out of business sale on the Premises. Tenant
will use the Premises in a careful, safe and proper manner and will not commit
waste thereon. Tenant shall not permit any objectionable or unpleasant odors,
smoke, dust, gas, noise, or vibrations to emanate from the Premises, or take any
other action that would constitute a nuisance or would disturb, unreasonably
interfere with, or endanger Landlord or any tenants of the Project. Outside
storage, including without limitation, storage of trucks and other vehicles, is
prohibited without Landlord's prior written consent. Tenant, at its sole
expense, shall use and occupy the Premises in compliance with all laws,
including, without limitation, the Americans With Disabilities Act, orders,
judgments, ordinances, regulations, codes, directive permits, licenses,
covenants and restrictions now or hereafter applicable to the Premises
(collectively, "Legal Requirements"). The Premises shall not be used as a place
of public accommodation under the Americans With Disabilities Act or similar
state statutes or local ordinances or any regulations promulgated thereunder,
all as may be amended from time to time. Landlord shall construct the Initial
Improvements and deliver the Premises to Tenant in compliance with all Legal
Requirements; provided, however, that Landlord shall have no such obligation
with respect to Tenant's "clean-room," the construction of which shall be
Tenant's responsibility; and provided further, that, subject to the immediately
following sentence, should any portion of the Premises or the Initial
Improvements constructed by Landlord fail to comply with all Legal Requirements,
Tenant's sole remedy shall be to have Landlord correct such non-complying
portions at Landlord's sole cost and expense, Tenant shall, at its expense, make
any alterations or modifications, within or without the Premises, that are
required by Legal Requirements related to Tenant's use or occupation of the
Premises. Tenant will not use or permit the Premises to be used for any purpose
or in any manner that would void Tenant's or Landlord's insurance, increase the
insurance risk, or cause the disallowance of any sprinkler credits. If any
increase in the cost of any insurance on the Premises or the Project is caused
by Tenant's use or occupation of the Premises, or because Tenant vacates the
premises, then Tenant shall pay the amount of such increase to Landlord.
Landlord acknowledges that Tenant intends to construct a "clean-room" on the
Premises, and agrees to be reasonable in exercising its approval authority,
subject to the requirements of this Lease Agreement, including without
limitation in Paragraphs 12 and 21; Landlord need not be reasonable, however,
regarding whether Tenant shall be obligated to remove the "clean-room"
improvements at the end of the Lease Term.
4. Base Rent. Tenant shall pay Base Rent in the amount set forth above.
The first month's Base Rent, the Security Deposit, and the first monthly
installment of estimated Operating Expenses (as hereafter defined) shall be due
and payable on the date hereof, and Tenant promises to pay to Landlord in
advance, without demand, deduction or set-off, monthly installments of Base Rent
on or before the first day of each calendar month succeeding the Commencement
Date. Payments of Base Rent for any fractional calendar month shall be prorated.
All payments required to be made by Tenant to Landlord hereunder shall be
payable at such address as Landlord may specify from time to time by written
notice delivered in accordance herewith. the obligation of Tenant to pay Base
Rent and other sums to Landlord and the obligations of Landlord under this Lease
are independent obligations. Tenant shall have no right at any time to abate,
reduce, or set-off any rent due hereunder except as may be expressly provided in
this Lease. Tenant waives and releases all statutory liens and offset rights as
to rent. If Tenant is delinquent in any monthly installment of Base Rent or of
estimated Operating Expenses beyond 5 days after the due date thereof, Tenant
shall pay to Landlord on demand a late charge equal to 5 percent of such
delinquent sum. Tenant shall not be required to pay the late charge until
Landlord has given Tenant 5 days written notice of the delinquent payment (which
may be given at any time during the delinquency); provided, however, that such
notice shall not be required more than once in any 12-month period or 3 times
over the term of the Lease. The provisions for such late charge shall be in
addition to all of Landlord's other rights and remedies hereunder or at law and
shall not be construed as a penalty.
5. Security Deposit. The Security Deposit shall be held by Landlord as
security for the performance of Tenant's obligations under this Lease. The
Security Deposit is not an advance rental deposit or a measure of Landlord's
damages in case of Tenant's default. Upon each occurrence of an Event of Default
(hereinafter defined), Landlord may use all or part of the Security Deposit to
pay delinquent payments due under this Lease, and the cost of any damage,
injury, expense or liability caused by such Event of Default, without prejudice
to any other remedy provided herein or provided by law. Tenant shall pay
Landlord on demand the amount that will restore the Security Deposit to its
original amount. Landlord's obligation respecting the Security Deposit is that
of a debtor, not a trustee; no interest shall accrue thereon. The Security
Deposit shall be the property of Landlord, but shall be paid
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to Tenant when Tenant's obligations under this Lease have been completely
fulfilled. Landlord shall be released from any obligation with respect to the
Security Deposit upon transfer of this Lease and the Premises and the Security
Deposit to a person or entity assuming Landlord's obligations under this
Paragraph 5.
6. Operating Expense Payments. During each month of the Lease Term, on the
same date that Base Rent is due, Tenant shall pay Landlord an amount equal to
1/12 of the annual cost, as estimated by Landlord from time to time, of Tenant's
Proportionate Share (hereinafter defined) of Operating Expenses for the Project.
Payments thereof for any fractional calendar month shall be prorated. The term
"Operating Expenses" means all costs and expenses incurred by Landlord with
respect to the ownership, maintenance, and operation of the Project including,
but not limited to costs of: Taxes (hereinafter defined) and reasonable fees
payable to tax consultants and attorneys for consultation and contesting taxes;
insurance; utilities; maintenance, repair and replacement of all portions of the
Project, including without limitation, paving and parking areas, roads, alleys,
and driveways, mowing, landscaping, exterior painting, utility lines, heating,
ventilation and air conditioning systems, lighting, electrical systems and other
mechanical and building systems; amounts paid to contractors and subcontractors
for work or services performed in connection with any of the foregoing; charges
or assessments of any association to which the Project is subject; property
management fees payable to a property manager, including any affiliate of
Landlord, or if there is no property manager, an administration fee of 10
percent of Operating Expenses payable to Landlord; security services, if any;
trash collection, sweeping and removal; and additions or alterations made by
Landlord to the Project or the Building in order to comply with Legal
Requirements (other than those expressly required herein to be made by Tenant)
or that are appropriate to the continued operation of the Project or the
Building as a bulk warehouse, administrative and light manufacturing facility in
the market area, provided that the cost of additions or alterations that are
required to be capitalized for federal income tax purposes shall be amortized on
a straight line basis over a period equal to the lesser of the useful life
thereof for federal income tax purposes or 10 years. Operating Expenses do not
include costs, or expenses, depreciation or amortization for capital repairs and
capital replacements required to be made by Landlord under Paragraph 10 of this
Lease, debt service (including principal and interest payments and refinancing
and other costs and fees) under mortgages or ground rent under ground leases,
costs of restoration to the extent of net insurance proceeds received by
Landlord with respect thereto, leasing commissions, the costs of renovating
space for tenants, depreciation of the Project or any portion thereof, legal
fees incurred in leasing to other tenants or in enforcing leases of other
tenants, the cost of any special services furnished to other tenants to the
extent Landlord does not make such services available to Tenant, expenses
incurred as the result of the default of any other tenant of the Project,
salaries of Landlord's executives except such portion of such salaries
attributable to work directly performed for the benefit of the Project, and
costs to the extent Landlord is reimbursed therefor from other non-tenant
sources.
If Tenant's total payments of Operating Expenses for any year are less
than Tenant's Proportionate Share of actual Operating Expenses for such year,
then Tenant shall pay the difference to Landlord within 30 days after demand,
and if more, then Landlord shall retain such excess and credit it against
Tenant's next payments. For purposes of calculating Tenant's Proportionate share
of Operating Expenses, a year shall mean a calendar year except the first year,
which shall begin on the Commencement Date, and the last year, which shall end
on the expiration of this Lease. With respect to Operating Expenses which
Landlord allocates to the entire Project, Tenant's "Proportionate Share" shall
be the percentage set forth on the first page of this Lease as Tenant's
Proportionate Share of the Project as reasonably adjusted by Landlord in the
future for changes in the physical size of the Premises or the Project; and,
with respect to Operating Expenses which Landlord allocates only to the
Building, Tenant's "Proportionate Share" shall be the percentage set forth on
the first page of this Lease as Tenant's Proportionate Share of the of the
Building as reasonably adjusted by Landlord in the future for changes in the
physical size of the Premises or the Building. Landlord may equitably increase
Tenant's Proportionate Share for any item of expense or cost reimbursable by
Tenant that relates to a repair, replacement, or service that benefits only the
Premises or only a portion of the Project or Building that includes the Premises
or that varies with occupancy or use. The estimated Operating Expenses for the
Premises set forth on the first page of this Lease are only estimates, and
Landlord makes no guaranty or warranty that such estimates will be accurate.
7. Utilities. Tenant shall pay for all water, gas, electricity, heat,
light, power, telephone, sewer, sprinkler services, refuse and trash collection,
and other utilities and services used on the Premises, all maintenance charges
for utilities, and any storm sewer charges or other similar charges for
utilities imposed by any governmental entity or utility provider, together with
any taxes, penalties, surcharges or the like pertaining to Tenant's use of the
Premises. Landlord shall have the right to cause at Tenant's expense any of said
services to be separately metered or charged directly to Tenant by the provider.
Tenant shall pay its share of all charges for jointly metered utilities based
upon consumption, as reasonably determined by Landlord. Landlord shall not be
liable for any interruption or failure of utilities or any other service to the
Premises and no such interruption or failure shall result in the abatement of
rent hereunder, except that Tenant shall receive an abatement of rent to the
extent any such interruption is caused by the negligence of Landlord or its
agents or employees. Tenant agrees to limit use of water and sewer for normal
restroom and office use.
8. Taxes. Landlord shall pay all taxes, assessments and governmental
charges (collectively referred to as "Taxes") that accrue against the Project
during the Lease Term, which shall be included as part of the Operating Expenses
charged to Tenant. Landlord may contest by appropriate legal proceedings the
amount, validity, or application of any Taxes or liens thereof. All capital
levies or other taxes assessed or imposed on Landlord upon the rents payable to
Landlord under this Lease and any franchise tax, any excise, transaction, sales
or privilege tax, assessment, levy or charge measured by or based, in whole or
in part, upon such rents from the Premises and/or the Project or any portion
thereof shall be paid by Tenant to Landlord monthly in estimated installments or
upon
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demand, at the option of Landlord, as additional rent; provided, however, in no
event shall Tenant be liable for any net income taxes imposed on Landlord unless
such net income taxes are in substitution for any Taxes payable hereunder. If
any such tax or excise is levied or assessed directly against Tenant, then
Tenant shall be responsible for and shall pay the same at such times and in such
manner as the taxing authority shall require. Tenant shall be liable for all
taxes levied or assessed against any personal property or fixtures placed in the
Premises, whether levied or assessed against Landlord or Tenant.
9. Insurance. Landlord shall maintain all risk property insurance covering
the full replacement cost of the Building. Landlord may, but is not obligated
to, maintain such other insurance and additional coverages as it may deem
necessary, including, but not limited to, commercial liability insurance and
rent loss insurance. All such insurance shall be included as part of the
Operating Expenses charged to Tenant. The Project or Building may be included in
a blanket policy (in which case the cost of such insurance allocable to the
Project or Building will be determined by Landlord based upon the insurer's cost
calculations). Tenant shall also reimburse Landlord for any increased premiums
or additional insurance which Landlord reasonably deems necessary as a result of
Tenant's use of the Premises.
Tenant, at its expense, shall maintain during the Lease Term; all
risk property insurance covering the full replacement cost of all property and
improvements installed or placed in the Premises by Tenant at Tenant's expense;
worker's compensation insurance with no less than the minimum limits required by
law; employer's liability insurance with such limits as required by law; and
commercial liability insurance, with a minimum limit of $1,000,000 per
occurrence and a minimum umbrella limit of $1,000,000, for a total minimum
combined general liability and umbrella limit of $2,000,000 (together with such
additional umbrella coverage as Landlord may reasonably require) for property
damage, personal injuries, or deaths or persons occurring in or about the
Premises. Landlord may from time to time require reasonable increases in any
such limits. The commercial liability policies shall name Landlord as an
additional insured, insure on an occurrence and not a claims-made basis, be
issued by insurance companies which are reasonably acceptable to Landlord, not
be cancelable unless 30 days prior written notice shall have been given to
Landlord, contain a hostile fire endorsement and a contractual liability
endorsement and provide primary coverage to Landlord (any policy issued to
Landlord providing duplicate or similar coverage shall be deemed excess over
Tenant's policies). Such policies or certificates thereof shall be delivered to
Landlord by Tenant upon commencement of the Lease Term and upon each renewal of
said insurance.
The all risk property insurance obtained by Landlord and Tenant
shall include a waiver of subrogation by the insurers and all rights based upon
an assignment from its insured, against Landlord or Tenant, their officers,
directors, employees, managers, agents, invitees and contractors, in connection
with any loss damage thereby insured against. Neither party nor its officers,
directors, employees, managers, agents, invitees or contractors shall be liable
to the other for loss or damage caused by any risk coverable by all risk
property insurance, and each party waives any claims against the other party,
and its officers, directors, employees, managers, agents, invitees and
contractors for such loss or damage. The failure of a party to insure its
property shall not void this waiver. Landlord and its agents, employees and
contractors shall not be liable for, and Tenant hereby waives all claims against
such parties for, business interruption and losses occasioned thereby sustained
by Tenant or any person claiming through Tenant with respect to Tenant's
property, resulting from any accident or occurrence in or upon the Premises or
the Project from any cause whatsoever, including without limitation, damage
caused in whole or in part, directly or indirectly, by the negligence of
Landlord or its agents, employees or contractors. The prior sentence shall not
address liability for third party death or personal injury, which is addressed
elsewhere in this Agreement.
