<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 10, 1999
REGISTRATION NO. 333-38057
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
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>
PROSPECTUS
3,500,000 SHARES
[LOGO]
COMMON STOCK
------------------------------------------------------------
CVC is offering 3,000,000 shares of common stock in its initial public offering.
Two of its stockholders are selling an aggregate of 500,000 shares in this
offering. CVC will not receive any of the proceeds from the sale of shares by
the selling stockholders.
CVC has applied to list the shares on the Nasdaq National Market under the
symbol "CVCI."
Anticipated Price Range $ to $ a share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 4.
<TABLE>
<CAPTION>
Per Share Total
----------- -----------
<S> <C> <C>
Public Offering Price............................................................ $ $
Underwriting Discount............................................................ $ $
Proceeds to CVC.................................................................. $ $
Proceeds to Selling Stockholders................................................. $ $
</TABLE>
The selling stockholders have granted the underwriters the right to purchase up
to 525,000 additional shares within 30 days to cover any over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Lehman Brothers expect to deliver these shares on , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
PRUDENTIAL SECURITIES
SG COWEN
WARBURG DILLON READ LLC
, 1999
<PAGE>
[DESCRIPTION OF ARTWORK]
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), Ion Beam Etching (IBE), 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 MOCVD process."
CONNEXION-Registered Trademark- is a registered trademark of CVC. OPEN
CONNEXION-TM-and INFINITY-TM- are trademarks of CVC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary............................ 1
Risk Factors.................................. 4
Use of Proceeds............................... 13
Dividend Policy............................... 13
Capitalization................................ 14
Dilution...................................... 15
Selected Consolidated Financial Data.......... 16
Unaudited Pro Forma Combined Statements of
Operations.................................. 17
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................. 19
<CAPTION>
PAGE
---------
<S> <C>
Business...................................... 28
Management.................................... 42
Certain Transactions.......................... 51
Principal and Selling Stockholders............ 52
Description of Capital Stock.................. 54
Shares Eligible for Future Sale............... 57
Underwriting.................................. 59
Legal Matters................................. 61
Experts....................................... 61
Additional Information........................ 61
Index to Consolidated Financial Statements.... F-1
</TABLE>
ABOUT THIS PROSPECTUS
Investors should rely only on the information contained in this prospectus.
CVC and the underwriters have not authorized anyone to provide any different or
additional information. This prospectus is not an offer to sell or a
solicitation of an offer to buy common stock in any jurisdiction where it is
unlawful. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock. This preliminary prospectus is
subject to completion prior to this offering.
This prospectus makes forward-looking statements. Investors should consider
any statements that are not statements of historical fact to be forward-looking
statements. The words "believes," "anticipates," "plans," "expects," "seeks,"
"estimates" and similar expressions identify forward-looking statements. There
are a number of important factors that could cause the results of CVC to differ
materially from those indicated by such forward-looking statements, including
those discussed under the section of this prospectus entitled "Risk Factors."
All trademarks and trade names appearing in this prospectus are the property
of their respective holders.
Until , 1999, all dealers selling shares of the common stock,
whether or not participating in this offering, 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.
i
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES APPEARING ELSEWHERE IN THIS
PROSPECTUS. EXCEPT AS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS
(1) ASSUMES THAT THE OVER-ALLOTMENT OPTION GRANTED TO THE UNDERWRITERS IS NOT
EXERCISED; (2) ASSUMES CONVERSION AND REDEMPTION OF ALL SHARES OF OUTSTANDING
PREFERRED STOCK AND (3) GIVES RETROACTIVE EFFECT TO A TWO-FOR-THREE REVERSE
STOCK SPLIT TO BECOME EFFECTIVE UPON THE CLOSING OF THIS OFFERING.
THE COMPANY
CVC is a leading worldwide supplier of fabrication equipment providing thin
film process solutions for the manufacture of magnetic heads for disk drives and
advanced semiconductor devices for computers and communications systems. Our
products are optimized for the highly uniform, repetitive steps required for the
manufacturing of devices involving multiple thin film layers and a wide range of
materials. Our solutions incorporate our core competencies, including:
- integrated thin film processing;
- materials science and plasma physics;
- vacuum engineering;
- atomic scale engineering of magnetic, microelectronic and optical devices;
and
- process control software.
The manufacture of magnetic recording heads and semiconductor devices
requires from tens to hundreds of fabrication processing steps. Both magnetic
recording heads and semiconductor devices are formed by building or removing
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 devices 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. The process of manufacturing magnetic heads
and semiconductors is constantly evolving to address the demand for smaller
devices with higher performance and requires advanced thin film fabrication
equipment.
Our principal product, the CONNEXION Cluster Tool system, is a modular
system with stations for connecting up to six process modules around a central
substrate-handling platform. Our CONNEXION Cluster Tool system utilizes an open
platform that enables the integration of process modules supplied by either CVC
or third parties. We currently offer a wide range of advanced process modules
for physical vapor deposition, or PVD, including sputtering and ion beam
deposition, metal-organic chemical vapor deposition, or MOCVD, and etching. The
CONNEXION Cluster Tool system enables the manufacture of highly uniform magnetic
recording head and semiconductor devices through the integration of various
processes in a controlled vacuum environment. We believe that the CONNEXION
Cluster Tool system, combined with its MOCVD module, is well suited for advanced
interconnect applications, including barrier and copper deposition.
Since 1993, we have shipped more than 100 CONNEXION Cluster Tool systems,
including more than 375 process modules. Our customers include many of the
leading manufacturers of thin film recording heads for the data storage
industry, including Alps, Fujitsu, IBM, Read-Rite, Seagate Technology, TDK and
Yamaha, as well as manufacturers of semiconductor devices, including Anadigics,
Analog Devices, Honeywell and M/A-COM. In order to expand our technology and
broaden our offering of process modules, we acquired Commonwealth Scientific
Corporation in May 1999. The
1
<PAGE>
acquisition of Commonwealth broadened our product offering by providing us with
our ion beam etch, deposition and diamond-like carbon process modules for the
data storage industry.
Our executive offices are located at 525 Lee Road, Rochester, New York,
14606, and our telephone number is (716) 458-2550. CVC 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.
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by CVC.................. 3,000,000 shares
Common stock offered by the selling
stockholders............................... 500,000 shares
Common stock to be outstanding after the
offering................................... 11,477,315 shares
Use of proceeds.............................. Approximately $15.0 million for repayment of
debt, $10.0 million for the redemption of the
Series D Redeemable Preferred Stock, $6.2
million for capital expenditures and the
balance for general corporate purposes. See
"Use of Proceeds." CVC will not receive any
of the proceeds from the sale of shares by
the selling stockholders.
Proposed Nasdaq National Market symbol....... CVCI
</TABLE>
Common stock to be outstanding after the offering excludes 2,263,389 shares
issuable upon exercise of stock options outstanding as of June 30, 1999 and
790,760 shares issuable upon the exercise of an outstanding warrant held by
Seagate Technology.
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following table summarizes the financial data of our business. The pro
forma results for fiscal 1998 and the nine months ended June 30, 1999 assume the
acquisition of Commonwealth Scientific Corporation occurred on October 1, 1997
and October 1, 1998, respectively and give effect to the automatic conversion of
all the outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock into common stock, as well as the conversion of
Series C Convertible Preferred Stock into common stock and into Series D
Redeemable Preferred Stock, all of which will occur upon the closing of this
offering.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS ENDED -----------------------------
YEAR ENDED SEPTEMBER 30, JUNE 30, YEAR ENDED NINE MONTHS
------------------------------------------ -------------------- SEPTEMBER 30, ENDED JUNE 30,
1995 1996 1997 1998 1998 1999 1998 1999
--------- --------- --------- --------- --------- --------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS
DATA:
Revenues.................... $ 21,358 $ 48,378 $ 62,588 $ 68,173 $ 54,275 $ 55,795 $ 112,060 $ 74,721
Gross margin................ 5,728 14,623 21,302 26,154 20,771 21,379 39,008 23,205
Income (loss) from
operations................ 143 3,376 4,095 2,367 2,436 2,618 4,782 (639)
Net income (loss)........... 130 3,179 2,045 264 879 739 2,196 (1,083)
Pro forma net income (loss)
per share:
Basic..................... $ 0.18 $ 4.32 $ 2.67 $ 0.26 $ 0.86 $ 0.58 $ 0.30 $ (0.13)
Diluted................... 0.02 0.46 0.29 0.04 0.12 0.09 0.26 (0.12)
Weighted average shares
outstanding:
Basic..................... 735 735 766 1,021 1,021 1,280 7,406 8,194
Diluted................... 5,302 6,914 6,993 7,071 7,056 8,044 8,363 9,128
</TABLE>
Excluding the effects of the acquisition of Commonwealth, pro forma earnings
per share for the year ended September 30, 1998 and the nine months ended June
30, 1999 were $0.04 and $0.10, respectively (basic). Diluted earnings per share
are unchanged from the historical diluted earnings per share amounts presented
above for these two periods.
The following table summarizes our balance sheet as of June 30, 1999. The
pro forma column reflects the automatic conversion of all the outstanding shares
of Series A Convertible Preferred Stock and Series B Convertible Preferred Stock
into common stock and Series C Convertible Preferred Stock into common stock and
into Series D Redeemable Preferred Stock, all of which will occur upon the
closing of this offering. The pro forma as adjusted column gives effect to the
sale of 3,000,000 shares of common stock offered by CVC, at an assumed initial
public offering price of $ per share, after deducting the underwriting discount
and estimated offering expenses, and the application of the estimated net
proceeds. See "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................... $ 767 $ 767
Working capital..................................................... 20,340 20,340
Total assets........................................................ 71,627 71,627
Short-term borrowings and current portion of long-term debt......... 7,817 7,817
Long-term debt, less current portion................................ 8,674 8,674
Preferred stock................................................... 19,895 10,000
Common stockholders' equity....................................... 10,939 20,834
Total stockholders' equity.......................................... 30,834 30,834
</TABLE>
3
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK IS RISKY. YOU SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISKS, AS WELL AS THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS.
WE EXPERIENCE FLUCTUATIONS IN OUR OPERATING RESULTS WHICH MAY ADVERSELY IMPACT
OUR STOCK PRICE.
Our quarterly operating results have fluctuated significantly in the past,
and we expect this trend to continue. A principal reason is that we derive a
substantial portion of our revenue from the sale of a relatively small number of
systems which typically range in price from approximately $1.0 million to $4.0
million. As a result, our revenues and results of operations for any one quarter
may be adversely affected by factors relating to the timing of orders and
shipments of these systems. Additional factors which affect our quarterly
operating results include:
- specific economic conditions in the data storage and semiconductor
industries
- cyclical patterns of capital spending by customers
- modification or cancellation of customer orders
- continued market acceptance of our systems and our customers' products
- shipment delays
- loss of a significant customer
- increased research and development or marketing costs associated with our
introduction of new products
- introduction of new products by our customers
- our ability to successfully introduce new products on a timely basis
- changes in our pricing policies or those of our competitors
- production and quality problems
- the publication of opinions by industry analysts about us, our products or
our competitors
In addition, our customers or potential customers may be affected by Year
2000 issues that may, in part (1) cause a delay in payments for products
shipped, (2) cause customers to expend significant resources on Year 2000
compliance matters, rather than investing in our products or (3) cause customers
to defer placing orders for our systems in the first quarter of our fiscal 2000
or beyond. These issues may impact our results of operations in the first
quarter of fiscal 2000, our first quarter as a public company.
Many of these factors are beyond our control, and our operating results for
any particular quarter may differ materially from our expectations or those of
the market. In addition, our operating results may not be indicative of future
operating results, which may adversely impact the price of our common stock.
WE FACE RISKS ASSOCIATED WITH LIMITED SALES BACKLOG.
Our backlog at the beginning of a quarter typically does not include all
orders required to achieve our sales objective for that quarter. Moreover, all
customer purchase orders are subject to cancellation or rescheduling by the
customer, generally with limited or no penalties. Therefore, backlog at any
particular date is not necessarily representative of actual sales for any
succeeding period. Our net sales and operating results for a quarter may depend
upon orders we obtain for systems to be shipped in the same quarter that the
order is received. In addition, we derive a substantial portion of our net sales
in
4
<PAGE>
any fiscal period from the sale of a relatively small number of high-priced
systems. As a result, the timing of recognition of revenue for a single
transaction could have a material adverse effect on our sales and operating
results.
A SIGNIFICANT AMOUNT OF OUR REVENUES IS RECORDED LATE IN EACH QUARTER. WE MAY BE
UNABLE TO ADJUST SPENDING QUICKLY ENOUGH TO COMPENSATE FOR SHORTFALLS IN
QUARTERLY REVENUES, AND AS A RESULT OUR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED.
We have historically recorded a significant amount of our revenues for each
quarter late in the quarter, while our expenses have been incurred more evenly
throughout the period. The concentration of product shipments late in the
quarter increases the risk of shipment delays and, consequently, the risk that
quarterly revenue expectations will not be met. Our business and financial
results for a particular period could be materially adversely affected if an
anticipated order for even one system is not received in time to permit shipment
during the period. In addition, a significant portion of our expenses are
relatively fixed. We also have limited visibility on revenues for future
quarterly periods and face risks of revenue shortfalls due to our limited sales
backlog in current periods. If the number of systems we actually ship, and thus
the amount of revenues we are able to record, late in any particular quarter are
below expectations for any reason, the adverse effect may be magnified by our
inability to adjust spending quickly enough to compensate for the revenue
shortfall.
THE SUCCESS OF OUR BUSINESS DEPENDS ON THE DEMAND FOR PRODUCTS FROM DATA STORAGE
AND SEMICONDUCTOR MANUFACTURERS, WHOSE INDUSTRIES ARE HIGHLY CYCLICAL.
Our business depends in large part upon the demand for products from data
storage and semiconductor manufacturers. The data storage and semiconductor
industries accounted for the following percentages of our net sales for the
periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Data Storage....................................................... 77% 88% 77%
Semiconductor...................................................... 14% 9% 21%
</TABLE>
The data storage and semiconductor industries have been characterized by
cyclicality. These industries have experienced significant economic downturns at
various times in the last decade, characterized by slowing product demand,
inventory surpluses, accelerated erosion of average selling prices and
production overcapacity. In the recent past, these downturns have had a material
adverse effect on the demand for the type of capital equipment and process
technology that we offer. In addition, because of (1) our continuing need to
invest in research and development, (2) our substantial capital equipment
requirements and (3) our extensive ongoing customer service and support
requirements worldwide, our ability to reduce expenses in response to any
downturn or slowdown in the rate of capital investment by manufacturers in these
industries may be limited.
In the recent past, the data storage and semiconductor industries have
experienced inventory oversupply and poor operating results. Our business would
likely be materially adversely affected if slowdowns in the rate of capital
investment or inventory surpluses in the data storage and semiconductor
industries occur in the future.
OUR REVENUES AND PROFITS MAY DECREASE IF WE LOSE ANY OF OUR MAJOR CUSTOMERS.
Our customer base is highly concentrated among a limited number of large
customers, primarily because the data storage industry is dominated by a small
number of large companies. In particular, purchases by Seagate Technology, also
our largest stockholder, have historically accounted for a significant portion
of our revenues. The loss of any of these customers, and Seagate Technology in
5
<PAGE>
particular, could have a material adverse effect on us. The following table sets
forth the percentage of our total revenues derived from sales to our five
largest customers for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
Five Largest Customers............................................. 81% 79% 71%
</TABLE>
We anticipate that our revenue will continue to depend on a limited number of
major customers, although the companies considered to be major customers and the
percentage of our revenue represented by each major customer may vary from
quarter to quarter.
We generally do not have long-term purchase agreements with our customers
and do not have any written agreements that require customers to purchase fixed
minimum quantities of our products. CVC'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 loss of, or reduced
demand for products or related services from, any of our major customers could
have a material adverse effect on our business. If any of these large
manufacturers discontinues its relationship with us or suffers economic
downturns, our results of operations could be materially adversely affected.
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
The data storage and semiconductor manufacturing industries are subject to
rapid technological change and new product introductions and enhancements, as
well as evolving industry standards. Our ability to remain competitive will
depend in part upon our ability to develop new and enhanced systems at
competitive prices in a timely and cost-effective manner and to accurately
predict technology transitions. In addition, new product introductions or
enhancements by our competitors could cause a decline in sales or loss of market
acceptance of our existing products. Increased competitive pressure could also
lead to intensified price competition, resulting in lower margins, which could
materially adversely affect our business.
Because new product development commitments must be made well in advance of
sales, new product decisions must anticipate both the future demand for the
products under development and the equipment required to produce such products.
We cannot be certain that we will be successful in developing, manufacturing and
marketing new products or in enhancing existing products.
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET, AND IF WE FAIL TO COMPETE
EFFECTIVELY, OUR BUSINESS MAY BE HARMED.
The data storage and semiconductor capital equipment industries are
intensely competitive. Established companies, both domestic and foreign, compete
with each of our product lines. Many of our competitors have greater financial,
engineering, manufacturing and marketing resources than we do. A substantial
investment is required by customers to evaluate, test, select and integrate
capital equipment into a production line. As a result, once a manufacturer has
selected a particular vendor's capital equipment, we believe that the
manufacturer generally relies upon that equipment for the specific production
line application and frequently will attempt to consolidate its other capital
equipment requirements with the same vendor. Accordingly, if a particular
customer selects a competitor's capital equipment, we expect to experience
difficulty in selling to that customer for a significant period of time. We
believe that our ability to compete successfully depends on a number of factors
both within and outside of our control, including:
- price
- product quality
6
<PAGE>
- breadth of product line
- system performance
- cost of ownership
- global technical service and support
- success in developing or otherwise introducing new products
We cannot be certain that we will be able to compete successfully in the
future.
THE SUCCESS OF OUR BUSINESS DEPENDS ON CONTINUED MARKET ACCEPTANCE OF OUR
CONNEXION CLUSTER TOOL SYSTEM.
Our principal product is a line of capital equipment, known as the CONNEXION
Cluster Tool system, which together with its associated process modules is used
to manufacture thin film recording heads and semiconductor devices. We believe
that continued future growth depends in large part upon our ability to gain
increased customer acceptance for our CONNEXION Cluster Tool system and related
technology. The following table sets forth the percentage of our net sales
derived from sales of the CONNEXION Cluster Tool systems for the periods
indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ---------
CONNEXION Cluster Tool system...................................... 71% 85% 83%
</TABLE>
Continued acceptance of the CONNEXION Cluster Tool system will depend on
factors, including:
- cost of ownership
- performance and reliability
- ability to manufacture on a successful and timely basis
- availability of customer support
If we fail to enhance continually the CONNEXION Cluster Tool system, the
future marketplace acceptance of that product could be adversely affected. We
cannot assure you that we will be successful in obtaining increased market
acceptance of the CONNEXION Cluster Tool system or any future enhanced version
of the system. If we fail to gain sufficient customer acceptance for this
system, our business could be materially adversely affected.
WE HAVE INVESTED SIGNIFICANT RESOURCES IN THE DEVELOPMENT OF ADVANCED COPPER
DEPOSITION TECHNOLOGY. IF WE FAIL TO SUCCESSFULLY DEVELOP ADVANCED COPPER
DEPOSITION PROCESSES THAT ARE ACCEPTED BY THE MARKETPLACE, OUR LONG-TERM GROWTH
COULD BE MATERIALLY ADVERSELY AFFECTED.
To date, we have invested significantly, and expect to continue investing
significantly in 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 and the market
for equipment incorporating this technology is not expected to reach commercial
viability until after 2000. Recently, several semiconductor device manufacturers
have announced that they have made advancements in copper-based technology.
These and other competitors with substantially greater resources than ours are
investing in research and development of similar technologies. These and other
competitors may achieve market acceptance of their products before us. We cannot
assure you that our efforts in this area will be technologically successful or,
even if technologically successful, will be commercially accepted by the
marketplace. If we fail to achieve
7
<PAGE>
commercial success in our pursuit of copper-based technology for the
semiconductor industry, our long-term growth prospects could be materially
adversely affected.
SALES TO FOREIGN MARKETS CONSTITUTE A SIGNIFICANT AND GROWING PORTION OF OUR
TOTAL REVENUES. OUR RESULTS OF OPERATIONS COULD BE ADVERSELY AFFECTED BY
ECONOMIC DOWNTURNS IN FOREIGN MARKETS AND OUR DEPENDENCE ON FOREIGN SALES
REPRESENTATIVES.
An increasing portion of our revenues in recent years has been derived from
sales in foreign markets. International sales are subject to various risks. The
following table sets forth for the periods indicated the percentage of our total
revenues derived from sales to our customers located outside of the United
States:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----- ----- -----
Non-U.S. Customers................................................. 19% 31% 38%
</TABLE>
We intend to continue to expand our operations outside the United States and
enter additional international markets, which will require significant
management attention and financial resources. International business presents
additional risks, including:
- periodic recessions in foreign economies as they impact our particular
sector
- the risk of government-financed competition
- changes in trade policies and tariff regulations
- worldwide political and economic instability
- difficulties in obtaining U.S. export licenses and managing businesses
abroad
Our international sales are denominated in U.S. dollars. As a result,
changes in the value of foreign currencies relative to the value of the U.S.
dollar can render our products comparatively more expensive. Although we have
not been significantly negatively impacted in the past by foreign currency
changes in Japan, Korea, Taiwan and Europe, such conditions could negatively
impact our international sales in future periods. Further, our international
sales are made primarily through several independent sales representatives and a
third party distributor. We cannot be certain that they will continue to market
and distribute our products successfully, if at all. Our implementation of new
distribution and sales arrangements could result in delays and disruptions in
our international sales and customer support efforts, which could reduce sales
and have a material adverse effect on our business.
THE LOSS OF ANY OF OUR KEY PERSONNEL COULD ADVERSELY IMPACT OUR ABILITY TO MEET
OUR CUSTOMER AND TECHNOLOGICAL DEMANDS.
Our future operating results depend in significant part upon the continued
contributions of our officers and key personnel who are critical to our success,
and many of whom would be difficult to replace. Many of our employees are not
bound by long-term employment or noncompetition agreements, and competitors may
attempt to recruit them. The loss of our officers or other key personnel could
have a material adverse effect on our business.
WE MAY HAVE DIFFICULTY ATTRACTING AND RETAINING QUALIFIED PERSONNEL WHICH COULD
ADVERSELY IMPACT OUR ABILITY TO EXECUTE OUR BUSINESS STRATEGY.
The competition for personnel throughout our industry can be significant.
Because of this competition for qualified labor, we have occasionally
experienced delays in meeting our staffing requirements. Our future success will
depend on our ability to attract and retain qualified technical, marketing and
management personnel, particularly highly skilled design, process and test
engineers.
8
<PAGE>
The market for such personnel has become intensely competitive, particularly in
California where there has been a significant increase in the business
activities of other companies in the data storage and semiconductor
manufacturing sectors.
Any protracted inability on our part to recruit, train and retain adequate
numbers of qualified personnel could adversely affect our ability to
manufacture, sell and support our products, which could materially adversely
affect our business.
WE MAY EXPERIENCE DIFFICULTY INTEGRATING OUR RECENT ACQUISITION.
We recently acquired Commonwealth Scientific Corporation. Realization of the
potential benefits from this acquisition may not occur unless the products,
technologies and personnel of Commonwealth are successfully integrated with our
operations in a timely and efficient manner. Any diversion of the attention of
management, and any difficulties encountered in the transition process, could
have a material adverse effect on the revenues, financial condition and
operating results of the combined enterprise. If we are not able to successfully
integrate Commowealth and its services and products into our operations, our
business could be materially adversely affected.
WE MAY BE UNABLE TO CONSUMMATE POTENTIAL ACQUISITIONS OR SUCCESSFULLY INTEGRATE
THEM WITH OUR BUSINESS WHICH COULD SLOW OUR GROWTH.
As part of our continued strategy to expand the range of our product
offerings and technologies, we intend to make acquisitions of complementary
businesses, technologies, services or products if appropriate opportunities
arise. However, we may be unable to identify suitable acquisition or investment
candidates at reasonable prices or on reasonable terms. Additionally, regardless
of whether suitable candidates are available, we may be unable to consummate
future acquisitions or investments, which could harm our growth strategy. If we
do consummate acquisitions, we could have difficulty integrating the acquired
products, personnel or technologies. These difficulties could disrupt our
ongoing business, distract our management and employees and increase our
expenses.
WE HAVE A LENGTHY SALES CYCLE WHICH MAY INCREASE OUR EXPOSURE TO CUSTOMER
CANCELLATIONS OR DELAYS IN ORDERS.
Sales of our systems depend, in significant part, upon the decision of an
existing or prospective customer to add new manufacturing capacity or to expand
existing manufacturing capacity, both of which involve a significant capital
commitment. We may experience delays in finalizing system sales following
initial system qualification while the customer evaluates and receives approvals
for the initial purchase of our systems. In general, for new customers or
applications our sales cycle could take 12 to 18 months to complete. During this
time, we may expend substantial funds and management effort as part of the sales
process. Lengthy sales cycles subject us to a number of significant risks,
including inventory obsolescence and fluctuations in operating results over
which we have little or no control.
PROTECTION OF OUR INTELLECTUAL PROPERTY RIGHTS MAY RESULT IN COSTLY LITIGATION.
There has been substantial litigation regarding patent and other
intellectual property rights in the data storage, semiconductor and related
industries. We have been, and may in the future be, notified of allegations that
we may be infringing intellectual property rights possessed by others. In the
future, protracted litigation and expense may be incurred if necessary to defend
ourselves against alleged infringement of third party rights. Any such
litigation, even if ultimately successful in our defense, could result in
substantial cost and diversion of time and effort by our management, which by
itself could have a material adverse effect on our business. Adverse
determinations in that litigation could:
- result in our loss of proprietary rights
9
<PAGE>
- subject us to significant liabilities, including treble damages under
certain circumstances
- require us to seek licenses from third parties, which licenses may not be
available on reasonable terms or at all
- prevent us from manufacturing or selling our products
Any of these outcomes could have a material adverse effect on our business.
OUR SUCCESS DEPENDS, IN PART, ON INTELLECTUAL PROPERTY WHICH MAY BE DIFFICULT TO
PROTECT AND COULD AFFECT OUR ABILITY TO COMPETE EFFECTIVELY.
We believe that our success depends, in part, on our ability to obtain and
protect patents protecting our proprietary technology. As of August 31, 1999,
CVC had obtained 11 U.S. patents, had received notices of allowance on two U.S.
patent applications and had 34 U.S. patent applications pending. In addition,
CVC had obtained two foreign patents from the United Kingdom and had 17 foreign
patent applications pending on its behalf as of that date.
We cannot assure you that:
- pending patent applications or any future applications will be approved
- any patents will provide us with competitive advantages or will not be
challenged by third parties
- the patents of others will not have an adverse effect on our ability to do
business
We cannot assure you that others will not independently develop similar
products, duplicate our products or, if patents are issued to us, design around
these patents. In addition, we may be forced to expend time and resources on
protracted litigation to defend our intellectual property rights against third
parties. Further, because foreign patents may afford less protection under
foreign law than is available under U.S. patent law, we cannot assure you that
any foreign patents issued to us will adequately protect our proprietary rights.
In addition to patent protection, we also rely upon trade secret protection,
employee and third-party nondisclosure agreements and other intellectual
property protection methods to protect our confidential and proprietary
information. Despite these efforts, we cannot be certain that:
- others will not independently develop substantially equivalent proprietary
information and techniques
- others will not otherwise gain access to our trade secrets
- others will not disclose our technology
- we can meaningfully protect our trade secrets
WE DEPEND ON A LIMITED NUMBER OF SUPPLIERS, AND IN SOME CASES SOLE SUPPLIERS.
ANY DISRUPTION OR TERMINATION OF THESE SUPPLY CHANNELS MAY HARM OUR BUSINESS.
We purchase components, subassemblies and services from a limited number of
suppliers and occasionally from a single source. Disruption or termination of
certain of these sources could occur, and these disruptions could have at least
a temporary adverse effect on our operations. A prolonged inability on our part
to obtain certain components included in our systems could have a material
adverse effect on our business.
10
<PAGE>
FAILURE BY US TO IDENTIFY AND REMEDIATE ALL MATERIAL YEAR 2000 RISKS COULD CAUSE
A SIGNIFICANT DISRUPTION TO OUR BUSINESS. WE COULD BE REQUIRED TO EXPEND
SIGNIFICANT INTERNAL RESOURCES ON YEAR 2000 REMEDIATION OR THE YEAR 2000
PROBLEMS OF OUR SUPPLIERS COULD CAUSE A DELAY IN SUPPLYING GOODS AND SERVICES TO
US. FURTHERMORE, YEAR 2000 PROBLEMS OF OUR CUSTOMERS COULD CAUSE THEM TO DELAY
PAYMENT FOR PRODUCTS THAT WE HAVE SHIPPED TO THEM.