10. Landlord's Repairs. Landlord shall maintain, at its expense, the
structural soundness of the roof, foundation, load bearing walls (except to the
extent modified by Tenant) and exterior walls of the Building in good repair,
reasonable wear and tear and uninsured losses and damages caused by Tenant, its
agents and contractors excluded. The term "walls" as used in this Paragraph 10
shall not include windows, glass or plate glass, doors or overhead doors,
special store fronts, dock bumpers, dock plates or levelers, or office entries.
Tenant shall not be charged, in the form of Operating Expenses, for the cost of
Landlord's maintenance, for other tenants in the Project, of the items set forth
in the first sentence of the Paragraph 10. Tenant shall promptly give Landlord
written notice of any repair by Landlord pursuant to this Paragraph 10, after
which Landlord shall have a reasonable opportunity to repair.
11. Tenant's Repairs. Landlord, at Tenant's expense as provided in
Paragraph 6, shall maintain in good repair and condition the parking area and
other common areas of the Project and the Building, including, but not limited
to driveways, alleys, landscape and grounds surrounding the Premises. Subject to
Landlord's obligation in Paragraph 10 Tenant, at its expense, shall maintain in
good repair and condition all portions of the Premises. If Tenant fails to
perform any repair for which it is responsible within 30 days of written notice
from Landlord (except for emergency situations, for which no notice shall be
required), Landlord may perform the repair and be reimbursed by Tenant within 10
days after demand therefor. Subject to Paragraphs 9 and 15, Tenant shall bear
the full cost of any repair to any part of the Building or Project that results
from damage caused by Tenant, its agents, contractors, or invitees and any
repair that benefits only the Premises. Heating, ventilation and air
conditioning systems and other mechanical and building systems serving the
Premises shall be maintained at Tenant's expense pursuant to maintenance service
contracts entered into by Tenant or, at Landlord's election, by Landlord. The
scope of services and contractors under such maintenance contracts shall be
reasonably approved by Landlord. At Landlord's request, Tenant shall enter into
a joint maintenance agreement with any railroad that services the Premises.
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12. Tenant-Made Alterations and Trade Fixtures. Any alterations,
additions, or improvements made by or on behalf of Tenant to the Premises which
cost in excess of $2,500 or modify in any manner the building exterior
("Tenant-Made Alterations") shall be subject to Landlord's prior written
consent. The previous sentence notwithstanding, Landlord hereby consents to the
Plans and Specifications set forth as Part II of the Work Letter Agreement
between Landlord and Tenant attached hereto as Exhibit B. Tenant shall cause, at
its expense, all Tenant-Made Alterations to comply with insurance requirements
and with Legal Requirements and shall construct at its expense any alteration or
modification required by Legal Requirements as a result of any Tenant-Made
Alterations. All Tenant-Made Alterations shall be constructed in a good and
workmanlike manner by contractors reasonably acceptable to Landlord and only
good grades of materials shall be used. All plans and specifications for any
Tenant-Made Alterations shall be submitted to Landlord for its approval, and
Landlord may monitor construction of the Tenant-Made Alterations and Tenant
shall reimburse Landlord for its reasonable costs in reviewing plans and
documents and in monitoring construction. Tenant shall provide Landlord with the
identities and mailing addresses of all persons performing work or supplying
materials, prior to beginning such construction, and Landlord may post on and
about the Premises notices of non-responsibility pursuant to applicable law.
Landlord's right to review plans and specifications and monitor construction
shall be solely for its own benefit, and Landlord shall have no duty to see that
such plans and specifications or construction comply with applicable laws,
codes, rules, or regulations. At Landlord's request, Tenant shall obtain payment
and performance bonds for any Tenant-Made Alterations which bonds shall be
delivered to Landlord prior to commencement of work on the Tenant-Made
Alterations and shall be in form and substance satisfactory to Landlord. Upon
completion of any Tenant-Made Alterations and payment therefor, Tenant shall
deliver to Landlord statements setting forth the names of all contractors and
subcontractors who did work on the Tenant-Made Alterations and final lien
waivers from all such contractors and subcontractors.
Tenant, at its own cost and expense, may erect such shelves, bind,
machinery and trade fixtures (collectively "Trade Fixtures") in the ordinary
course of its business provided that such items do not alter the basic character
of the Premises, do not overload or damage the Premises, and may be removed
without injury to the Premises, and provided that the construction, erection,
and installation thereof complies with all Legal Requirements and with
Landlord's requirements. Subject to Paragraphs 21 and 38 below, upon the
expiration of the Lease Term Tenant shall remove its Trade Fixtures and shall
repair any damage caused by such removal, by the last day of the Lease Term.
13. Signs. Tenant shall not make any changes to the exterior of the
Premises, install any exterior lights, decorations, balloons, flags, pennants,
banners, or painting, or erect or install any signs, windows or door lettering,
placards, decorations, or advertising media of any type which can be viewed from
the exterior of the Premises, without Landlord's prior written consent. Upon
vacation of the Premises, Tenant shall remove all signs and repair, paint,
and/or replace the building facia surface to which its signs are attached.
Tenant shall obtain all applicable governmental permits and approvals for sign
and exterior treatments. All signs, decorations, advertising media, blinds,
draperies and other window treatment or bars or other security installations
visible from outside the Premises shall be subject to Landlord's approval and
conform in all respects to Landlord's requirements.
14. Parking. Tenant shall be entitled to park in common with other tenants
of the Project in those areas designated for nonreserved parking. Landlord may
allocate parking spaces among Tenant and other tenants in the Project if
Landlord determines that such parking facilities are becoming crowded. Landlord
shall not be responsible for enforcing Tenant's parking rights against any third
parties.
15. Restoration. If at any time during the Lease Term the Premises or any
substantial portion thereof are damaged by a fire or other casualty, Landlord
shall notify Tenant within 60 days after such damage as to the amount of time
Landlord reasonably estimates it will take to restore the Premises. If the
restoration time is estimated to exceed 6 months, either Landlord or Tenant may
elect to terminate this Lease upon notice to the other party given no later than
30 days after Landlord's notice. If neither party elects to terminate this Lease
or if Landlord estimates that restoration will take 6 months or less, then,
subject to receipt of sufficient insurance proceeds, Landlord shall promptly
restore the Premises excluding the improvements installed by Tenant or by
Landlord and paid by Tenant, subject to delays arising from the collection of
insurance proceeds or from Force Majeure events. Tenant at Tenant's expense
shall promptly perform, subject to delays arising from the collection of
insurance proceeds, or from Force Majeure events, all repairs or restoration not
required to be done by Landlord and shall promptly re-enter the Premises and
commence doing business in accordance with this Lease. Notwithstanding the
foregoing, either party may terminate this Lease if the Premises are damaged
during the last year of the Lease Term and Landlord reasonably estimates that it
will take more than one month to repair such damage. Tenant shall pay to
Landlord with respect to any damage to the Premises the amount of the
commercially reasonably deductible under Landlord's insurance policy (currently
$10,000) within 10 days after presentment of Landlord's invoice. Tenant's
obligation to pay an applicable deductible referenced in the previous sentence
shall in no event exceed $15,000. If the damage involves the premises of other
tenants, Tenant shall pay the portion of the deductible that the cost of the
restoration of the Premises bears to the total cost of restoration, as
reasonably determined by Landlord. Base Rent and Operating Expenses shall be
abated for the period of repair and restoration in the proportion which the area
of the Premises, if any, which is not usable by Tenant bears to the total area
of the Premises. Such abatement shall be the sole remedy of Tenant, and except
as provided herein, Tenant waives any right to terminate the Lease by reason of
damage or casualty loss.
16. Condemnation. If any part of the Premises or the Project should be
taken for any public or quasi-public use under governmental law, ordinance, or
regulation, or by right of eminent domain, or by private purchase
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in lieu thereof (a "Taking" or "Taken"), and the Taking would prevent or
materially interfere with Tenant's use of the Premises or in Landlord's
reasonable judgment would materially interfere with or impair its ownership or
operation of the Project, then upon written notice by Landlord or Tenant, as
applicable, this Lease shall terminate and Base Rent shall be apportioned as of
said date. If part of the Premises shall be Taken, and this Lease is not
terminated as provided above, the Base Rent payable hereunder during the
unexpired Lease Term shall be reduced to such extent as may be fair and
reasonable under the circumstances. In the event of any such Taking, Landlord
shall be entitled to receive the entire price or award from any such Taking
without any payment to Tenant, and Tenant hereby assigns to Landlord Tenant's
interest, if any, in such award, except to the extent that any portion of such
award is for the express purpose of Tenant relocation or compensation for damage
to Tenant's Trade Fixtures and leasehold improvements made by Tenant at its sole
expense. Tenant shall have the right, to the extent that same shall not diminish
Landlord's award, to make a separate claim against the condemning authority (but
not Landlord) for such compensation as may be separately awarded or recoverable
by Tenant for moving expenses and damage to Tenant's Trade Fixtures, if a
separate award for such items is made to Tenant.
17. Assignment and Subletting. Without Landlord's prior written consent,
which Landlord shall not unreasonably withhold, Tenant shall not assign this
Lease or sublease the Premises or any part thereof or mortgage, pledge, or
hypothecate its leasehold interest or grant any concession or license within the
Premises and any attempt to do any of the foregoing shall be void and of no
effect. For purposes of this paragraph, a transfer of the ownership interests
controlling Tenant shall be deemed an assignment of this Lease unless such
ownership interests are publicly traded. Notwithstanding the above, Tenant may
without the prior written consent of Landlord, assign or sublet the Premises, or
any part thereof, to (a) any entity controlling Tenant, controlled by Tenant or
under common control with Tenant (a "Tenant Affiliate"), or (b) to any person or
entity which shall acquire not less than 51% of the stock or assets of Tenant as
a result of a consolidation, merger or sale, provided that in the case of this
Subparagraph 18(b), (x) such consolidation, merger or sale is for a good
business purpose and not principally for the purpose of transferring Tenant's
leasehold estate, and (y) the assignee or successor entity has a net worth at
least equal to the net worth of Tenant immediately prior to such consolidating
merger or sale. Tenant shall reimburse Landlord for all of Landlord's reasonable
out-of-pocket expenses in connection with any assignment or sublease. Upon
Landlord's receipt of Tenant's written notice of a desire to assign or sublet
50% or more of the Premises (other than to a Tenant Affiliate or other person or
entity for which Landlord's consent is not required), Landlord may, by giving
written notice to Tenant within 30 days after receipt of Tenant's notice,
terminate this Lease with respect to the space described in Tenant's notice, as
of the date specified in Tenant's notice for the commencement of the proposed
assignment or sublease. If Landlord so terminates the Lease, Landlord may enter
into a lease directly with the proposed sublessee or assignee. Tenant may
withdraw its notice to sublease or assign by notifying Landlord within 10 days
after Landlord has given Tenant notice of such termination, in which case the
Lease shall not terminate but shall continue.
It shall be reasonable for the Landlord to withhold its consent to
any assignment or sublease in any of the following instances: (i) an Event of
Default has occurred and is continuing that would not be cured upon the proposed
sublease or assignment; (ii) the assignee or sublessee does not have a net worth
calculated according to generally accepted accounting principles at least equal
to the greater of the net worth of Tenant immediately prior to such assignment
or sublease or the net worth of the Tenant at the time it executed the Lease;
(iii) the intended use of the Premises by the assignee or sublessee is not
reasonably satisfactory to Landlord; (iv) the intended use of the Premises by
the assignee or sublessee would materially increase the pedestrian or vehicular
traffic to the Premises or the Project; (v) occupancy of the Premises by the
assignee or sublessee would, in Landlord's opinion, violate an agreement binding
upon Landlord or the Project with regard to the identity of tenants, usage in
the Project, or similar matters; (vi) the identity or business reputation of the
assignee or sublessee will, in the good faith judgment of Landlord, tend to
damage the goodwill or reputation of the Project; (vii) the assignment or sublet
is to another existing tenant in the Project and is at rates which are below
those charged by Landlord for comparable space in the Project; (viii) in the
case of a sublease, the subtenant has not acknowledged that the Lease controls
over any inconsistent provision in the sublease; or (ix) the proposed assignee
or sublessee is a governmental agency, Tenant and Landlord acknowledge that each
of the foregoing criterion are reasonable as of the date of execution of this
Lease. The foregoing criteria shall not exclude any other reasonable basis for
Landlord to refuse its consent to such assignment or sublease. Any approved
assignment or sublease shall be expressly subject to the terms and conditions of
this Lease. Tenant shall provide to Landlord all information concerning the
assignee or sublessee as Landlord may reasonably request.
Notwithstanding any assignment or subletting, Tenant and any
guarantor or surety of Tenant's obligations under this Lease shall at all times
remain fully responsible and liable for the payment of the rent and for
compliance with all of Tenant's other obligations under this Lease (regardless
of whether Landlord's approval has been obtained for any such assignments or
sublettings). In the event that the rent due and payable by a subleases or
assignee for which Landlord's consent is required (or a combination of the
rental payable under such sublease or assignment plus any bonus or other
consideration therefor or incident thereto), less expenses and costs incurred by
Tenant with respect to brokerage fees and tenant improvements made for the
benefit of such assignee or sublessee as amortized on a straight-line basis over
the remaining term of the Lease, exceeds the rental payable under this Lease,
then Tenant shall be bound and obligated to pay Landlord as additional rent
hereunder 50% of such excess rental and other excess consideration within 10
days following receipt thereof by Tenant.
If this Lease be assigned or if the Premises be subleased (whether
in whole or in part) or in the event of the mortgage, pledge, or hypothecation
of Tenant's leasehold interest or grant of any concession or license within the
Premises or if the Premises be occupied in whole or in part by anyone other than
Tenant, then upon a
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default by Tenant hereunder Landlord may collect rent from the assignee,
sublessee, mortgagee, pledgee, party to whom the leasehold interest was
hypothecated, concessionee or licensee or other occupant and, except to the
extent set forth in the preceding paragraph, apply the amount collected to the
next rent payable hereunder; and all such rentals collected by Tenant shall be
held in trust for Landlord and immediately forwarded to Landlord. No such
transaction or collection of rent or application thereof by Landlord, however,
shall be deemed a waiver of these provisions or a release of Tenant from the
further performance by Tenant of its covenants, duties, or obligations
hereunder.
18. Indemnification. Except for the negligence of Landlord, its agents,
employees or contractors, and to the extent permitted by law, Tenant agrees to
indemnify, defend and hold harmless Landlord, and Landlord's agents, employees
and contractors, from and against any and all losses, liabilities, damages,
costs and expenses (including attorneys' fees) resulting from claims by third
parties for injuries to any person and damage to or theft or misappropriation
or loss of property occurring in or about the Project and arising from the use
and occupancy of the Premises or from any activity, work, or thing done,
permitted or suffered by Tenant in or about the Premises or due to any other
act or omission of Tenant, its subtenants, assignees, invitees, employees,
contractors and agents. The furnishing of insurance required hereunder shall
not be deemed to limit Tenant's obligations under this Paragraph 18.
19. Inspection and Access. Landlord and its agents, representatives,
and contractors may enter the Premises at any reasonable time upon reasonable
notice to inspect the Premises and to make such repairs as may be required or
permitted pursuant to this Lease and for any other business purpose. Landlord
and Landlord's representatives may enter the Premises during business hours
upon reasonable notice for the purpose of showing the Premises to prospective
purchasers and, during the last year of the Lease Term, to prospective
tenants. Landlord may erect a suitable sign on the Premises stating the
Premises are available to let or that the Project is available for sale.
20. Quiet Enjoyment. If Tenant shall perform all of the covenants and
agreements herein required to be performed by Tenant, Tenant shall, subject to
the terms of this Lease, at all times during the Lease Term, have peaceful and
quiet enjoyment of the Premises against any person claiming by, through or
under Landlord.
21. Surrender. Upon termination of the Lease Term or earlier
termination of Tenant's right of possession, all Tenant-Made Alterations and
any improvements constructed by Landlord pursuant to the Construction Addendum,
if any, attached hereto ("Initial Improvements") shall remain in the Premises
as the property of Landlord. Alternatively, upon any such termination,
Landlord may, by notice to Tenant, require Tenant at Tenant's expense to remove
any or all Trade Fixtures and/or any or all Tenant-Made Alterations, and to
repair any damage caused by such removal; provided that Tenant shall not be
required to remove any of the Initial Improvements. In addition, when
consenting to any Tenant-Made Alterations, Landlord shall indicate whether
Landlord shall require Tenant to remove such Tenant-Made Alterations at the end
of the Lease Term. Any Trade Fixtures, Tenant-Made Alterations or Initial
Improvements not so removed by Tenant as permitted or required herein shall be
deemed abandoned and may be stored, removed, and disposed of by Landlord at
Tenant's expense, and Tenant waives all claims against Landlord for any damages
resulting from Landlord's retention and disposition of such property. All
obligations of Tenant hereunder not fully performed as of the termination of
the Lease Term shall survive the termination of the Lease Term, including
without limitation, indemnity obligations, payment obligations with respect to
Operating Expenses and obligations concerning the condition and repair of the
Premises.
22. Holding Over. If Tenant retains possession of the Premises after the
termination of the Lease Term, unless otherwise agreed in writing, such
possession shall be subject to immediate termination by Landlord at any time,
and all of the other terms and provisions of this Lease (excluding any
expansion or renewal option or other similar right or option) shall be
applicable during such holdover period, except that Tenant shall pay Landlord
from time to time, upon demand, as Base Rent for the holdover period, an amount
equal to 150% of the Base Rent in effect on the termination date, computed on a
monthly basis for each month or part thereof during such holding over. All
other payments shall continue under the terms of this Lease. In addition,
Tenant shall be liable for all damages incurred by Landlord as a result of such
holding over. No holding over by Tenant, whether with or without consent of
Landlord, shall operate to extend this Lease except as otherwise expressly
provided, and this Paragraph 22 shall not be construed as consent for Tenant to
retain possession of the Premises.
23. Events of Default. Each of the following events shall be an event
of default ("Event of Default") by Tenant under this Lease:
(i) Tenant shall fail to pay any installment of Base Rent or any
other payment required herein when due, and such failure shall continue
for a period of 5 days from receipt of notice therefor from Landlord
(provided, that if Landlord shall have provided notice of Tenant's failure
to pay Base Rent once during any calendar year or three times during the
Lease Term, thereafter, as the case may be, Tenant's failure to pay Base
Rent within 5 days after the due date thereof shall constitute an Event of
Default without any requirement of notice from Landlord.
(ii) Tenant or any guarantor surety of Tenant's obligations
hereunder shall (A) make a general assignment for the benefit of
creditors; (B) commence any case, proceeding or other action seeking to
have an order for relief entered on its behalf as a debtor or to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, liquidation, dissolution or composition of it or
its debts
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or seeking appointment of a receiver, trustee, custodian or other similar
official for it or for all or of any substantial part of its property
(collectively a "proceeding for relief"); (C) become the subject of any
proceeding for relief which is not dismissed within 60 days of its filing
or entry; or (D) die or suffer a legal disability (if Tenant, guarantor,
or surety is an individual) or be dissolved or otherwise fail to maintain
its legal existence (if Tenant, guarantor or surety is a corporation,
partnership or other entity).
(iii) Any insurance required to be maintained by Tenant pursuant to
this Lease shall be cancelled or terminated or shall expire or shall be
reduced or materially changed, except, in each case, as permitted in this
Lease.
(iv) Tenant shall not occupy or shall vacate the Premises or shall
fail to continuously operate its business at the Premises for the
permitted use set forth herein, whether or not Tenant is in monetary or
other default under this Lease. The prior sentence notwithstanding,
Tenant's vacating of the Premises shall not constitute an Event of Default
if, prior to vacating the Premises, Tenant has made arrangements
reasonably acceptable to Landlord to (a) insure that Tenant's insurance
for the Premises will not be voided or cancelled with respect to the
Premises as a result of such vacancy, (b) insure that the Premises are
secured and not subject to vandalism, and (c) insure that the Premises
will be properly maintained after such vacation. Tenant shall inspect the
Premises at least once each month and report monthly in writing to
Landlord on the condition of the Premises.
(v) Tenant shall assign, sublease or transfer Tenant's interest in
or with respect to this Lease except as otherwise permitted in this Lease.
(vi) Tenant shall fail to discharge any lien placed upon the
Premises in violation of this Lease within 30 days after any such lien or
encumbrance is filed against the Premises.
(vii) Tenant shall fail to comply with any provision of this Lease
other than those specifically referred to in this Paragraph 23, and except
as otherwise expressly provided herein, such default shall continue for
more than 30 days after Landlord shall have given Tenant written notice of
such default (unless the curing of such default will, due to the nature of
the obligation, require a period of time in excess of 30 days, then after
such period of time as is reasonably necessary to cure such default).
24. Landlord's Remedies. Upon each occurrence of an Event of Default and
so long as such Event of Default shall be continuing, Landlord may at any time
thereafter at its election: terminate this Lease or Tenant's right of
possession, (but Tenant shall remain liable as hereinafter provided) and/or
pursue any other remedies at law or in equity. Upon the termination of this
Lease or termination of Tenant's right of possession, it shall be lawful for
Landlord, without formal demand or notice of any kind, to re-enter the Premises
by summary dispossession proceedings or any other action or proceeding
authorized by law and to remove Tenants and all persons and property therefrom.
If Landlord re-enters the Premises, Landlord shall have the right to keep in
place and use, or remove and store, all of the furniture, fixtures and equipment
at the Premises.
Except as otherwise provided in the next paragraph, if Tenant breaches
this Lease and abandons the Premises prior to the end of the term hereof, or if
Tenant's right to possession is terminated by Landlord because of an Event of
Default by Tenant under this Lease, this Lease shall terminate. Upon such
termination, Landlord may recover from Tenant the following, as provided in
Section 1951.2 of the Civil Code of California: (i) the worth at the time of
award of the unpaid Base Rent and other charges under this Lease that had been
earned at the time of termination; (ii) the worth at the time of award of the
amount by which the reasonable value of the unpaid Base Rent and other charges
under this Lease which would have been earned after termination until the time
of award exceeds the amount of such rental loss that Tenant proves could have
been reasonably avoided; (iii) the worth at the time of award by which the
reasonable value of the unpaid Base Rent and other charges under this Lease for
the balance of the term of this Lease after the time of award exceeds the amount
of such rental loss that Tenant proves could have been reasonably avoided; and
(iv) any other amount necessary to compensate Landlord for all the detriment
proximately caused by Tenant's failure to perform its obligations under this
Lease or that in the ordinary course of things would be likely to result
therefrom. As used herein, the following terms are defined: (a) the "worth at
the time of award" of the amounts referred to in Sections (i) and (ii) is
computed by allowing interest at the lesser of 18 percent per annum or the
maximum lawful rate. The "worth at the time of award" of the amount referred to
in Section (iii) is computed by discounting such amount at the discount rate of
the Federal Reserve Bank of San Francisco at the time of award plus one percent;
(b) The "time of award" as used in clauses (i), (ii), and (iii) above is the
date on which judgment is entered by a court of competent jurisdiction; (c) The
"reasonable value" of the amount referred to in clause (ii) above is computed by
determining the mathematical product of (1) the "reasonable annual rental value"
(as defined herein) and (2) the number of years, including fractional parts
thereof, between the date of termination and the time of award. The "reasonable
value" of the amount referred to in clause (iii) computed by determining the
mathematical product of (1) the annual Base Rent and other charges under this
Lease and (2) the number of years including fractional parts thereof remaining
in the balance of the term of this Lease after the time of award.
Even though Tenant has breached this Lease and abandoned the
Premises, this Lease shall continue in effect for so long as Landlord doe not
terminate Tenant's right to possession, and Landlord may enforce all its right
and remedies under this Lease, including the right to recover rent as it becomes
due. This remedy is intended to be the remedy described in California Civil Code
Section 1951.4, and the following provision from such Civil
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Code Section is hereby repeated: "The Lessor has the remedy described in
California Civil Code Section 1951.4 (lessor may continue lease in effect after
leasee's breach and abandonment and recover rent as it becomes due, if leasee
has right to sublet or assign, subject only to reasonable limitations)." Any
such payments due Landlord shall be made upon demand therefor from time to time
and Tenant agrees that Landlord may file suit to recover any sums falling due
from time to time. Notwithstanding any such reletting without termination,
Landlord may at any time thereafter elect in writing to terminate this Lease for
such previous breach.
Exercise by Landlord of any one or more remedies hereunder granted
or otherwise available shall not be deemed to be an acceptance of surrender of
the Premises and/or a termination of this Lease by Landlord, whether by
agreement or by operation of law, it being understood that such surrender and/or
termination can be effected only by the written agreement of Landlord and
Tenant. Any law, usage, or custom to the contrary notwithstanding, Landlord
shall have the right at all times to enforce the provisions of this Lease in
strict accordance with the terms hereof; and the failure of Landlord at any time
to enforce its rights under this Lease strictly in accordance with same shall
not be construed as having created a custom in any way or manner contrary to the
specific terms, provisions, and covenants of this Lease or as having modified
the same. Tenant and Landlord further agree that forbearance or waiver by
Landlord to enforce its rights pursuant to this Lease or at law or in equity,
shall not be a waiver of Landlord's right to enforce one or more of its rights
in connection with any subsequent default. A receipt by Landlord of rent or
other payment with knowledge of the breach of any covenant hereof shall not be
deemed a waiver of such breach, and no waiver by Landlord of any provision of
this Lease shall be deemed to have been made unless expressed in writing and
signed by Landlord. To the greatest extent permitted by law, Tenant waives the
service of notice of Landlord's intention to re-enter as provided for in any
statute, or to institute legal proceedings to that end, and also waives all
right of redemption in case Tenant shall be dispossessed by a judgment or by
warrant of any court or judge. The terms "enter," "re-enter," "entry" or
"re-entry," as used in this Lease, are not restricted to their technical legal
meanings. Any reletting of the Premises shall be on such terms and conditions as
Landlord in its sole discretion may determine (including without limitation a
term different than the remaining Lease Term, rental concessions, alterations
and repair of the Premises, lease of less than the entire Premises to any tenant
and leasing any or all other portions of the Project before reletting the
Premises). Landlord shall not be liable, nor shall Tenant's obligations
hereunder be diminished because of, Landlord's failure to relet the Premises or
collect rent due in respect of such reletting. The foregoing shall not affect
Landlord's obligation under law to use reasonable efforts to mitigate Tenant's
damages; provided, however, (a) Landlord shall not be obligated to accept any
tenant proposed by Tenant, (b) Landlord shall have the right to lease any other
space controlled by Landlord first, and (c) any proposed tenant shall meet all
of Landlord's leasing criteria.