We have implemented a multi-phase Year 2000 project consisting of assessment
and remediation, and testing following remediation. We cannot, however, be
certain that we have identified all of the potential risks. Failure by us to
identify and remediate all material Year 2000 risks could adversely affect our
business, financial condition and results of operations. We have identified the
following risks you should be aware of:
- we cannot be certain that the entities on whom we rely for certain goods
and services that are important to our business will be successful in
addressing all of their software and systems problems in order to operate
without disruption in the Year 2000 and beyond
- our customers or potential customers may be affected by Year 2000 issues
that may, in part:
-- cause a delay in payments for products shipped
-- cause customers to expend significant resources on Year 2000
compliance matters, rather than investing in our products
- we have not developed a contingency plan related to the failure of our or
a third-party's Year 2000 remediation efforts and may not be prepared for
such an event
Further, while we have made efforts to notify our customers who have
purchased potential non-compliant products, we cannot be sure that customers who
purchased such products will not assert claims against us alleging that such
products should have been Year 2000 compliant at the time of purchase, which
could result in costly litigation and divert management's attention.
IF WE FAIL TO COMPLY WITH ENVIRONMENTAL REGULATIONS TO WHICH WE ARE SUBJECT, OUR
BUSINESS COULD BE ADVERSELY IMPACTED.
We are 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 our manufacturing processes. Any failure on our part
to comply with regulations or to control in any way our handling of hazardous
substances could subject us to future liabilities which could have a material
adverse effect on our business.
OUR STOCK PRICE MAY BE VOLATILE.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in CVC will lead to the development of a
trading market or how liquid that market might become. Further, we cannot
guarantee that the price of our common stock will not decline below the initial
public offering price. Stock prices of companies in our industry have
experienced price fluctuations which have often been unrelated to the operating
performance of affected companies. The initial public offering price may not be
indicative of prices that will prevail in the trading market. Various factors
could cause the market price of our common stock to fluctuate substantially.
These factors may include:
- news announcements relating to CVC, our competitors, customers or other
entities regarding quarterly operating results, technology advances or
production overcapacity
- general trends in our industry
- changes in market conditions in the data storage and semiconductor
industries
11
<PAGE>
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against these companies. This type of litigation, or similar
litigation, could have a material adverse effect on our business.
A LIMITED NUMBER OF STOCKHOLDERS WILL HAVE THE ABILITY TO INFLUENCE OUR POLICIES
FOLLOWING THE OFFERING.
A substantial majority of our capital stock is held by a limited number of
stockholders. After completion of this offering, assuming no exercise of
currently exercisable stock options, our principal stockholders and executive
officers and directors will beneficially own approximately 65% of the shares of
common stock outstanding, 67% if Seagate Technology exercises in full its
warrant to purchase common stock. In particular, Seagate Technology is CVC's
largest stockholder and two of its representatives are members of CVC's board of
directors. Following completion of this offering, Seagate Technology will own
2,428,313 shares representing approximately 21% of CVC's outstanding common
stock. In addition, if Seagate Technology exercises in full a warrant for the
common stock that it holds, it would own an aggregate of approximately 26% of
the outstanding common stock.
Accordingly, this limited number of stockholders, including Seagate
Technology, will likely for some time influence the election of our board of
directors, control major decisions of corporate policy and determine the outcome
of any major transaction or other matter submitted to our stockholders or board
of directors, including potential mergers or acquisitions, and amendments to our
certificate of incorporation. Stockholders other than these principal
stockholders are therefore likely to have little or no influence on decisions
regarding such matters.
THE PRICE OF OUR STOCK COULD DECREASE AS A RESULT OF SHARES BEING SOLD IN THE
MARKET AFTER THE OFFERING.
The market price of our common stock could drop as a result of sales of a
large number of shares of common stock in the market after the offering, or the
perception that these sales could occur. These factors also could make it more
difficult for us to raise funds through future offerings of common stock.
There will be 11,477,315 shares of common stock outstanding immediately
after the offering. Of these shares, the shares sold in the offering will be
freely transferable without restriction or further registration under the
Securities Act, except for any shares purchased by our "affiliates" as defined
in Rule 144 under the Securities Act. The remaining 7,977,315 shares of common
stock outstanding will be "restricted securities" as defined in Rule 144. These
shares may be sold in the future without registration under the Securities Act
to the extent permitted by Rule 144 or an exemption under the Securities Act. In
addition, additional shares of common stock subject to outstanding vested stock
options could also be sold. The holders of the shares of common stock issued
upon conversion of outstanding preferred stock and some of our other large
stockholders will also have registration rights allowing them to cause us to
register their shares under the Securities Act.
12
<PAGE>
USE OF PROCEEDS
The estimated net proceeds to us from the sale of 3,000,000 shares of our
common stock in this offering are estimated to be approximately $ . This is
based on an assumed initial public offering price of $ per share, after
deducting underwriting discounts and estimated offering expenses payable by us.
We will not receive any proceeds from the sale of our common stock by the
selling stockholders.
We intend to use approximately $15.0 million of the proceeds from the
offering to repay the outstanding balance under several loan agreements. These
loan agreements include: (1) a line of credit with an interest rate at prime
plus 1/4%; (2) a term loan which matures October 2001 with an interest rate at
prime plus 1/2%; (3) a note payable which matures September 2000 with an
interest rate at 8%; and (4) three capital leases with maturity dates of March
2000, August 2000, and January 2002, and interest rates of 13.9%, 16.5%, and
8.1%, respectively. In addition, we intend to use approximately $10.0 million to
redeem the Series D Redeemable Preferred Stock and approximately $6.2 million
for capital expenditures. The balance of the net proceeds will be used for
general corporate purposes, which may include acquisitions of other businesses.
We do not currently have any arrangements or understandings regarding any
acquisitions and we are not currently engaged in any negotiations regarding any
acquisition. Pending such uses, we will invest the net proceeds of this offering
in short-term obligations of investment grade.
DIVIDEND POLICY
We have never paid or declared cash dividends on our common stock. We
currently intend to retain all future earnings for our business and do not
anticipate paying cash dividends in the foreseeable future. We are currently
restricted under the terms of some of our 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: (1) our results of
operations, (2) capital requirements and (3) restrictions in loan agreements.
13
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 1999. Our
capitalization is presented:
- on an actual basis;
- on a pro forma basis to give effect to the automatic conversion of all
outstanding shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock into common stock, as well as the conversion
of Series C Convertible Preferred Stock into common stock and Series D
Redeemable Preferred Stock, all of which will occur upon the closing of
this offering; and
- on a pro forma as adjusted basis to reflect our receipt of the net
proceeds from the sale of 3,000,000 shares of common stock in this
offering at an assumed initial public offering price of $ per share
after deducting the underwriting discount and estimated offering expenses,
the repayment of approximately $15.0 million of debt, of which
approximately $7.5 million relates to debt outstanding as of June 30, 1999
and the redemption of all outstanding shares of Series D Redeemable
Preferred Stock for $10.0 million.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
---------------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ------------- -------------------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings and current portion of long-term debt............... $ 7,817 $ 7,817
Long-term debt, less current portion...................................... 8,674 8,674
Stockholders' equity:
Preferred stock, $0.01 par value, 502,500 shares authorized; shares
issued and outstanding:
Series C, $0.01 par value; 100,000 shares authorized and outstanding,
actual; 0 shares issued and outstanding pro forma; and 0 shares
issued and outstanding pro forma as adjusted........................ 9,855 --
Series D, $0.01 par value; 200,000 shares authorized; 0 shares issued
and outstanding, actual; 0 shares issued and outstanding, pro forma;
0 shares issued and outstanding, pro forma as adjusted.............. -- 10,000
Series B, $0.01 par value; 100,000 shares authorized; 60,492 shares
issued and outstanding, actual; 0 shares issued and outstanding, pro
forma; 0 shares issued and outstanding, pro forma as adjusted....... 8,355 --
Series A, $0.01 par value; 2,500 shares authorized; 1,685 shares
issued and outstanding, actual; 0 shares issued and outstanding, pro
forma; 0 shares issued and outstanding, pro forma as adjusted....... 1,685 --
Common stock, $0.01 par value per share; 50,000,000 shares authorized;
2,345,394 shares issued and outstanding, actual; 8,477,315 shares
issued and outstanding, pro forma; 11,477,315 shares issued and
outstanding, pro forma as adjusted.................................... 23 84
Additional paid-in capital.............................................. 9,249 19,097
Warrant................................................................. 14 --
Unamortized deferred compensation....................................... (168) (168)
Retained earnings....................................................... 1,952 1,952
Minimum pension liability............................................... (131) (131)
-
--------- -------------
Total stockholders' equity............................................ 30,834 30,834
-
--------- -------------
Total capitalization.................................................. $ 47,325 $ 47,325
-
-
--------- -------------
--------- -------------
</TABLE>
Common stock to be outstanding after the offering excludes 2,263,389 shares
issuable upon exercise of stock options outstanding as of June 30, 1999 and
790,760 shares issuable upon the exercise of an outstanding warrant held by
Seagate Technology.
See "Selected Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included in this prospectus.
14
<PAGE>
DILUTION
The pro forma net tangible book value of the common stock as of June 30,
1999 was $ , or $ per share, after giving effect to the automatic
conversion of all outstanding shares of Series A Convertible Preferred Stock,
Series B Convertible Preferred Stock and Series C Convertible Preferred Stock
into an aggregate of shares of common stock which will occur upon
the consummation of this offering. After giving effect to the sale of the common
stock pursuant to this offering at an assumed initial public offering price of
$ per share, assuming that the underwriters' over-allotment option is not
exercised, and after deducting the underwriting discount and estimated expenses
of the offering, the adjusted pro forma net tangible book value at June 30,
1999, would have been $ , or $ per share.
Pro forma net tangible book value per share before the offering has been
determined by dividing pro forma net tangible book value (total tangible assets
less total liabilities) by the pro forma number of shares of common stock
outstanding at June 30, 1999. The offering will result in an increase in pro
forma net tangible book value per share of $ to existing stockholders and
dilution of $ to new investors who purchase shares in the offering.
Dilution is determined by subtracting pro forma net tangible book value per
share from the assumed initial public offering price of $ per share. The
following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Initial public offering price................................... $
Pro forma net tangible book value per share at June 30,
1999........................................................ $
Increase attributable to sale of common stock in the offering
(1).........................................................
---------
Pro forma net tangible book value per share after the
offering......................................................
---------
Dilution to persons who purchase shares in the offering......... $
---------
---------
</TABLE>
- ------------------------
(1) After deduction of the underwriting discount and estimated offering expenses
totaling $ .
If the underwriters' over-allotment option were exercised in full, the pro
forma net tangible book value per share after the offering would be $ per
share, the increase in net tangible book value per share to existing
stockholders would be $ per share and the dilution to persons who purchase
shares in the offering would be $ per share.
The following table summarizes, on a pro forma basis as of June 30, 1999,
the differences between the total consideration paid and the average price per
share paid by the existing shareholders and the new investors with respect to
the number of shares of common stock purchased from us based on an assumed
initial public offering price of $ per share:
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED
------------------------ ------------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)....................................
New investors................................................
Total......................................................
</TABLE>
- ------------------------
(1) The sale by the selling stockholders in the offering will reduce the number
of shares held by existing stockholders to shares, or % 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
shares, or % of the total number of shares of common stock to
be outstanding after the offering. See "Principal and Selling Stockholders."
These tables do not assume exercise of stock options or warrants outstanding
as of June 30, 1999. At June 30, 1999, an aggregate of 2,263,389 shares of
common stock were issuable upon the exercise of outstanding options at a
weighted average exercise price of $3.46 per share. Upon consummation of this
offering, a warrant will become convertible into 790,760 shares of common stock
at $5.58 per share. To the extent that outstanding options and this warrant are
exercised in the future, there will be further dilution to new investors.
15
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of CVC set forth below as of
September 30, 1997 and 1998 and for each of the years ended September 30, 1996,
1997 and 1998 are derived from CVC's audited consolidated financial statements,
which appear elsewhere in this prospectus. The selected consolidated financial
data as of September 30, 1994, 1995, and 1996 and for each of the years ended
September 30, 1994 and 1995 have been derived from audited consolidated
financial statements of CVC not included in this prospectus. The selected
financial data as of June 30, 1999 and for the nine months ended June 30, 1998
and 1999 have been derived from the unaudited consolidated financial statements
which appear elsewhere in this prospectus and which, in the opinion of the
management of CVC, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position and the
results of operations for these periods. Operating results for the nine months
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the fiscal year ending September 30, 1999. The pro forma June 30,
1999 balance sheet data reflects the automatic conversion of all the outstanding
shares of Series A Convertible Preferred Stock and Series B Convertible
Preferred Stock into common stock, as well as the conversion of Series C
Convertible Preferred Stock into common stock and into Series D Redeemable
Preferred Stock. The data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and with Management's Discussion and
Analysis of Financial Condition and Results of Operations appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
NINE
MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
----------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................................ $ 13,915 $ 21,358 $ 48,378 $ 62,588 $ 68,173 $ 54,275
Cost of goods sold...................................... 11,795 15,630 33,755 41,286 42,019 33,504
--------- --------- --------- --------- --------- ---------
Gross margin............................................ 2,120 5,728 14,623 21,302 26,154 20,771
Operating expenses:
Research and development.............................. 1,271 1,214 4,346 9,055 12,615 9,844
Sales and marketing................................... 2,354 2,924 4,777 5,613 7,696 5,593
General and administrative............................ 1,248 1,447 2,124 2,539 3,476 2,898
In-process R&D write-off.............................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Total................................................. 4,873 5,585 11,247 17,207 23,787 18,335
Income (loss) from operations........................... (2,753) 143 3,376 4,095 2,367 2,436
Interest and other, net................................. (533) (559) (197) (593) (1,154) (931)
Write-off of deferred charges........................... -- -- -- -- (675) --
--------- --------- --------- --------- --------- ---------
Income (loss) before income taxes....................... (3,286) (416) 3,179 3,502 538 1,505
Income taxes (benefit).................................. 36 (546) -- 1,457 274 626
--------- --------- --------- --------- --------- ---------
Net income (loss)....................................... $ (3,322) $ 130 $ 3,179 $ 2,045 $ 264 $ 879
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Net income (loss) per share:
Basic................................................. $ (5.46) $ 0.18 $ 4.32 $ 2.67 $ 0.26 $ 0.86
Diluted............................................... (0.80) 0.02 0.46 0.29 0.04 0.12
Weighted average shares outstanding:
Basic................................................. 608 735 735 766 1,021 1,021
Diluted............................................... 4,160 5,302 6,914 6,993 7,071 7,056
<CAPTION>
<S> <C>
1999
-----------
<S> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues................................................ $ 55,795
Cost of goods sold...................................... 34,166
-----------
Gross margin............................................ 21,629
Operating expenses:
Research and development.............................. 8,489
Sales and marketing................................... 6,395
General and administrative............................ 2,953
In-process R&D write-off.............................. 1,174
-----------
Total................................................. 19,011
Income (loss) from operations........................... 2,618
Interest and other, net................................. (355)
Write-off of deferred charges........................... --
-----------
Income (loss) before income taxes....................... 2,263
Income taxes (benefit).................................. 1,524
-----------
Net income (loss)....................................... $ 739
-----------
-----------
Net income (loss) per share:
Basic................................................. $ 0.58
Diluted............................................... 0.09
Weighted average shares outstanding:
Basic................................................. 1,230
Diluted............................................... 8,044
</TABLE>
Assuming the conversion of the outstanding shares of Series A Convertible
Preferred Stock and Series B Convertible Preferred Stock into common stock and
the conversion of Series C Convertible Preferred Stock into common stock and
into Series D Redeemable Preferred Stock and excluding the effects of the
acquisition of Commonwealth, pro forma earnings per share for the year ended
September 30, 1998 and the nine months ended June 30, 1999 were $0.04 and $0.10,
respectively (basic). Diluted earnings per share are unchanged from the
historical diluted earnings per share amounts presented above for these two
periods.
<TABLE>
<CAPTION>
AS OF
JUNE 30,
AS OF SEPTEMBER 30, 1999
----------------------------------------------------- ---------
<S> <C> <C> <C> <C> <C> <C>
1994 1995 1996 1997 1998 ACTUAL
--------- --------- --------- --------- --------- ---------
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 2 $ 3,157 $ 730 $ 2,161 $ 106 $ 767
Working capital......................................... (2,312) 5,429 8,816 9,259 10,904 20,340
Total assets............................................ 11,425 23,554 31,837 43,833 42,764 71,627
Short term borrowings and current portion of long-term
debt.................................................. 2,229 188 894 2,295 5,689 7,817
Long-term debt, less current portion.................... 3,935 3,528 5,635 5,309 11,379 8,674
Preferred stock....................................... (1,685) 10,040 10,040 10,040 10,040 19,895
Common stockholders' equity (deficit)................. (4,014) (3,857) (721) 1,388 1,940 10,939
Total stockholders' equity (deficit).................... (2,329) 6,183 9,319 11,428 11,980 30,834
<CAPTION>
<S> <C>
PRO FORMA
-----------
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 767
Working capital......................................... 20,340
Total assets............................................ 71,627
Short term borrowings and current portion of long-term
debt.................................................. 7,817
Long-term debt, less current portion.................... 8,674
Preferred stock....................................... 10,000
Common stockholders' equity (deficit)................. 20,834
Total stockholders' equity (deficit).................... 30,834
</TABLE>
16
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following unaudited pro forma statements of operations for the year
ended September 30, 1998 and the nine months ended June 30, 1999 give effect to
the May 10, 1999 acquisition of Commonwealth Scientific Corporation. The
unaudited pro forma statements of operations are based on the statements of
operations for CVC, appearing elsewhere in this prospectus, and the statements
of operations of Commonwealth as if the acquisition occurred on October 1, 1997
and October 1, 1998, respectively. The Commonwealth statements of operations
have been modified to conform to CVC's fiscal year end. These unaudited pro
forma statements of operations should be read in conjunction with the historical
financial statements and notes thereto of CVC and Commonwealth included
elsewhere in this prospectus.
The unaudited pro forma combined statements of operations give effect to the
following pro forma adjustments necessary to reflect the acquisition of
Commonwealth:
- Reduction in certain operating expenses related to the restructuring
activities undertaken, solely comprised of Commonwealth employees
terminated as of or shortly after the acquisition;
- Elimination of the write-off of the portion of the purchase price
allocated in-process research, development and engineering, due to its
one-time nature;
- Amortization of goodwill and other intangibles over periods ranging from
five to ten years; and
- Decrease in income taxes related to adjustments.
Amounts are in thousands, except for per share data.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1998
-----------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
------------------------
<CAPTION>
CVC CSC ADJUSTMENTS COMBINED
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues..................................................... $ 68,173 $ 43,887 $ -- $ 112,060
Cost of goods sold........................................... 42,019 31,033 -- 73,052
--------- ---------- ----------- -----------
Gross margin................................................. 26,154 12,854 -- 39,008
Operating expenses........................................... 23,787 11,132 (840) 34,079
In-process R&D write-off..................................... -- -- -- --
Goodwill and intangibles amortization........................ -- -- 147 147
--------- ---------- ----------- -----------
Total operating expenses................................... 23,787 11,132 (693) 34,226
--------- ---------- ----------- -----------
Income (loss) from operations................................ 2,367 1,722 693 4,782
Write-off of deferred charges................................ (675) -- -- (675)
Interest and other, net...................................... (1,154) (302) -- (1,456)
--------- ---------- ----------- -----------
Income (loss) before income taxes............................ 538 1,420 693 2,651
Income taxes (benefit)....................................... 274 517 (336) 455
--------- ---------- ----------- -----------
Net income (loss)............................................ $ 264 $ 903 $ 1,029 $ 2,196
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Net income per share:
Basic...................................................... $ 0.26 $ 0.96
Diluted.................................................... 0.04 0.26
Weighted average shares outstanding:
Basic...................................................... 1,021 1,269 2,290
Diluted.................................................... 7,070 1,293 8,363
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED JUNE 30, 1999
-----------------------------------------------
<S> <C> <C> <C> <C>
PRO FORMA
------------------------
CVC CSC ADJUSTMENTS COMBINED
--------- ---------- ----------- -----------
STATEMENTS OF OPERATIONS:
Revenues...................................................... $ 55,795 $ 18,926 $ -- $ 74,721
Cost of goods sold............................................ 34,166 17,350 -- 51,516
--------- ---------- ----------- -----------
Gross margin.................................................. 21,629 1,576 -- 23,205
Operating expenses............................................ 17,826 6,538 (630) 23,734
In-process R&D write-off...................................... 1,174 -- (1,174) --
Goodwill and intangibles amortization......................... 11 -- 99 110
--------- ---------- ----------- -----------
Total operating expenses.................................... 19,011 6,538 (1,705) 23,844
--------- ---------- ----------- -----------
Income (loss) from operations................................. 2,618 (4,962) 1,705 (639)
Write-off of deferred charges................................. -- -- -- --
Interest and other, net....................................... (355) (305) -- (660)
--------- ---------- ----------- -----------
Income (loss) before income taxes............................. 2,263 (5,267) 1,705 (1,299)
Income taxes (benefit)........................................ 1,524 (1,488) (252) (216)
--------- ---------- ----------- -----------
Net income (loss)............................................. $ 739 $ (3,779) $ 1,957 $ (1,083)
--------- ---------- ----------- -----------
--------- ---------- ----------- -----------
Net income per share:
Basic....................................................... $ 0.58 $ (.47)
Diluted..................................................... 0.90 (.47)
Weighted average shares outstanding:
Basic....................................................... 1,279 1,048 2,327
Diluted..................................................... 8,044 5,717 2,327
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. CVC'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
DISCUSSED IN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS
INCLUDING THOSE SET FORTH UNDER "RISK FACTORS" AND ELSEWHERE IN THE PROSPECTUS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH
"SELECTED CONSOLIDATED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO APPEARING ELSEWHERE IN THIS PROSPECTUS.
OVERVIEW
CVC is a leading worldwide supplier of fabrication equipment providing thin
film process solutions for the manufacture of magnetic heads for disk drives and
advanced semiconductor devices for computers and communications equipment. CVC's
principal product is the CONNEXION Cluster Tool system, which provides
integrated deposition and etch equipment based on a central substrate handling
platform and a series of interchangeable thin film deposition and etch
processing modules. CVC also derives revenue from the sale of sources, spare
parts, enhancements, and field service contracts. System revenues represented
80%, 83% and 85% of CVC's total revenue in the first nine months of fiscal 1999,
fiscal 1998 and fiscal 1997, respectively. In order to expand its technology and
broaden its offering of process modules, CVC acquired Commonwealth Scientific
Corporation in May 1999. Commonwealth's primary products are ion beam etch,
deposition and diamond-like carbon process modules for the data storage industry
and ion beam sources principally used by suppliers of optical equipment.
CVC's growth in the past four years has been primarily due to the expansion
of the disk drive industry and transition of the industry to magnetoresistive,
or MR, heads and giant magnetoresistive, or GMR, heads. During the first nine
months of fiscal 1999, fiscal 1998 and fiscal 1997, 80%, 77% and 88%,
respectively, of CVC's revenue was derived from sales made to manufacturers of
magnetic heads and 9%, 21%, and 9%, respectively was derived from sales to
manufacturers of semiconductor devices, with the remainder of the revenue
derived from ancillary products and services. CVC's top four customers for the
nine months ended June 30, 1999, were Seagate, IBM, TDK and Alps, all of whom
manufacture magnetic heads. CVC expects that these customers will continue to
account for a significant portion of CVC's total 1999 and 2000 revenues and that
significant customer concentration will continue for the foreseeable future.
CVC recognizes revenue from system sales, enhancements and spare parts at
the time of shipment. Provisions for estimated installation and warranty costs
are recorded at the time revenue is recognized. Revenue on field service
contracts is deferred and recognized on a straight-line basis over the period of
the contract.
Revenue derived from system sales is dependent upon the timing of orders due
to customer requirements for additional manufacturing capacity and CVC's ability
to respond on a timely basis to rapid technological developments. CVC's
customers typically place large orders, which could cause revenues to fluctuate
significantly from period to period. Orders for system sales range in price from
approximately $1.0 million to $4.0 million, depending on the configuration of
the system. For example, in the second half of fiscal 1998 and the first quarter
of fiscal 1999, CVC's revenues were adversely affected by reduced orders from
magnetic head manufacturers, who experienced reduced demands, inventory
surpluses and poor operating results and as a result, deferred capital
expenditures of fabrication equipment. In recent quarters, magnetic head
manufacturers have increased capital spending to acquire new process
technologies that enable them to produce GMR heads. Because the data storage and
semiconductor industries are highly cyclical, and orders in CVC's backlog are
subject to cancellation or rescheduling, CVC's visibility on revenues for future
periods is limited, and its operating results could fluctuate significantly from
period to period.
19
<PAGE>
International sales accounted for 36%, 38% and 31% of our total revenues in
the first nine months of fiscal 1999, fiscal 1998 and fiscal 1997, respectively.
CVC expects that international sales will continue to account for a significant
portion of our revenue in the foreseeable future. CVC's international sales are
denominated in U.S. dollars. As a result, changes in the value of foreign
currencies relative to the value of the U.S. dollar can render our products
comparatively more expensive. Although CVC has not been significantly negatively
impacted in the past by foreign currency changes in Japan, Korea, Taiwan and
Europe, such conditions could negatively impact its international sales in
future periods.
CVC's gross margin is influenced by a number of factors related to the mix
of revenues within a particular period. For example, systems for new process
applications tend to have lower margins initially than those for existing
processes. As a result, sales to semiconductor manufacturers, whose process
requirements tend to be unique, generally have a lower gross margin than sales
to magnetic head manufacturers, who typically purchase systems for which we have
significantly more processing experience. Sales to international customers
typically have a lower gross margin than sales to domestic customers. In
addition, revenues from ion beam sources, enhancements, spare parts and field
service contracts typically have a higher gross margin than system margins. As a
result of these factors, CVC expects its gross margin to fluctuate from period
to period.
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
revenues for certain items in CVC's consolidated statement of operations data.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED JUNE 30,
YEAR ENDED SEPTEMBER 30, ----------------------
-------------------------------
1996 1997 1998 1998 1999
--------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Revenues............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold.................................. 69.8 66.0 61.6 61.7 61.2
--------- --------- --------- ----- ---------
Gross margin........................................ 30.2 34.0 38.4 38.3 38.8
Operating expenses
Research and development.......................... 9.0 14.5 18.5 18.1 15.2
Sales and marketing............................... 9.8 9.0 11.3 10.3 11.5
General and administrative........................ 4.4 4.0 5.1 5.4 5.3
In-process R&D Write-off.......................... -- -- -- -- 2.1
--------- --------- --------- ----- ---------
Total............................................. 23.2 27.5 34.9 33.8 34.1
Income from operations.............................. 7.0 6.5 3.5 4.5 4.7
Interest and other, net............................. (0.4) (0.9) (1.7) (1.7) (0.6)
Write-off of deferred charges....................... -- -- (1.0) -- --
--------- --------- --------- ----- ---------
Income before income taxes.......................... 6.6 5.6 0.8 2.8 4.1
Income taxes........................................ 0.0 2.3 0.4 1.2 2.7
--------- --------- --------- ----- ---------
Net income.......................................... 6.6 3.3 0.4 1.6 1.3
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
NINE MONTHS ENDED JUNE 30, 1999 COMPARED TO NINE MONTHS ENDED JUNE 30, 1998
REVENUES. Revenues increased 2.8% to $55.8 million for the nine months
ended June 30, 1999 from $54.3 million for the nine months ended June 30, 1998.
The increase is attributable primarily to increased sales of GMR systems to
magnetic head manufacturers and increased sales resulting from the Commonwealth
acquisition, which offset lower sales of CVC's systems to semiconductor
manufacturers.
20
<PAGE>
GROSS MARGIN. Gross margin increased to 38.8% of revenues for the nine
months ended June 30, 1999 from 38.3% for the nine months ended June 30, 1998.
Gross margin contributions in the fiscal 1999 period was affected by the mix of
lower margin sales of newly-acquired Commonwealth systems, offset by higher
margins attributable to revenues from ion beam sources and enhancements. In the
fiscal 1998 period, the gross margin reflects the higher percentage of lower
margin sales of new systems for semiconductor manufacturers.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased 13.2%
to $8.5 million for the nine months ended June 30, 1999 from $9.8 million for
the nine months ended June 30, 1999. As a percentage of revenues, research and
development expenses decreased to 15.2% for the nine months ended June 30, 1999
compared to 18.1% for the nine months ended June 30, 1998. The higher
expenditure level in the fiscal 1998 period is primarily attributable to
material expenses associated with the completion of a government contract. In
addition, expenses in the fiscal 1999 period reflect lower material costs
related to certain internal development projects offset by additional
Commonwealth research and development expenses. Notwithstanding the decrease in
fiscal 1999 expenses, CVC 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 absolute dollars for the foreseeable future.
SALES AND MARKETING. Sales and marketing expenses increased 14.2% to $6.4
million for the nine months ended June 30, 1999 from $5.6 million for the nine
months ended June 30, 1998. As a percentage of revenues, sales and marketing
expenses increased to 11.5% for the nine months ended June 30, 1999 from 10.3%
for the nine months ended June 30, 1998. The increase is attributable to the
addition of Commonwealth personnel and related expenses as well as additional
personnel and related expenses in sales, marketing and field service to support
CVC's expanded product offerings and customer base, including the expansion of
the field service group in Japan and the United States.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
3.4% to $3.0 million for the nine months ended June 30, 1999 from $2.9 million
for the nine months ended June 30, 1998. The increase in general administrative
expenses primarily reflects the additional expenses associated with the
Commonwealth acquisition. As a percentage of revenues, administrative expenses
were 5.3% for the nine months ended June 30, 1999 and 5.4% for the nine months
ended June 30, 1998.
IN-PROCESS R&D WRITE-OFF. During the nine months ended June 30, 1999, as
part of the purchase of Commonwealth, the value assigned to research
expenditures reflecting products in the development stage and not considered to
have reached technological feasibility were written off in accordance with
applicable accounting rules. This write-off amounted to approximately $1.2
million.
INTEREST AND OTHER, NET. Interest and other, net decreased to $0.4 million
for the nine months ended June 30, 1999 from $0.9 million for the nine months
ended June 30, 1998. The decrease in interest and other, net primarily reflects
reduced interest expense due to the reduction of borrowings with the proceeds
from the sale of preferred stock in December 1998 and a one-time gain associated
with the sale of two non-core product lines.
INCOME TAXES. Income tax expense for the nine months ended June 30, 1999
amounted to $1.5 million compared to $0.6 million for the nine months ended June
30, 1998. The effective tax rate for the nine months ended June 30, 1999 was
67.3% compared to the effective rate of 41.6% for the nine months ended June 30,
1998. The increase is the result of the non-deductible in-process R&D write-off.
21
<PAGE>
YEAR ENDED SEPTEMBER 30, 1998 COMPARED TO YEAR ENDED SEPTEMBER 30, 1997
REVENUES. Revenues increased 8.9% to $68.2 million in fiscal 1998 from
$62.6 million in fiscal 1997. The increase in revenues is attributable primarily
to increased systems sales to semiconductor manufacturers and increased sales of
spares, partially offset by reduced systems sales to magnetic head
manufacturers.
GROSS MARGIN. Gross margin increased to 38.4% of revenues in fiscal 1998
from 34.0% in fiscal 1997. The margin improvement was attributable to lower
systems manufacturing costs as the result of efficiencies derived from repeat
orders and increased sales of higher margin spares and enhancements.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 38.4%
to $12.6 million in fiscal 1998 from $9.1 million in fiscal 1997. As a
percentage of revenues, research and development expenses increased to 18.5% in
fiscal 1998 from 14.5% in fiscal 1997. The increase is attributable to increased
expenditures for an expanded demonstration program, increased personnel costs
due to the hiring of engineers in the fourth quarter 1997 to support the
expanded demonstration program and new development projects, as well as expenses
related to government contracts.
SALES AND MARKETING. Sales and marketing expenses increased 37.5% to $7.7
million in fiscal 1998 from $5.6 million in fiscal 1997. As a percentage of
revenues, sales and marketing expenses increased to 11.3% in fiscal 1998 from
9.0% in fiscal 1997. The increase is attributable to the addition of marketing
personnel to support the semiconductor market, the addition of field service
personnel, increased trade show and advertising expense, and higher commissions
resulting from increased system sales.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
40% to $3.5 million in fiscal 1998 from $2.5 million in fiscal 1997. As a
percentage of revenues, general and administrative expenses increased to 5.1% in
fiscal 1998 compared to 4.0% in fiscal 1997. The increase is attributable to the
full year impact of additional employees hired in fiscal 1997 as well as several
new hires in fiscal 1998, an increase in consulting services directly related to
the implementation of a new computer system and an increase in depreciation due
to expenditures in computer systems made in fiscal 1997 and 1998.
INTEREST AND OTHER, NET. Interest and other, net increased to $1.2 million
in fiscal 1998 from $0.6 million in fiscal 1997, reflecting an increase in
borrowings on the credit line and interest expense on a new $8.0 million term
loan.
WRITE-OFF OF DEFERRED CHARGES. In fiscal 1997, costs were incurred relative
to preparing CVC for its initial public offering. During the fourth quarter of
fiscal 1998, the intent to complete the public offering was withdrawn due to
continued weakness in the data storage and semiconductor industries and the
equity market for initial public offerings and, accordingly, these costs were
charged against current period earnings.
INCOME TAXES (BENEFIT). Income tax expense in fiscal 1998 was $0.3 million
compared to $1.5 million in fiscal 1997. The effective tax rate for fiscal 1998
was 50.9% compared to the effective rate of 41.6% in fiscal 1997. The increase
of 9.3% was due to permanent non-tax deductible expenses and a low level of
profitability, partially offset by the utilization of a valuation allowance
related to net operating loss carryforwards.
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
increased sales of systems to magnetic head
22
<PAGE>
manufacturers, partially offset by reduced systems sales to semiconductor
manufacturers and reduced sales of shock testing systems, which is a non-core
product.
GROSS MARGIN. Gross margin increased to 34.0% of revenue in fiscal 1997
from 30.2% in fiscal 1996. This increase was attributable to manufacturing
efficiencies as the result of higher volumes of systems and cost reductions
resulting from improved processes in the 1997 period, partially offset by the
initial sale to SEMATECH, a non-profit research and development consortium, of
an advanced copper MOCVD CONNEXION Cluster Tool system for research and
development purposes and thus at a price not intended to produce a profit.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
108.4% to $9.1 million in fiscal 1997 from $4.3 million in fiscal 1996. As a
percentage of revenues, research and development expenses increased to 14.5% in
fiscal 1997 from 9.0% in fiscal 1996. This increase was attributable to the
hiring of 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 CVC's
commitment to advanced copper deposition technology for high performance
semiconductor device fabrication.
SALES AND MARKETING. Sales and marketing expenses increased 17.5% to $5.6
million in fiscal 1997 from $4.8 million in fiscal 1996. 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.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
19.5% to $2.5 million in fiscal 1997 from $2.1 million in fiscal 1996. The
increase in general and administrative expenses is attributable to increased
personnel to support the rate of revenue growth in this period. As a percentage
of revenues, general and administrative expenses decreased to 4.0% in fiscal
1997 from 4.4% in fiscal 1996.
INTEREST AND OTHER, NET. Interest and other, net, increased to $0.6 million
in fiscal 1997 from $0.2 million in fiscal 1996, reflecting an increase in
borrowings on a credit line, a $3.0 million term loan obtained in September 1996
and 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 CVC's return to profitability and management's assessment that the
realization 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. ']
23
<PAGE>
QUARTERLY OPERATING RESULTS
The following tables set forth CVC's operating results for each of the eight
quarters ended June 30, 1999. 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 CVC considers
necessary to present fairly this information when read in conjunction with CVC'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. CVC's operating results for any one quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1998 1998 1998 1998
----------- --------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues....................................... $ 18,964 $ 19,346 $ 20,529 $ 14,400 $ 13,898 $ 14,655
Cost of goods sold............................. 12,077 12,307 13,108 8,265 8,339 8,249
----------- --------- ----------- ----------- ----------- ---------
Gross margin................................... 6,887 7,039 7,421 6,135 5,559 6,406
Operating expenses
Research and development..................... 2,512 2,867 4,009 2,968 2,771 2,439
Sales and marketing.......................... 1,518 1,885 1,913 1,620 2,278 1,930
General and administrative................... 656 1,028 865 1,006 577 812
In-process R&D write-off..................... -- -- -- -- -- --
----------- --------- ----------- ----------- ----------- ---------
Total........................................ 4,686 5,780 6,787 5,594 5,626 5,181
----------- --------- ----------- ----------- ----------- ---------
Income (loss) from operations.................. 2,201 1,259 634 541 (67) 1,225
Interest and other, net........................ (162) (211) (305) (414) (224) (326)
Write-off of deferred charges.................. -- -- -- -- (675) --
----------- --------- ----------- ----------- ----------- ---------
Income (loss) before income taxes.............. 2,039 1,048 329 127 (966) 899
Income taxes (benefit)......................... 848 436 137 53 (352) 419
----------- --------- ----------- ----------- ----------- ---------
Net income (loss).............................. $ 1,191 $ 612 $ 192 $ 74 $ (614) $ 480
----------- --------- ----------- ----------- ----------- ---------
----------- --------- ----------- ----------- ----------- ---------
<CAPTION>
MAR 31, JUNE 30,
1999 1999
----------- -----------
<S> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues....................................... $ 17,788 $ 23,352
Cost of goods sold............................. 10,983 14,934
----------- -----------
Gross margin................................... 6,805 8,418
Operating expenses
Research and development..................... 2,546 3,504
Sales and marketing.......................... 1,832 2,633
General and administrative................... 902 1,239
In-process R&D write-off..................... -- 1,174
----------- -----------
Total........................................ 5,280 8,550
----------- -----------
Income (loss) from operations.................. 1,525 (132)
Interest and other, net........................ 190 (219)
Write-off of deferred charges.................. -- --
----------- -----------
Income (loss) before income taxes.............. 1,715 (351)
Income taxes (benefit)......................... 757 348
----------- -----------
Net income (loss).............................. $ 958 $ (699)
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31,
1997 1997 1998 1998 1998 1998
----------- ----------- ----------- ----------- ----------- -----------
<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................................... 36.3 36.4 36.1 42.6 40.0 43.7
Operating expenses
Research and development..................... 13.2 14.8 19.5 20.6 19.9 16.6
Sales and marketing.......................... 8.0 9.8 9.3 11.2 16.4 13.2
General and administrative................... 3.5 5.3 4.3 7.0 4.2 5.5
In-process R&D write-off..................... -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Total........................................ 24.7 29.9 33.1 38.8 40.5 35.4
----------- ----------- ----------- ----------- ----------- -----------
Income (loss) from operations.................. 11.6 6.5 3.1 3.8 (0.5) 8.3
Interest and other, net........................ (0.9) (1.1) (1.5) (2.9) (1.6) (2.2)
Write-off of deferred charges.................. -- -- -- -- (4.9) --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss).............................. 6.3% 3.2% 0.9% 0.5% (4.4%) 3.3%
----------- ----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
MAR 31, JUNE 30,
1999 1999
----------- -----------
<S> <C> <C>
PERCENTAGE OF REVENUE:
Revenues....................................... 100.0% 100.0%
Gross margin................................... 38.3 36.0
Operating expenses
Research and development..................... 14.3 15.0
Sales and marketing.......................... 10.3 11.3
General and administrative................... 5.1 5.3
In-process R&D write-off..................... -- 5.0
----------- -----------
Total........................................ 29.7 36.6
----------- -----------
Income (loss) from operations.................. 8.6 (0.6)
Interest and other, net........................ (1.1) (0.9)
Write-off of deferred charges.................. -- --
----------- -----------
Net income (loss).............................. 5.4% (3.0%)
----------- -----------
----------- -----------
</TABLE>
CVC'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:
- specific economic conditions in the data storage and semiconductor
industries
- the timing of significant orders
- cyclical patterns of capital spending by customers
- modification or cancellation of customer orders
- continued market acceptance of our systems and our customers' products
- shipment delays
- loss of a significant customer
- increased research and development or marketing costs associated with our
introduction of new products
24
<PAGE>
- introduction of new products by our customers
- our ability to successfully introduce new products on a timely basis
- changes in our pricing policies or those of our competitors
- production and quality problems
- the publication of opinions by industry analysts about us, our products or
our competitors
CVC's revenues have fluctuated over the past eight quarters primarily due to
the overall decline in the data storage and semiconductor markets in 1998, which
adversely affected CVC's sales for the last two quarters of fiscal 1998 and the
first quarter of fiscal 1999. CVC's quarterly gross margin is influenced by a
number of factors relating to the level and mix of revenues for products
carrying different gross margins, as well as the type of customer, whether data
storage or semiconductor manufacturers, and type of order, whether a repeat or
new application. Repeat orders generally have lower costs associated with the
order due to manufacturing efficiencies. Gross margin as a percentage of sales
increased during the last two quarters of fiscal 1998 and the first quarter of
fiscal 1999 due to: (1) a higher percentage of total revenues generated from
increased sales of spare parts and enhancements carrying relatively higher gross
margins and (2) a higher percentage of total system revenues generated from
repeat system sales to data storage customers carrying relatively higher gross
margins. Gross margin as a percentage of sales decreased during the second
quarter of fiscal 1999 in part due to the consolidation of Commonwealth's
operating results from May 10, 1999, the date of the acquisition. Sales and
marketing as a percentage of sales increased during the last quarter of fiscal
1998 due to an increase in advertising, customer demonstrations and exhibits
expense.
Due to potential quarterly fluctuations in operating results, CVC 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 CVC's net sales or operating results were 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
In recent years, CVC has financed its capital and operating needs
principally through the sale of $10.0 million of its preferred securities,
advances from customers, and borrowings under various credit facilities. As of
June 30, 1999, CVC had working capital of $20.3 million, including cash and cash
equivalents of $0.8 million, compared to working capital of $10.9 million at
September 30, 1998. Operating activities in the nine months ended June 30, 1999
provided cash flow of $1.4 million, as compared with fiscal 1998 in which
operating activities used cash of $6.9 million. In the nine months ended June
30, 1999, reduced inventory levels, depreciation and advances from customers
provided cash of $3.4 million, $2.8 million and $3.0 million, respectively, and
were offset in part by increased accounts receivable of $6.7 million and
decreased accounts payable of $2.3 million. The use of cash in operating
activities in fiscal 1998 was a direct result of a $7.5 million or 87% decrease
in advances from customers generally attributable to lower order rates from
customers, and a $2.8 million or 28% decrease in accounts payable. These
decreased liabilities were partially offset by $2.2 million in depreciation and
reduced levels of receivables and inventory, which provided cash of $1.3 million
and $1.7 million, respectively. These net changes reflect lower fourth quarter
sales in fiscal 1998 as compared to fiscal 1997 by approximately $5.1 million
combined with overall inventory level reductions.
In the first nine months of fiscal 1999 and fiscal 1998, CVC invested $4.8
million and $3.6 million, respectively, in capital expenditures. The capital
expenditures were primarily for facilities, machinery and equipment, computers
and related equipment, and demonstration system tools. The Company has invested
heavily in demonstration tools for use at its facilities in order to demonstrate
new product capabilities for its magnetic head and semiconductor device
customers. Although CVC currently has no significant capital commitments, it
expects to spend approximately $6.0 million on capital expenditures over the
next 12 months.
25
<PAGE>
As of June 30, 1999, CVC's principal source of liquidity consisted of a
$10.0 million line of credit under a demand line and term loan agreement, under
which there were $6.1 million in borrowings. As of June 30, 1999, CVC was in
compliance with all covenants in this agreement. Borrowings associated with term
loans from a commercial bank as of June 30, 1999 amounted to $8.4 million. One
such loan requires monthly payments of principal and interest at prime plus
1/2% while the other term loan requires monthly payments of principal and
interest at 8.39%. CVC also has a mortgage credit facility which requires
monthly payments of principal and interest at 5.29% on the first $500,000 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, CVC may
select the interest rate on the remaining principal from certain interest rate
alternatives specified in the mortgage credit facility agreement.
CVC's principal liquidity requirements are expected to be for working
capital, capital expenditures, demonstration equipment, and if appropriate,
acquisitions. CVC intends to use the proceeds of the offering for general
corporate purposes, including approximately $6.2 million for capital
expenditures relating to facility expansion and manufacturing and demonstration
equipment, $15.2 million for repayment of debt, $10.0 million to reduce the
Series D Redeemable Preferred Stock, and the balance for additional working
capital. See "Use of Proceeds." CVC believes that cash from operations, and bank
borrowings, together with the net proceeds of the sale of common stock by CVC in
the offering, will be adequate to fund operations for at least the next 12
months.
CVC's long-term capital requirements will be affected by many factors,
including the success of CVC's current product offerings, CVC'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. CVC 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 CVC's
activities, CVC 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.
YEAR 2000
The Year 2000 Issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of CVC's computer programs
or hardware or other equipment that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
CVC has determined that it needs to modify or replace portions of its
business systems' software and certain hardware so that those systems will
properly utilize dates beyond December 31, 1999. In May 1999, CVC installed a
new business system which has been certified by the vendor as Year 2000
compliant. In addition, CVC is in the process of completing its inventory and
assessment of its desktop systems and laptops. CVC currently uses standard "off
the shelf" vendor-supplied software on its desktop systems and laptops. Many of
these vendors are still implementing their Year 2000 compliance programs and CVC
will implement the Year 2000 compliant versions as required when those solutions
are available. CVC has run internal tests on its desktop systems and laptops and
believe it has identified those systems and laptops which require upgrade or
replacement. CVC currently expects that such remediation efforts will be
complete by November 1999. CVC believes that with these and other modifications
or replacements of its business systems' existing software and certain hardware,
its computer programs should be able to continue to operate effectively after
December 31,1999. However, if such modifications and replacements are not made,
or are not completed in a timely manner, the Year 2000 Issue could have a
material adverse impact on CVC's operations.
26
<PAGE>
In addition to its systems, CVC relies directly and indirectly on external
systems of its customers, suppliers, subcontractors, utilities providers and
other third parties. CVC has contacted these third parties about their Year 2000
readiness. These third parties have either informed CVC that the systems they
provide to CVC are either Year 2000 compliant or are in the process of upgrading
those systems that are not Year 2000 compliant. For those systems that are not
Year 2000 compliant, CVC and the particular supplier are in the process of
upgrading the affected systems, a process which CVC currently expects to be
complete by November 1999. To date, CVC is not aware of any third-party Year
2000 issues that could materially impact its results of operations, liquidity or
capital resources. However, CVC has no means of ensuring that the third parties
that it deals with will be Year 2000 ready. If the systems of any third parties
with which CVC interacts experience Year 2000 problems, CVC's business,
financial condition or results of operations could be materially adversely
affected. CVC cannot be certain that the systems of third parties with which it
interacts will not suffer from Year 2000 problems.
CVC's new products are designed to be Year 2000 ready; however, some of its
older products will require upgrades for Year 2000 readiness. CVC intends to
provide upgrades for certain of these products, some of which will be provided
to customers without charge. Notwithstanding these efforts, if any of CVC's
products fails to perform or causes a system malfunction due to the onset of
Year 2000, customers could bring claims against CVC, which could have a material
adverse effect on CVC's business, results of operations or financial condition.
Moreover, CVC's customers could choose to convert to other Year 2000 ready
products in order to avoid such malfunctions, which could have a material
adverse effect on CVC's business, results of operations or financial condition.
CVC does not currently have any formal contingency plans and has not yet
determined its most reasonably likely worst case scenario with respect to the
Year 2000 Issue. CVC cannot be certain that any measures it adopts will prevent
the occurrence of Year 2000 problems, which could have a material adverse effect
on its business, results of operations or financial condition.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 is not expected to impact the Company's financial position
or results of operations.
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use."
SOP 98-1 establishes the accounting for costs of software products developed or
purchased for internal use, including when such costs should be capitalized. We
do not expect SOP 98-1, which is effective for us beginning April 1, 1999, to
have a material effect on our financial condition or results of operations.
In April 1998, the Accounting Standards Executive Committee issued SOP 98-5,
"Reporting on the Costs of Start-Up Activities." Start-up activities are defined
broadly as those one-time activities relating to opening a new facility,
introducing a new product or service, conducting business in a new territory,
conducting business with a new class of customer, commencing some new operation
or organizing a new entity. Under SOP 98-5, the cost of start-up activities
should be expensed as incurred. SOP 98-5 is effective for our fiscal year 2000
financial statements and do not expect its adoption to have material effect on
our financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The new standard establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal year quarters of fiscal years beginning after June 15,
1999. We do not expect SFAS No. 133 to have a material effect on our financial
condition or results of operations.
27
<PAGE>
BUSINESS
INTRODUCTION
CVC is a leading worldwide supplier of fabrication equipment providing thin
film process solutions for the manufacture of magnetic heads for disk drives and
advanced semiconductor devices for computers and communications equipment. Our
products are optimized for the highly uniform, repetitive steps required for the
manufacturing of devices involving multiple thin film layers and a wide range of
materials. Since 1993, we have shipped more than 100 CONNEXION Cluster Tool
systems, including more than 375 process modules. Our customers include many of
the leading manufacturers of thin film recording heads for the data storage
industry, including Alps, Fujitsu, IBM, Read-Rite, Seagate Technology, TDK and
Yamaha, as well as manufacturers of semiconductor devices, including Anadigics,
Analog Devices, Honeywell and M/A-COM.
INDUSTRY BACKGROUND
THE DATA STORAGE INDUSTRY
In order to satisfy market demand for devices with greater storage capacity,
the disk drive industry has developed new types of recording heads enabling
greater areal density. Areal density is the measure of stored bits per square
inch in the recording surface of a disk. According to data storage industry
sources, areal densities have been increasing approximately 60% per year since
1990. The increase in areal density has been facilitated by the development of
magnetoresistive, or MR, heads that provide areal densities of up to 5 gigabits
per square inch. During 1996 and 1997, the disk drive industry began to
transition to MR heads. Prior to this transition, most hard disk drives utilized
inductive heads that provided areal densities of no more than 2 gigabits per
square inch. The data storage industry is currently transitioning to giant
magnetoresistive, or GMR, heads which are expected to provide areal densities of
up to 50 gigabits per square inch by 2005.
According to TrendFocus, GMR head shipments are expected to increase from 30
million units in 1998 to 1.2 billion units in 2002, while the shipment of MR
heads are expected to decrease from 650 million units in 1998 to limited
shipments by 2001. The disk drive industry's expected growth and transition from
MR heads to GMR heads reflect a number of factors, including:
- the exchange of increasing volumes of data among users across the Internet
and intranets;
- the rapid accumulation of data resulting from growth of digital content,
including audio, video and data;
- continued improvements in computing price performance ratios, including
the emergence of the sub-$1,000 personal computer; and
- the introduction of new applications for storage devices such as digital
cameras, auto navigation, video on demand and personal digital assistants,
or PDAs.
Inductive, MR and GMR heads are manufactured using various thin film
deposition processes, which provide magnetic, conductive and insulating
properties. MR and GMR heads typically require the deposition of approximately
18 to 28 thin film layers of different materials. CVC believes that the data
storage industry's current transition to GMR heads and future transition to
advanced GMR heads will require the data storage industry to make investments in
advanced processing equipment to support both the technology transition and
anticipated volume growth.
THE SEMICONDUCTOR INDUSTRY
The manufacture of semiconductors involves multiple thin film processing
steps. Certain types of semiconductor devices that utilize exotic substrates,
such as Gallium Arsenide, or GaAs, are more difficult to produce due to certain
physical characteristics such as lower maximum tolerable processing temperatures
and less mechanical strength of the substrates. However, these substrates enable
the fabrication of high-speed, high-performance devices with low power
consumption that make them ideally suited for advanced communications
applications, such as portable communication devices,
28
<PAGE>
including digital pagers and cellular phones. Due to the characteristics of
these exotic substrates, the fabrication of devices involving these substrates
requires advanced process equipment that can provide multiple, highly uniform,
precision thin film materials.
In order to increase the performance and reduce the cost of semiconductor
devices, manufacturers have continued to shrink line widths, while at the same
time adding multiple layers of metal interconnect materials. Semiconductor
manufacturers currently use aluminum or aluminum alloys to interconnect the
various layers of a semiconductor device. As semiconductor line widths shrink
below 0.18 microns, or 0.18 millionths of a meter, copper is increasingly being
used as an alternative to aluminum interconnects. Copper provides less
resistance to electron flow at narrow line widths and makes it possible to build
high speed devices using fewer interconnect layers than would be necessary with
aluminum. The deposition of copper interconnect material requires two steps: (1)
the deposition of a barrier layer, to protect the insulating layers from being
contaminated by copper, and (2) the deposition of seed and copper fill layers,
which serve as the interconnect. The deposition of interconnect material
involves very specialized substrate processing equipment, including metal
deposition equipment. According to Dataquest, copper deposition equipment sales
are expected to grow from $100 million in 1998 to $700 million in 2003.
SUBSTRATE PROCESSING
The manufacture of MR and GMR heads and semiconductors requires from tens to
hundreds of fabrication processing steps. Many of these steps involve the
controlled application or removal of layers of materials to or from a base
material, or substrate, or on a previously deposited layer. The process of
deposition involves the building up of extremely thin films of electrically
insulating or electrically conducting materials. These layers can range from
over one-thousandth to less than one-millionth of a millimeter in thickness. A
wide range of materials and deposition processes, including physical vapor
deposition, or PVD, chemical vapor deposition, or CVD, and electro chemical
deposition, or ECD, are used to build up thin film layers on substrates to
achieve specific performance characteristics. The removal of material from
substrates, known as etching, involves the precise removal of residue or excess
material using dry plasma or ion beams in order to build a specific pattern, for
example, to form a semiconductor device.
The process of manufacturing magnetic heads and semiconductors is constantly
evolving to address the demand for smaller devices with higher performance.
Devices with smaller features sizes and higher levels of performance require new
materials or more manufacturing steps involving multiple layers of thin film
materials. To successfully develop new manufacturing processes, thin film
recording head and semiconductor manufacturers require sophisticated processing
equipment that:
- incorporates highly specialized processing and systems knowledge;
- enables the precise, uniform deposition of a wide range of thin film
materials;
- supports a variety of deposition and etching processes on an integrated
platform; and
- provides the ability to transition to new materials and fabrication
processes efficiently
THE CVC SOLUTION
CVC is a leading worldwide provider of thin film processing solutions and
equipment for the data storage and semiconductor industries. CVC provides
integrated thin film deposition and etching equipment based on a central
substrate-handling platform and a series of interchangeable process modules.
CVC's solutions incorporate its core competencies, including: integrated thin
film processing, materials science and plasma physics, vacuum engineering,
process control software and atomic scale engineering of magnetic,
microelectronic and optical devices. These solutions are optimized for the
highly uniform, repetitive steps required for the manufacturing of devices
involving multiple thin film layers and a wide range of materials. CVC's
integrated, modular-based solutions provide functional flexibility that enables
thin film recording head and semiconductor manufacturers to quickly transition
29
<PAGE>
to new fabrication processes, improve time-to-market of higher performance
products and improve manufacturing yields.
CVC's CONNEXION Cluster Tool system is a modular system with stations for
connecting up to six process modules around a central substrate-handling
platform. CVC's CONNEXION Cluster Tool system utilizes an open platform that
enables the integration of modules supplied by either CVC or third-parties. CVC
currently offers a wide range of advanced process modules for PVD, including
sputtering and ion beam deposition, metal-organic chemical vapor deposition, or
MOCVD, and etching. The CONNEXION Cluster Tool, combined with a wide range of
process modules, enables the manufacture of highly uniform devices through the
integration of various processes in a controlled vacuum environment. Principal
applications for CVC's CONNEXION Cluster Tool system include the fabrication of
thin-film recording heads and semiconductors. CVC believes that the CONNEXION
Cluster Tool system, combined with its MOCVD module, is well suited for advanced
interconnect applications, such as barrier and copper deposition.
STRATEGY
CVC's objective is to enhance its position as a leading worldwide developer
of thin film processing solutions for the data storage and semiconductor
industries. Key elements of CVC's strategy include:
MAINTAIN TECHNOLOGICAL LEADERSHIP IN THE DATA STORAGE INDUSTRY. Since 1990,
CVC has focused on the development of integrated thin film process technologies
that enable the fabrication of advanced magnetic heads used in data storage
applications. To date, CVC has shipped more than 100 of its cluster tool
systems, including more than 375 process modules. CVC intends to continue to
combine its expertise in thin film processing with the open architecture,
modular design of its CONNEXION Cluster Tool system to develop increasingly
efficient and cost-effective integrated process solutions for the data storage
industry.
EXPAND DATA STORAGE LEADERSHIP INTO THE SEMICONDUCTOR MARKET. CVC intends
to leverage its accumulated expertise in thin film head processing by targeting
selected semiconductor markets that require advanced thin film processes. CVC
believes that its CONNEXION Cluster Tool systems is well suited for the
fabrication of advanced semiconductors, such as those manufactured with GaAs
substrates, advanced storage devices, such as magnetic random-access memory, or
MRAM, and optical components, such as optical amplifiers, pump laser chips and
dense wave division multiplexing, or DWDM, components. CVC plans to continue to
identify and develop products that address integrated process solutions where
thin film process technologies play a critical role.
CAPITALIZE ON CLOSE RELATIONSHIPS WITH INDUSTRY LEADERS. CVC has
established strategic relationships with a number of industry-leading data
storage and semiconductor manufacturers. By working closely with industry
leaders early in their research and development stage, CVC can identify and
develop customized integrated process solutions that better address customers'
existing and future processing requirements. Having met the specific needs of
market leaders with innovative integrated process solutions, CVC is able to
leverage the experience gained to create products that will meet the demands of
an expanded set of customers across a range of applications and process
technologies. CVC's ability to implement new process solutions also helps CVC
meet its customers' time-to-market demands and advances CVC's goal of having
products designed early into its customers' production and planning cycles.
TARGET ADVANCED INTERCONNECT OPPORTUNITIES IN THE SEMICONDUCTOR
INDUSTRY. Since 1993, CVC has committed significant resources to the
development of advanced interconnect technology for high-performance integrated
circuit fabrication. CVC has developed an MOCVD module that enables deposition
of both barrier and copper layers in an integrated system. CVC has delivered an
integrated copper and barrier MOCVD deposition system to one of its strategic
customers and intends to continue to develop solutions to meet the requirements
of emerging advanced interconnect technologies.