25. Tenant's Remedies/Limitation of Liability. Landlord shall not be in
default hereunder and Tenant shall not have any remedy or cause of action unless
Landlord fails to perform any of its obligations hereunder within 30 days after
written notice from Tenant specifying such failure (unless such performance
will, due to the nature of the obligation, require a period of time in excess of
30 days, then after such period of time as is reasonably necessary). All
obligations of Landlord hereunder shall be construed as covenants, not
conditions; and, except as may be otherwise expressly provided in this Lease,
Tenant may not terminate this Lease for breach of Landlord's obligations
hereunder. All obligations of Landlord under this Lease will be binding upon
Landlord only during the period of its ownership of the Premises and not
thereafter. The term "Landlord" in this Lease shall mean only the owner, for the
time being of the Premises, and in the event of the transfer by such owner of
its interest in the Premises, such owner shall thereupon be released and
discharged from all obligations of Landlord thereafter accruing, but such
obligations shall be binding during the Lease Term upon each new owner for the
duration of such owner's ownership. Any liability of Landlord under this Lease
shall be limited solely to its interest in the Project, and in no event shall
any personal liability be asserted against Landlord in connection with this
Lease nor shall any recourse be had to any other property or assets of Landlord.
26. Waiver of Jury Trial TENANT AND LANDLORD WAIVE ANY RIGHT TO TRIAL BY
JURY OR TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE, WHETHER SOUNDING IN
CONTRACT, TORT, OR OTHERWISE, BETWEEN LANDLORD AND TENANT ARISING OUT OF THIS
LEASE OR ANY OTHER INSTRUMENT, DOCUMENT, OR AGREEMENT EXECUTED OR DELIVERED IN
CONNECTION HEREWITH OR THE TRANSACTIONS RELATED HERETO.
27. Subordination. This Lease and Tenant's interest and rights hereunder
are and shall be subject and subordinate at all times to the lien of any first
mortgage, now existing or hereafter created on or against the Project or the
Premises, and all amendments, restatements, renewals, modifications,
consolidations, refinancing, assignments and extensions thereof, without the
necessity of any further instrument or act on the part of Tenant. Tenant agrees,
at the election of the holder of any such mortgage, to attorn to any such
holder, provided that such holder agrees to execute the non-disturbance
agreement in which such holder agrees not to disturb Tenant's possession of the
Premises under the terms of the Lease in the event such holder or ground lessor
acquires title to the Premises through foreclosure, deed in lieu of foreclosure
or otherwise. Tenant agrees upon demand to execute, acknowledge and deliver such
instruments, confirming such subordination and such instruments of attornment as
shall be requested by any such holder. Tenant hereby appoints Landlord attorney
in fact for Tenant irrevocably (such power of attorney being coupled with an
interest) to execute, acknowledge and deliver any such instrument and
instruments for and in the name of the Tenant and to cause any such instrument
to be recorded. Notwithstanding the foregoing, any such holder may at any time
subordinate its mortgage to this Lease, without Tenant's consent, by notice in
writing to Tenant, and thereupon this Lease shall be deemed prior to such
mortgage without regard to their respective dates of execution, delivery or
recording and in that event such holder shall have the same rights with respect
to this Lease as though this Lease had been executed prior to the execution,
delivery and recording of
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<PAGE>
such mortgage and had been assigned to such holder. The term "mortgage" whenever
used in this Lease shall be deemed to include deeds of trust, security
assignments and any other encumbrances, and any reference to the "holder" of a
mortgage shall be deemed to include the beneficiary under a deed of trust.
28. Mechanic's Liens. Tenant has no express or implied authority to create
or place any lien or encumbrance of any kind upon, or in manner to bind the
interest of Landlord or Tenant in, the Premises or to charge the rentals payable
hereunder for any claim in favor of any person dealing with Tenant, including
those who may furnish materials or perform labor for any construction or
repairs. Tenant covenants and agrees that it will pay or cause to be paid all
sums legally due and payable by it on account of any labor performed or
materials furnished in connection with any work performed on the Premises and
that it will save and hold Landlord harmless from all loss, cost or expense
based on or arising out of asserted claims or liens against the leasehold estate
or against the interest of Landlord in the Premises or under this Lease. Tenant
shall give Landlord immediate written notice of the placing of any lien or
encumbrance against the Premises and cause such lien or encumbrance to be
discharged within 30 days of the filing or recording thereof; provided, however,
Tenant may contest such liens or encumbrances as long as such contest prevents
foreclosure of the lien or encumbrance and Tenant causes such lien or
encumbrance to be bonded or insured over in a manner satisfactory to Landlord
within such 30 day period.
29. Estoppel Certificates. Tenant agrees, from time to time, within 10
days after request of Landlord, to execute and deliver to Landlord, or
Landlord's designee, any estoppel certificate requested by Landlord, stating
that this Lease in full force and effect, the date to which rent has been paid,
that, to Tenant's knowledge, Landlord is not in default hereunder (or specifying
in detail the nature of Landlord's default), the termination date of this Lease
and such other matters pertaining to this Lease as may be requested by Landlord.
Tenant's obligation to furnish each estoppel certificate in a timely fashion is
a material inducement for Landlord's execution of this Lease. No cure or grace
period provided in this lease shall apply to Tenant's obligations to timely
deliver an estoppel certificate. Tenant hereby irrevocably appoints Landlord as
its attorney in fact to execute on its behalf and in its name any such estoppel
certificate if Tenant fails to execute and deliver the estoppel certificate
within 10 days after Landlord's written request thereof.
30. Environment Requirements. Except for Hazardous Material contained in
products used by Tenant in de minimis quantities for ordinary cleaning and
office purposes, Tenant shall not permit or cause any party to bring any
Hazardous Material upon the Premises or store or use any Hazardous Material in
or about the Premises without Landlord's prior written consent. Notwithstanding
the foregoing, Landlord hereby acknowledges that Tenant intends to apply to the
City of Fremont for a Class H-6 Hazardous Materials permit to utilize certain
chemicals in its business operations, and Landlord agrees that Tenant's use of
the Hazardous Materials set forth in Exhibit C attached hereto shall be
permitted by Landlord, subject to Tenant's full compliance with all requirements
of this Paragraph 30. Landlord hereby agrees to permit such use subject to
Tenant's following good engineering practice, subject to Tenant's full
compliance with all Environment Laws and all storage, handling and other
requirements of the City of Fremont under said Class H-6 Hazardous Materials
permit, subject to the use restrictions set forth in Paragraph 3 hereof, and
subject to the requirement that Landlord's approval shall be obtained by Tenant
for Tenant's use of any Hazardous Materials not previously specifically approved
by Landlord (which approval shall not be unreasonably withheld). If Landlord
does not provide a response within 5 days of Tenant's written request for
approval of any additional Hazardous Materials as set forth in the last
clause of the immediately preceding sentence, then Landlord shall be deemed to
have approved the use of such Hazardous Materials, subject to Tenant's
compliance with the remaining provisions of the immediately preceding sentence.
Tenant, at its sole cost and expense, shall operate its business in the Premises
in compliance with all Environmental Requirements and shall immediately
remediate any Hazardous Materials released on or from the project by Tenant, its
agents, employees, contractors, subtenants or invitees. The term "Environmental
Requirements" means all applicable present and future statutes, regulations,
ordinances, rules, codes, judgments, orders or other similar enactments of any
governmental authority or agency regulating or relating to health, safety, or
environmental conditions on, under, or about the Premises or the environment,
including without limitation, the following: the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"); the Resource Conservation
and Recovery Act; and all state and local counterparts thereto, and any
regulations or policies promulgated or issued thereunder. The term "Hazardous
Materials" means and includes petroleum (as defined in CERCLA) and any
substance, material, waste, pollutant, or contaminant listed or defined as
hazardous or toxic, under any Environmental Requirements, asbestos and
petroleum, including crude oil or any fraction thereof, natural gas, or
synthetic gas usable for fuel (or mixtures of natural gas and such synthetic
gas). As defined in Environmental Requirements, Tenant is and shall be deemed to
be the "operator" of Tenant's "facility" and the "owner" of all Hazardous
Materials brought on the Premises by Tenant, its agents, employees, contractors
or invitees, and the wastes, by-products, or residues generated, resulting, or
produced therefrom.
Tenant represents and warrants that it is not currently subject to
an inquiry, regulatory investigation, enforcement order, or any other proceeding
regarding the generation, use, treatment, storage, or disposal of a Hazardous
Material.
Tenant immediately shall notify Landlord in writing of any spill,
release, discharge, or disposal of any Hazardous Material in, on or under the
Premises or the Project. All reporting obligations imposed by Environmental
Requirements are strictly the responsibility of Tenant. Tenant shall supply to
Landlord within 5 business days after Tenant first receives or sends the same,
copies of all claims, reports, complaints, notices, warnings or asserted
violations relating in any way to Tenant's use of the Premises.
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<PAGE>
Tenant shall indemnify, defend, and and hold harmless from and
against any and all losses (including, without limitation, diminution in value
of the Premises or the Project and loss of rental income from the Project),
claims, demands, actions, suits, damages (including, without limitation,
punitive damages), expenses (including, without limitations, remediation,
corrective action, or cleanup expenses), and costs (including, without
limitation, actual attorneys' fees, consultant fees or expert fees) which are
brought or recoverable against, or suffered or incurred by Landlord as a result
of any release of Hazardous Materials for which Tenant is obligated to remediate
as provided above or any other breach of the requirements under this Paragraph
30 by Tenant, its agents, employees, contractors, subtenants, assignees or
invitees, regardless of whether Tenant had knowledge of such noncompliance. The
obligations of Tenant under this Paragraph 30 shall survive any termination of
this Lease.
Landlord shall have access to, and a right to perform inspections
and tests of, the Premises to determine Tenant's compliance with environmental
Requirements and the Class H-6 Hazardous Materials permit, its obligations under
this Paragraph 30, or the environmental condition of the Premises. Access shall
be granted to Landlord upon Landlord's prior notice to Tenant and at such times
so as to minimize, so far as may be reasonable under the circumstances, any
disturbance to Tenant's operations. Such inspections and tests shall be
conducted at Landlord's expense, unless such inspections or tests reveal that
Tenant has not complied with any environmental Requirement, in which case Tenant
shall reimburse Landlord for the reasonable cost of such inspection and tests.
Landlord's receipt of or satisfaction with any environmental assessment in no
way waives any rights that Landlord holds against Tenant.
At the expiration or earlier termination of the Lease, Tenant, at
its sole cost and expense, shall: (i) remove and dispose off-site any drums,
containers, receptacles, structures, or tanks storing or containing Hazardous
Materials (or which have stores or contained Hazardous Materials) and the
contents thereas; and (ii) remove, empty, and purge all underground and above
ground storage tank systems, including connected piping, of all vapors, liquids,
sludge and residues, in each case, which have been brought to or installed on
the Project or Premises by Tenant. Such activities shall be performed in
compliance with all environmental Requirements and the Class H-6 Hazardous
Materials permit and to the satisfaction of Landlord. Landlord's satisfaction
with such activities or the condition of the Premises does not waive, or release
Tenant from, any obligations hereunder.
31. Rules and Regulations. Tenant shall, at all times during the Lease
Term and any extension thereof, comply with all reasonable rules and regulations
at any time or from time to time established by Landlord covering use of the
Premises and the Project. The current rules and regulations are attached hereto.
In the event of any conflict between said rules and regulations and other
provisions of this Lease, the other terms and provisions of this Lease shall
control. Landlord shall not have any liability or obligation for the breach of
any rules or regulations by other tenants in the Project. Notwithstanding
Paragraph 1 of the Rules and Regulations to the contrary, Tenant shall have full
use of the loading docks for normal business purposes to the extent consistent
with access rights of other tenants. Notwithstanding Paragraph 5 of the Rules
and Regulations to the contrary, Tenant may use its own electrician subject to
Landlord's reasonable approval rights. Notwithstanding the second sentence of
Paragraph 6 of the Rules and Regulations to the contrary, Tenant may use those
materials that are consistent with its rights under Paragraphs 3 and 30 of this
Agreement.
32. Security Service. Tenant acknowledges and agrees that, while Landlord
may patrol the Project, Landlord is not providing any security services with
respect to the Premises and that Landlord shall not be liable to Tenant for, and
Tenant waives any claim against Landlord with respect to, any loss by theft or
any other damage suffered or incurred by Tenant in conjunction with any
unauthorized entry into the Premises or any other breach of security with
respect to the Premises.
33. Force Majeure. Each of Landlord and Tenant shall not be held
responsible for delays in the performance of its obligations hereunder when
caused by strikes, lockouts, labor disputes, acts of God, inability to obtain
labor or materials or reasonable substitutes therefor, governmental
restrictions, governmental regulations, governmental controls, delay in issuance
of permits, enemy or hostile governmental action, civil commotion, fire or other
casualty, and other causes beyond their respective reasonable control ("Force
Majeure"), provided, however, that Tenant's obligation to pay rent shall survive
any such Force Majeure occurrence.
34. Entire Agreement. This Lease constitutes the complete agreement of
Landlord and Tenant with respect to the subject matter hereof. No
representations, inducements, promises or agreements, oral or written, have been
made by Landlord or Tenant, or anyone acting on behalf of Landlord or Tenant,
which are not contained herein, and any prior agreements, promises,
negotiations, or representations are superseded by this Lease. This Lease may
not be amended except by an instrument in writing signed by both parties hereto.