30
<PAGE>
CONTINUE TO PROVIDE SUPERIOR CUSTOMER SERVICE ON A WORLDWIDE BASIS. CVC is
focused on delivering a high level of customer satisfaction by providing
superior customer service through a dedicated customer service group consisting
of 38 full-time employees and a research development group consisting of 73
full-time employees, as well as through distributors and sales representatives
in the United States, Japan, East Asia and Europe. CVC believes that its focus
on customer service combined with the Company's process and systems expertise
has enhanced its reputation in the data storage and semiconductor industries.
CVC's CONNEXION Cluster Tool system is used by a majority of the leading
magnetic recording head manufacturers in the data storage industry. CVC believes
this broad industry representation is due in part to its superior worldwide
customer service.
BROADEN PRODUCT OFFERINGS THROUGH INTERNAL DEVELOPMENT AND
ACQUISITIONS. CVC plans to continue to expand its product offerings through
both internal development and acquisitions of complementary businesses, products
and technologies. Since the market introduction of the CONNEXION Cluster Tool
system in 1993, CVC has continuously enhanced and expanded its product offerings
in response to the evolving needs of its customers through internal research and
development. In 1998, CVC developed and introduced integrated metrology
capabilities that 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. In May 1999, the Company
expanded its existing family of process modules through the acquisition of
Commonwealth, a provider of ion beam deposition and etching modules.
PRODUCTS
CONNEXION CLUSTER TOOL SYSTEM
CVC's principal product is its CONNEXION Cluster Tool system. The CONNEXION
Cluster Tool system is based on a central substrate-handling platform and a
series of interchangeable thin-film deposition and etching processing modules.
CVC's CONNEXION Cluster Tool system utilizes an open platform that enables the
integration of process modules supplied by either CVC or third parties. Since
1993, CVC has shipped more than 100 of these systems, including more than 375
process modules. The diagrams below illustrate two typical configurations of the
CONNEXION Cluster Tool system incorporating various process modules offered by
CVC.
<TABLE>
<CAPTION>
DATA STORAGE SEMICONDUCTOR
GMR CONFIGURATION GAAS CONFIGURATION
<S> <C>
[LOGO] [LOGO]
A. SEVEN STATION CENTRAL WAFER HANDLER D. SINGLE-TARGET PVD MODULE
B. MULTI-TARGET ION BEAM DEPOSITION MODULE E. EIGHT STATION CENTRAL WAFER HANDLER
F. INDUCTIVELY-COUPLED-PLASMA SOFT CLEAN
C. MULTI-TARGET PVD MODULE MODULE
</TABLE>
Depending on the configuration, individual systems range from $1.0 million
to more than $4.0 million, and individual process modules range from
approximately $350,000 to $2.0 million.
31
<PAGE>
CVC believes that the advantages provided by its CONNEXION Cluster Tool
system include the following:
ABILITY TO PROCESS A WIDE RANGE OF MATERIALS. The modular design of the
CONNEXION Cluster Tool system also provides customers the ability to process a
wide range of materials. This ability allows CVC's customers to address their
rapidly evolving manufacturing and material requirements across multiple
applications. The following table provides an overview of the materials and
applications addressed by CVC's CONNEXION Cluster Tool systems for the data
storage and semiconductor industries:
<TABLE>
<CAPTION>
DATA STORAGE
MATERIALS GROUPS SPECIFIC MATERIALS PRODUCT APPLICATIONS
<S> <C> <C> <C>
Conductors Aluminum Tantalum
Chromium Titanium
Copper Titanium/Tungsten
Gold Tungsten
Molybdenum
Platinum
Magnetic Materials Aluminum Silicon Iron Iridium Manganese Inductive, MR and GMR
Cobalt Chromium Iron Manganese Heads for Disk Drives
Platinum Iron Tantalum Nitride
Cobalt Iron Nickel Iron
Cobalt Platinum Nickel Iron Rhodium
Cobalt Zirconium Nickel Manganese
Tantalum Platinum Chromium Manganese
Cobalt Zirconium Platinum Manganese
Niobium
Insulating Aluminum Nitride Silicon Nitride
Materials Aluminum Oxide Silicon Oxide
Wear-Resistant Diamond-like-carbon, or DLC
Coatings
</TABLE>
<TABLE>
<CAPTION>
SEMICONDUCTOR DEVICES
MATERIALS GROUPS SPECIFIC MATERIALS PRODUCT APPLICATIONS
<S> <C> <C> <C>
Conductors Aluminum (alloys) Titanium GaAs and Silicon
Cobalt Titanium Silicide Semiconductors
Copper Titanium Tungsten Nitride
Gold Tungsten
Nickel
Platinum
Barrier/Liner/Glue/ Tantalum Titanium
Layers Tantalum Nitride Titanium Nitride Logic and Memory
Integrated Circuits
High-k Dielectrics Barium Strontium Tantalum Pentoxide
Titanate Titanium Oxide Analog and Mixed
Signal Integrated
Other Specialty Blue Phosphor Silicon Chromium Carbon Circuits
Materials Chromium Silicon Nitride Tantalum Nitride
Nickel Chromium Zinc Oxide
Silicon Chromium
</TABLE>
32
<PAGE>
FLEXIBILITY OF MODULAR DESIGN. The modular design of the CONNEXION Cluster
Tool system provides customers the flexibility to cost effectively transition
from the development stage to full production. In the development stage,
customers can use a process module as a fully-functional, stand-alone tool to
develop and test individual fabrication steps. Following the successful
development of individual process steps, a customer can combine multiple process
modules with CVC's CONNEXION Cluster Tool platform, to form an integrated system
for commercial production. Furthermore, the modular design allows customers to
reconfigure systems that are in production to address the evolving manufacturing
processes required by magnetic head and semiconductor manufacturers. The
flexibility to exchange modules enables customers to develop quickly new
fabrication processes, improving time-to-market of higher performance products,
with a lower capital investment.
BENEFITS OF INTEGRATED PLATFORM. The integrated platform of the CONNEXION
Cluster Tool system provides customers with the ability to combine various
deposition and etching modules on a single platform in a vacuum controlled
environment. The benefits of a vacuum controlled environment include high
uniformity and reduced incidences of cross contamination and damage from
external handling. CVC's integrated platform enables customers to achieve
improved manufacturing yields, enhanced tool uptime and device reliability and
performance.
HIGHLY SPECIALIZED PROCESS SOLUTIONS. CVC provides customers highly
specialized process solutions, including a variety of energy sources and
components. These solutions enable CVC's customers to achieve high uniformity
over a wide range of substrate materials and sizes, as well as control of the
composition materials, atomic microstructures and surface/interface properties.
CVC PROCESS MODULES
CVC offers process modules for physical vapor deposition, including plasma
sputtering and ion beam deposition, metal-organic chemical vapor deposition, ion
beam etching, diamond like carbon processing, inductively-coupled-plasma soft
clean processing and rapid thermal processing. CVC obtained its ion beam
deposition, etching and its diamond like carbon processing modules through its
acquisition of Commonwealth Scientific Corporation in May 1999.
PHYSICAL VAPOR DEPOSITION--PLASMA SPUTTERING MODULE
Physical vapor deposition by sputtering is used to deposit a wide range of
magnetic, conductive and insulating materials on various substrates with
different topographies. PVD is performed in a high vacuum chamber by applying a
strong direct current or radio frequency electric field to an inert gas, usually
argon, to create a plasma. 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 both a
single wafer PVD module and a multi-station PVD module for the sequential
deposition of various materials within a single vacuum chamber.
PHYSICAL VAPOR DEPOSITION--ION BEAM DEPOSITION MODULE
PVD by ion beam deposition, or IBD, is used to deposit a wide range of very
thin magnetic, conductive and insulating materials on various substrates with
different topographies. Ion beam deposition is performed in a high vacuum
chamber by focusing an ion beam generated by a radio frequency or direct current
ion beam source toward a target made of the desired material to be deposited.
The beam of energetic ions hits the target and ejects atoms of the desired
material toward the wafer or substrate, building up a thin film layer in a
slower, more directional manner than with sputtering. With certain processes, a
second ion beam is directed toward the substrate to control the microstructure
of the thin film while depositing the desired material.
33
<PAGE>
METAL-ORGANIC CHEMICAL VAPOR DEPOSITION MODULE
MOCVD is used to deposit various materials such as aluminum, copper,
tungsten, titanium, titanium nitride, tantalum and tantalum nitride. The MOCVD
process causes precursor materials that contain atoms of the material to be
deposited to react at the heated wafer or substrate surface resulting in the
formation of the thin film layer of the material. MOCVD uses a metal organic
compound distributed through a liquid delivery system as the source of the
material to be deposited. The MOCVD process deposits a uniform and conformal
thin film as a barrier layer and a seed layer prior to electrodeposition. In
addition, this process provides an alternative to electrodeposition for copper
filling of narrow interconnect structures in the manufacture of advanced
semiconductors.
ION BEAM ETCH MODULE
Etching by ion beam, or IBE, is used for ion milling in conjunction with
microlithography to transfer a desired device pattern from a photoresist made to
the substrates, as well as surface preparation applications. An ion beam
directed toward the substrate can be used to remove contaminants such as oxide
layers or for substrate conditioning to improve adhesion. Ion beam etching is
performed in a high vacuum chamber by focusing an ion beam generated by a radio
frequency and direct current ion beam source toward the wafer or substrate.
During ion beam etching, atoms are ejected from the substrate surface as a
result of variable angle bombardment by a beam of energetic ions.
DIAMOND-LIKE-CARBON MODULE
IBD of thin diamond-like-carbon, or DLC, is used to deposit hard coating
layers as wear and corrosion protection for thin-film heads and magnetic media.
The IBD DLC module employs a carbon-containing gas flow through an ion source
mounted onto a vacuum process chamber to deposit thin layers of DLC on wafers or
other substrates. CVC's ion beam DLC deposition system sources are currently
used in production by the thin-film head manufacturers. As hard disk storage
densities increase, the distance between the recording head and magnetic media
are decreasing to below 100 Angstroms. The next-generation advanced GMR heads
will require dense and defect-free DLC films below 50 Angstroms. To address this
requirement, CVC has developed a filtered cathodic arc DLC deposition cluster
module which enables controlled deposition of high-quality ultrathin DLC layers.
This cluster module will enable CVC to effectively serve the DLC application for
several future generations of thin film recording heads and magnetic media.
INDUCTIVELY-COUPLED-PLASMA SOFT CLEAN MODULE
CVC offers a multi-zone inductively-coupled-plasma, or ICP, soft clean
module for surface preparation prior to material depositions. CVC's ICP module
technology employs the design features of the ICP system licensed by CVC from
Texas Instruments and enhanced by CVC through internal developments. The 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 PROCESSING/RAPID THERMAL CHEMICAL VAPOR DEPOSITION MODULE
CVC's RTP module with multi-zone temperature control optimizes temperature
and process uniformity and repeatability control. CVC's RTP and RTCVD module is
designed for various thermal processing applications including anneal, oxidation
and CVD processes.
34
<PAGE>
600 SERIES PHYSICAL VAPOR DEPOSITION SYSTEMS
Introduced in 1988, the 610 and 611 products are PVD sputtering deposition
systems, handling up to 6-inch diameter substrates. The 611 system is equipped
with a loadlock and eight work stations which accept combinations of radio
frequency magnetron, radio frequency diode and direct current 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.
ION BEAM SOURCES AND POWER SUPPLIES
With its acquisition of Commonwealth, CVC obtained a range of ion sources,
as well as the power supplies used to operate these sources. Ion beam processing
is used in a variety of advanced research and development applications, as well
as the production of thin film etch and deposition applications where precise
control and repeatability of multilayer thin films are critical. CVC provides
these products on an OEM basis to companies supplying equipment to the precision
optics, opthalmics and optoelectronics industries. In addition, CVC uses its ion
beam sources and power supplies in its IBD, IBE and DLC process modules.
CUSTOMERS
CVC's customers include many of the leading manufacturers of thin film
recording heads for the data storage industry and certain manufacturers of
semiconductor devices. During fiscal year 1998, approximately 77% of CVC's
revenues were derived from sales made to thin film recording head manufacturers
and approximately 21% of CVC's revenues were from sales to semiconductor device
manufacturers. Customers of CVC who have placed orders or purchased at least one
system from it during fiscal 1998 and 1999 include:
<TABLE>
<CAPTION>
DATA STORAGE SEMICONDUCTOR
- ----------------------------------------- -----------------------------------------
<S> <C>
Alps Electronics Anadigics
Applied Magnetics Analog Devices
Fujitsu Honeywell
Hitachi Metals Kodak
IBM M/A-COM
Read-Rite Xerox
Samsung Electronics
Seagate Technology
TDK
Yamaha
</TABLE>
RELATIONSHIP WITH SEAGATE TECHNOLOGY
Seagate Technology, which provides products for storing, managing and
accessing digital information on computers and data communications systems, is
CVC's largest customer, as well as its largest stockholder. Seagate Technology
accounted for 57% of CVC's total revenue in fiscal 1996, 47% of CVC's total
revenue in fiscal 1997 and 31% of CVC's total revenue in fiscal 1998. In
addition, Seagate Technology is CVC's largest stockholder. In 1995, Seagate
Technology made an equity investment of approximately $9.0 million in CVC. In
connection with such investment, Seagate Technology obtained the right to elect
two members of CVC's Board of Directors. That right will terminate upon
consummation of this offering.
35
<PAGE>
Following completion of this offering, Seagate Technology will own shares
representing approximately 21% of CVC's outstanding common stock. In addition,
pursuant to a warrant acquired by Seagate Technology in 1995, Seagate Technology
has the right to acquire an additional 790,760 shares of common stock at an
exercise price of $5.58 per share. Assuming full exercise of such warrant,
Seagate Technology would own an aggregate of approximately 26% of CVC's
outstanding common stock following completion of this offering.
BACKLOG
CVC's backlog consists generally of product orders for which a purchase
order has been received and which are scheduled for shipment within 12 months.
Because a large percentage of CVC's orders require products to be shipped in the
same quarter in which the order was received, and due to possible changes in
delivery schedules, cancellations of orders and delays in shipment, CVC does not
believe that the level of backlog at any point in time is an accurate indicator
of its performance.
MARKETING AND SALES
CVC sells its products in the United States and Europe through its direct
sales force that is supported by its 16-person marketing and sales organization.
In Japan and Europe, CVC utilizes distributors to sell its products. CVC markets
its products in China, Korea, Taiwan, Malaysia, Singapore and Thailand, through
independent sales representatives. International sales accounted for 19% of
CVC's total revenues for fiscal 1996, 31% for fiscal 1997 and 38% for fiscal
1998. CVC'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 CVC's process technologies, as well as complementary technologies
offered by other equipment providers. CVC 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 CVC'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 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 CVC'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.
CUSTOMER SERVICE AND SUPPORT
Prompt and effective field service and support is critical to CVC's sales
efforts, due to the substantial commitments made by customers that purchase
CVC's equipment. As of September 30, 1998, CVC had 38 full-time employees
dedicated to customer service and support. CVC's strategy of supporting its
installed base through both customer support and research and development groups
has served to encourage the use of CVC's equipment and process technologies in
customer production applications. CVC's 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 CVC's
Fremont, California, Rochester, New York and Alexandria, Virginia research and
demonstration facilities. CVC believes that its marketing efforts are enhanced
by the technical expertise of its engineers who also provide customer process
support and participate in industry forums, conferences and user groups.
36
<PAGE>
CVC generally warrants its new systems for 15 months from the date of
shipment. CVC generally warrants to an original purchaser of its new systems
that the products and parts manufactured or assembled by CVC and the application
software supplied will be free from defects in materials and workmanship under
normal use. Installation is included in the price of the system. CVC'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 CVC's systems. For a fee, CVC trains its customers' service
engineers to perform routine services, and, in addition, CVC provides its
customers with 24-hour a day, seven day a week, telephone consultation services.
CVC also has customer support centers located in New York, California, Texas,
Minnesota, Virginia, 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. CVC'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, CVC 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. CVC 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, CVC has recently developed advanced
cluster-integrated IN SITU sensor-based process control capabilities to enable
precise, real-time measurements during the production process of thin film
structures for data storage devices. CVC has also developed a magnetic
orientation device to achieve more accurate and programmable characteristics of
magnetic thin films. In the area of advanced interconnect technologies, CVC has
been developing leading-edge MOCVD barrier and copper metallization processes
for high-performance semiconductor interconnect applications. CVC operates
process development and applications engineering facilities in New York,
California, Virginia and Texas with process and metrology capabilities for data
storage thin film recording head and semiconductor technologies.
As of September 30, 1998, CVC had 73 full-time employees dedicated to its
research, development and engineering programs. In fiscal 1996, 1997 and 1998,
CVC expended $4.3 million, $9.1 million and $12.6 million on these programs,
constituting 9%, 15% and 19% of revenues during those periods, respectively.
Research and development expenditures consist primarily of salaries, project
materials and other costs associated with CVC's ongoing research and development
efforts. CVC expects in future years that research, development and engineering
expenditures will continue to represent a substantial percentage of revenues.
CVC augments its internal technology development efforts by licensing technology
from others and establishing strategic research and development relationships
with universities and various major customers.
Trade, industry standards and development consortia, such as SEMI, SEMATECH
and SEMI/ SEMATECH, help to define the methods, measurement parameters,
manufacturing requirements and specifications influencing commercial
transactions within the data storage and semiconductor industry. Christine
Whitman, the chief executive officer of CVC, serves on the Board of Directors of
SEMI/ SEMATECH. CVC believes that its involvement with such organizations has
helped to ensure that CVC's new products conform to industry standards and
emerging requirements.
37
<PAGE>
MANUFACTURING
CVC's manufacturing activities consist primarily of assembling and testing
components and subassemblies which are acquired from third party suppliers and
then integrated by CVC into finished systems. The manufacturing operations are
conducted in CVC's 90,000 square foot facility in Rochester, New York and its
32,000 square foot facility in Alexandria, Virginia. As of September 30, 1998,
CVC had 119 full-time employees dedicated to its manufacturing efforts. CVC
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 CVC'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. CVC's customers
frequently participate in systems testing during the final assembly and
inspection process.
CVC's Rochester and Fremont facilities are ISO 9001 certified. CVC believes
that ISO 9001 certification, a quality assurance model for companies that
design, produce, install and inspect items as part of their businesses, offers
CVC a competitive advantage over competitors which are not ISO 9001 certified
and, in some cases, is a condition of doing business with certain of its
customers.
CVC procures components and subassemblies included in its products from a
limited group of suppliers and occasionally from a single source. CVC does not
maintain long-term supply contracts with its key suppliers but believes that
alternative suppliers could be found if necessary.
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. CVC 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 could lead to
lower prices for CVC's products, thereby adversely affecting CVC's operating
results.
In the data storage market, CVC's current competitors include Balzers
Process Systems, Nordiko and Veeco Instruments. In the semiconductor market,
CVC's competitors include Applied Materials, Balzers Process Systems and
Novellus. Certain of CVC'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 CVC.
CVC 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 and technology innovation
- product quality and reliability
- product performance
- breadth of its product line
- price
38
<PAGE>
- technical service and support
- adequacy of manufacturing quality and capacity and sources of raw
materials
- efficiency of production
- delivery capabilities
- protection of CVC's products by intellectual property laws
CVC believes it competes favorably in the data storage and semiconductor
manufacturing markets based on its differentiated value-added process
technologies, enhanced system performance, customer support and the cost of
ownership of its equipment.
CVC 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.
PATENTS AND OTHER INTELLECTUAL PROPERTY
CVC relies on a combination of patent, copyright, trademark and trade secret
laws and non-disclosure agreements to protect its proprietary process and
equipment technology. While CVC believes that its patents and its other
intellectual property rights 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 or
such other rights. As of August 31, 1999, CVC had obtained 11 U.S. patents, had
received notices of allowance on two U.S. patent applications and had 34 U.S.
patent applications pending. In CVC has also obtained two foreign patents from
the United Kingdom and had 17 foreign patent applications pending on its behalf
as of that date. In addition, in connection with the acquisition of Commonwealth
Scientific Corporation, CVC has licensed and been assigned rights to certain
jointly-owned patents but there can be no assurance that such licensed and
assigned rights are sufficiently broad for current or contemplated uses.
The data storage and semiconductor industries are characterized by frequent
litigation regarding patent and other intellectual property rights. Although CVC
is not aware of any pending or threatened patent litigation involving CVC, there
can be no assurance that third parties will not assert claims against CVC 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 CVC, could result in significant expense
to CVC and divert the efforts of CVC's technical and management personnel from
productive tasks. In the event of an adverse ruling in such litigation, CVC
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 CVC and CVC's failure to
develop or license a substitute technology at a reasonable cost, CVC's business,
financial condition and results of operations would be materially adversely
affected.
There can be no assurance that CVC'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 CVC's business. There can be no assurance that others will
not independently develop similar products, duplicate CVC's products or, if
patents are issued to CVC, design around the patents issued to CVC. CVC 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 CVC's trade secrets or disclose such technology or that
CVC can meaningfully protect its trade secrets.
39
<PAGE>
EMPLOYEES
As of September 30, 1998, CVC had a total of 277 full-time employees at all
of its locations, consisting of 119 in manufacturing, 73 in research and
development, 16 in marketing and sales, 38 in customer service and support, 27
in administration and four in facilities maintenance.
As of September 30, 1998, 49 employees at CVC'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, 2001. CVC believes that its
relations with its employees, and the bargaining unit which represents certain
of them, are good.
FACILITIES
CVC's principal office is located in Rochester, New York, and consists of
90,000 square feet used for manufacturing, research and development and
administration. CVC 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 CVC. On September 29, 1997, CVC 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, CVC is obligated to purchase the Rochester facility from the Agency for
nominal consideration.
As part of its acquisition of Commonwealth Scientific Corporation in May
1999, CVC obtained two operating facilities. These facilities are located in
Alexandria, Virginia. The principal administrative office is in an owned
building which is approximately 30,000 square feet. The manufacturing and
engineering functions are located in a separate leased facility of approximately
32,000 square feet. The lease on this facility expires September 12, 2001.
In addition, CVC leases 24,000 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. CVC also leases space in Minneapolis, Minnesota,
Japan, Northern Ireland, Singapore and Taiwan for sales and customer support.
Although CVC 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, CVC 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 CVC.
40
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of CVC are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- ------------------------------------------------------------------
<S> <C> <C>
Christine B. Whitman................... 48 President, Chief Executive Officer and Chairman
Giovanni Nocerino, Ph.D................ 47 Executive Vice President, Sales & Service
Emilio O. DiCataldo.................... 48 Senior Vice President and Chief Financial Officer
Mehrdad M. Moslehi, Ph.D............... 39 Senior Vice President and Chief Technical Officer
Christopher J. Mann.................... 41 Senior Vice President, Marketing
Richard J. Chicotka, Ph.D.............. 58 Vice President, Engineering
Richard A. Kellogg..................... 57 Vice President, Manufacturing
Judd C. Prozeller...................... 48 Vice President, Quality & Human Resources
G. Patrick Bonnie...................... 55 Director
Robert C. Fink......................... 64 Director
James Geater........................... 66 Director
Douglas A. Kingsley.................... 37 Director
Victor E. Mann......................... 74 Director
Seiya Miyanishi........................ 52 Director
Andrew C. Peskoe....................... 42 Director
George R. Thompson, Jr................. 69 Director
Donald L. Waite........................ 66 Director
</TABLE>
Ms. Whitman joined CVC Products in 1978 and has served as President, Chief
Executive Officer and Chairman of CVC 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 Frontier Telephone of Rochester and The M&T
Bank. 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 Al Sigl
Center Partners' Foundation Board of Governors and is a member of the Board of
Trustees of Rochester Institute of Technology.
Dr. Nocerino joined CVC in the fall of 1997 as Executive Vice President,
Sales & Service. From 1994 to 1997, Dr. Nocerino worked as Vice President and
General Manager of Sales and Marketing at Varian Associates, a supplier of
semiconductor manufacturing equipment. Prior to his employment at Varian
Associates, Dr. Nocerino was Executive Vice President with Materials Research
Corporation, a subsidiary of Sony and a manufacturer of thin film equipment and
material for the data storage and semiconductor industries. Dr. Nocerino holds a
joint honors B.Sc. in Physics and Electronic Engineering and a Ph.D. from the
University of Manchester, England in 1977.
Mr. DiCataldo joined CVC 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. Moslehi joined CVC 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
41
<PAGE>
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, Marketing. Mr. Mann has previously held the positions of Field
Service Manager, Engineering Services Manager and Vice President, Marketing at
CVC 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.
Dr. Chicotka joined CVC in 1995 as Vice President, Engineering. 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 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. Kellogg joined CVC in January of 1999 and currently serves as Vice
President, Manufacturing. Prior to this assignment, he consulted with CVC and
other firms in the materials management area. From 1997 to 1998, Mr. Kellogg
held the position of Vice President, Materials for Lam Research. During the
period from 1994 to 1997, Mr. Kellogg was Vice President of Operations for
Varian Thin Film Systems, a manufacturer of plasma vapor deposition systems and,
after its acquisition, with Novellus Systems. He spent the period from 1989 to
1994 with Libbey Owens Ford Glass as General Manager of its Shelbyville
Operations. Mr. Kellogg holds a BA from Lake Forest College.
Mr. Prozeller joined CVC in 1995 and currently serves as Vice President,
Quality and Human Resources. 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. Bonnie has been a director of CVC since 1998. Mr. Bonnie serves as a
Senior Vice President and General Manager of Seagate Technology's Recording Head
Operations. Previously, Mr. Bonnie served in a range of managerial assignments
in engineering and manufacturing at Seagate Technology, including process
engineering, magnetic device design and production activities in the wafer,
slider, assembly and test areas of the head business over the last 30 years. Mr.
Bonnie holds a B.Ch.E. from the University of Minnesota and has done graduate
work in engineering and law.
Mr. Fink has been a director of CVC 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 Lam'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 in Metallurgical
Engineering from Polytechnical Institute of New York.
Mr. Geater has been a director of CVC since 1990. Since 1986, Mr. Geater has
served as President of Geater Associates, a management consulting firm. He
previously held various positions at Eastman Kodak, including General Business
Manager and was a faculty member of the Wm. E. Simon Graduate
42
<PAGE>
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.
Mr. Kingsley has been a director of CVC since 1998. Mr. Kingsley is a Senior
Vice President of Advent International Corporation, a venture capital firm,
where he has been employed since 1990. From 1985 through 1988 Mr. Kingsley was a
Sales engineer for Teradyne, Inc., a manufacturer of automatic test equipment
for the electronics industry. Mr. Kingsley is a graduate of Dartmouth College
and Harvard Business School. He is a director of LeCroy Corporation and a member
of the Board of Overseers of the Boston Symphony Orchestra.
Mr. Victor Mann has been a director of CVC 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. Mann has degrees in Telecommunications and Engineering
and Management Studies.
Mr. Miyanishi has been a director of CVC since 1990. Since 1987, Mr.
Miyanishi has served as President and Chief Executive Officer of Nikko Tecno, a
company based in Japan and 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 CVC 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 mergers and acquisitions and corporate
finance. Through his ownership in SWSE Capital Partners, Inc. and directly, Mr.
Peskoe is also a private investor in technology companies. Mr. Peskoe received
his undergraduate degree from Harvard College and a JD from Harvard Law School.
Mr. Thompson became a director of, as well as a consultant to, CVC upon
CVC's acquisition of Commonwealth Scientific Corporation in May 1999. Mr.
Thompson was a co-founder of Commonwealth Scientific and was President and CEO
from 1970 to 1999. Prior to founding Commonwealth, he served in various
engineering and marketing positions with Systems Research laboratories, Barry
Controls Inc., and Bromion, Inc. Mr. Thompson attended the University of
Virginia and received a BS in General Engineering from M.I.T.
Mr. Waite has been a director of CVC 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 CVC are elected by CVC's 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 CVC, except
for Victor Mann, a director, whose son Christopher Mann is Senior Vice
President, Marketing. Mr. Thompson has advised CVC that, subject to the
consummation of this offering, he will resign his directorship.
DIRECTOR COMMITTEES AND COMPENSATION
DIRECTOR COMMITTEES
The Audit Committee of CVC's board of directors consists of Messrs.
Kingsley, Victor Mann, Thompson and Waite. The Audit Committee:
- reviews with CVC's independent accountants the scope and timing of their
audit services;
43
<PAGE>
- the accountants' report on CVC's consolidated financial statements
following completion of their audit; and
- CVC's policies and procedures with respect to internal accounting and
financial controls.
In addition, the Audit Committee makes annual recommendations to CVC's board of
directors for the appointment of independent accountants for the ensuing year.
The Compensation Committee of CVC's board of directors consists of Messrs.
Fink, Geater and Peskoe. The Compensation Committee:
- reviews and evaluates the compensation and benefits of all officers of
CVC;
- reviews general policy matters relating to compensation and benefits of
employees of CVC;
- makes recommendations concerning these matters to CVC's board of
directors; and
- administers CVC's stock option plans. See "--Stock Plans."
DIRECTOR COMPENSATION
Directors who are employees of CVC will receive no additional compensation
for their services as members of CVC's board of directors or as members of Board
committees. Directors who are not employees of CVC 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. In addition, chairman of Board
committees are paid an additional amount of $1,000 in cash. CVC's directors are
reimbursed for their out-of-pocket and travel expenses incurred in connection
with their service as directors.
CVC's Nonemployee Directors' 1999 Stock Option Plan contains provisions
pursuant to which options for 7,500 shares of common stock are granted to each
nonemployee director upon commencement of service on the Board, and options for
2,000 shares of common stock are granted to each nonemployee director on March
31 of each year of continued service on the Board. CVC has authorized and
reserved 200,000 shares of common stock for issuance under this plan.
44
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation for fiscal 1998 of the
chief executive officer and each of the other four most highly compensated
executive officers of (each, a "Named Executive Officer", and collectively, the
"Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
ANNUAL UNDERLYING
COMPENSATION OPTIONS/SARS
------------------------------------------- LONG-TERM
OTHER ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS COMPENSATION (2)
- --------------------------------------- --------- ---------- ------------- ---------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Christine B. Whitman
President, Chief Executive
Officer and Chairman................... 1998 $ 173,040 $ 47,600 -- -- $ 2,647
Giovanni Nocerino
Executive Vice President, Sales &
Service.............................. 1998 183,333 -- -- $ 160,000 --
Mehrdad M. Moslehi
Senior Vice President and
Chief Technical Officer................ 1998 147,054 31,100 -- -- 2,576
Christopher J. Mann
Senior Vice President,
Marketing.............................. 1998 147,290 27,100 $ 77,731(3) -- 4,153
Emilio O. DiCataldo
Senior Vice President and
Chief Financial Officer................ 1998 146,692 31,800 -- -- 1,900
</TABLE>
- ------------------------
(1) 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.
(2) Represents matching contributions made by CVC on behalf of the Named
Executive Officer to CVC's 401(k) Plan.
(3) Represents automobile allowance of $10,488 and sales commissions of $67,243.
45
<PAGE>
The following table sets forth certain information regarding the option
grants made during fiscal 1998 to each of the Named Executive Officers. CVC
issued no stock appreciation rights in fiscal 1998.
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
VALUE AT ASSUMED
ANNUAL RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION --------------------------
NAME OPTIONS FISCAL 1998 ($/SHARE) DATE 5% 10%
- ------------------------------------------- ----------- --------------- ------------- ----------- ------------ ------------
Christine B. Whitman....................... -- -- -- -- -- --
Giovanni Nocerino.......................... 160,000 38.62% $ 5.73 10/1/07 $ 1,170,095 $ 1,475,516
Mehrdad M. Moslehi......................... -- -- -- -- -- --
Christopher J. Mann........................ -- -- -- -- -- --
Emilio O. DiCataldo........................ -- -- -- -- -- --
</TABLE>
The following table sets forth information regarding exercise of options and
the number and value of options held at September 30, 1998, by each of the Named
Executive Officers.
YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT FISCAL YEAR END AT FISCAL YEAR END(1)
-------------------------- ---------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Christine B. Whitman..................................... 346,800 27,200
Giovanni Nocerino........................................ -- 160,000
Mehrdad M. Moslehi....................................... 1,600 6,400
Christopher J. Mann...................................... 203,000 12,000
Emilio O. Dicataldo...................................... 136,400 25,600
</TABLE>
- ------------------------
(1) The value of the unexercised, in-the-money options on September 30, 1998 is
based on the difference between the assumed initial public offering price of
the common stock ($ per share), and the per share option exercise price,
multiplied by the number of shares of common stock underlying the options.
STOCK OPTION PLANS
STOCK OPTION PROGRAM
Until June 1996, CVC 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 CVC's selected employees and to further align their interests with
those of CVC. Under this program, the Compensation Committee and/or CVC's board
of directors:
- selected the participants;
- determined the number of shares of common stock offered to each
participant;
- determined the terms of the repurchase rights for each participant; and
- determined other terms of sale.
46
<PAGE>
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 1,473,840 shares of common stock have been granted, of which options to
purchase 313,333 shares of common stock have been exercised and options to
purchase 120,000 shares of common stock have been cancelled.
1996 STOCK OPTION PLAN
CVC's 1996 Stock Option Plan was adopted by CVC's board of directors
effective June 30, 1996 under which selected employees were granted nonqualified
stock options, or "NSOs" and incentive stock options, or "ISOs," to purchase
shares of common stock. The primary purpose of this plan was to provide
long-term incentives to CVC's selected employees and to further align their
interests with those of CVC. Under the plan, the Compensation Committee and/or
CVC's board of directors:
- selected the participants;
- determined the form and number of shares of common stock offered to each
participant;
- determined the exercise period of each option;
- determined the terms of the repurchase rights for each participant; and
- determined other terms of sale.
Options granted to employees under this plan were generally at fair market
value as of the grant date based upon valuations obtained contemporaneously from
an independent appraiser. Options granted generally vested over a period of
three-to-five 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.
As of August 31, 1999, options to purchase 582,134 shares of common stock
have been granted under this plan, of which options to purchase 6,200 shares of
common stock have been exercised and options to purchase 160,933 shares have
been cancelled. This plan was terminated as of August 30, 1999.
1997 STOCK OPTION PLAN
CVC's 1997 Stock Option Plan was adopted by CVC's board of directors
effective October 16, 1997, under which stock options may be granted to
employees of CVC and its subsidiaries. This plan permits the grant of stock
options that qualify as ISOs under Section 422 of the Internal Revenue Code, and
NSOs which do not so qualify. CVC has initially authorized and reserved
1,833,333 shares of the common stock for issuance under this plan, with the
number of shares authorized and reserved being increased annually in an amount
equal to 5% of the total number of shares of common stock issued by CVC in the
preceding fiscal year, with a maximum aggregate of shares issued under this plan
not to exceed 5,000,000. As of August 31, 1999, 736,002 options had been
granted. Options to purchase 150,467 shares have been cancelled and none have
been exercised as of August 31, 1999. 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 that option
will again be available for grant under the plan.
The Compensation Committee administers the plan. Subject to the limitations
set forth therein, 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;
47
<PAGE>
- 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;
- the duration of the exercise period;
- 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;
- 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
- 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 CVC and its subsidiaries are
eligible to receive grants of stock options under this plan, as selected by the
Compensation Committee. The maximum term of options granted under this 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 CVC, as defined in this 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 this 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 this plan, in which case all
unexercised options will be immediately forfeited.
In addition, 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. This plan has a term of ten years, subject
to earlier termination or amendment by CVC's board of directors, and all options
granted under its plan prior to its termination remain outstanding until they
have been exercised or are terminated in accordance with their terms. CVC's
board of directors may amend this plan at any time.
1999 NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
CVC's board of directors has adopted the 1999 Nonemployee Director Stock
Option Plan. Under this plan, stock options are granted to each member of CVC's
board of directors who is not an employee of CVC. See "--Director Committees and
Compensation" and "--Director Compensation."
ASSUMPTION OF CERTAIN STOCK OPTIONS
In connection with the closing of the acquisition of Commonwealth Scientific
Corporation, all outstanding options to purchase shares of Commonwealth as of
the closing were assumed by CVC. These non-qualified options are governed by
stand alone agreements with each respective optionee. As
48
<PAGE>
of August 31, 1999, options to purchase an aggregate of 260,815 shares of common
stock are held by former optionees of Commonwealth.
PENSION PLAN
CVC 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 service with CVC as well as benefits
employees may be entitled to receive under certain prior plans of CVC. Such plan
was frozen effective September 30, 1991 and no further benefits will be accrued
under its plan. Mr. Christopher Mann will receive $157.68 and Ms. Christine
Whitman will receive $394.28, each 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, 1998, nor at any other time within the past five years, an officer
or employee of CVC. No executive officer of CVC serves as a member of a board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of CVC's board of directors or its
Compensation Committee.
AGREEMENTS WITH EMPLOYEES
CVC has entered into severance agreements with each of its Named Executive
Officers. These agreements provide that the employees will serve CVC 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 these agreements. These agreements set forth the minimum base
salary of each employee during the term of the particular agreement, 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 the employee towards
achievement of the annual business goals of CVC. Under these agreements, the
employees are entitled to participate in the employee benefit plans of CVC and
are eligible for the grant of stock options, in the sole discretion of the
Compensation Committee.
In addition, these agreements include provisions that are effective upon the
termination of employment under certain circumstances. In general, the employees
are entitled to a lump-sum cash severance payment upon termination by CVC
without "cause" or termination by the employee for "good reason" following a
"change in control", each as defined in the agreements. This lump-sum severance
payment is equal to the employee's base salary as in effect immediately prior to
termination multiplied by a specified number of months (24 months for Ms.
Whitman, 18 months for Mr. DiCataldo, 12 months for Drs. Moslehi, Chicotka,
Nocerino and Messrs. Christopher Mann Kellogg and Prozeller) and then discounted
to present value from the dates such payments would otherwise have been made.
Under certain circumstances, 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. An employee terminated
after a "change in control" will retain the right to exercise any options to
purchase shares of common stock for 12 months following the date of such
termination or, if earlier, the expiration of the original term of the option.
These agreements include certain restrictive covenants for the benefit of
CVC relating to non-disclosure by the employee of CVC's confidential business
information and CVC's right to inventions and technical improvements of the
employee.
49
<PAGE>
CERTAIN TRANSACTIONS
Advent International Group is a principal stockholder of CVC. Mr. Kingsley,
a director of CVC, is a Managing Director of Advent.
In December 1998, CVC sold an aggregate of 100,000 shares of Series C
Convertible Preferred Stock for a price of $10.00 per share and a warrant to
purchase an aggregate of 200,000 shares of the common stock to entities
affiliated with Advent International Corporation (collectively, "Advent") in a
private placement. The Series C Convertible Preferred Stock is automatically
converted into 1,016,260 shares of common stock, as well as 100,000 shares of
Series D Redeemable Preferred Stock upon consummation of this offering. The
Series D Redeemable Preferred Stock will, in turn, be redeemed by CVC upon the
consummation of this offering for a redemption price of $10.0 million. The
warrant will be terminated upon consummation of this offering. See "Description
of Capital Stock."
Also, in connection with that transaction, CVC entered into an Amended and
Restated Registration Rights Agreement with Advent, Seagate Technology, Nikko
Tecno and certain executive officers and stockholders of CVC. Such agreement
grants certain demand and piggy-back registration rights to Seagate Technology
and Advent with respect to shares of common stock issuable upon conversion of
all outstanding shares of the Series B and Series C Senior Convertible
Redeemable Preferred Stock, and also grants certain piggy-back registration
rights to certain executive officers and stockholders of CVC. See "Description
of Capital Stock--Registration Rights." In addition, CVC entered into an Amended
and Restated Stockholders' Agreement with Advent, Seagate Technology, Nikko
Tecno and certain executive officers and stockholders of CVC providing for
voting and pre-emptive rights with respect to the acquisition and sale of shares
by CVC and certain matters affecting corporate governance. These rights will
terminate when the Series A, Series B and Series C Senior Convertible Redeemable
Preferred Stock are converted into common stock upon the consummation of this
offering.
As part of CVC's acquisition of Commonwealth in May 1999, CVC entered into a
consulting agreement with George R. Thompson, Jr., the former Chief Executive
Officer of Commonwealth and a current director of CVC. Under the terms of this
consulting agreement, CVC is obligated to pay Mr. Thompson an aggregate amount
of $525,000 over the three-year period following the acquisition, as
consideration for consulting services provided by him to CVC. In addition, Mr.
Thompson is entitled to specified benefits, including an automobile allowance.
This consulting agreement may be terminated by the Company in certain
circumstances and by Mr. Thompson for any reason.
Nikko Tecno, a Japanese corporation, is a principal stockholder and a
distributor of CVC's products in Japan. Mr. Miyanishi, a director of CVC, is the
President and Chief Executive Officer of Nikko Tecno. CVC borrowed from Nikko
Tecno $1.5 million in November of 1990 and $1.0 million in December of 1991
under two unsecured notes that required 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 was paid in January of
1999. See Notes to Consolidated Financial Statements.
Andrew Peskoe, a director of CVC, is a partner in the law firm of Golenbock,
Eiseman, Assor & Bell, which has provided legal services to CVC in connection
with a variety of business and organizational matters.
50
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of CVC's common stock as of August 31, 1999, by each person or entity
known to CVC to own beneficially more than 5% of the outstanding shares of
common stock, each of CVC's directors and Named Executive Officers, the selling
stockholders who are Anne G. Whitman and George R. Thompson, Jr. and all
directors and executive officers as a group. Unless otherwise indicated below,
to the knowledge of CVC, 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 OWNED
PRIOR TO THE SHARES TO 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)................................... 3,219,073 34.7 -- 3,219,073 26.2
920 Disc Drive
Scotts Valley, CA 95066-4544
Nikko Tecno(4).......................................... 1,412,316 16.7 -- 1,412,316 12.3
P.O. Box 139
Central Tokyo, Japan
Advent International Group(5)........................... 1,017,593 12.0 -- 1,017,593 8.9
75 State Street
Boston, MA 02109
Anne G. Whitman(6)...................................... 1,108,800 13.1 300,000 808,800 7.0
Christine B. Whitman(7)................................. 721,600 8.2 -- 721,600 6.1
Giovanni Nocerino....................................... 106,667 1.2 -- 106,667 *
Mehrdad M. Moslehi(7)................................... 307,200 3.6 -- 307,200 2.7
Christopher J. Mann..................................... 261,960 3.0 -- 261,960 2.2
Emilio O. DiCataldo..................................... 142,800 1.7 -- 142,800 1.2
G. Patrick Bonnie(8).................................... -- * -- -- *
Robert C. Fink.......................................... 4,888 * -- 4,888 *
James Geater............................................ 36,316 * -- 36,316 *
Douglas A. Kingsley(9).................................. 1,017,593 12.0 -- 1,017,593 8.9
Victor E. Mann.......................................... 20,316 * -- 20,316 *
Seiya Miyanishi(10)..................................... 1,412,316 16.7 -- 1,412,316 12.3
Andrew C. Peskoe(11).................................... 134,316 1.6 -- 134,316 1.2
George R. Thompson, Jr.(7)(12).......................... 862,447 10.2 200,000 662,447 5.8
Donald L. Waite(13)..................................... -- -- -- -- *
All directors and executive officers as a group
(19 persons)(14)...................................... 5,148,459 41.3 -- 4,948,459 40.4
</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 August 31, 1999. 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--353,600 shares; Giovanni Nocerino--106,667
shares; Mehrdad M. Moslehi--3,200 shares; Christopher J. Mann--206,000
shares; Emilio O. DiCataldo--142,800 shares; and Andrew C. Peskoe--50,000
shares.
51
<PAGE>
(3) Includes 2,419,680 shares of common stock issuable upon conversion of
outstanding shares of Series B Convertible Preferred Stock and 790,760
additional shares of common stock issuable upon exercise of a warrant held
by Seagate Technology.
(4) Includes 1,392,000 shares of common stock issuable upon conversion of Series
A Convertible Preferred Stock.
(5) Includes ownership by the following venture capital funds managed by Advent
International Corporation: (i) 826,560 shares of common stock issuable to
Global Private Equity III Limited Partnership upon conversion of outstanding
shares of Series C Convertible Preferred Stock, (ii) 126,641 shares of
common stock issuable to Advent PGGM Global Limited Partnership upon
conversion of outstanding shares of Series C Convertible Preferred Stock,
(iii) 12,496 shares of common stock issuable to Advent Partners GPE III
Limited Partnership upon conversion of outstanding shares of Series C
Convertible Preferred Stock, (iv) 3,739 shares of common stock issuable to
Advent Partners (NA) GPE III Limited Partnership upon conversion of
outstanding shares of Series C Convertible Preferred Stock and (v) 14,563
shares of common stock issuable to Advent Partners Limited Partnership upon
conversion of outstanding shares of Series C Convertible Preferred Stock.
Advent is the general partner for all of the above limited partnerships.
(6) Includes an aggregate of 38,400 shares of common stock held by Ms. Whitman's
three children pursuant to trust agreements with The Chase Manhattan Bank.
Ms. Whitman disclaims beneficial ownership of these shares. Anne G. Whitman
is not related to Christine B. Whitman.
(7) The stockholders' address is: c/o CVC, Inc., 525 Lee Road, Rochester, New
York, 14606.
(8) Excludes 3,219,073 shares of common stock beneficially owned by Seagate
Technology. Mr. Bonnie is an executive officer and stockholder of Seagate
Technology. Mr. Bonnie 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.
(9) Includes 1,017,593 shares owned by Advent. Mr. Kingsley is a Senior Vice
President of Advent International Corporation, the venture capital firm
which is the manager of the funds affiliated with the Advent International
Group. Mr. Kingsley disclaims beneficial ownership of the shares of common
stock owned by Advent except to the extent of his indirect pecuniary
interest therein as a partner in Advent.
(10) Includes 1,412,316 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.
(11) Includes 64,000 shares of common stock, and 50,000 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.
(12) Includes 50,868 shares of common stock held by Mr. Thompson's daughter,
Eleanor Thompson, and 50,868 shares of common stock held by his son, G.
Richard Thompson. Mr. Thompson disclaims beneficial ownership of the shares
of common stock held by his children.
(13) Excludes 3,219,073 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.
(14) Includes 64,000 shares of common stock and 50,000 additional shares of
common stock issuable upon exercise of an option beneficially owned by the
wife of a director of CVC, 1,412,316 shares held of record by Nikko Tecno,
the ownership of which is attributed to a director of CVC, 1,017,593 shares
held of record by Advent, the ownership of which is attributed to a director
of CVC and 50,868 shares of common stock held by Mr. Thompson's daughter,
Eleanor Thompson, and 50,868 shares of common stock held by his son, G.
Richard Thompson.
52
<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED STOCK
Upon the completion of this offering, the authorized capital stock of CVC
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.
COMMON STOCK
Assuming conversion of all outstanding Series A, Series B and Series C
Convertible Preferred Stock, at August 31, 1999 there were 8,477,315 shares of
common stock issued and outstanding held by approximately 66 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 CVC's board of directors out of funds legally
available therefor. In the event of a liquidation, dissolution or winding up of
CVC, 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 CVC may designate and issue in the future.
PREFERRED STOCK
As of August 31, 1999, 1,685 shares of Series A Convertible Preferred Stock,
60,492 shares of Series B Convertible Preferred Stock, 100,000 shares of Series
C Convertible Preferred Stock and no shares of Series D Redeemable Preferred
Stock were issued and outstanding. Simultaneously with the closing of this
offering, the outstanding shares of Series A Convertible Preferred Stock will
automatically be converted into an aggregate of 2,696,000 shares of common stock
and the Series B Convertible Preferred Stock will automatically be converted
into 2,419,680 shares of common stock. At the same time, the Series C
Convertible Preferred Stock will automatically be converted into 1,016,260
shares of common stock and 100,000 shares of Series D Redeemable Preferred
Stock. The Series D Redeemable Preferred Stock will, in turn, be redeemed by CVC
upon the consummation of this offering for a redemption price of $10.0 million.
Upon the closing of the offering, the conversion of the outstanding Series
A, Series B and Series C Convertible Preferred Stock, the redemption of the
Series D Redeemable Preferred Stock and the filing of an Amended and Restated
Certificate of Incorporation of CVC removing the designation of those series,
CVC's 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 Certificate of
Incorporation, CVC's 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
CVC's board of directors.
The purpose of authorizing CVC's 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.
53
<PAGE>
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 CVC. CVC has no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Upon consummation of this offering, the holders of 7,218,197 shares of
common stock will be entitled to certain rights with respect to the registration
of these shares under the Securities Act. These registration rights have been
waived with respect to the offering. Under the terms of an agreement between CVC
and the holders of the shares eligible for registration, if CVC 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,
these holders are entitled to notice of registration and are entitled to include
their eligible shares in the offering, provided that the managing underwriters
have the right to limit the number of these shares included in the registration.
Holders of 3,435,940 shares the shares eligible for registration may also
require CVC to file a registration statement under the Securities Act at its
expense with respect to these securities, and CVC is required to use its best
efforts to effect that registration, subject to, among other things, the right
of CVC not to effect any registration within six months following this offering.
Further, stockholders may require CVC to file additional registration statements
on Form S-3 when that form becomes available to CVC, subject to certain
conditions and limitations. All expenses incurred in connection with such
registrations must be borne by CVC, other than underwriting discounts and
commissions.
WARRANTS
CVC has issued a warrant to Seagate Technology 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 May 22, 1995, the date this warrant was issued. Upon the consummation of this
offering, this warrant will become exercisable for 790,760 shares of common
stock at an exercise price of $5.58 per share of common stock.
CVC has issued warrants to Advent to purchase an aggregate of 133,333 shares
of common stock at an exercise price of $15.00 per share during the four-year
period commencing on December 1, 2001. This warrant, however, will terminate
upon the consummation of this offering.
LIMITATIONS ON DIRECTOR LIABILITY
CVC's Certificate of Incorporation provides that, to the fullest extent
permitted by the Delaware General Corporation Law, none of its directors will be
personally liable to CVC or its stockholders for monetary damages. Section
102(b) (7) of the Delaware General Corporation Law currently provides that a
director's liability for breach of fiduciary duty to a corporation may be
eliminated, except for liability:
- for any breach of the director's duty of loyalty to the corporation or its
stockholders;
- for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law, for unlawful
dividends or unlawful stock repurchases or redemptions; and
- for any transaction from which the director derives an improper personal
benefit.
Any amendment to these provisions of the Delaware General Corporation Law
will automatically be incorporated by reference into CVC's Certificate of
Incorporation without any vote on the part of
54
<PAGE>
its stockholders unless otherwise required, including this provision in CVC's
Amended and Restated Certificate. These provisions may, however, discourage or
deter stockholders or management from bringing a lawsuit against directors for a
breach of their fiduciary duties, even though such an action, if successful,
might otherwise benefit us and our stockholders.
CVC's By-laws provide that CVC will indemnify its directors and officers to
the-fullest extent permitted by Delaware law. Generally, CVC is required to
indemnify our directors and officers for all:
- judgments;
- fines;
- settlements;
- legal fees; and
- other expenses incurred in connection with pending or threatened legal
proceedings because of the director's or officer's position with CVC.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
CVC is subject to the provisions of Section 203 of the Delaware General
Corporation Law. Under Section 203, 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 generally prohibited
for a three-year period following the date that such a stockholder became an
interested stockholder, unless:
- the corporation has elected in its original certificate of incorporation
not to be governed by Section 203. CVC did not make this election;
- 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,
- 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
- the business combination was approved by the board of directors of the
corporation and ratified by two-thirds of the voting stock not owned by
the interested stockholder.
The three-year prohibition also does not apply to some business combinations
proposed by an interested stockholder following the announcement or notification
of an extraordinary transaction 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 under Section 203 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 under Section 203
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 CVC and therefore could discourage attempts to acquire CVC.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, CVC will have 11,477,315 shares of common
stock outstanding. Of these shares, the 3,500,000 shares of common stock sold in
the offering will be freely tradable without restriction under the Securities
Act. However, any shares purchased by "affiliates" of CVC, as that term is
defined in Rule 144 under the Securities Act, generally may be sold only in
compliance with the limitations of Rule 144 described below. Affiliates include
directors, officers and holders of 10% or greater of the total outstanding
shares of comon stock.
SALES OF RESTRICTED SECURITIES
The remaining shares of common stock outstanding upon completion of the
offering are deemed "restricted securities" under Rule 144. Of the restricted
securities, up to 1,168,737 shares will be eligible for sale in the public
market after the offering pursuant to Rule 144(k) under the Securities Act;
925,003 of these shares are subject to the 180-day lock-up agreements described
below, but will be eligible for sale in the public market immediately upon the
closing of the offering. Of the remaining restricted securities outstanding,
4,702,873 shares will be eligible for resale under Rule 144 commencing 90 days
after the date of this prospectus; 4,201,665 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
securities who beneficially owns shares that were not acquired from CVC or an
affiliate of CVC within the previous year 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 114,773
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 of restricted securities under Rule 144 are subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about CVC. A person who is not deemed an affiliate
of CVC at any time during the three months preceding a sale, and who
beneficially owns shares that were not acquired from CVC 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 CVC.
Any employee, officer or director of or consultant to CVC 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. Affiliates can sell
their Rule 701 shares without having to comply with Rule 144's one-year
holding-period restrictions, but must otherwise comply with its volume
limitations and manner of sale provisions.
OPTIONS
Upon completion of the offering, 1,594,132 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;
1,421,196 of these shares underlying these options are subject to the 180-day
lock-up agreements. An additional 1,247,798 shares of common stock are available
for future grants under CVC's stock option plans.
CVC 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 CVC's stock option plans
that do not qualify for an exemption under Rule 701 from the registration
requirements of the Securities Act. CVC has agreed with the Underwriters not to
file these
56
<PAGE>
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.
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
CVC's future ability to raise capital through an offering of equity securities.
57
<PAGE>
UNDERWRITING
Each underwriter named below has agreed to purchase from CVC and the selling
stockholders the number of shares of common stock set forth opposite its name.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------- -----------------
<S> <C>
Lehman Brothers Inc........................................................
Prudential Securities......................................................
SG Cowen Securities Corporation............................................
Warburg Dillon Read LLC....................................................
-----------------
Total.................................................................. 3,500,000
-----------------
-----------------
</TABLE>
The underwriters will purchase the shares pursuant to an underwriting
agreement with CVC and the selling stockholders. The underwriters will pay CVC
the public offering price less the underwriting discount specified on the cover
page of this prospectus. CVC estimates that its expenses for this offering will
be $ . Certain conditions contained in the underwriting agreement must
be satisfied before the underwriters are required to purchase the shares,
including the delivery of legal opinions by legal counsel. The underwriters will
purchase either all of the shares or none of them.
The underwriters have advised CVC that they will offer the shares directly
to the public initially at the public offering price and to selected dealers,
who may include underwriters, at the public offering price less a selling
concession not to exceed $ per share. The underwriters may allow,
and these dealers may reallow, a concession not to exceed $ per share
to certain brokers and dealers. After the initial offering of the shares the
underwriters may change the public offering price and other selling terms.
The underwriters will offer the shares subject to prior sale, withdrawal,
cancellation or modification of offer of the shares without notice, and to their
receipt and acceptance of the shares. The underwriters may reject any order to
purchase shares.
The selling stockholders have granted the underwriters an option,
exercisable not later than 30 days after the date of this prospectus, to
purchase up to 525,000 additional shares at the public offering price less the
underwriting discount specified on the cover page of this prospectus. To the
extent that the underwriters exercise this option, each of the underwriters will
have a firm commitment, subject to conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by it shown in
the above table bears to each underwriter's initial purchase commitment, and CVC
and the selling stockholders will be obligated to sell such shares to the
underwriters. The underwriters may exercise such option only to cover
over-allotments.
Each of the officers and directors of CVC, and certain shareholders of CVC,
have agreed not to offer, sell, pledge or otherwise dispose of any shares of
common stock, directly or indirectly, or engage in hedging transactions with
respect to the common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of Lehman Brothers Inc.
Stockholders who have agreed to this lock-up arrangement hold an aggregate of
shares of common stock and options to purchase an aggregate of
shares of common stock. CVC has agreed not to sell or otherwise dispose of any
shares of common stock for a period of 180 days, subject to exceptions. Lehman
Brothers Inc. may, in its sole discretion and at any time without notice,
release all or any portion of the shares subject to such lock-up agreements. See
"Shares Eligible for Future Sale."
Prior to this offering, there has been no public market for the shares of
common stock. The initial public offering price will be negotiated by the
underwriters and CVC. The underwriters will consider, among other things and in
addition to prevailing market conditions, CVC's historical performance and
capital structure, estimates of business potential and earning prospects, an
overall assessment of CVC's
58
<PAGE>
management and the consideration of the above factors in relation to market
valuation of companies in related businesses.
At CVC's request, the underwriters have reserved for sale, at the initial
public offering price, up to of the shares of common stock offered
in this offering for CVC's directors, officers, employees and related persons.
The number of shares of common stock available for sale to the general public
will be reduced to the extent such individuals purchase such reserved shares.
Any reserved shares which are not so purchased will be offered by the
underwriters to the general public on the same basis as the other shares offered
hereby.
Application has been made to have the common stock approved for quotation on
the Nasdaq National Market under the symbol "CVCI."
CVC has agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute, under
specified circumstances, to payments that the underwriters may be required to
make in respect thereof.
Until the distribution of the common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters and
certain selling group members to bid for an purchase shares of common stock. As
an exception to these rules, the underwriters are permitted to engage in
transactions that stabilize the price of the common stock. Such transactions may
consist of bids or purchases for the purposes of pegging, fixing or maintaining
the price of the common stock.
If the underwriters create a short position in the common stock in
connection with this offering (i.e., they sell more shares than are set forth on
the cover page of this prospectus), the underwriters may reduce that short
position by purchasing common stock in the open market. The underwriters also
may elect to reduce any short position by exercising all or part of their
over-allotment option.
The underwriters also may impose a penalty bid on certain underwriters and
selling group members. This means that if the underwriters purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither CVC nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
CVC nor any of the underwriters makes any representation that the underwriters
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Any offers in Canada will be made only pursuant to an exemption from the
requirements to file a prospectus in the relevant province of Canada in which
such sale is made.
Purchasers of the shares of common stock offered by this prospectus may be
required to pay stamp taxes and other charges under the laws and practices of
the country of purchase, in addition to the public offering price.