35. Severability. If any clause or provision of this Lease is illegal,
invalid or unenforceable under present or future laws, then and in that event,
it is the intention of the parties hereto that the remainder of this Lease shall
not be affected thereby. It is also the intention of the parties to this Lease
that in lieu of each clause or provision of this Lease that is illegal, invalid
or unenforceable, there be added, as a part of this Lease, a clause or provision
as similar in terms to such illegal, invalid or unenforceable clause or
provision as may be possible and be legal, valid and enforceable.
36. Brokers. Landlord shall be responsible for the payment of any
commission due to Broker, in accordance with a separate agreement between
Landlord and Broker. Landlord and Tenant each represents and warrants that it
has has dealt with no broker, agent or other person in connection with this
transaction and that no
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<PAGE>
broker, agent or other person brought about this transaction, other than the
Broker, if any, set forth on the first page of this Lease, and landlord and
Tenant each agrees to indemnify and hold the other party harmless from and
against any claims by any other broker, agent or other person claiming a
commission or other form of compensation by virtue of having dealt with Landlord
or Tenant, as as the case may be, with regard to this leasing transaction.
37. Miscellaneous.
(a) Any payments or charges dues from Tenant to Landlord hereunder shall
be considered rent for all purposes of this Lease.
(b) If and when included within the term "Tenant," as used in this
instrument, there is more than one person, firm or corporation, each shall be
jointly and severally liable for the obligations of Tenant.
(c) All notices required or permitted to be given under this Lease shall
be in writing and shall be sent by registered or certified mail, return receipt
requested, or by a reputable national overnight courier service, postage
prepaid, or by hand delivery addressed to the parties at their addresses below,
and with a copy sent to Landlord at 14100 East 35th Place, Aurora, Colorado
80011. Either party may by notice given aforesaid change its address for all
subsequent notices. Except where otherwise expressly provided to the contrary,
notice shall be deemed given upon delivery.
(d) Except as expressly provided in this Lease, Landlord retains the
absolute right to withhold any consent or approval.
(e) To the extent required under Addendum 2 of this Lease, Tenant shall,
upon Landlord's request, furnish landlord with true and complete copies of its
most recent annual and quarterly financial statements prepared by Tenant or
Tenant's accountants and any other financial information or summaries that
Tenant typically provides to its lenders or shareholders. Landlord will maintain
the confidentiality of the above-referenced financial information, except as
otherwise required by law.
(f) Neither this Lease nor a memorandum of lease shall be filed by or on
behalf of Tenant in any public record. Landlord may prepare and file, and upon
request by Landlord Tenant will execute, a memorandum of lease.
(g) The normal rule of construction to the effect that any ambiguities are
to be resolved against the drafting party shall not be employed in the
interpretation of this Lease or any exhibits or amendments hereto.
(h) The submission by Landlord to Tenants of this Lease shall have no
binding force or effect, shall not constitute an option for the leasing of the
Premises, nor confer any right or impose any obligations upon either party until
execution of this Lease by both parties.
(i) Words of any gender used in this Lease shall be held and construed to
include any other gender, and words in the singular number shall be held to
include the plural, unless the context otherwise requires. The captions inserted
in this Lease are for convenience only and in no way define, limit or otherwise
describe the scope or intent of this Lease, or any provision hereof, or in any
way affect the interpretations of this Lease.
(j) Any amount not paid by Tenant within 5 days after its due date in
accordance with the terms of this Lease shall bear interest from such due date
until paid in full at the lesser of the highest rate permitted by applicable law
or 15 percent per year. It is expressly the intent of Landlord and Tenant at all
times to comply with applicable law governing the maximum rate or amount of any
interest payable on or in connection with this Lease. If applicable law is ever
judicially interpreted so as to render usurious any interest called for under
this Lease, or contracted for, charged, taken, reserved, or received with
respect to this Lease, then it is Landlord's and Tenant's express intent that
all excess amounts theretofore collected by Landlord be credited on the
applicable obligation (or, if the obligation has been or would thereby be paid
in full, refunded to Tenant), and the provisions of this Lease immediately shall
be deemed reformed and the amounts thereafter collectible hereunder reduced,
without the necessity of the execution of any new document, as as to comply with
the applicable law, but so as to permit the recovery of the fullest amount
otherwise called for hereunder.
(k) Construction and interpretation of this Lease shall be governed by the
laws of the state in which the Project is located, excluding any principles of
conflicts of laws.
(l) Time is of the essence as to the performance of Tenant's obligations
under this Lease.
(m) All exhibits and addenda attached hereto are hereby incorporated into
this Lease and made a part hereof. In the event of any conflict between such
exhibits or addenda and the terms of this Lease, such exhibits or addenda shall
control.
38. Intentionally deleted.
39. Limitation of Liability of Trustees, Shareholders, and Officers of
Security Capital Industrial Trust. Any obligation or liability whatsoever of
Security Capital Industrial Trust, a Maryland real estate investment
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<PAGE>
trust, which may arise at any time under this Lease or any obligation or
liability which may be incurred by it pursuant to any other instrument,
transaction, or undertaking contemplated hereby shall not be personally binding
upon, nor shall resort for the enforcement thereof be had to the property of,
its trustees, directors, shareholders, officers, employees or agents, regardless
of whether such obligation or liability is in the nature of contract, tort, or
otherwise.
IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the
day and year first above written.
TENANT: LANDLORD:
CVC HOLDINGS, INC., SCI LIMITED PARTNERSHIP-1,
A DELAWARE CORPORATION A DELAWARE LIMITED PARTNERSHIP
By: /s/ [Illegible] By: Security Capital Industrial Trust,
------------------ a Maryland real estate investment trust,
General Partner
Title: /s/ [Illegible]
---------------
Address:
By: /s/ [Illegible]
----------------------
525 Lee Road Name: /s/ [Illegible]
- ---------------------- --------------------
Rochester New York Title: /s/ [Illegible]
- ---------------------- -------------------
14603 Address:
- ----------------------
14100 E. 35th Place
Aurora, CO 80011
CC: 47775 Fremont Boulevard
Fremont, CA 94538
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<PAGE>
Rules and Regulations
1. The sidewalk, entries, and driveways of the project shall not be
obstructed by Tenant, or its agents, or used by them for any purpose other
than ingress and egress to and from the Premises.
2. Tenant shall not place any objects, including antennas, outdoor furniture,
etc., in the parking areas, landscaped areas or other areas outside of its
Premises, or on the roof of the Project.
3. Except for seeing-eye dogs, no animals shall be allowed in the offices,
halls, or corridors in the Project.
4. Tenant shall not disturb the occupants of the Project or adjoining
buildings by the use of any radio or musical instrument or by the making
of loud or improper noises.
5. If Tenant desires telegraphic, telephonic or other electric connections in
the Premises, Landlord or its agent will direct the electrician as to
where and how the wires may be introduced; and, without such direction, no
boring or cutting of wires will be permitted. Any such installation or
connection shall be made at Tenant's expense.
6. Tenant shall not install or operate any steam or gas engine or boiler, or
other mechanical apparatus in the Premises, except as specifically
approved in the Lease. The use of oil gas or inflammable liquids for
heating, lighting or any other purpose is expressly prohibited. Explosives
or other articles deemed extra hazardous shall not be brought into the
Project.
7. Parking any type of recreational vehicles is specifically prohibited on or
about the Project. Except for the overnight parking of operative vehicles,
no vehicle of any type shall be stored in the parking areas at any time.
In the event that a vehicle is disabled, it shall be removed within 48
hours. There shall be no "For Sale" or other advertising signs on or about
any parked vehicle. All vehicles shall be parked in the designated parking
areas in conformity with all signs and other markings. All parking will be
open parking, and no reserved parking, numbering or lettering of
individual spaces will be permitted except as specified by Landlord.
8. Tenant shall maintain the Premises free from rodents, insects and other
pests.
9. Landlord reserves the right to exclude or expel from the Project any
person who, in the judgment of Landlord, is intoxicated or under the
influence of liquor or drugs or who shall in any manner do any act in
violation of the Rules and Regulations of the Project.
10. Tenant shall not cause any unnecessary labor by reason of Tenant's
carelessness of indifference in the preservation of good order and
cleanliness. Landlord shall not be responsible to Tenant for any loss of
property on the Premises, however occurring, or for any damage done to the
effects of Tenant by the janitors or any other employee or person.
11. Tenant shall give Landlord prompt notice of any defects in the water, lawn
sprinkler, sewage, gas pipes, electrical lights and fixtures, heating
apparatus, or any other service equipment affecting the Premises.
12. Tenant shall not permit storage outside the Premises, including without
limitation, outside storage of trucks and other vehicles, or dumping of
waste or refuse or permit any harmful materials to be placed in any
drainage system or sanitary system in or about the Premises.
13. All moveable trash receptacles provided by the trash disposal firm for the
Premises must be kept in the trash enclosure areas, if any, provided for
that purpose.
14. No auction, public or private, will be permitted on the Premises or the
Project.
15. No awnings shall be placed over the windows in the Premises except with
the prior written consent of Landlord.
16. The Premises shall not be used for lodging, sleeping or cooking or for any
illegal purposes or for any purpose other than that specified in the
Lease. No gaming devices shall be operated in the Premises.
17. Tenant shall ascertain from Landlord the maximum amount of electrical
current which can safely be used in the Premises, taking into account the
capacity of the electrical wiring in the Project and the Premises and the
needs of other tenants, and shall not use more than such safe capacity.
Landlord's consent to the installation of electric equipment shall not
relieve Tenant from the obligation not to use more electricity than such
safe capacity.
18. Tenant assumes full responsibility for protecting the Premises from theft,
robbery and pilferage.
19. Tenant shall not install or operate on the Premises any machinery or
mechanical devices of a nature not directly related to Tenant's ordinary
use of the Premises and shall keep all such machinery free of vibration,
noise and air waves which may be transmitted beyond the Premises.
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<PAGE>
ADDENDUM I
BASE RENT ADJUSTMENTS
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED NOVEMBER 11, 1995, BETWEEN
SCI LIMITED PARTNERSHIP-I
and
CVC HOLDINGS, INC.
Base rent shall equal the following amounts for the respective periods set forth
below:
Period Monthly Base Rent
------ -----------------
Months 1-30 $10,368
Months 31-60 $10,656
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<PAGE>
ADDENDUM 2
LETTER OF CREDIT
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED 11-7, 1995, BETWEEN
SCI LIMITED PARTNERSHIP-I
and
CVC HOLDINGS, INC.
The Letter of Credit shall be in the form of an unconditional, irrevocable
letter of credit from a bank reasonably acceptable to Landlord. The primary
purpose of the Letter of Credit is to reimburse Landlord for the cost of Broker
fees paid and the Initial Improvements constructed by Landlord in the event
Tenant defaults under this Lease. As such, the Letter of Credit is separate and
distinct from the Security Deposit set forth in Paragraph 5. The Letter of
Credit may only be drawn upon the occurrence of an Event of Default under the
Lease, and only to reimburse Landlord for the cost of Broker fees paid and the
Initial Improvements constructed by Landlord to the extent Landlord is entitled
to reimbursement therefor. The approved form of Letter of Credit is attached
hereto as Item 1. If Landlord sells or conveys the Premises. Tenants shall, at
Landlord's request, corporate in having the Letter of Credit transferred to the
purchaser. If the Letter of Credit does not automatically renew as provided
therein, and Tenant does not provide an acceptable replacement Letter of Credit
at least 20 days prior to expiration of the existing Letter of Credit, Landlord
may submit a Drawing Request (as defined in the Letter of Credit) for the full
amount of the Letter of Credit than in effect.
The Letter of Credit shall be in the amount of $250,000 and shall decline
annually during the Lease Term as set forth below:
Amount of
Period Letter of Credit
------ ----------------
Months 1-12 $250,000
Months 13-24 $210,250
Months 25-36 $166,000
Months 37-48 $116,000
Month 49-60 $ 61,500
This Letter of Credit shall be in place for a minimum of two years from
the Commencement Date. Landlord shall release the Letter of Credit at any time
after two years if the following conditions have been met for the fiscal year
prior to the date of contemplated release of such Letter of Credit. Tenant shall
have a tangible net worth in excess of $5,000,000 as of the end of such prior
fiscal year and annual net income shall exceed $1,000,000. In addition, the
average annual net income for such fiscal year and the fiscal year prior to that
shall be a minimum of $750,000. The above financial milestones shall be
documented by audited financial statements.
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<PAGE>
Item 1
FORM OF LETTER OF CREDIT
[LETTERHEAD OF LETTER OF CREDIT BANK]
[DATE]
SCI-Limited Partnership-I
Attention:___________
Re: Irrevocable Transferrable Letter of Credit
No._______________________________________
Beneficiary:
By order of our client, ______________(the "Applicant"), we hereby
establish this Irrevocable Transferrable Letter of Credit No._________ in your
favor for an amount up to but not exceeding the aggregate sum of ______and
No/100 Dollars ($___________) (as reduced from time to time in accordance with
the terms hereof, the "Letter of Credit Amount"), effective immediately, and
expiring on the close of business at our office at the address set forth above
one year from the date hereof unless renewed as hereinafter provided.
Funds under this Letter of Credit are available to you on or prior to the
expiry date against presentation by you of your (i) sight drafts drawn on us in
the form of Annex 1 hereto, indicating this Letter of Credit number and (ii)
request in the form of Annex 2 hereto (such sight draft and request, together
referred to as a "Drawing Request"), sight drafts(s), completed and signed by
one of your officers. Presentation of your Drawing Requests may be made by you
to us at the address set forth above or may be made by facsimile transmission,
to the following facsimile number_____________. You may present to us one or
more Drawing Requests from time to time prior to the expiry date in an aggregate
amount not to exceed the Letter of Credit Amount then in effect (it being
understood that the honoring by us of each Drawing Request shall reduce the
Letter of Credit Amount then in effect.).