The underwriters have informed CVC that they do not intend to confirm sales
of shares of common stock to any accounts over which they exercise discretionary
authority in excess of 5% of the shares offered by them.
59
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for CVC by Dewey Ballantine LLP, New York, New York and for the
Underwriters by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The consolidated financial statements of CVC as of September 30, 1998 and
1997 and for the three years in the period ended September 30, 1998 included in
this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Commonwealth Scientific Corporation as of March
31, 1999 and for the three years in the period ended March 31, 1999 included in
this prospectus have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein upon the authority of said firm as experts in giving said reports.
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 the 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.
60
<PAGE>
CVC, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CVC, INC.
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
ACQUIRED COMPANY (COMMONWEALTH SCIENTIFIC CORPORATION)
Report of Independent Public Accountants............................................. F-22
Balance Sheets....................................................................... F-23
Statements of Operations............................................................. F-25
Statements of Stockholders' Equity................................................... F-26
Statements of Cash Flows............................................................. F-27
Notes to Financial Statements........................................................ F-28
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of CVC, Inc.
The stock split described in Note 1 to the consolidated financial statements
has not been consummated at September 10, 1999. When it has been consummated, we
will be in a position to furnish the following report:
"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, 1998 and
1997, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1998 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."
PricewaterhouseCoopers LLP
Rochester, New York
November 12, 1998,
except as to Note 1,
which is as of October , 1999
F-2
<PAGE>
CVC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, PRO FORMA
-------------------- JUNE 30, JUNE 30, 1999
1997 1998 1999 (NOTE 1)
--------- --------- --------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................ $ 2,161 $ 106 $ 767 $ 767
Accounts receivable--trade (includes related party receivables of $3,485 and
$1,397 at September 30, 1997 and 1998, respectively, and $4,515 at June 30,
1999 (unaudited) less allowance for doubtful accounts of $149, and $345 at
September 30, 1997 and 1998, respectively, and $741 at June 30, 1999
(unaudited))................................................................... 8,288 7,026 16,210 16,210
Inventories...................................................................... 22,360 18,811 29,308 29,308
Deferred income taxes............................................................ 1,153 1,431 2,605 2,605
Other current assets............................................................. 651 1,055 1,193 1,193
--------- --------- --------- -------------
34,613 28,429 50,083 50,083
Property, plant and equipment, net................................................. 9,130 13,901 20,268 20,268
Goodwill and other intangible assets............................................... 90 434 1,276 1,276
--------- --------- --------- -------------
Total assets............................................................... $ 43,833 $ 42,764 $ 71,627 $ 71,627
--------- --------- --------- -------------
--------- --------- --------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term debt (includes related
party note of $1,000 at September 30, 1997).................................... $ 2,295 $ 5,689 7,817 7,817
Accounts payable................................................................. 9,993 7,221 9,083 9,083
Advances from customers (includes related party amounts of $1,691 and $463 at
September 30, 1997 and 1998, respectively, and $4,356 at June 30, 1999
(unaudited))................................................................... 8,652 1,167 6,883 6,883
Other current liabilities........................................................ 4,414 3,448 5,960 5,960
--------- --------- --------- -------------
25,354 17,525 29,743 29,743
Long-term debt (includes related party note of $1,500 at September 30, 1997 and
1998)............................................................................ 5,309 11,379 8,674 8,674
Deferred income taxes.............................................................. 1,403 1,393 1,614 1,614
Other liabilities.................................................................. 339 487 762 762
--------- --------- --------- -------------
Total liabilities.......................................................... 32,405 30,784 40,793 40,793
Commitments (Note 14)
Stockholders' equity:
Preferred stock, $.01 par value per share; 502,500 shares authorized; shares
issued and outstanding:
Series C--100,000 shares in 1999 (liquidation preference of $10,000,000)......... -- -- 9,855 --
Series D--100,000 shares pro forma (liquidation preference of $10,000,000)....... 10,000
Series B--60,492 shares at September 30, 1997 and 1998 and June 30, 1999
(liquidation preference of $9,000,000)......................................... 8,355 8,355 8,355 --
Series A--1,685 shares at September 30, 1997 and 1998 and June 30, 1999
(liquidation preference of $1,685,000)......................................... 1,685 1,685 1,685 --
Common Stock, $.01 par value per share; 50,000,000 shares authorized; 849,260
shares issued and outstanding at September 30, 1997, 1,057,931 shares issued and
outstanding at September 30, 1998 and 2,345,394 shares issued and outstanding at
June 30, 1999.................................................................... 8 10 23 84
Additional paid-in capital......................................................... 772 1,100 9,249 19,083
Warrant............................................................................ -- -- 14 14
Unamortized deferred compensation.................................................. (254) (252) (168) (168)
Retained earnings.................................................................. 949 1,213 1,952 1,952
Minimum pension liability.......................................................... (87) (131) (131) (131)
--------- --------- --------- -------------
Total stockholders' equity......................................................... 11,428 11,980 30,834 30,834
--------- --------- --------- -------------
Total liabilities and stockholders' equity......................................... $ 43,833 $ 42,764 $ 71,627 $ 71,627
--------- --------- --------- -------------
--------- --------- --------- -------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
CVC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- ----------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenues (includes sales to related party of $27,795,
$29,244 and $21,322, for the year ended September 30,
1996, 1997 and 1998, respectively) and $16,455 and
$18,566 for the nine months ended June 30, 1998 and
1999, respectively (unaudited)........................ $ 48,378 $ 62,588 $ 68,173 $ 54,275 $ 55,795
Cost of goods sold (includes cost of goods sold to
related party of $16,162, $17,352 and $11,115 for the
year ended September 30, 1996, 1997 and 1998,
respectively) and $9,438 and $10,011 for the nine
months ended June 30, 1998 and 1999, respectively
(unaudited)........................................... 33,755 41,286 42,019 33,504 34,166
--------- --------- --------- --------- -----------
Gross margin............................................ 14,623 21,302 26,154 20,771 21,629
Operating expenses
Research and development.............................. 4,346 9,055 12,615 9,844 8,489
In-process R&D write-off.............................. -- -- -- -- 1,174
Sales and marketing................................... 4,777 5,613 7,696 5,593 6,395
General and administrative............................ 2,124 2,539 3,476 2,898 2,953
--------- --------- --------- --------- -----------
11,247 17,207 23,787 18,335 19,011
--------- --------- --------- --------- -----------
Income from operations.................................. 3,376 4,095 2,367 2,436 2,618
Other income/(expense)
Write-off of deferred charges......................... -- -- (675) -- --
Interest and other income............................. 102 11 171 6 494
Interest expense...................................... (299) (604) (1,325) (937) (849)
--------- --------- --------- --------- -----------
(197) (593) (1,829) (931) (355)
--------- --------- --------- --------- -----------
Income before income taxes.............................. 3,179 3,502 538 1,505 2,263
Income taxes............................................ -- 1,457 274 626 1,524
--------- --------- --------- --------- -----------
Net income.............................................. $ 3,179 $ 2,045 $ 264 $ 879 $ 739
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Net income per share:
Basic................................................. $ 4.33 $ 2.67 $ 0.26 $ 0.86 $ 0.58
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Diluted............................................... $ 0.46 $ 0.29 $ 0.04 $ 0.12 $ 0.09
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
CVC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B PREFERRED SERIES C
STOCK STOCK PREFERRED STOCK
---------------------- -------------------- ----------------------
NUMBER NUMBER NUMBER
OF OF OF
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- --------- --------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1995............................. 1,685 $ 1,685 60,492 $ 8,355
Minimum pension liability..............................
Net income.............................................
----- --------- --------- --------- ----------- ---------
Balance at September 30, 1996.......................... 1,685 1,685 60,492 8,355 -- --
Issuance of common stock...............................
Minimum pension liability..............................
Deferred compensation..................................
Amortization of deferred compensation..................
Net income.............................................
----- --------- --------- --------- ----------- ---------
Balance at September 30, 1997.......................... 1,685 1,685 60,492 8,355 -- --
Issuance of common stock...............................
Minimum pension liability..............................
Deferred compensation..................................
Amortization of deferred compensation..................
Net income.............................................
----- --------- --------- --------- ----------- ---------
Balance at September 30, 1998.......................... 1,685 1,685 60,492 8,355 -- --
(UNAUDITED)
Issuance of preferred stock and warrant................ 100,000 $ 9,855
Issuance of common stock...............................
Minimum pension liability..............................
Deferred compensation..................................
Amortization of deferred compensation..................
Net income.............................................
----- --------- --------- --------- ----------- ---------
Balance at June 30, 1999............................... 1,685 $ 1,685 60,492 $ 8,355 100,000 $ 9,855
----- --------- --------- --------- ----------- ---------
----- --------- --------- --------- ----------- ---------
<CAPTION>
COMMON STOCK
-------------------------------------
NUMBER UNAMORTIZED
OF PAR PAID-IN DEFERRED
SHARES VALUE CAPITAL WARRANT COMPENSATION
----------- ------------- --------- ----------- -------------
<S> <C> <C>
Balance at October 1, 1995............................. 735,160 $ 7 $ 450
Minimum pension liability..............................
Net income.............................................
----------- --- --------- --- ------
Balance at September 30, 1996.......................... 735,160 7 450
Issuance of common stock............................... 114,100 1 57
Minimum pension liability..............................
Deferred compensation.................................. 261 $ (261)
Amortization of deferred compensation.................. 7
Net income.............................................
----------- --- --------- --- ------
Balance at September 30, 1997.......................... 849,260 8 772 (254)
Issuance of common stock............................... 313,007 2 219
Minimum pension liability..............................
Deferred compensation.................................. 109 (109)
Amortization of deferred compensation.................. 111
Net income.............................................
----------- --- --------- --- ------
Balance at September 30, 1998.......................... 1,057,931 10 $ 1,100 (252)
(UNAUDITED)
Issuance of preferred stock and warrant................ $ 14
Issuance of common stock............................... 1,287,463 13 8,155
Minimum pension liability..............................
Deferred compensation.................................. (6) 6
Amortization of deferred compensation.................. 78
Net income.............................................
----------- --- --------- --- ------
Balance at June 30, 1999............................... 2,345,394 $ 23 $ 9,249 $ 14 $ (168)
----------- --- --------- --- ------
----------- --- --------- --- ------
<CAPTION>
MINIMUM
RETAINED PENSION
EARNINGS LIABILITY
--------- -----------
Balance at October 1, 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..................................
Amortization of deferred compensation..................
Net income............................................. 2,045
--------- -----
Balance at September 30, 1997.......................... 949 (87)
Issuance of common stock...............................
Minimum pension liability.............................. (44)
Deferred compensation..................................
Amortization of deferred compensation..................
Net income............................................. 264
--------- -----
Balance at September 30, 1998.......................... 1,213 (131)
(UNAUDITED)
Issuance of preferred stock and warrant................
Issuance of common stock...............................
Minimum pension liability..............................
Deferred compensation..................................
Amortization of deferred compensation..................
Net income............................................. 739
--------- -----
Balance at June 30, 1999............................... $ 1,952 $ (131)
--------- -----
--------- -----
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
CVC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities:
Net income............................................ $ 3,179 $ 2,045 $ 264 $ 878 $ 739
Adjustments to reconcile net income to net cash (used)
provided by operating activities:.........................
In process R&D write-off.................................. -- -- -- -- 1,174
Depreciation and amortization............................. 937 1,285 2,167 1,473 2,860
Provision for deferred taxes.............................. (452) 461 (259) -- --
Changes in operating assets and liabilities -
Accounts receivable (including related party)........... (579) (3,406) 1,262 (874) (6,697)
Inventories............................................. (6,433) (5,767) 1,721 530 3,388
Other assets............................................ 212 (405) (931) (1,087) 286
Accounts payable........................................ 3,198 4,556 (2,772) (3,412) (2,274)
Advances from customers (including related party)....... (2,585) 3,035 (7,485) (5,678) 2,999
Other liabilities....................................... 1,004 1,299 (890) (123) (1,105)
--------- --------- --------- --------- ---------
Total adjustments..................................... (4,698) 1,058 (7,187) (9,171) 631
--------- --------- --------- --------- ---------
Net cash (used) provided by operating activities...... (1,519) 3,103 (6,923) (8,293) 1,370
--------- --------- --------- --------- ---------
Cash flows from investing activities:
Capital expenditures...................................... (3,680) (2,805) (4,817) (4,281) (3,556)
--------- --------- --------- --------- ---------
Net cash used in investing activities................. (3,680) (2,805) (4,817) (4,281) (3,556)
--------- --------- --------- --------- ---------
Cash flows from financing activities:
Net proceeds from (payments on) line of credit............ -- 527 3,612 4,049 (2,433)
Payments on notes payable (including related party)....... -- -- (1,127) (960) (1,500)
Proceeds from long-term debt.............................. 3,000 2,000 8,000 8,000 --
Payments on long-term debt and capital lease
obligations............................................. (229) (1,452) (1,021) (814) (3,143)
Net proceeds from issuance of preferred stock............. -- -- -- -- 9,855
Net proceeds from issuance of common stock................ -- 58 221 244 68
--------- --------- --------- --------- ---------
Net cash provided by financing activities............. 2,771 1,133 9,685 10,519 2,847
--------- --------- --------- --------- ---------
Net (decrease) increase in cash and cash equivalents........ (2,428) 1,431 (2,055) (2,055) 661
Cash and cash equivalents, beginning of period.............. 3,158 730 2,161 2,161 106
--------- --------- --------- --------- ---------
Cash and cash equivalents, end of period.................... $ 730 $ 2,161 $ 106 $ 106 $ 767
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing transaction:
Equipment capitalized from inventory...................... $ -- $ -- $ 1,828 $ 1,828 $ 645
Cash paid during the year for:
Interest.................................................. $ 346 $ 542 $ 1,287 $ 895 $ 867
Income taxes.............................................. $ 147 $ 782 $ 1,430 $ 1,428 $ 1,100
</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, Alexandria, Virginia, Fremont,
California, Garland, Texas, Minneapolis, Minnesota, Japan and Northern Ireland.
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 Convertible Preferred Stock
automatically converts into common stock and the Company's Series C Convertible
Preferred Stock automatically converts into common stock and Series D Redeemable
Preferred Stock concurrent with the closing of an initial public offering (Note
10). 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 stock is assumed to have been
converted as of June 30, 1999.
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
12). 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 1998, as the maturities 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. Provisions
for estimated product warranty and installation costs are recorded at the time
revenue is recognized. The Company generally warrants its new systems for 15
months from the date of shipment. Such warranties provide that new systems are
free from defects in materials and workmanship under normal use. Warranty and
installation costs incurred by the Company and the related warranty and
installation accruals for each of the three years in the period ended September
30, 1998 are immaterial.
Amounts received from customers in advance of product shipment are
classified as customer advances.
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 income.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes the costs associated with purchased software and
subsequently amortizes such costs on a units-of-production basis over their
estimated remaining economic life, generally 3 years. These amounts, which are
included in other assets, are reported at the lower of the unamortized cost or
net realizable value and are immaterial.
F-8
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 financial
statement carrying amounts and the tax basis of such assets and liabilities.
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 June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (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 is not expected to impact the
Company's financial position or results of operations.
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 stock split 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.
On August 30, 1999, the Company declared a 2-for-3 reverse stock split
effective for stockholders of record upon the closing of an initial public
offering. This reverse stock split will decrease the number of common shares
outstanding by 1,172,697. All references in the consolidated financial
statements referring to share prices, conversion rates, per share amounts, stock
option plans and common shares issued and/or outstanding have been adjusted
retroactively for the 2-for-3 reverse stock split.
F-9
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INTERIM RESULTS (UNAUDITED)
The interim financial statements as of June 30, 1999 and for the nine months
ended June 30, 1998 and 1999 are unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and results of operations for the interim periods. The operating
results for the nine months ended June 30, 1999 are not necessarily indicative
of the results to be expected for the full year ending September 30, 1999.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the
current year presentation.
NOTE 2--ACQUISITION (UNAUDITED)
On May 10, 1999, the Company acquired Commonwealth Scientific Corporation
(Commonwealth), a Virginia based company which offers ion beam modules and
systems which provide ion beam etching, deposition and diamond-line carbon (DLC)
processes and ion beam sources for research and development (R&D) and original
equipment manufacturer customers. The purchase price of $8,498,000 was comprised
of the issuance of 1,268,797 shares of the Company's common stock, exchanged and
assumed options in Commonwealth for options to purchase 286,223 shares of the
Company's common stock, and related acquisition costs. The issuance of the
Company's stock was recorded at fair market value, and the assumed options were
recorded at fair market value using the Black-Scholes option pricing model. The
acquisition was accounted for using the purchase method of accounting. The
purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Net tangible assets of Commonwealth................................. $ 6,298
Purchased in-process R&D............................................ 1,174
Intangible assets:
Workforce in place................................................ 704
Current technology................................................ 265
Goodwill.......................................................... 57
---------
Total purchase price................................................ $ 8,498
---------
---------
</TABLE>
The net tangible assets includes a write-up Commonwealth's property to fair
market value of $600,000 and the recognition of a restructuring liability
approximating $639,000. The restructuring liability relates to the costs of
exiting certain leased facilities and the reduction of Commonwealth's workforce
by approximately 20%.
The purchased in-process R&D includes the value of products in the
development stage, which have not reached technological feasibility and for
which there is no alternative future use. In accordance with applicable
accounting rules, purchased in-process R&D is required to be expensed.
Accordingly, the amount of $1,174,000 was expensed in the third quarter of
fiscal 1999.
The amortization period of intangible assets related to workforce in place,
current technology and goodwill are ten years, five years and seven years,
respectively.
F-10
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION (UNAUDITED) (CONTINUED)
The operating results of Commonwealth have been included in the Company's
consolidated statement of operations from the date of acquisition. The unaudited
pro forma results below assume the acquisition occurred on October 1, 1997 and
October 1, 1998 (in thousands):
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------------
FOR THE NINE MONTHS
FOR THE YEAR ENDED ENDED
SEPTEMBER 30, 1998 JUNE 30, 1999
------------------ ------------------------
<S> <C> <C>
Net sales....................................... $ 112,060 $ 74,721
Operating income (loss)......................... 4,782 (639)
Net income (loss)............................... 2,196 (1,083)
Net income (loss) per share:
--Basic....................................... $ 0.96 $ (0.47)
--Diluted..................................... $ 0.26 $ (0.47)
</TABLE>
The pro forma results include amortization of the intangibles presented
above, cost reductions related to the restructuring charges and exclude the
write-off of the in-process R&D in each period. The pro forma results are not
necessarily indicative of what actually would have occurred if the acquisition
had been completed as of the beginning of each of the fiscal periods presented,
nor are they necessarily indicative of future consolidated results.
NOTE 3--INVENTORIES
Inventories consisted of the following at September 30, 1997 and 1998 and
June 30, 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- -----------
<S> <C> <C> <C>
(UNAUDITED)
Component parts............................................ $ 11,268 $ 8,976 $ 15,866
Work-in-process............................................ 6,169 5,615 11,451
Finished goods............................................. 5,208 4,917 3,710
--------- --------- -----------
22,645 19,508 31,027
Less--reserve for obsolescence......................... (285) (697) (1,719)
--------- --------- -----------
$ 22,360 $ 18,811 $ 29,308
--------- --------- -----------
--------- --------- -----------
</TABLE>
F-11
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30,
1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Land.................................................................... $ 625 $ 625
Buildings and improvements.............................................. 5,117 5,954
Machinery and equipment................................................. 6,235 10,358
--------- ---------
11,977 16,937
Less--Accumulated depreciation........................................ (2,847) (4,721)
--------- ---------
9,130 12,216
Construction-in-process................................................. -- 1,685
--------- ---------
$ 9,130 $ 13,901
--------- ---------
--------- ---------
</TABLE>
Construction-in-process is mainly comprised of machinery and equipment which
will be placed in service subsequent to September 30, 1998.
Included in property, plant and equipment is $2,220,000 for a building held
under a capital lease agreement at September 30, 1997 and 1998. Related
accumulated amortization at September 30, 1997 and 1998 was $347,000 and
$403,000, respectively.
Total depreciation and amortization expense on plant and equipment was
$727,000, $1,215,000 and $1,874,000 in 1996, 1997 and 1998, respectively. Total
depreciation expense on assets under capital leases was $83,000 in 1996 and
$56,000 in 1997 and 1998, respectively.
NOTE 5--OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at September 30, 1997
and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accrued payroll and benefits............................................... $ 1,176 $ 874
Other current liabilities.................................................. 3,238 2,574
--------- ---------
$ 4,414 $ 3,448
--------- ---------
--------- ---------
</TABLE>
NOTE 6--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 required monthly payments of principal
and interest at 8% (approximately $19,000 in total). In September 1997, the
Company refinanced 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. 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
F-12
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
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 likely 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 $2,242,400 at
September 30, 1998.
In December 1990, the Company borrowed $254,000 from former stockholders of
CVC Products, Inc. The obligation, which required annual interest payments at
9%, was paid in full in 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 9%. The $1,000,000 note was paid in full in November 1997 and the $1,500,000
note was paid in full in January 1999. Interest expense on these notes totaled
$225,000 in 1996 and 1997 and $138,000 in 1998.
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.
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.
In April 1998, the Company borrowed $8,000,000 from a commercial bank. The
seven year term loan requires monthly payments of principal and interest at
8.39% until April 2005. The obligation is secured by certain personal property
and other intangibles of the Company including patents, patent applications and
trademarks.
The Company also has a bank line of credit at September 30, 1998 which
allows for maximum borrowings of $10,000,000 based on certain financial
criteria. Maximum allowable borrowings based on the criteria at September 30,
1998 were $5,926,000. Borrowings under the agreements are at an interest rate of
prime plus 1/2%. There was approximately $4,139,000 outstanding under the line
of credit at September 30, 1998.
The debt agreements contain 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, 1998 and June 30, 1999.
F-13
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
A summary of the notes payable and long-term debt outstanding at September
30, 1997 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Term loan, 5 year........................................................ $ 2,450 $ 1,850
Term loan, 7 year........................................................ -- 7,624
Notes payable due former stockholders.................................... 127 --
Notes payable due related party.......................................... 2,500 1,500
Mortgage credit facility................................................. 2,000 1,955
Borrowings on line of credit............................................. 527 4,139
--------- ---------
7,604 17,068
Less--Current portion................................................ (2,295) (5,689)
--------- ---------
$ 5,309 $ 11,379
--------- ---------
--------- ---------
</TABLE>
The aggregate maturities for debt over the next five years and thereafter
are as follows (in thousands):, 1999--$5,689, 2000--$3,117, 2001--$1,709,
2002--$1,257, and 2003 and thereafter--$5,296.
NOTE 7--INCOME TAXES
The components of income taxes for the years ended September 30, 1996, 1997
and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.......................................................... $ 145 $ 604 $ 417
State............................................................ 307 392 116
--------- --------- ---------
452 996 533
Deferred:
Federal.......................................................... (145) 475 (211)
State............................................................ (307) (14) (48)
--------- --------- ---------
(452) 461 (259)
--------- --------- ---------
$ -- $ 1,457 $ 274
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-14
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
The significant components of deferred tax assets and liabilities at
September 30, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................................... $ 228 $ 175
Inventories............................................................ 266 455
State and federal tax credits.......................................... 100 122
Allowance for doubtful accounts........................................ 59 138
Accrued compensation and benefits...................................... 182 240
Other accruals......................................................... 707 577
--------- ---------
1,542 1,707
--------- ---------
Deferred tax liabilities:
Unamortized inventory accounting change................................ (805) (605)
Property, plant and equipment.......................................... (832) (962)
--------- ---------
(1,637) (1,567)
--------- ---------
Deferred tax asset valuation allowance................................... (155) (102)
--------- ---------
Net deferred tax asset (liability)....................................... $ (250) $ 38
--------- ---------
--------- ---------
</TABLE>
The differences between income taxes (benefit) at the U.S. statutory rate
and the effective rate for the years ended September 30, 1996, 1997 and 1998 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Provision at federal statutory rate............................... $ 1,081 $ 1,191 $ 183
State taxes, net of federal benefit............................... 228 213 45
Permanent items................................................... 31 53 101
Release of valuation allowance.................................... (1,459) -- (53)
Other............................................................. 119 -- (2)
--------- --------- ---------
Income tax expense................................................ $ -- $ 1,457 $ 274
--------- --------- ---------
--------- --------- ---------
</TABLE>
During 1996 and 1998, the valuation allowance, which relates to net
operating loss carryforwards and state investment credits, was reduced by
$1,459,000 and $53,000,, respectively, due to the increased likelihood the
benefits will be recognized.
The net operating tax loss carryforwards of approximately $435,000 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-15
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8--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 $80,000, $92,000 and $222,000 in fiscal years 1996, 1997 and 1998,
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. Approximately $122,000 was included in other liabilities at
September 30, 1997 and 1998 for accrued pension costs. Further, 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.
NOTE 9--POSTRETIREMENT HEALTH CARE BENEFITS
The Company provides health care and life insurance benefits to certain
retired hourly employees as well as health care benefits to salaried retirees
employed prior to December 31, 1996. 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 for the years ended September 30,
1996, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Service cost.......................................................... $ 31 $ 68 $ 90
Interest cost on benefit obligation................................... 81 82 78
Amortization.......................................................... 56 56 56
--------- --------- ---------
Retiree health care cost.............................................. $ 168 $ 206 $ 224
--------- --------- ---------
--------- --------- ---------
</TABLE>
An analysis of amounts shown in the consolidated balance sheet at September
30, 1997 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................................ $ 852 $ 810
Active participants..................................................... 346 465
--------- ---------
1,198 1,275
Unrecognized prior service cost........................................... -- (39)
Unrecognized net gain..................................................... 18 73
Unrecognized transition obligation........................................ (1,000) (944)
--------- ---------
Retirement benefit liability.............................................. $ 216 $ 365
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9--POSTRETIREMENT HEALTH CARE BENEFITS (CONTINUED)
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 rate of
4.7% in 1998 and grades down uniformly to 3.6% 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, 1998 accumulated postretirement benefit obligation by $180,000,
and the 1998 net postretirement health care cost by $36,000. The weighted
average rate of compensation increase and discount rate used in determining the
accumulated postretirement benefit obligation was 3% and 6.75%, respectively.
NOTE 10--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 1,600 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 converted to
2,696,000 shares of common stock upon the closing of an initial public offering
with a price per share in excess of $12.50 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 40 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 2,419,680 shares of common stock upon the closing
of an initial public offering with a price per share in excess of $12.50 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 790,760 shares of the Company's Common
Stock at an exercise price of $5.58 per share in lieu of Series B Preferred
Stock.
(UNAUDITED) In December 1998, the Company issued 100,0000 shares of Series C
Non-Cumulative Convertible Preferred Stock (Series C Preferred Stock). The
Series C Preferred Stock is convertible at any time at the option of the holder
into common stock at the rate of 10.1626 shares of common stock for each share
of Series C Preferred Stock. Preferred voting rights are one vote for each share
of common stock into which the preferred shares may be converted. The Series C
Preferred Stock will be automatically converted to 1,016,260 shares of common
stock as well as 100,000 shares of Series D Redeemable Preferred Stock upon the
closing of an initial public offering with a price per share in excess of $12.50
and aggregate gross proceeds of $10,000,000.
F-17
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
(UNAUDITED) In connection with the issuance of Series C Preferred Stock, the
holder was granted a seven-year warrant to purchase an aggregate of 133,333
shares of common stock at $15 per share. The warrant cannot be exercised until
December 10, 2001. Additionally, the warrant will no longer be exercisable upon
an initial public offering. A fair value of $14,000 was assigned to this warrant
at the time of purchase.
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, and total authorized preferred stock to
502,500 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. Options vest over a 3 to 5 year period and expire after 10 years from the
date of grant.
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 833,333 shares of common stock for
issuance under the Plan. At September 30, 1998, options for 523,333 shares were
available for grant under the Plan.
During fiscal 1997 and 1998, approximately 203,333 and 160,000 options,
respectively, 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. During fiscal 1997 and 1998, compensation expense
recognized in the statements of income approximated $7,000 and $111,000,
respectively.
Under the provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation" the Company has elected to continue to account for its employee
stock plans in accordance with the provisions of APB Opinion No. 25 which
requires compensation costs to be recognized based on the intrinsic value of
options at the grant date. Had compensation cost for the Company's stock option
plan been determined based on the fair value at the grant date for awards in
fiscal years 1996, 1997 and 1998 consistent with the provisions of SFAS No. 123,
the Company's net earnings and earnings per share would have been the following
(in thousands, except per share amounts):
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss) As reported.......................................... $ 3,179 $ 2,045 $ 264
Pro forma............................................ $ 3,169 $ 1,954 $ (12)
Basic earnings per share As reported.......................................... $ 4.33 $ 2.67 $ 0.26
Pro forma............................................ $ 4.31 $ 2.55 $ (0.01)
Diluted earnings per share As reported.......................................... $ 0.46 $ 0.29 $ 0.04
Pro forma............................................ $ 0.46 $ 0.28 $ 0.00
</TABLE>
F-18
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model (minimum value method) with the weighted
average assumptions of risk free interest rates (based on anticipated length of
time until exercise) ranging from 5.32% to 6.69% and expected lives of five
years.