This Letter of Credit will be automatically renewed for a one-year period
upon the expiration date set forth above and upon each anniversary of such date,
unless at least sixty (60) days prior to such expiration date, or prior to any
anniversary of such date, we notify both you and the Applicant in writing by
certified mail that we elect not to so renew the Letter of Credit.
This Letter of Credit sets forth in full the terms of our undertaking and
such undertaking shall not in any way be modified, amended or amplified by
reference to any document or instrument referred to herein or in which this
Letter of Credit is referred to or to which this Letter of Credit relates, and
no such reference shall be deemed to incorporate herein by reference any
document or instrument.
All bank charges and commissions incurred in this transaction are for the
Applicant's account.
This Letter of Credit is transferrable by you and your successors and
assigns any number of times in its entirety and not in part, but only by
delivery to us of a Notice of Assignment in the form of Annex 3 hereto.
We hereby agree with the drawers, endorsers, and bona fide holders of
drafts drawn under and in compliance with the terms of this Letter of Credit
that such drafts will be duly honored upon presentation to the drawee from our
own funds and not the funds of the Applicant and shall be available to such
drawers, endorsers, and bona fide holders, as the case may be, on or before
noon, New York time, on the Business Day (defined below) next following the date
on which such drafts are received by us. "Business Day" shall mean any day which
is not a Saturday, Sunday or day on which we are required or authorized by law
to be closed in New York, New York.
To the extent not inconsistent with the express terms hereof, this Letter
of Credit shall be governed by, and construed in accordance with, the terms of
the Uniform Customs and Practice for
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<PAGE>
Commercial Documentary Credits (1993 Revision), I.C.C. Publication No. 500 (the
"UCP 500") and as to matters not governed by the UCP 500, this Letter of Credit
shall be governed by and construed in accordance with the laws of the State of
New York
Very truly yours,
[NAME OF LETTER OF CREDIT BANK]
By: ______________________________
Name:
Title:
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<PAGE>
ANNEX 1
SIGHT DRAFT
________, 199__
For value received, at sight pay to the order of SCI-LIMITED PARTNERSHIP,
the sum of [Amount in words] [Amount in Figures] United States Dollars drawn
under [Name of Letter of Credit Bank] Irrevocable Transferrable Letter of Credit
No. _________ dated ________________, 199_____.
SCI-LIMITED PARTNERSHIP-I,
a Delaware limited partnership
By: Security Capital Industrial Trust,
a Maryland real estate investment trust,
General Partner
By:_____________________________
Name:___________________________
Title:__________________________
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<PAGE>
ANNEX 2
DRAWING REQUEST
________________, 199___
[NAME AND ADDRESS OF LETTER
OF CREDIT BANK]
Re: Irrevocable Transferrable Letter of Credit No.---(the "Letter of
Credit")
The undersigned (the "Beneficiary"), hereby certifies to [Name of Letter
of Credit Bank} (the "issuer") that:
(a) The Beneficiary is making a request for payment in lawful currency of
the United States of America under Irrevocable Transferrable Letter of Credit
No._________(the "Letter of Credit") in the amount of $________..
(b) The Letter of Credit Amount (as defined in the Letter of Credit) as of
the date hereof and prior to payment of the amount demanded in this Drawing
Request is $_________. The amount requested by this Drawing Request does not
exceed the Letter of Credit Amount.
(c) Demand is made for payment under the Letter of Credit as a result of
the occurrence and continuation of an Event of Default (as defined in the Lease
Agreement).
Please wire transfer the proceeds of the drawing to the following account
of the Beneficiary at the financial institution indicated below:
_________________________
_________________________
_________________________
Unless otherwise defined, all capitalized terms used herein have the
meanings provided in, or by reference in, the Letter of Credit.
IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Drawing Request as of the ___ day of __________, 199___.
SCI-LIMITED PARTNERSHIP-I
a Delaware limited partnership
By: Security Capital Industrial Trust
a Maryland real estate investment trust,
General Partner
By:________________________________________
Name:______________________________________
Title:_____________________________________
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<PAGE>
ANNEX 3
NOTICE OF ASSIGNMENT
_______, 199___
[NAME AND ADDRESS OF
LETTER OF CREDIT BANK]
Re: Irrevocable Transferable Letter of Credit No.____
The undersigned (the "Beneficiary"), hereby notifies [Name of Letter of
Credit Bank] (the "Issuer") that it has irrevocably assigned the
above-referenced Letter of Credit to ________(the "Assignee") with an address at
________________________effective as of the date the Issuer receives this Notice
of Assignment. The assignee acknowledges and agrees that the Letter of Credit
Amount may have been reduced pursuant to the terms thereof, and that the
Assignee is bound by any such reduction.
IN WITNESS WHEREOF, the undersigned has duly executed and delivered this
Notice of Assignment as of this ___day of_____, 199__.
SCI-LIMITED PARTNERSHIP-I
a Delaware limited partnership
By: Security Capital Industrial Trust,
a Maryland real estate investment
trust, General Partner
By:___________________________________
Name:_________________________________
Title:________________________________
Agreed:
[Assignee]
______________________
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<PAGE>
ADDENDUM 3
CONSTRUCTION - SHORT FORM
(ALLOWANCE)
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED 11-7, 1995, BETWEEN
SCI LIMITED PARTNERSHIP-I
and
CVC HOLDINGS, INC.
(a) Landlord agrees to furnish or perform those items of construction and
those improvements (the "Initial Improvements") as described to Exhibit B.
Landlord shall pay for the Initial Improvements up to a maximum amount of
$216,000, and Tenant shall pay for the costs of the Initial Improvements in
excess of such amount. If the cost of the Initial Improvements is estimated to
exceed $216,000, 50% of such estimated overage shall be paid in advance by
Tenant to Landlord before Landlord commences construction, with the remaining
estimated overage to be placed by Tenant in a joint escrow account for the
benefit of the Tenant and Landlord. A final accounting and adjusting payment
based upon the actual costs of the Initial Improvements minus $216,000 minus
Tenant's initial 50% advance payment shall be made by Tenant when the Initial
Improvements are complete.
(b) If Tenant shall desire any changes to the final Approved Plans and
Specifications, Tenant shall so advice Landlord in writing and Landlord shall
determine whether such changes can be made in a reasonable and feasible manner.
Any and all costs of reviewing any requested changes, and any and all net costs
attributed to making any changes to the Initial Improvements which Tenant may
request and which Landlord may agree to shall be at Tenant's sole cost and
expense and shall be paid to Landlord upon demand and before execution of the
change order.
(c) Landlord shall proceed with and complete the construction of the
Initial Improvements. As soon as such improvements have been substantially
completed, Landlord shall notify Tenant in writing of the date that the Initial
Improvements were Substantially Completed. Such date, unless otherwise agreed to
in writing between Landlord and Tenant, shall be the "Commencement Date" unless
the completion of such improvements was delayed due to Tenant's fault, including
as a result of changes made to such improvements by Tenant or development of
Tenant's "clean-room" or processing of Tenant's Class H-6 Hazardous Materials
permit, in which case the Commencement Date shall be the date such improvements
would have been completed but for the delays caused by Tenant . The Initial
Improvements shall be deemed substantially completed ("Substantially Completed")
upon the later of (A) when in the opinion of the construction manager (whether
an employee or agent of Landlord or a third party construction manager), the
Premises are substantially completed except for punch list items which do not
prevent in any material way the use of the Premises for the purposes for which
they were intended; or (B) when a final inspection is received and acceptance is
indicated by the City of Fremont building inspector ("Inspection Approval"),
provided that Tenant's "clean-room" or Class H-6 Hazardous Materials permit
shall not be part of such Inspection Approval requirement and shall not delay
the date of Substantial Completion if such "clean-room" or Class H-6 Hazardous
Materials permit application delay the issuance of such Inspections Approval.
After the Commencement Date Tenant shall, upon demand, execute and deliver to
Landlord a letter of acceptance of delivery of the Premises.
(d) The failure of Tenant to take possession of or to occupy the Premises
upon satisfaction of the conditions set forth in the previous paragraph shall
not serve to relieve Tenant of obligations arising on the Commencement Date or
delay the payment of rent by Tenant. Subject to applicable ordinances and
building codes governing Tenant's right to occupy or perform in the Premises and
subject to the provisions of Paragraph 12 of the Lease, Tenant shall be allowed
to install its tenant improvements, machinery, equipment, fixtures, or other
property on the Premises during the final stages of completion of construction
provided that Tenant does not thereby interfere with the completion of
construction or cause any labor dispute as a result of such installation, and
provided further that Tenant does hereby agree to assume all risk of loss or
damage to such improvements, machinery, equipment, fixtures, and other property
and to indemnify, defend and hold Landlord harmless from (i) any loss or damage
to such property, and all liability, loss, or damage arising from any injury to
the Project or the property of the Landlord, its contractors, subcontractors, or
materialmen arising out of such installations, whether or not
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<PAGE>
any such loss, damage or liability was caused by Landlord's negligence, and {ii}
any death or personal injury to any person or persons arising out of such
installations, except to the extent such death or personal injury was caused by
Landlord's negligence. Delay in putting Tenant in possession of the Premises
shall not serve to extend the term of this Lease or to make Landlord liable for
any damages arising therefrom.
(e) Except for incomplete punch list items, Tenant upon the Commencement
Date shall have and hold the Premises as the same shall then be without any
liability or obligation on the part of the Landlord for making any further
alterations or improvements of any kind in or about the Premises except as
otherwise provided in the Lease.
(f) If Landlord does not complete the Initial Improvements within 6 months
of the date this Lease is executed, subject to an extension for any force
majeure delays or delays caused by tenant (including without limitation, change
orders, clean room construction and approvals, and H-6 Hazardous Materials
permit processing and compliance), then Tenant may terminate this Lease
Agreement.
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<PAGE>
ADDENDUM 4
SIGN CRITERIA
GATEWAY CORPORATION CENTER II
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED 11-7, 1995, BETWEEN
SCI LIMITED PARTNERSHIP-1
and
CVC HOLDINGS, INC.
WINDOW IDENTIFICATION SIGNS:
Each Tenant will be allowed one window sign placed either to the left or the
right of the entrance door, whichever provides the best visibility.
Company names, logos or symbols will be allowed in this area-color and size to
be determined by the Tenant. All other copy in this area except for logos or
symbols will be mat white vinyl pressure sensitive letters.
Copy must state at 5' from grade, working down to no more than 3 1/2' from
grade. Sign layout including copy, sizes and color must be approved by the
building management. Management reserves the right to deny any copy or color it
considers unsuitable.
Once security decal only may be applied to the front door glass in the lower
corner if the Tenant so desires. All exterior alarm bells are to be mounted to
the rear of the building only.
DIRECTORY SIGN IDENTIFICATION
Tenant shall be allowed to utilize the entire directory sign located near the
entrance to the Premises, and is required to use pressure sensitive matte, Pearl
Gray vinyl letters with a letter height suitable for the area allowed, and logo
if so desired, also in Pearl Gray.
REAR LOADING SIGNS
Each Tenant will be allowed to identify its rear door for shipping and receiving
purposes. The company name shall be placed on a 36"x24" aluminum panel adjacent
to the rear doors. The aluminum panel shall be painted gray to match the
building.
Copy shall consist of 3" white vinyl capital letters only in Futura Bold style.
Company name and logos only are allowed.
Management reserves the right to deny any copy it considers unsuitable. Layout
to be approved by building management. The cost of all lettering and logos will
be he responsibility of the Tenant. No other signs are allowed in the windows or
doors.
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<PAGE>
ADDENDUM 5
RENEWAL OPTION
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED NOVEMBER 7, 1995, BETWEEN
SCI LIMITED PAPRTNERSHIP-I
and
CVC HOLDINGS, INC.
(a) Provided that as of the time of the giving of the Extension Notice and
the Commencement Date of the Extension Term (as such terms are defined below),
(x) Tenant is the Tenant originally named herrein, (y) Tenant actually occupies
all of the Premises initially demised under this Lease and any space added to
the Premises, and (z) no Event of Default exists, or would exist but for the
passage of time or the giving of notice, or both; then Tenant shall have the
right to extend the Lease Term for an additinal term of 3 years (such additional
term is hereinafter called the "Extension Term") commencing Date of the day
following the expiration of the Lease Term (hereinafter referred to as the
"Commencement Date of the Extension Term"). Tenant must give Landllord notice
(hereinafter called the "Extension Notice") of its election to extend the term
of the Lease Term at least 6 months, but not more than 9 months, prior to the
scheduled expiration date of the Lease Term.
(b) The Base Rent payable by Tenant to Landlord during the Extension Term
shall be the greater of:
(i) the Base Rent in effect on the expiration of the Lease Term (if
the Base Rent is stated as an annual or other periodic rate, adjusted for the
length of the Lease Term), and
(ii) the Fair Market Rent, as defined and determined pursuant to
Paragraphs (c), (d), and (e) below.