A summary of the status of the Company's stock option plan for the three
years ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- -----------------
<S> <C> <C>
Outstanding at October 1, 1995................................. 1,441,840 $ 0.93
Granted.................................................... 194,200 $ 4.04
Canceled................................................... 51,000 $ 1.37
----------
Outstanding at September 30, 1996.............................. 1,585,040 $ 1.32
Granted.................................................... 406,600 $ 4.76
Canceled................................................... 118,000 $ 1.86
Exercised.................................................. 120,200 $ 0.74
----------
Outstanding at September 30, 1997.............................. 1,753,440 $ 2.12
Granted.................................................... 427,667 $ 7.80
Canceled................................................... 205,995 $ 9.08
Exercised.................................................. 199,338 $ 0.84
----------
Outstanding at September 30, 1998.............................. 1,775,774 $ 2.82
Assumed in Acquisition..................................... 286,223 $ 5.97
Granted.................................................... 250,667 $ 6.00
Cancelled.................................................. 49,275 $ 6.95
Exercised.................................................. -- --
---------- -----
Outstanding at June 30, 1999, unaudited........................ 2,263,389 $ 3.48
</TABLE>
The weighted average fair value of options granted during fiscal 1996 was
$.73. The weighted-average fair value of options granted during fiscal 1997 and
1998 was $1.29
The weighted-average exercise price of options granted to employees during
1997 and 1998 at an amount which was less than fair market value was $5.30 and
$5.73, respectively. The weighted-average fair value of such options granted in
1997 and 1998 was $2.67 and $2.37, respectively.
A summary of the options outstanding and exercisable as of September 30,
1998 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
EXERCISE OPTIONS CONTRACTUAL PRICE PER OPTIONS PRICE PER
PRICES PER SHARE OUTSTANDING LIFE IN YEARS SHARE OUTSTANDING SHARE
- ---------------- ----------- --------------- ----------- ----------- -----------
0$.63-$ 1.25.... 848,507 3.4 $ 0.66 848,507 $ 0.66
3$.18-$ 4.17.... 444,333 7.6 $ 3.78 275,267 $ 3.51
4$.85-$12.00.... 482,933 9.2 $ 5.93 39,733 $ 5.42
--
----------- ----- ----------- -----
0$.63- 12.00.... 1,775,773 6.0 $ 2.82 1,163,507 $ 1.50
</TABLE>
F-19
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11--EARNINGS PER SHARE
During the first quarter of fiscal 1998, the Company adopted the provisions
of SFAS 128, "Earnings per Share." This statement replaces the presentation of
primary earnings per share with a presentation of basic earnings per share and
also requires dual presentation of diluted earnings per share. Basic earnings
per share (EPS) is computed by dividing income available to common shareholders
by the weighted average number of common shares actually outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.
The following table illustrates the calculation of both basic and diluted
EPS for the years ended September 30, 1996, 1997 and 1998 and for the nine
months ended June 30, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, JUNE 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income available to common shareholders.................... $ 3,179 $ 2,045 $ 264 $ 879 $ 739
Weighted average number of common shares....................... 735 765 1,021 1,021 1,280
--------- --------- --------- --------- ---------
Basic earnings per share....................................... $ 4.33 $ 2.67 $ 0.26 $ 0.86 $ 0.58
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
DILUTED EARNINGS PER SHARE
Net income available to common shareholders.................... $ 3,179 $ 2,045 $ 264 $ 879 $ 739
--------- --------- --------- --------- ---------
Weighted average number of common shares....................... 735 765 1,021 1,021 1,280
Common equivalent shares related to stock options and
convertible preferred stock.................................. 6,179 6,227 6,049 6,035 6,764
--------- --------- --------- --------- ---------
Weighted average common and common equivalent shares........... 6,914 6,992 7,070 7,056 8,044
--------- --------- --------- --------- ---------
Diluted earnings per share..................................... $ 0.46 $ 0.29 $ 0.04 $ 0.12 $ 0.09
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
Certain antidilutive outstanding options and warrants were excluded from the
computation of diluted EPS since their exercise prices exceed the average market
price of the common shares during the period. The antidilutive stock options and
warrants so excluded at the end of September 30, 1996, 1997 and 1998 and their
associated exercise prices are summarized below. The options and warrants expire
at various times between 2002 and 2008.
<TABLE>
<CAPTION>
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
Number of options and warrants................. 794,000 815,333 836,000
Exercise price................................. $ 4.04-$5.58 $ 5.58-$5.73 $ 5.58-$12.00
</TABLE>
NOTE 12--TRANSACTIONS WITH RELATED PARTIES
At September 30, 1997 and 1998, the Company had borrowings of $2,500,000 and
$1,500,000, respectively, from a company whose president is a director and
shareholder of the Company (Note 6). The Company has renegotiated the $1,500,000
note to extend the term to November 1999. 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 and a
F-20
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--TRANSACTIONS WITH RELATED PARTIES (CONTINUED)
significant stockholder. Revenues, cost of goods sold, accounts receivable and
unearned revenue associated with transactions between the Company and Seagate
are reported as related party in the consolidated 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 13--SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
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. For the year ended September 30, 1998, sales
to the Company's three largest customers comprised 31%, 16% and 11% of revenues,
respectively.
Export sales to customers (including related party sales) outside the United
States represent 38%, 31% and 19% of the Company's revenues for the fiscal years
ended September 30, 1996, 1997 and 1998, respectively. These export sales were
made to the following geographic regions:
<TABLE>
<CAPTION>
EUROPE ASIA-PACIFIC CANADA TOTAL
------------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
1996.................................... $ 6,238,000 $ 3,013,000 $ 33,000 $ 9,284,000
1997.................................... 5,746,000 13,209,000 507,000 19,462,000
1998.................................... 13,220,000 12,643,000 26,000 25,889,000
</TABLE>
NOTE 14--COMMITMENTS
The Company leases various equipment and facilities under operating lease
agreements. Rental expense under operating lease agreements was approximately
$237,000, $289,000 and $774,000 in fiscal years 1996, 1997 and 1998,
respectively. The future minimum lease payments under non-cancelable lease
agreements are $1,041,000 in 1999, $959,000 in 2000, $793,000 in 2001, $193,000
in 2002 and $74,000 in 2003.
NOTE 15--WRITE-OFF OF DEFERRED CHARGES
During fiscal 1998, the Company incurred costs related to a potential
initial public offering. These costs were accounted for as a deferred asset with
the intent of deducting such amounts from contributed equity upon receipt of the
proceeds from the initial public offering. During the fourth quarter of fiscal
1998, the Company withdrew its intent to complete the public offering and,
accordingly, these costs were charged against current period earnings.
F-21
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and the Board of Directors of
Commonwealth Scientific Corporation:
We have audited the accompanying balance sheets of Commonwealth Scientific
Corporation (the "Company," a Virginia corporation), a wholly owned subsidiary
of CVC, Inc. (the "Parent," a Delaware corporation), as of March 31, 1998 and
1999, and the related statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended March 31, 1999. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Commonwealth Scientific
Corporation as of March 31, 1998 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended March 31, 1999,
in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN
Vienna, Virginia
May 17, 1999
F-22
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 378,920 $ 326,623
Accounts receivable, net of allowance for doubtful accounts of
$233,000 and $300,000 at March 31, 1998 and 1999,
respectively................................................... 5,556,183 3,160,366
Inventories...................................................... 15,601,983 13,837,715
Prepaid expenses and other current assets........................ 206,630 134,410
Income taxes receivable.......................................... -- 732,905
Deferred income taxes............................................ 456,188 539,070
---------- ----------
Total current assets......................................... 22,199,904 18,731,089
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land............................................................. 703,900 703,900
Building and improvements........................................ 839,153 882,025
Leasehold improvements........................................... 476,489 623,896
Manufacturing and test equipment................................. 5,191,647 6,332,468
Office furniture and fixtures.................................... 480,691 496,417
---------- ----------
7,691,880 9,038,706
Less--Accumulated depreciation and amortization.................. (3,503,079) (4,147,289)
---------- ----------
Net property and equipment................................... 4,188,801 4,891,417
---------- ----------
OTHER ASSETS....................................................... 67,497 55,631
---------- ----------
Total assets................................................. $26,456,202 $23,678,137
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-23
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------------
<S> <C> <C>
1998 1999
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................................................................. $ 4,387,666 $ 4,197,963
Accrued expenses................................................................. 2,209,071 3,632,967
Lines of credit.................................................................. 2,584,574 3,393,173
Current portion of long-term obligations......................................... 308,788 551,540
Deposits on sales contracts...................................................... 6,109,603 2,796,684
------------- -------------
Total current liabilities.................................................... 15,599,702 14,572,327
LONG-TERM OBLIGATIONS, net of current portion...................................... 1,677,718 2,067,830
DEFERRED INCOME TAX LIABILITY...................................................... 202,620 221,117
------------- -------------
Total liabilities............................................................ 17,480,040 16,861,274
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 10,000,000 shares authorized, 333,180 and 336,680
shares issued at March 31, 1998 and 1999, respectively......................... 333,180 336,680
Additional paid-in capital....................................................... 751,320 782,820
Retained earnings................................................................ 7,902,662 5,708,363
Treasury stock; 6,900 shares at cost............................................. (11,000) (11,000)
------------- -------------
Total stockholders' equity................................................... 8,976,162 6,816,863
------------- -------------
Total liabilities and stockholders' equity................................... $ 26,456,202 $ 23,678,137
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-24
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------------
<S> <C> <C> <C>
1997 1998 1999
-------------- -------------- --------------
NET SALES........................................................ $ 35,366,323 $ 33,982,554 $ 43,597,852
COST OF SALES.................................................... (23,445,963) (23,344,034) (34,473,248)
-------------- -------------- --------------
Gross profit............................................... 11,920,360 10,638,520 9,124,604
-------------- -------------- --------------
OPERATING EXPENSES:
Research and development....................................... 3,645,520 3,746,433 4,005,021
Selling and marketing.......................................... 2,376,572 3,013,517 3,408,480
General and administrative..................................... 1,447,319 1,635,329 2,072,667
Commissions.................................................... 1,558,193 1,509,848 1,992,786
-------------- -------------- --------------
Total operating expenses................................... 9,027,604 9,905,127 11,478,954
-------------- -------------- --------------
INCOME (LOSS) FROM OPERATIONS.................................... 2,892,756 733,393 (2,354,350)
INTEREST EXPENSE, NET............................................ (163,470) (239,036) (425,949)
-------------- -------------- --------------
INCOME (LOSS) BEFORE INCOME TAXES................................ 2,729,286 494,357 (2,780,299)
INCOME (PROVISION) TAX BENEFIT................................... (911,000) (151,000) 586,000
-------------- -------------- --------------
NET INCOME (LOSS)................................................ $ 1,818,286 $ 343,357 $ (2,194,299)
-------------- -------------- --------------
-------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
PAID-IN RETAINED TREASURY
COMMON STOCK CAPITAL EARNINGS STOCK TOTAL
-------------- ---------- ------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, March 31, 1996.................... $ 318,880 $ 614,900 $ 5,741,019 $ (10,600) $ 6,664,199
Exercise of stock options................ 4,000 43,720 -- -- 47,720
Net income............................... -- -- 1,818,286 -- 1,818,286
-------------- ---------- ------------- ---------- -------------
BALANCE, March 31, 1997.................... 322,880 658,620 7,559,305 (10,600) 8,530,205
Exercise of stock options................ 10,300 92,700 -- -- 103,000
Purchase of treasury stock............... -- -- -- (400) (400)
Net income............................... -- -- 343,357 -- 343,357
-------------- ---------- ------------- ---------- -------------
BALANCE, March 31, 1998.................... 333,180 751,320 7,902,662 (11,000) 8,976,162
Exercise of stock options................ 3,500 31,500 -- -- 35,000
Net loss................................. -- -- (2,194,299) -- (2,194,299)
-------------- ---------- ------------- ---------- -------------
BALANCE, March 31, 1999.................... $ 336,680 $ 782,820 $ 5,708,363 $ (11,000) $ 6,816,863
-------------- ---------- ------------- ---------- -------------
-------------- ---------- ------------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------------------
<S> <C> <C> <C>
1997 1998 1999
------------ ----------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................... $ 1,818,286 $ 343,357 $ (2,194,299)
Adjustments to reconcile net income to net cash (used in) provided by
operating activities-
Depreciation and amortization...................................... 620,589 930,211 1,249,908
(Gain) loss on disposal of equipment............................... 8,912 7,179 (148,229)
Changes in assets and liabilities:
Accounts receivable.............................................. (1,215,469) (672,405) 2,395,817
Inventories...................................................... 538,938 (5,417,308) 1,764,268
Prepaid expenses and other current assets........................ 38,564 (83,214) 72,220
Income taxes receivable/payable.................................. -- (217,443) (732,905)
Deferred income taxes............................................ (81,337) (30,506) (64,385)
Other assets..................................................... -- -- 11,866
Accounts payable and accrued expenses............................ 761,920 870,127 1,234,193
Income tax payable............................................... (225,416) -- --
Deposits on sales contracts...................................... (450,043) 2,988,206 (3,312,919)
------------ ----------- -------------
Net cash provided by (used in) operating activities............ 1,814,944 (1,281,796) 275,535
------------ ----------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................................. (2,004,735) (1,147,768) (1,952,524)
Proceeds from disposal of equipment.................................. -- -- 148,229
------------ ----------- -------------
Net cash used in investing activities.......................... (2,004,735) (1,147,768) (1,804,295)
------------ ----------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on line of credit......................................... 4,256,574 6,854,568 13,878,298
Payments on lines of credit.......................................... (4,080,865) (5,122,408) (13,069,699)
Borrowings on long-term obligations.................................. 20,000 1,012,000 1,082,140
Payments on long-term obligations.................................... (248,512) (290,237) (449,276)
Exercise of stock options............................................ 47,720 103,000 35,000
Purchase of treasury stock........................................... -- (400) --
------------ ----------- -------------
Net cash (used in) provided by financing activities............ (5,083) 2,556,523 1,476,463
------------ ----------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................... (194,874) 126,959 (52,297)
CASH AND CASH EQUIVALENTS, beginning of year........................... 446,835 251,961 378,920
------------ ----------- -------------
CASH AND CASH EQUIVALENTS, end of year................................. $ 251,961 $ 378,920 $ 326,623
------------ ----------- -------------
------------ ----------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for--
Interest........................................................... $ 136,650 $ 186,245 $ 355,654
------------ ----------- -------------
------------ ----------- -------------
Income taxes....................................................... $ 1,217,747 $ 406,360 $ 205,875
------------ ----------- -------------
------------ ----------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-27
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BUSINESS
Commonwealth Scientific Corporation (the "Company"), a wholly owned
subsidiary of CVC, Inc. (the "Parent"), is engaged in the development,
production, sale, service, and repair of precision equipment for the purpose of
etching or deposition at submicron levels by means of ion beam technology. The
Company was acquired by CVC, Inc., on May 10, 1999 (see Note 13). The Parent is
committed to the necessary support of the operations and capital requirements of
the Company.
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates made by management include the adequacy
of reserves for doubtful accounts, obsolete and excess inventories, and customer
warranty obligations. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue is recognized when all significant risks of ownership are
transferred and all significant related acts of performance are completed, which
is generally upon shipment of products.
SIGNIFICANT CUSTOMER
During fiscal year 1997, 28, 14, and 11 percent of net sales were derived
from three customers. In fiscal year 1999, the Company had one customer who
accounted for 32 percent of net sales. No other customer accounted for more than
10 percent of net sales.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided using the straight-line method
for financial reporting purposes over the following estimated useful lives:
<TABLE>
<S> <C>
5 to 31.5
Building and improvements.................................... years
Manufacturing and test equipment............................. 5 years
Office furniture and fixtures................................ 5 to 7 years
</TABLE>
Repair and maintenance costs are charged to expense when incurred. Renewals
and betterments that significantly increase the useful life of the related asset
are capitalized. Leasehold improvements are amortized over the expected useful
life or the lease term, whichever is shorter.
The Company implemented Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, "during 1996. As of March 31, 1999, management
determined there had been no impairment of long-lived assets as defined by SFAS
No. 121.
The Company's anticipated gross revenues, the remaining estimated lives of
tangible assets, or both could be reduced significantly in the near term due to
changes in technology, available financing, or
F-28
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
competitive pressures in any of the Company's individual markets. As a result,
the carrying amount of long-lived assets could be reduced materially in the near
term.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are recognized as expenses in the period
incurred.
WARRANTY SERVICES
The Company recognizes the estimated cost of warranty obligations at the
time the related products are sold. A one-year warranty on materials and
workmanship is offered on products sold.
DEPOSITS ON SALES CONTRACTS
The Company negotiates progress payments on projects that require
significant engineering development and/or several months to complete.
CASH AND CASH EQUIVALENTS
For financial reporting purposes, the Company considers demand deposits and
all highly liquid investments with a maturity of three months or less to be cash
and cash equivalents. As of March 31, 1998 and 1999, cash equivalents consisted
principally of investments in overnight reverse repurchase agreements and
commercial paper. The Company maintains bank accounts with federally insured
financial institutions. At times, balances may exceed insured limits.
2. INVENTORIES:
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market. Work in progress and finished goods include
provisions for direct labor and manufacturing overhead. Inventories were
composed of the following as of March 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Raw materials.................................................. $ 7,006,170 $ 7,247,963
Work in progress............................................... 8,062,980 6,666,877
Finished goods................................................. 1,035,053 852,875
------------- -------------
16,104,203 14,767,715
Less--Inventory reserve........................................ (502,220) (930,000)
------------- -------------
$ 15,601,983 $ 13,837,715
------------- -------------
------------- -------------
</TABLE>
The Company's products are subject to technological change and changes in
the Company's competitive market. Management has provided reserves for excess
and obsolete inventories. It is possible that new product launches could result
in unforeseen changes in inventory requirements for which no reserve has been
provided.
F-29
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
3. ACCRUED LIABILITIES:
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Commissions payable............................................... $ 540,162 $ 914,872
Vacation accrual.................................................. 406,674 420,683
Installation and warranty accrual................................. 280,000 895,019
Accrued payroll................................................... 462,416 373,397
Other............................................................. 519,819 1,028,996
------------ ------------
Total......................................................... $ 2,209,071 $ 3,632,967
------------ ------------
------------ ------------
</TABLE>
4. LINES OF CREDIT:
The Company has a bank line of credit, subject to annual approval, which
provides for borrowings up to the lesser of $1,800,000 or an amount equal to 70
percent of eligible accounts receivable that have been outstanding not more than
90 days. Amounts borrowed under the line are payable on demand. Interest accrues
at the bank's prime rate plus 0.5 percent (8.25 percent at March 31, 1999) and
is payable monthly. The amount borrowed on the line of credit was approximately
$1,385,000 and $693,000 at March 31, 1998 and 1999, respectively.
The Company has two bank lines of credit for inventory that provide for
borrowings up to $3,500,000. Amounts borrowed under these lines of credit are
payable on due dates between June 2001 and January 2002. Interest accrues at the
bank's prime rate plus 1.0 percent (8.75 percent at March 31, 1999) and is
payable monthly. The amount borrowed on the line of credit was $1,200,000 and
$2,700,000 at March 31, 1998 and 1999, respectively.
All lines of credit discussed above are collateralized by the same assets as
the notes payable to a bank discussed in Note 5. One of the inventory lines of
credit is personally guaranteed by the president of the Company in an amount up
to $2,000,000. The remaining amounts outstanding under the lines of credit,
together with the long-term obligations described below, are guaranteed by the
president of the Company in an amount up to $1,000,000. As further described in
Note 13, all amounts outstanding under these lines of credit were paid in full
subsequent to March 31, 1999.
F-30
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
5. LONG-TERM OBLIGATIONS:
Long-term obligations as of March 31, 1998 and 1999, are summarized as
follows:
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
Equipment loan payable to a bank, bearing interest at the bank's prime rate plus 0.5%
(8.25% at March 31, 1999). Principal payments of $24,764 plus interest are payable
monthly. The note matures in October 2004........................................... $ 1,956,369 $ 1,659,199
Equipment loan payable to a bank, bearing interest at the bank's prime rate plus 0.5%
(8.25% at March 31, 1999). Principal payments of $11,917 plus interest are payable
monthly. The note matures in November 2003.......................................... -- 638,333
Automobile loan payable to a bank, bearing interest at the bank's prime rate plus 0.5%
(8.25% at March 31, 1999). Principal payments of $417 plus interest are payable
monthly. The note matures in December 2000.......................................... 13,750 8,751
Future minimum payments under capital leases, payable through March 2002.............. 18,535 355,105
------------ ------------
1,988,654 2,661,388
Less--Interest included in capital lease payments..................................... (2,148) (42,018)
------------ ------------
Total............................................................................. 1,986,506 2,619,370
Less--Current portion................................................................. (308,788) (551,540)
------------ ------------
$ 1,677,718 $ 2,067,830
------------ ------------
------------ ------------
</TABLE>
The bank notes and lines of credit are secured by all the Company's present
and future fixtures, equipment, supplies, inventory, work in progress, accounts
receivable and contract rights, and a first lien deed of trust on the Company's
real property and improvements. These borrowings are personally guaranteed by
the president of the Company in an amount up to $1,000,000 pursuant to the
guarantee on the lines of credit described in Note 4. According to the terms of
the loan agreements, the Company must satisfy various covenants, including a
debt to equity ratio of less than 2 to 1, a current ratio of greater than 1 to
1, a net worth of at least $7,500,000, and debt service coverage of greater than
1 to 1 among other restrictions. The Company was not in compliance with the
tangible net worth and debt service coverage ratios, consignments, sale and
transfer of assets, and capital expenditure and lease obligation covenants as of
March 31, 1999. The Company received a waiver from the bank for these covenant
violations in April 1999.
Future minimum principal payments under long-term obligations are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
MARCH 31,
------------
<S> <C>
2000............................................................................ $ 551,540
2001............................................................................ 553,422
2002............................................................................ 537,386
2003............................................................................ 440,170
2004............................................................................ 363,503
Thereafter...................................................................... 173,349
------------
$ 2,619,370
------------
------------
</TABLE>
F-31
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
5. LONG-TERM OBLIGATIONS: (CONTINUED)
As further described in Note 13, all amounts due under these bank loans were
paid in full subsequent to March 31, 1999.
6. STOCK AND STOCK OPTIONS:
During fiscal year 1985, the Company's stockholders approved a stock option
plan (the "Stock Option Plan") for key employees, officers, and directors of the
Company for 100,000 shares of stock, of which 76,150 shares were granted as of
March 31, 1999. The Company's stock option plan expired in fiscal year 1994. The
options outstanding under the Stock Option Plan are fully vested two years after
the grant date and are exercisable for three years.
Options issued after fiscal year 1994 but prior to March 1999 were issued
after the expiration of the Stock Option Plan and are classified as nonqualified
for tax purposes. The terms and conditions of these options are identical to
those options issued under the Stock Option Plan described above.
The options issued in March 1999 were also issued after the expiration of
the Stock Option Plan and are also classified as nonqualified for tax purposes.
These options vest immediately and are exercisable for five years.
The following table summarizes the Company's stock option activity for each
of the three years in the period ended March 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE PRICE PER SHARE
----------- ----------------- -----------------
<S> <C> <C> <C>
OPTIONS OUTSTANDING AT MARCH 31, 1996........................... 54,250 $ 12.13 $10.00--$15.00
Granted....................................................... -- -- --
Canceled/expired/forfeited.................................... (8,000) 10.85 10.85
Exercised..................................................... (4,000) 11.93 11.93
----------- ------ -----------------
OPTIONS OUTSTANDING AT MARCH 31, 1997........................... 42,250 12.40 10.00-- 15.00
Granted....................................................... -- -- --
Canceled/expired/forfeited.................................... (9,700) 10.77 10.00-- 15.00
Exercised..................................................... (10,300) 10.00 10.00
----------- ------ -----------------
OPTIONS OUTSTANDING AT MARCH 31, 1998........................... 22,250 14.21 10.00-- 15.00
Granted....................................................... 59,254 27.28 26.00-- 28.00
Canceled/expired/forfeited.................................... (7,050) 25.79 15.00-- 28.00
Exercised..................................................... (3,500) 10.00 10.00
----------- ------ -----------------
OPTIONS OUTSTANDING AT MARCH 31, 1999........................... 70,954 $ 24.18 $10.00--$28.00
----------- ------ -----------------
----------- ------ -----------------
</TABLE>
As of March 31, 1998 and 1999, 22,250 and 42,354 options, respectively, are
exercisable. The weighted-average remaining life for options outstanding at
March 31, 1999, was approximately four years.
The Financial Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," defines a fair value based method of accounting for an employee
stock option or similar equity instrument. Under the fair value based method,
compensation cost is measured at the grant date based on the value of the award
and is recognized over the service period.
F-32
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
6. STOCK AND STOCK OPTIONS: (CONTINUED)
SFAS No. 123 allows an entity to continue to use the intrinsic value method
as defined by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and management has elected to do so. Under the
intrinsic value method, compensation cost is the excess, if any, of the quoted
market price of the stock at grant date or other measurement date over the
amount an employee must pay to acquire the stock. The Company has elected to
continue to apply APB Opinion No. 25 to its stock-based compensation awards to
employees. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value based method of accounting had been applied. Accordingly, net (loss)
income would be as follows for each of the three years in the period ended March
31, 1999:
<TABLE>
<CAPTION>
AS REPORTED PRO FORMA
YEAR NET (LOSS) NET (LOSS)
ENDED INCOME INCOME
- -------------------------------------------------------------------- ------------- -------------
<S> <C> <C>
1997................................................................ $ 1,818,286 1,811,114
1998................................................................ 343,357 340,489
1999................................................................ (2,194,299) $ (2,439,258)
</TABLE>
The fair value of each option is estimated using the Black Scholes option
pricing model with the following assumption used for grants: no dividend yield,
no volatility, risk-free interest rate of 5.5 percent, and expected life of 5
years.
7. INCOME TAXES:
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." SFAS 109 requires the determination of deferred
tax liabilities and assets based on the differences between the financial
statement and income tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to reverse. The
measurement of a deferred tax asset is adjusted by a valuation allowance, if
necessary, to recognize tax benefits only to the extent that based on available
evidence it is more likely than not that they will be realized.
The (benefit) provision for income taxes consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
CURRENT:
Federal............................................... $ 933,000 $ 190,000 $ (500,000)
State................................................. 148,000 30,000 (57,000)
---------- ---------- -----------
1,081,000 220,000 (557,000)
LESS--GENERAL BUSINESS INCOME TAX CREDITS............... (116,000) (58,000) --
---------- ---------- -----------
965,000 162,000 (557,000)
---------- ---------- -----------
DEFERRED:
Federal............................................... (46,000) (9,000) (26,000)
State................................................. (8,000) (2,000) (3,000)
---------- ---------- -----------
(54,000) (11,000) (29,000)
---------- ---------- -----------
(BENEFIT) PROVISION FOR INCOME TAXES.................... $ 911,000 $ 151,000 $ (586,000)
---------- ---------- -----------
---------- ---------- -----------
</TABLE>
F-33
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
7. INCOME TAXES: (CONTINUED)
The components of the net deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
DEFERRED TAX ASSETS:
Warranty reserves................................................. $ 104,000 $ 305,000
Obsolescence reserves............................................. 186,000 344,000
Bad-debt reserves................................................. 86,000 111,000
Commission accrual................................................ -- 162,000
Vacation accrual.................................................. 125,000 104,000
Other............................................................. 55,000 31,000
Valuation allowance............................................... (100,000) (518,000)
----------- -----------
GROSS DEFERRED TAX ASSETS........................................... 456,000 539,000
DEFERRED TAX LIABILITIES:
Depreciation and amortization..................................... 202,000 221,000
----------- -----------
NET DEFERRED TAX ASSETS............................................. $ 254,000 $ 318,000
----------- -----------
----------- -----------
</TABLE>
A reconciliation of the statutory income tax rate to the effective tax rate
included in the statement of operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
<S> <C> <C> <C>
1997 1998 1999
------------ ---------- -------------
Income (Loss) before income tax.......................................... $ 2,729,286 $ 494,357 $ (2,780,299)
Tax rate................................................................. 34% 34% 34%
------------ ---------- -------------
Income tax expense (benefit) at statutory rate........................... 927,957 168,081 (945,302)
Increases (decreases) in tax resulting from:
State income taxes, net of Federal income tax benefit.................. 97,514 19,920 (37,620)
Other.................................................................. (114,471) (37,001) (21,078)
Change in valuation allowance.......................................... -- -- 418,000
------------ ---------- -------------
Actual tax expense (benefit)............................................. $ 911,000 $ 151,000 $ (586,000)
------------ ---------- -------------
------------ ---------- -------------
Effective tax rate....................................................... 33.4% 30.5% 21.1%
------------ ---------- -------------
------------ ---------- -------------
</TABLE>
8. COMMITMENTS AND CONTINGENCIES:
LEASES
In addition to the equipment under capital leases discussed in Note 5, the
Company has rental agreements for certain other real property and equipment
expiring at various dates through January 2002. The Company has the option to
purchase the equipment at termination of the lease for
F-34
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
$1. The Company incurred approximately $398,000 and $624,697 in rent expense in
fiscal years 1998 and 1999, respectively. Future minimum lease and rental
commitments are as follows:
<TABLE>
<S> <C>
2000.............................................................. $ 537,310
2001.............................................................. 242,154
2002.............................................................. 153,762
---------
$ 933,226
---------
---------
</TABLE>
PURCHASE COMMITMENTS
At March 31, 1999, the Company had contractual commitments to purchase
approximately $780,000 of inventory to be delivered within six months of fiscal
year end.