(c) The term "Fair Market Rent" shall mean the Base Rent, expressed as an
annual rent per square foot of floor area, which Landlord would have received
from leasing the Premises for the Extension Term to an unaffiliated person which
is not then a tenant in the Project, assuming that such space were to be
delivered in "as-is" condition, and taking into account the rental which such
other tenant would most likely have paid for such premises (excluding the clean
room buildout, but including the space occupied by the clean room and assuming a
level of buildout for the space occupied by the clean room which is comparable
to the remaineder of the Premises), including market escalations, provided that
Fair Market Rent shall not in any event be less than the Base Rent for the
Premises as of the expiration of the Lease Term. Fair Market Rent shall not be
reduced by reason of any costs or expenses saved by Landlord by reason of
Landlord's not having to find a new tenant for the Premises (including without
limitation brokerage commissions, cost of improvements necessary to prepare the
space for such tenant's occupancy, rent concession, or lost rental income during
any vacancy period). Fair Market Rent means only the rent component defined as
Base Rent in the Lease and does not include reimbursements and payments by
Tenant to Landlord with respect to operating expenses and other items payable or
reimbursable by Tenant under the Lease. In addition to its obligation to pay
Base Rent (as determined herein), Tenant shall continue to pay and reimburse
Landlord as set forth in the Lease with respect to such operating expenses and
other items with respect to the Premises during the Extension Term. The
arbitration process described below shall be limited to the determination of the
Base Rent and shall not affect or otherwise reduce or modify the Tenant's
obligation to pay or reimburse Landlord for such operating expenses and other
reimbursable items.
(d) Within 10 days after receipt of the Extension Notice, Landlord shall
notify Tenant of its determination of the Fair Market Rent (which shall be made
in Landlord's sole discretion and shall in any event be not less than the Base
Rent in effect as of the expiration of the Lease Term) for the Extension Term,
and Tenant shall advise Landlord of any objection within 10 days of receipt of
Landlord's notice. Failure to respond within the 10-day period shall constitute
Tenant's acceptance of such Fair Market Rent. If Tenant objects, Landlord and
Tenant shall commence negotiations to attempt to agree upon the Fair Market Rent
within 10 days of Landlord's receipt of Tenant's notice. If the parties cannot
agree upon such rental rate and execute an amendment (defined below) at least 5
months prior to the expiration of the Lease, each acting in good faith but
without any obligation to agree, then the Lease Term shall not be extended and
shall terminate on its scheduled termination date and Tenant shall have no
further right
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<PAGE>
hereunder or any remedy by reason of the parties' failure to agree unless Tenant
or Landlord invokes the arbitration procedure provided below to determine the
Fair Market Rent.
(e) Arbitration to determine the Fair Market Rent shall be in accordance
with the Real Estate Valuation Arbitration Rules of the American Arbitration
Association. Unless otherwise required by state law, arbitration shall be
conducted in the metropolitan area where the Project is located by a single
arbitrator unaffiliated with either party. Either party may elect to arbitrate
by sending written notice to the other party and the Regional Office of the
American Arbitration Association within 5 days after the 10-day negotiating
period provided in Paragraph (d), invoking the binding arbitration provisions of
this paragraph. Landlord and Tenant shall each submit to the arbitrator their
respective proposal of Fair Market Rent. The arbitrator must choose between the
Landlord's proposal and the Tenant's proposal and may not compromise between the
two or select some other amount. Notwithstanding any other provision herein, the
Fair Market Rent determined by the arbitrator shall not be less than, and the
arbitrator shall have no authority to determine a Fair Market Rent less than,
the Base Rent in effect as of the scheduled expiration of the Lease Term. The
cost of the arbitration shall be paid by Landlord if the Fair Market Rent is
that proposed by Landlord and by Tenant if the Fair Market Rent is that proposed
by Tenant; and shall be borne equally otherwise. If the arbitrator has not
determined the Fair Market Rent as of the end of the Lease Term, Tenant shall
pay 105 percent of the Base Rent in effect under the Lease as of the end of the
Lease Term until the Fair Market Rent is determined as provided herein. Upon
such determination, Landlord and Tenant shall make the appropriate adjustments
to the payments between them.
(f) The parties consent to the jurisdiction of any appropriate court to
enforce the arbitration provisions of this Addendum and to enter judgment upon
the decision of the arbitrator.
(g) Except for the Base Rent as determined above, Tenant's occupancy of
the Premises during the Extension Term shall be on the same terms and condition
as are in effect immediately prior to the expiration of the initial Lease Term;
provided, however, Tenant shall have no further right to extend the Lease Term
pursuant to this addendum or to any allowances, credits or abatements or options
to expand, contract, renew or extend the Lease.
(h) If Tenant does not sent the Extension Notice within the period set
forth in Paragraph (a), Tenant's right to extend the Lease Term shall
automatically terminate. Time is of the essence as to the giving of the
Extension Notice and the notice of Tenant's objection under Paragraph (d).
(i) Landlord shall have no obligation to refurbish or otherwise improve
the Premises for the Extension Term. The Premises shall be tendered on the
Commencement Date of the Extension Term in "as-is" condition.
(j) If the Lease is extended for the Extension Term, then Landlord shall
prepare and Tenant shall execute an amendment to the Lease confirming the
extension of the Lease Term and the other provisions applicable thereto.
(k) If Tenant exercises its right to extend the term of the Lease for the
Extension Term pursuant to this Addendum, the term "Lease Term" as used in the
Lease, shall be construed to include, when practicable, the Extension Term
except as provided in (g) above.
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<PAGE>
[GRAPHIC OMITTED]
[Printed copy has a map of Gateway Corporate Center with "EXHIBIT A"
stamped at the top]
<PAGE>
EXHIBIT B
WORK LETTER AGREEMENT
ATTACHED TO AND A PART OF THE LEASE AGREEMENT
DATED 11-7, 1995, BETWEEN
SCI LIMITED PARTNERSHIP-1
and
CVC HOLDINGS, INC.
I. Initial Improvements: Plans and Specifications. Landlord and Tenant
shall prepare plans and specifications including fully detailed working drawings
(the "Plan and Specifications") for the Tenant Improvements that Tenant desires
Landlord to construct for Tenant's use in the Building. The Plans and
Specifications must be acceptable to both Landlord and Tenant, and shall be
consistent with Initial Improvements: Tenant Improvement Standards set forth
below, except as otherwise mutually agreed to in writing by Landlord and Tenant.
The Plans and Specifications shall also be consistent with and include those
items shown on the space plan attached hereto as Exhibit II and the additional
tenant improvement standards as outlined herein. Tenant shall cooperate
diligently with the Landlord's architect (the "Architect") and shall furnish all
information required by the Architect for completion of the Plans and
Specifications. Landlord and Tenant shall indicate their approval of the Plans
and Specifications (the "Approved Plans") by initialling them and attaching them
hereto as Exhibit III. All third party costs and expenses relative to creating
the Plans and Specifications shall be included within the definition of "Initial
Improvements" payable by Tenant.
II. Initial Improvements: Tenant Improvement Standards.
A. Office and Warehouse
Please refer to Exhibit I attached hereto.
B. Exclusions
The Initial Improvements do not include the following items, which shall
be paid for separately by Tenant:
1. Electrical data gathering lines or security equipment.
2. Telephonic or other communications equipment and cabling.
3. Construction of Tenant's "clean-room."
III. Changes to Plans for Initial Improvements. Once the Approved Plans
have been finally approved by Tenant as provided above, thereafter neither party
shall have the right to order extra work or change orders with respect to the
construction of the Initial Improvements without the prior written consent of
the other, which consent shall not be unreasonably withheld or delayed. All
extra work or change order requests by Tenant shall be made in writing, shall
specify the amount of delay or the time saved resulting therefrom, shall specify
any added or reduced cost resulting therefrom and shall become effective and a
part of the Approved Plans once approved in writing by both parties.
IV. Commencement and Completion of the Initial Improvements. As soon as
(a) the Approved Plans have been developed as provided above, and (b) all
necessary governmental approvals have been obtained, Landlord shall thereafter
commence construction of such improvements and shall complete such construction
in a good and workmanlike manner.
V. Delay in Completion Caused by Tenant. The parties hereto acknowledge
that the date on which tenant's obligations to pay all rent payable under this
Lease would otherwise commence, may be delayed because of, among other things:
A. Tenant's request for special materials, finishes, or
installations which are not readily available and not specifically set forth in
the Plans and Specifications;
B. Change orders requested by Tenant and approved by Landlord;
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<PAGE>
C. Tenant's failure to promptly review and approve the Plans and
Specifications, promptly provide information to the City regarding Tenant's
business and/or use of the premises, or to complete any of its own improvement
work to the extent Tenant delays completion by appropriate governmental
authorities of their final inspection and approval of Landlord's improvements;
or
D. Interference with Landlord's work caused by Tenant or by Tenant's
contractor or subcontractors.
It is the intent of the parties hereto that Tenant's obligations to pay
all rent payable under this Lease may not be delayed by any of such causes or by
any other act of Tenant, and in the event it is so delayed, then Tenant's
obligation to pay such rent shall commence as of the date it would otherwise
have commenced absent said delay caused by Tenant.
VI. Tenant's Requirements. Tenant acknowledges that it shall provide
Landlord with certain information regarding its specific needs relating to the
Premises which shall be incorporated into the Plans and Specifications to
address those needs. Tenant also acknowledges that it may provide some of its
own equipment for installation in the Premises. Tenant understands and agrees
that Landlord will take no independent review of any such information, designs,
specifications or equipment to determine if same adequately addresses Tenant's
needs or are suitable for the Premises, and anything in this Lease to the
contrary notwithstanding, Landlord does not warrant, either expressly or
implied, the adequacy of any such designs, specifications or equipment or the
Initial Improvements, for Tenant's intended purpose.
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<PAGE>
EXHIBIT I
CVC PRODUCTS
SECURITY CAPITAL INDUSTRIAL TRUST
TENANT IMPROVEMENT STANDARDS
OFFICE AREA
1. CABINETS: Coffee bar and/or lunch room base cabinet(s) shall be 6'0" long
grey melamine with chrome wire pulls.
2. COUNTERTOPS: The coffee bar top shall have a square front edge with a 4"
splash in plastic laminate.
3. LAVATORY COUNTERTOPS: In all tenants spaces the toilet room lavatories
shall be installed in a plastic laminated countertop with a bullnosed
front edge and a 4" backsplash.
4. ROOF INSULATION: The insulation above conditioned office area ceilings
shall be minimum R-11 fiberglass batts.
5. THERMAL WALL INSULATION: Walls between conditioned and unconditioned
spaces shall receive minimum R-11 unfaced fiberglass batt insulation.
6. ACOUSTIC INSULATION: All toilet room walls and ceilings shall receive 3
1/2" unfaced fiberglass batt acoustic insulation.
7. DOORS AND FRAMES: 3"-0" x 9-0" x1-3/4", solid core, birch, 8-3 stain
prefinished with clear anodized aluminum frames.
8. INTERIOR DOOR HARDWARE: Schlage "S" series Saturn in a brushed chrome 626
finish.
9. INTERIOR WINDOWS: 2090 tempered glass sidelights at office doors.
10. MIRRORS: toilet rooms shall have mirrors the length of the lavatory top.
11. DRYWALL PARTITIONS: office walls shall be undergrid 3-5/8" x 25 Ga. metal
studs at 24" o.c. with 5/8" gypsum board.
12. DRYWALL FINISH: All drywall and exposed concrete walls within the office
and toilet rooms shall receive a skip trowel textured.
13. WAINSCOT: Toilet room wet walls shall have 4' -6" high white Pionite
wainscot.
14. ACOUSTIC CEILING TILE: Office areas shall have an exposed grid acoustic
ceiling with 24" x 48" non-directional fissured tile, installed at 10"-0"
15. OFFICE CARPET: Designweave or Shaw direct glue-down. 26 oz. face weight
level loop or 30 oz cut pile carpet without pad.
16. LUNCH ROOM: shall have vinyl composition tile (vct) flooring 1/8" gauge,
standard grade, as manufactured by Tarkett or Armstrong.
17. RUBBER BASE: The office area shall have a 4" high topset rubber base as
manufactured by Burke, Roppe, or Tarkett, installed in all areas receiving
floor covering except the toilet rooms.
18. TOILET ROOM: The flooring shall be sheet vinyl by Armstrong "Suffield",
"Best of Both Worlds" or "Seagate" with a 6" coved base.
19. PAINT: One (1) coat of paint in a standard light color interior flat
latex, except in the toilet rooms and at the coffee bar which shall
receive one (1) coat of latex semi-gloss enamel over one (1) coat of PVA
sealer.
20. TOILET ACCESSORIES: Napkin Disposals: Bobrick B-270 sanitary napkin
disposals in each women's toilet stall. Paper Towel Dispenser: Bobrick
B-369 (for single accommodation toilet rooms) or a Bobrick B-3944 (for
multiple accommodation toilet rooms) recessed paper towel dispenser with a
waste receptacle. Seat Cover Dispenser: Bobrick B-221 seat cover dispenser
in each toilet stall. Toilet Paper Holder: Bobrick B-685 double toilet
paper holder. Grab Bars: Bobrick No. B6806-36 and B6806-42 stainless steel
handicap grab bars per code.
21. TOILET PARTITIONS: Metal, floor mounted, overhead braced toilet partitions
with a backed enamel finish by Global Steel, Knickerbocker or equal in
manufactures standard color.
22. BLINDS: All exterior windows, except storefront doors, shall receive
vertical blinds in a building standard color with a valance.
23 PLUMBING FIXTURES AND TRIM: Lavatory for vanity: American Standard or
equal. "Oval Horizon" model 3303.013, white, self-rimming with a Delta
Model 523 WF HDF single lever type faucet assembly with a grid strainer
and bright chrome finish.
<PAGE>
EXHIBIT I (Continued)
Water closet: American Standard or equal. "Cadet Aquameter" elongated. 1.5
SPF, model 3042.12, white, with an Olsonite #95 seat and a Sloan #111
flush valve. Urinal: American Standard or equal. "Allbrook", model
6540.017, white, with a Sloan 180-1.5 flush valve. Coffee bar sink: Elkay
or equal, ""Peacemaker Starlite", model PSR-1918, stainless steel, with a
Delta # 100 faucet. Water heater: sized to meet demand installed in a
smitty pan draining into a hub drain with a trap primer.
24. Fire sprinkler heads shall be chrome with white escutcheons, semirecessed,
not centered, on the ceiling tiles.
25. The HVAC systems shall maintain 75 degrees indoors, on a 100 degree
outdoor day
26. The HVAC systems shall be connected to a 7-day skip-a-day time clock and
include a bypass timer at each thermostat.
27. All thermostats shall have an automatic change-over feature and a locking
cover.
28. Toilet rooms and any shower rooms shall have an exhaust fan.
29. All conditioned areas shall have supply register and a ducted return
register. Supply and return air registers shall be white baked enamel 2"
x2" with a perforated face, flush mounted. Supply air registers shall have
a 4-way blow.
30. Office lighting: shall be 2' x4" three lamp lay-in flourescent light
fixtures with standard acrylic lens and T-12 low watt type lamps, 75 foot
candles at 3" A.F.F. or as permitted by code but not less than two (2)
fixtures per office.
31. Furnish and install two (2) 110V duplex receptacles in each office
32. Furnish and install a dedicated 110 volt fourplex outlet at the telephone
board and two dedicated 110V outlets at the coffee bar.
33. Furnish and install a 2" diameter P.V.C. or steel (where required by code)
conduit for phone system from the building telephone service entrance to a
telephone board within the tenant space.
WAREHOUSE
34. FULL HEIGHT DRYWALL PARTITIONS @ tenant [ILLEGIBLE] walls: Metal studs
with one layer of 5/8" type "X" gypsum board on each side from the floor
to the roof deck.
35. OFFICE/WAREHOUSE WALL: Metal studs with two layers of 5/8" type "X" gypsum
board on each side to 6" A.F.F.
36. WAREHOUSE WALL FINISH: All drywall shall be fire taped only. Spot nails in
firetaped areas.
37. CONCRETE FLOOR SEALER: Exposed concrete floors shall receive one coat of
acrylic concrete sealer.
38. WAREHOUSE LIGHTING: Provide 16' high output flourescent strip light
fixtures or metal halide fixtures to achieve 15 foot candles of light
measured at the floor in the warehouse space.
<PAGE>
EXHIBIT II
SPACE PLAN
[GRAPHIC OMITTED]
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<PAGE>
EXHIBIT III
APPROVED PLANS
[Landlord and Tenant to mutually agree]
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<PAGE>
EXHIBIT 10.26
This Subordinated Promissory Note shall be subject to such
Subordination Agreements as are referred to in the body of this
Subordinated Promissory Note and as are in effect from time to time.
SUBORDINATED PROMISSORY NOTE
U.S. $1,000,000 December 20, 1991
FOR VALUE RECEIVED, CVC Products, Inc., a Delaware corporation (the
"Maker"), having an address at 525 Lee Road, Rochester, New York 14603-1886,
hereby promises to pay to the order of CVC Holdings, Inc. or assigns ("Payee"),
on the fifth anniversary of the date hereof at such address as the holder of
this Note shall specify from time to time to the Maker, such principal amounts
as shall be loaned to the Maker by the holder of this Note from time to time,
such principal amount not to exceed in the aggregate at any one time One-Million
U.S. Dollars (U.S. $1,000,000.00), and which shall then be outstanding together
with interest (computed on the basis of a 365-day year) on the unpaid balance of
such principal from time to time commencing on the date hereof at the rate of
nine percent (9%) per annum, payable on each date when a payment of principal is
made and, commencing with and continuing after 1992, on each March 31, June 30
and September 30, December 31 of each year.
At the time of the making of each loan by the holder of this Note to
the Maker, and upon each payment of principal of any such loan the holder of
this Note shall, and is hereby authorized to, make a notation on the Grid
attached hereto and made a part hereof, of the date and the amount of such loan
or payment, as the case may be. The notations on the Grid shall constitute prima
facie evidence of the amount of loan principal outstanding under this Note from
time to time. Notwithstanding the foregoing, the failure to make a notation with
respect to any loan or payment shall not limit or otherwise affect the
obligation of the Maker hereunder with respect to any loan or payment. Although
this Note is dated the date of issue, interest in respect hereof shall be
payable only for the periods during which the loans evidenced hereby are
outstanding and although the stated principal amount of this Note shall be
$1,000,000, this Note shall be enforceable, with respect to the Maker's
obligation to pay the principal amount hereof, only to the extent of the unpaid
principal amount of the loans at the time evidenced hereby.
This Note may be prepaid in whole at any time or in part from time
to time without penalty. Each such prepayment shall be applied first to accrued,
but unpaid, interest, and then to principal.
<PAGE>
If an Event of Default (as hereinafter defined) shall occur, then,
at the option of the holder hereof upon written notice thereof to the Maker,
this Note shall become immediately due and payable; provided, however, if an
Event of Default as defined in clause (d) or (e) of the next succeeding
paragraph shall occur, then this Note automatically shall become immediately due
and payable in its entirety.
An "Event of Default" shall be deemed to have occurred hereunder if
and only if (a) the Maker shall fail to make any payment in full when due under
this Note or under the Subordinated Promissory Note in the face amount of
$1,500,000 from the Maker to Payee dated December 21, 1990, and such failure
shall not be cured within 10 days following written notice thereof to the Maker
from the holder hereof; or (b) the Maker shall make an assignment for the
benefit of creditors, or approve of, consent to or acquiesce in the appointment
of a trustee, receiver, liquidator, custodian, sequestrator or similar official
(collectively, "Custodians") for itself or for any substantial portion of its
assets; or (c) a Custodian shall be appointed for the Maker or any substantial
subsidiary thereof without its consent, or for any substantial portion of its
assets, and such appointment shall not be terminated or stayed within 60 days;
or (d) any proceeding shall be commenced by the Maker, as debtor, under any
bankruptcy, reorganization, insolvency, readjustment of debt, arrangement,
receivership or liquidation law or statute of the federal or any state
government; or (e) any proceeding shall be commenced against the Maker under any
bankruptcy, reorganization, insolvency, readjustment of debt, arrangement,
receivership or liquidation law or statute of the federal or any state
government, and such proceeding shall continue and not be dismissed or stayed
within 60 days or not be timely controverted by the Maker or an order for relief
shall not be granted in such proceeding.
The indebtedness represented by this Note (including the interest
thereon) shall be subordinate and junior in right of payment to the prior
payment in full of all Senior Indebtedness to the extent set forth herein and to
the extent set forth in any Subordination Agreement (as hereinafter defined). To
the extent that any provision in this Note shall conflict with or be
inconsistent with any provision of any Subordination Agreement, the provision of
the Subordination Agreement shall govern. The Payee agrees from time to time to
enter into such subordination agreements with or for the benefit of holders of
Senior Indebtedness as such holders shall reasonably require from time to time
to evidence the subordination of the Payee's rights hereunder to the rights of
the holders of Senior Indebtedness; provided such agreements shall contain only
subordination
-2-
<PAGE>
provisions ordinarily obtained by such holders under similar circumstances. Each
such subordination agreement is sometimes referred to in this Agreement as a
Subordination Agreement and collectively as the Subordination Agreements.
"Senior Indebtedness" means (a) the principal of, premium, if any, and interest
on, and all other obligations to pay money or expend funds under, all
Indebtedness whether outstanding on the date hereof or hereafter created or
incurred; and (b) any amendments, modifications, deferrals, renewals or
extensions of any such Senior Indebtedness, or debentures, notes or other
evidences of indebtedness issued in exchange for any such Senior Indebtedness.
The term "Indebtedness" as used in the foregoing sentence means any liability of
the Maker (i) for money borrowed from, or in respect of the factoring of
receivables and/or the issuance of letters of credit and other financial
accommodations by, any bank, factoring or other financial institution, or (ii)
arising under a lease of property, equipment or other assets which, pursuant to
generally accepted accounting principles then in effect, is classified upon the
balance sheet of the Maker as a liability of the Maker, or (iii) arising under a
guaranty by the Maker of the liability of another (including any subsidiary of
the Maker) which is outstanding on the date of this Note, or any such guaranty
hereafter executed by the Maker, in each case where the liability of the Maker
arising thereunder is, under the express provisions of such guaranty, superior
in right of payment to this Note.
Subject to the payment in full of all Senior Indebtedness, the
holder of this Note shall be subrogated to the rights of the holders of Senior
Indebtedness to receive payments or distributions of cash, property or
securities of the Maker applicable to the Senior Indebtedness until all amounts
owing on this Note shall be paid in full, and, as between the Maker, its
creditors other than holders of Senior Indebtedness, and the holder of this
Note, no payment or distribution of cash, property or securities made to the
holders of Senior Indebtedness by virtue of the subordination provisions hereof
which otherwise would have been made to the holder of this Note shall he deemed
to be a payment by the Maker on account of the Senior Indebtedness, and no
payment or distribution of cash, property or securities made to the holder of
this Note by virtue of the subrogation provided for herein which otherwise would
have been made to the holders of Senior Indebtedness shall be deemed to be a
payment on account of this Note; it being understood that the provision hereof
are, and are intended solely, for the purpose of defining the relative rights of
the holder of this Note, on the one hand, and the holders of the Senior
Indebtedness, on the other hand.
-3-
<PAGE>
Nothing contained in this Note is intended to or shall impair, as
between the Maker, and the holder of this Note, the obligations of the Maker,
which is absolute and unconditional, to pay to the holder of this Note the
principal of and interest on this Note and all other sums due in connection
herewith as and when the same shall become due and payable in accordance with
the terms hereof, nor shall anything in this Note prevent the holder of this
Note from exercising all remedies otherwise permitted by applicable law upon
default hereunder, subject to the rights of the holders of Senior Indebtedness.
Any Note issued in replacement hereof or exchanged herefor shall
contain all of the provisions of this Note relating to the subordination of the
indebtedness represented by this Note to the Senior Indebtedness.
The Maker agrees to pay all costs of collection upon default of any
amounts due hereunder when incurred, including, without limitation, reasonable
attorneys' fees and expenses. Such costs shall be added to the balance of
principal then due.
The obligations hereunder shall be binding upon the successors and
assigns of the Maker. The Maker, for itself and its successors and assign,
hereby waives presentment for payment, notice of nonpayment or dishonor,
protest, notice of protest and all other notices in connection with delivery,
acceptance, performance or enforcement of this Note.
This Note shall be construed in accordance with and governed by the
laws of the State of New York applicable to contracts executed, delivered and to
be fully performed in New York without regard to its choice of law provisions.
This Note is being entered into for the benefit of the holders from
time to time of the Senior Indebtedness and the provisions hereof may be
enforced by such holders. This Note may not be amended or modified in any manner
which will impair or adversely affect the rights of the holders of Senior
Indebtedness without the written consent of the holders of Senior Indebtedness.
CVC PRODUCTS, INC.
By: /s/ Christine B. Whitman
-------------------------------------
Christine B. Whitman,
President
-4-
<PAGE>
GRID
LOAN AND PAYMENT SCHEDULE
Amount of Unpaid Name of
Date of Amount of Principal Paid Principal Person Making
Loan Advance or Prepaid Balance Notation
------- --------- -------------- --------- -------------
12/20/91 $1,000,000 $1,000,000 C. Whitman
<PAGE>
COMPUTATION OF
EARNINGS PER SHARE
Exhibit 11
-----------------------------------------
1995 1996 1997
---------- ----------- -----------
Net income $ 130,269 $ 3,179,507 $ 2,044,575
Add: Interest expense, net of tax 29,488 72,810 282,384
---------- ----------- -----------
Net income, as adjusted 159,757 3,252,317 2,326,959
Weighted average common and
common equivalent shares 8,501,522 11,216,861 12,493,186
========== =========== ===========
Net income per share $ 0.02 $ 0.29 $ 0.19
========== =========== ===========
(1) Historical earnings per share has been omitted for the fiscal year ended
September 30, 1994 since a net loss existed in that year and, therefore,
earnings per share data is not considered meaningful in light of the
non-cumulative preferred stock (see Note 9 of Notes to Consolidated
Financial Statements) being a common equivalent share which would have an
anti-dilutive effect on earnings per share in 1994.
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 (Amendment No. 1) of our report dated
October 24, 1997, except as to the stock split described in Note 1, which is
as of October 31, 1997, relating to the consolidated financial statements of
CVC, Inc., which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
/s/ Price Waterhouse LLP
- -----------------------------
PRICE WATERHOUSE LLP
Rochester, New York
November 13, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 730
<SECURITIES> 0
<RECEIVABLES> 4,882
<ALLOWANCES> 92
<INVENTORY> 16,304
<CURRENT-ASSETS> 23,947
<PP&E> 9,688
<DEPRECIATION> 1,803
<TOTAL-ASSETS> 31,837
<CURRENT-LIABILITIES> 15,131
<BONDS> 6,529
0
10,040
<COMMON> 4
<OTHER-SE> (725)
<TOTAL-LIABILITY-AND-EQUITY> 31,837
<SALES> 48,378
<TOTAL-REVENUES> 48,378
<CGS> 33,755
<TOTAL-COSTS> 33,755
<OTHER-EXPENSES> 11,246
<LOSS-PROVISION> 42
<INTEREST-EXPENSE> 299
<INCOME-PRETAX> 3,180
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,180
<EPS-PRIMARY> 0
<EPS-DILUTED> .29
</TABLE>