9. GEOGRAPHIC INFORMATION:
The information below summarizes the Company's product sales, service, and
other income for each of the fiscal years in the period ended March 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Domestic........................................ $ 13,913,015 $ 15,624,769 $ 27,058,936
International................................... 21,453,308 18,357,785 16,538,916
------------- ------------- -------------
$ 35,366,323 $ 33,982,554 $ 43,597,852
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
10. RELATED PARTY:
During 1998 and 1999, a company owned by a former officer of the Company
performed research and development activities on the Company's behalf. In
addition, the officer received royalties on sales of certain of the Company's
products. During fiscal years 1998 and 1999, the Company paid approximately
$656,000 and $894,000, respectively, under that arrangement.
11. EMPLOYEE BENEFIT PLAN:
The Company established an employee contribution plan (the "Benefit Plan"),
effective January 1, 1987, under Section 401(k) of the Internal Revenue Code.
Any employee who has attained age 21 and has completed one year of service with
the Company is eligible to participate. Each participant may contribute amounts
to the Benefit Plan, subject to limits by the Internal Revenue Service, in
pretax contributions ranging from 1 to 15 percent of base salary. The Company
will match 50 percent of each participant's contribution up to $500 per year. At
the end of each fiscal year, the Company may contribute a percentage of its
profits to the Benefit Plan. The Company made discretionary contributions of
$50,000 and $0 to the Benefit Plan for the years ended March 31, 1998 and 1999,
respectively.
12. THE YEAR 2000 ISSUE:
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1,
F-35
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
12. THE YEAR 2000 ISSUE: (CONTINUED)
2000, and if not addressed, the impact on operations and financial reporting may
range from minor errors to significant systems failure, which could affect an
entity's ability to conduct normal business operations. It is not possible to be
certain that all aspects of the Year 2000 Issue affecting an entity, including
those related to the efforts of customers, suppliers, or other third parties,
will be fully resolved.
13. SUBSEQUENT EVENTS:
On May 10, 1999, CVC, Inc., acquired all the outstanding common stock of the
Company. As consideration, CVC, Inc., gave to each holder of Company stock
6.03601 shares of its common stock for each share of Company common stock held,
subject to certain adjustments described below. The merger agreement between
CVC, Inc., CVC Acquisition Corp., Commonwealth Scientific Corporation, and
Certain Stockholders Thereof, dated April 1, 1999, provides for 975,000 shares
to be held in escrow pending determination of the final purchase price. As of
May 10, the Company adopted CVC, Inc.'s year-end of September 30, 1999. The
final purchase price is dependent upon a number of representations and
warranties, including minimum net worth requirements and tax and environmental
liability considerations.
In May 1999, CVC, Inc., repaid the entire balance (approximately $5,700,000
of principal and accrued interest) due under the Company's lines of credit, as
well as the long-term equipment and automobile loans payable to the Company's
bank. No further obligations exist under these debt instruments.
On April 1, 1999, the Company converted approximately $1.2 million in
accounts payable due to a creditor to an unsecured note payable, bearing
interest at 8 percent per annum. Beginning May 15, 1999, principal and interest
payments of $71,790 are payable monthly. Interest will accrue at a rate of 10
percent per annum in the event of the Company's failure to pay the amounts due
within ten days of the due date. Monthly installments shall continue until the
entire indebtedness is repaid; however, any remaining indebtedness, if not
sooner paid, shall be due and payable on October 15, 2000.
F-36
<PAGE>
3,500,000 SHARES
[LOGO]
COMMON STOCK
PROSPECTUS
, 1999
LEHMAN BROTHERS
PRUDENTIAL SECURITIES
SG COWEN
WARBURG DILLON READ LLC
<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.................................. 250,000
Legal fees and expenses......................................... 200,000
Printing and engraving expenses................................. 120,000
Transfer agent and registrar fees............................... 10,000
Miscellaneous................................................... 200,973
---------
Total....................................................... $ 860,000
---------
---------
</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.
The following figures give effect to a 20-1 stock split in December 1995, a
3-1 stock split in October 1997 and a 2-3 reverse stock split in September 1999.
During the fiscal year ended September 30, 1996, the Company granted options
to acquire an aggregate of 194,200 shares of common stock at an exercise price
of $4.04 to various directors, officers, employees and/or consultants.
On March 18, 1997, Mehrdad Moslehi, Senior Vice President and Chief
Technical Officer, purchased 20,000 shares of common stock for $12,500.
On March 18, 1997, Patrick Borrelli purchased 200 shares of common stock for
$808.
On April 1, 1997, the Company issued 9,900 shares of common stock to various
non-employee directors as payment of their annual retainer.
On June 9, 1997, Mehrdad Moslehi, Senior Vice President and Chief Technical
Officer, purchased 60,000 shares of common stock for $37,500.
On August 11, 1997, Yong Jin Lee purchased 20,000 shares of common stock for
$12,500.
On September 15, 1997, Cecil Davis purchased 20,000 shares of common stock
for $25,000.
During the fiscal year ended September 30, 1997, the Company granted options
to acquire an aggregate of 406,600 shares of common stock at exercise prices
ranging from $3.00 to $5.73 to various directors, officers, employees and/or
consultants.
On October 21, 1997, Rhen Zhou purchased 1,334 shares of common stock for
$5,389.
On October 31, 1997, Carla Reif purchased 667 shares of common stock for
$2,695.
On November 5, 1997, Cecil Davis purchased 33,333 shares of common stock for
$41,666.
II-2
<PAGE>
On November 18, 1997, Mehrdad Moslehi purchased 48,000 shares of common
stock for $30,240.
On December 2, 1997, Mehrdad Moslehi purchased 112,000 shares of common
stock for $70,360.
On December 8, 1997, Jeff Dobbs purchased 1,333 shares of common stock for
$5,385.
On December 8, 1997, George Heltz purchased 668 shares of common stock for
$2,699.
On March 24, 1998, Peter Schwartz purchased 667 shares of common stock for
$2,695.
During the fiscal year ended September 30, 1998, the Company granted options
to acquire an aggregate of 427,667 shares of common stock at exercise prices
ranging from $5.73 to $12.00 to various directors, officers, employees and/or
consultants.
On April 1, 1998, the Company issued 9,333 shares of common stock to various
non-employee directors as payment of their annual retainer.
In December 1998, the Company issued and sold 100,000 shares of Series C
Convertible Preferred Stock to Advent International Corporation for a price of
$10.00 per share. Upon completion of the offering, these shares are convertible
into 1,016,260 shares of such common stock. The Company also sold to Advent
International Corporation warrants to purchase an aggregate of 133,333 shares of
common stock at an exercise price of $15.00 during the four-year period
commencing on December 1, 2001, which warrant terminates upon consummation of
this offering. See "Certain Transactions" and "Description of Capital Stock."
In May 1999, the Company issued 1,268,796 shares of common stock, to former
shareholders of Commonwealth Scientific Corporation as part of its acquisition
of Commonwealth.
On May 14, 1999 the Company issued 10,667 shares of common stock to various
non-employee directors as payment of their annual retainer.
On July 2, 1999 Robert Matthews purchased 8,000 shares of common stock for
$10,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<C> <S>
1.1 Underwriting Agreement*
3.1 Amended and 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 Amended and Restated Registration Rights Agreement, dated May 10, 1999, 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.**
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.9 U.S. $1,000,000 Subordinated Promissory Note, dated November 14, 1990, between the
Registrant and Nikko Techno Co., Inc.**
10.10 U.S. $500,00 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 Agreement, dated September 30, 1996, by Registrant and M&T
Company**
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.**
10.27 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Giovanni Nocerino**
10.29 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Emilio O. Dicataldo**
10.30 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Mehrdad M. Moslehi**
10.31 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Christopher J. Mann**
10.32 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Richard J. Chicotka**
10.33 Securities Purchase Agreement, dated December 10, 1998, among the Registrant and
entities affiliated with Advent International Corporation.+
10.34 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Global Private Equity III Limited Partnership.+
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.35 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent PGGM Global Limited Partnership.+
10.36 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent GPE III Limited Partnership.+
10.37 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent Partners (NA) GPE III.+
10.38 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent Partners Limited Partnership.+
10.39 Merger Agreement, dated as of April 1, 1999, among the Registrant, CVC Acquisition
Corp., Commonwealth Scientific Corporation and the 5% Stockholders.+
10.40 Escrow Agreement, dated as of May 10, 1999, among the Registrant, Commonwealth
Scientific Corporation and M&T Company.+
10.41 Consulting Agreement, dated as of May 10, 1999, between the Registrant and George R.
Thompson, Jr.+
10.42 Union Agreement, dated October 31, 1998, between the Registrant and Local 342,
International Union of Electronic, Electrical, Salaried, Machine & Furniture
Workers.
10.43 Amended and Restated Stockholders Agreement, dated as of May 10, 1999, among the
Registrant and certain of its stockholders.
11.0 Computation of Earnings Per Share**
21.1 List of Subsidiary**
23.1 Consent of PricewaterhouseCoopers LLP +
23.2 Consent of Arthur Andersen 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
II-5
<PAGE>
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-6
<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 September 10, 1999.
<TABLE>
<S> <C> <C>
CVC, INC.
BY: /S/ CHRISTINE B. WHITMAN
-----------------------------------------
Christine B. Whitman
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each of the persons whose names
appear below appoint and constitute Christine B. Whitman and Emilio O.
DiCataldo, and each of them, his true and lawful attorney-in-fact and agent,
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to execute any and all amendments to
the within Registration Statement, and to sign any and all registration
statements relating to the same offering of the securities as this Registration
Statement that are filed pursuant to Rule 462(b) of the Securities Act of 1933,
as amended, and to file the same, together with all exhibits thereto, with the
Securities and Exchange Commission, the National Association of Securities
Dealers, Inc., and such other agencies, offices and persons as may be required
by applicable law, granting unto each said attorney-in-fact and agent, full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that each said attorney-in-fact and agent may lawfully do or cause to be done by
virtue hereof.
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 September 10, 1999 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
Chairman of the Board,
/s/ CHRISTINE B. WHITMAN Chief Executive Officer
- ------------------------------ and President (principal September 10, 1999
Christine B. Whitman executive officer)
Senior Vice President and
/s/ EMILIO O. DICATALDO Chief Financial Officer
- ------------------------------ (principal accounting and September 10, 1999
Emilio O. Dicataldo financial officer)
/s/ G. PATRICK BONNIE Director
- ------------------------------ September 10, 1999
G. Patrick Bonnie
/s/ ROBERT C. FINK Director
- ------------------------------ September 10, 1999
Robert C. Fink
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
/s/ JAMES GEATER Director
- ------------------------------ September 10, 1999
James Geater
- ------------------------------ Director
Douglas A. Kingsley , 1999
/s/ VICTOR E. MANN Director
- ------------------------------ September 10, 1999
Victor E. Mann
/s/ SEIYA MIYANISHI Director
- ------------------------------ September 10, 1999
Seiya Miyanishi
/s/ ANDREW C. PESKOE Director
- ------------------------------ September 10, 1999
Andrew C. Peskoe
/s/ GEORGE R. THOMPSON, JR. Director
- ------------------------------ September 10, 1999
George R. Thompson, Jr.
/s/ DONALD L. WAITE Director
- ------------------------------ September 10, 1999
Donald L. Waite
</TABLE>
<TABLE>
<S> <C>
*By: /s/ EMILIO O. DICATALDO
-------------------------------------------
Emilio O. DiCataldo
(ATTORNEY IN FACT)
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Underwriting Agreement*
3.1 Amended and 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 Amended and Restated Registration Rights Agreement, dated May 10, 1999, 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 Techno Co., Inc.**
10.10 U.S. $500,00 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 Agreement, dated September 30, 1996, by Registrant and M&T
Company**
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.**
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.27 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Giovanni Nocerino**
10.29 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Emilio O. Dicataldo**
10.30 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Mehrdad M. Moslehi**
10.31 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Christopher J. Mann**
10.32 Employment Agreement, dated as of December 15, 1997, between the Registrant and
Richard J. Chicotka**
10.33 Securities Purchase Agreement, dated December 10, 1998, among the Registrant and
entities affiliated with Advent International Corporation.+
10.34 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Global Private Equity III Limited Partnership.+
10.35 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent PGGM Global Limited Partnership.+
10.36 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent GPE III Limited Partnership.+
10.37 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent Partners (NA) GPE III.+
10.38 Common Stock Purchase Warrant, dated December 10, 1998, between the Registrant and
Advent Partners Limited Partnership.+
10.39 Merger Agreement, dated as of April 1, 1999, among the Registrant, CVC Acquisition
Corp., Commonwealth Scientific Corporation and the 5% Stockholders.+
10.40 Escrow Agreement, dated as of May 10, 1999, among the Registrant, Commonwealth
Scientific Corporation and M&T Company.+
10.41 Consulting Agreement, dated as of May 10, 1999, between the Registrant and George
R. Thompson, Jr.+
10.42 Union Agreement, dated October 31, 1998, between the Registrant and Local 342,
International Union of Electronic, Electrical, Salaried, Machine & Furniture
Workers.
10.43 Amended and Restated Stockholders Agreement, dated as of May 10, 1999, among the
Registrant and certain of its stockholders.
11.0 Computation of Earnings Per Share**
21.1 List of Subsidiary**
23.1 Consent of PricewaterhouseCoopers LLP+
23.2 Consent of Arthur Andersen 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
<PAGE>
Exhibit 10.7
CVC, INC.
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (the "Agreement") is made as of
May 10, 1999 by and among CVC, Inc., a Delaware corporation (the "Company"),
Seagate Technology, Inc., a Delaware corporation (the "Series B Purchaser"), the
stockholders of the Company listed on EXHIBIT A attached hereto (the "Existing
Purchasers") those persons listed on EXHIBIT B attached hereto (collectively,
the "Series C Purchasers") and George R. Thompson, Jr. (the "Commonwealth
Purchaser"); the Series B Purchaser, the Existing Purchasers, the Series C
Purchasers and the Commonwealth Purchaser being collectively referred to herein
as the "Purchasers" and individually as a "Purchaser."
RECITALS
WHEREAS, the Company, CVC Acquisition Corporation, a Virginia
corporation and wholly owned subsidiary of the Company ("Sub") and Commonwealth
Scientific Corporation, a Virginia corporation ("CSC") are entering into an
Agreement and Plan of Merger (the "Merger Agreement"), dated as of April 1,
1999, providing for the merger of Sub with and into CSC;
WHEREAS, pursuant to the Merger Agreement, the Commonwealth Purchaser
is receiving from the Company shares of its common stock, $.01 par value per
share (the "Common Stock") in exchange for all the shares of common stock of CSC
and rights to acquire such shares held by the Commonwealth Purchaser;
WHEREAS, the Company, the Existing Purchasers, the Series B Purchaser
and the Series C Purchasers entered into that certain Amended and Restated
Registration Rights Agreement, dated as of December 10, 1998 (the " Amended and
Restated Registration Rights Agreement"); and
WHEREAS, the obligations of the Company and the Commonwealth Purchaser
under the Merger Agreement are conditioned, among other things, upon the
execution and delivery of this Agreement, which amends and restates the Amended
and Restated Registration Rights Agreement, by the Company, the Series B
Purchaser, the Series C Purchasers, the Existing Purchasers and the Commonwealth
Purchaser;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth below, the Company and the Purchasers agree as follows:
1. CERTAIN DEFINITIONS.
As used in this Agreement, the following terms shall have the following
respective meanings:
"COMMISSION" shall mean the Securities and Exchange Commission
or any other federal agency at the time administering the Securities Act.
<PAGE>
"COMMON STOCK" shall mean the Common Stock of the Company, par
value $.01 per share.
"CONVERSION STOCK" means the Common Stock issued or issuable
pursuant to conversion of the Preferred Stock and the Warrant Shares.
"HOLDERS" shall mean (i) the Purchasers for so long as
Purchasers hold Registrable Securities, and (ii) any person holding Registrable
Securities under this Agreement to whom the rights of the Purchased Securities
have been transferred in accordance with Section 5.10.
"INITIATING HOLDERS" shall mean any Series B Holders who own
in the aggregate not less than 40% of the Registrable Securities held by all
Series B Holders.
"LARGE HOLDERS" shall mean the Series C Purchasers, the Series
B Purchaser, Nikko Tecno Co., Inc., Anne G. Whitman and Christine B. Whitman,
and their permitted assignees under Section 7.7.
"NON SERIES B PURCHASERS" shall mean Holders who are not
Series B Holders.
"NON SERIES C PURCHASERS" shall mean Holders who are not
Series C Holders.
"PREFERRED STOCK" shall mean the Series A Preferred Stock, the
Series B Preferred Stock, the Series C Preferred Stock and Series D Preferred
Stock.
"REGISTRABLE SECURITIES" means outstanding Common Stock, the
Conversion Stock and any shares of Common Stock, (i) acquired by any Holder by
any means, (ii) issued or issuable in respect of shares of Common Stock acquired
by any Holder upon any stock split, stock dividend, recapitalization, or similar
event or (iii) upon exercise of the Warrant; provided, however, that Registrable
Securities shall not include shares of Common Stock that have previously been
sold to or through a broker or dealer or underwriter in a public distribution or
a public securities transaction.
The terms "REGISTER," "REGISTERED" and "REGISTRATION" refer to
a registration effected by preparing and filing a registration statement in
compliance with the Securities Act, and the declaration or ordering of the
effectiveness of such registration statement.
"REGISTRATION EXPENSES" shall mean all expenses, except as
otherwise stated below, incurred by the Company in complying with Sections 5.1,
5.2 and 5.3 hereof, including, without limitation, all registration,
qualification and filing fees, printing expenses, escrow fees, fees and
disbursements of counsel for the Company, blue sky fees and expenses, the
expense of any special audits incident to or required by any such registration
(but excluding the compensation of regular employees of the Company which shall
be paid in any event by the Company) and, in the case of the Series B Holders
and the Series C Holders, the fees and disbursements of counsel for the Series B
Holders and the Series C Holders, respectively.
2
<PAGE>
"RESTRICTED SECURITIES" shall mean the securities of the
Company required to bear the legend set forth in Section 3 hereof.
"SECURITIES ACT" shall mean the Securities Act of 1933, as
amended, or any similar federal statute and the rules and regulations of the
Commission thereunder, all as the same shall be in effect at the time.
"SELLING EXPENSES" shall mean all underwriting discounts,
selling commissions and stock transfer taxes applicable to the securities
registered by the Holders and, except as set forth under "Registration
Expenses," all fees and disbursements of counsel for any Holder.
"SERIES A PREFERRED STOCK" shall mean the 8% Non-Cumulative
Convertible Preferred Stock, $.0l par value per share, of the Company.
"SERIES B HOLDERS" shall mean (i) the Series B Purchaser for
so long as the Series B Purchaser holds Registrable Securities, and (ii) any
person holding Registrable Securities to whom the rights under this Agreement
have been transferred from the Series B Purchaser or a transferee of the Series
B Purchaser in accordance with Section 5.10.
"SERIES B PREFERRED STOCK" shall mean the Series B
Non-Cumulative Convertible Preferred Stock, $.01 par value per share of the
Company issued pursuant to the Securities Purchase Agreement.
"SERIES C HOLDERS" shall mean (i) the Series C Purchasers for
so long as the Series C Purchasers hold (i) Registrable Securities or (ii)
Series D Preferred Stock and (ii) any person holding Registrable Securities to
whom the rights under this Agreement have been transferred from a Series C
Purchaser or a transferee of a Series C Purchaser in accordance with Section
5.10.
"SERIES C PREFERRED STOCK" shall mean the Series C Senior
Convertible Redeemable Preferred Stock, $.01 par value per share, of the
Company.
"SERIES D PREFERRED STOCK" shall mean the Series D Redeemable
Preferred Stock, $.0l par value per share of the Company.
"STOCKHOLDERS AGREEMENT" shall mean the Amended and Restated
Stockholders Agreement, dated as of the date hereof, by and among the Company,
the Series C Purchasers, the Series B Purchaser, the Existing Purchasers and the
Commonwealth Purchaser, as it may be amended from time to time.
"WARRANT" shall mean the warrant to purchase 200,000 shares of
Common Stock issued by the Company to the Series C Purchasers pursuant to the
Stock Purchase Agreement (the "Purchase Agreement"), dated as of December 10,
1998, between CVC, Inc. and entities affiliated with Advent International
Corporation.
3
<PAGE>
"WARRANT SHARES" shall mean the number of shares of Common
Stock issuable upon exercise of the Warrant purchased pursuant to Section 1.2 of
the Purchase Agreement.
RESTRICTIONS ON TRANSFERABILITY. The shares of Preferred Stock
and Common Stock (i) acquired by any Holder and (ii) issued or issuable in
respect of shares of Preferred Stock or Common Stock acquired by any Holder upon
any stock split, stock dividend, recapitalization, merger, consolidation or
similar event, shall not be sold, assigned, transferred or pledged except upon
the conditions specified in this Agreement, which conditions are intended to
ensure compliance with the provisions of the Securities Act. Each Holder will
cause any proposed purchaser, assignee, transferee, or pledgee of any such
shares held by such Holder to agree to take and hold such securities subject to
the provisions and upon the conditions specified in this Agreement.
2. RESTRICTIVE LEGEND. Each certificate representing shares of
Preferred Stock and Common Stock (i) acquired by any Holder and (ii) issued or
issuable in respect of shares of Preferred Stock or Common Stock acquired by any
Holder upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted by the
provisions of Section 4 below) be stamped or otherwise imprinted with a legend
in substantially the following form (in addition to any legend required under
applicable state securities laws):
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended (the "Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Corporation receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the Act, (b)
it is established to the satisfaction of the Corporation that such sale
or transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Corporation receives a "no
action" letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Corporation at the principal executive offices of the
Corporation.
The Corporation is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Corporation.
4
<PAGE>
Each Holder consents to the Company making a notation on its records
and giving instructions to any transfer agent of the Preferred Stock, the
Warrant Shares or the Common Stock in order to implement the restrictions on
transfer established in this Agreement.
3. NOTICE OF PROPOSED TRANSFERS. The Holder of each certificate representing
Restricted Securities by acceptance thereof agrees to comply in all material
respects with the provisions of this Section 4. Prior to any proposed sale,
assignment, transfer or pledge of any Restricted Securities (other than a
transfer not involving a change in beneficial ownership), unless there is in
effect a registration statement under the Securities Act covering the proposed
transfer, the holder thereof shall give written notice to the Company of such
holder's intention to effect such transfer, sale, assignment or pledge. Each
such notice shall describe the manner and circumstances of the proposed
transfer, sale, assignment or pledge in sufficient detail, and shall be
accompanied, at such holder's expense, by either (i) a written opinion of legal
counsel reasonably satisfactory to the Company addressed to the Company, to the
effect that the proposed sale or transfer of the Restricted Securities may be
effected without registration under the Securities Act, (ii) documentation which
establishes to the satisfaction of the Company that the proposed sale or
transfer is in a transaction which is exempt under, or otherwise in compliance
with, such laws, or (iii) a "no action" letter or similar declaration from the
Commission to the effect that the transfer of such securities without
registration will not result in a recommendation by the staff of the Commission
that action be taken with respect thereto, whereupon the holder of such
Restricted Securities shall, subject to compliance with the Stockholders
Agreement, be entitled to transfer such Restricted Securities in accordance with
the terms of the notice delivered by the holder to the Company. Each certificate
evidencing the Restricted Securities transferred as above provided shall bear
the appropriate restrictive legend set forth in Section 3 above, except that
such certificate shall not bear such restrictive legend if, in the opinion of
counsel for such holder and the Company, such legend is not required in order to
establish compliance with any provision of the Securities Act.
4. REGISTRATION.
4.1 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. In case the Company
shall receive from the Initiating Holders or the Series C Holders a written
request that the Company effect any registration, qualification or compliance
with respect to shares of Registrable Securities with an anticipated aggregate
offering price, net of underwriting discounts and commissions, of at least
twenty million dollars ($20,000,000), the Company will:
(i) promptly give written notice of the proposed
registration, qualification or compliance to all other Holders; and
(ii) as soon as practicable, use its best efforts to
effect such registration, qualification or compliance (including, without
limitation, appropriate
5
<PAGE>
qualification under applicable blue sky or other state securities laws and
appropriate compliance with applicable regulations issued under the Securities
Act and any other governmental requirements or regulations) as may be so
requested and as would permit or facilitate the sale and distribution of all or
such portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Series B
Holder or Series C Holder joining in such request as are specified in a written
request received by the Company within twenty (20) days after receipt of such
written notice from the Company.
(b) Notwithstanding the foregoing, the Company shall
not be obligated to take any action pursuant to this Section 5.1:
(i) In any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required
under the Securities Act;
(ii) At any time prior to the earlier of (A) December
10, 2001 with respect to the Initiating Holders and December 10, 2000 with
respect to the Series C Holders and (B) six (6) months after the date of the
closing of an initial firm commitment underwritten public offering pursuant to
an effective registration statement under the Securities Act covering the offer
and sale of the Company's Common Stock;
(iii) After the Company has effected two (2) such
registrations at the request of the Initiating Holders and one (1) such
registration at the request of the Series C Holders, pursuant to this Section
5.1 (a), and any such registration has been declared or ordered effective,
provided, however, that in the event that a registration statement has been
filed with the Commission pursuant to this Section 5.1 (a) and is subsequently
withdrawn solely at the request of the Initiating Holders or the Series C
Holders (as the case may be) and the request to withdraw the registration
statement is not in any way the result of any action or inaction by the Company
adversely affecting such registration or the result of an adverse change in the
condition, financial or otherwise, or in the earnings, business operations or
prospects of the Company since the date of the written request for registration
by the Initiating Holders or the Series C Holders (as the case may be), then
such registration shall count as one (1) of the two (2) registrations with
respect to the Initiating Holders and one (1) with respect to the Series C
Holders provided for under this clause (iii) unless the Holders participating in
such registration pay all Registration Expenses incurred by the Company in
connection with such withdrawn registration; or
(iv) If the Company shall furnish to the Initiating
Holders and the Series C Holders requesting registration pursuant to Section 5.1
hereof (as the case may be) a certificate signed by the President of the Company
stating that in the good faith judgment of the Board of Directors it would be
seriously detrimental to the Company or its stockholders for a registration
statement to be filed in the near future, then the Company's obligation to use
its best efforts to register, qualify or comply under this Section 5.1 shall be
deferred for a period not to exceed 120 days from the date of receipt
6
<PAGE>
of written request from the Initiating Holders or the Series C Holders (as the
case may be), provided that the Company may not exercise this deferral right
more than once per twelve (12) month period.
Subject to the foregoing clauses (i) through (iv), the Company shall
file a registration statement covering the Registrable Securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Initiating Holders or the Series C Holders (as the case may be).
(c) PIGGYBACK REGISTRATION RIGHTS. In the event the Company
shall receive from the Initiating Holders or the Series C Holders (as the case
may be) a written request to effect any registration, qualification or
compliance with respect to shares pursuant to Section 5.1, the Company will (i)
promptly give written notice thereof to all other Holders; and (ii) subject to
Section 5.1 (d) below, include in such registration (and any related
qualification under blue sky laws or other compliance), and in any underwriting
involved therein, all the Registrable Securities specified in a written request
or requests, made within twenty (20) days after receipt of such written notice
from the Company, by any other Holder. The Company shall not be required to
register pursuant to this Section 5.1 the shares of another Holder then eligible
for sale pursuant to Rule 144 under the Securities Act (or similar successor
provision) ("Rule 144") without limitation as to volume.
(d) UNDERWRITING. In the event of a registration pursuant to
Section 5.1, the Company shall advise the Holders as part of the notice given
pursuant to Sections 5.1(a)(i) and 5. l(c)(i) that the right of any Holder to
registration pursuant to Section 5.1 shall be conditioned upon such Holder's
participation in the underwriting arrangements required by this Section 5.1, and
the inclusion of such Holder's Registrable Securities in the underwriting to the
extent requested shall be limited to the extent provided herein.
The Company shall (together with all Holders proposing to distribute
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by either the Initiating Holders or the Series C Holders (as the case may be),
but subject to the Company's reasonable approval. Notwithstanding any other
provision of this Section 5.1, if the managing underwriter advises the Holders
that marketing factors require a limitation of the number of shares to be
underwritten, then the Company shall so advise all Holders of Registrable
Securities and, in such case, the number of shares of Registrable Securities
that may be included in the registration and underwriting shall be allocated
first among all Series B Holders and the Series C Holders. To the extent the
managing underwriter has advised the Initiating Holders and the Series C Holders
that marketing factors require a limitation of the number of shares to be
underwritten to less than all of the shares that the Series B Holders and the
Series C Holders (as the case may
7
<PAGE>
be) have requested registration under Section 5.1 (a), (i) none of the shares of
Registrable Securities held by the Non Series B Purchasers or Non Series C
Holders (as the case may be) will be included in such Registration pursuant to
Section 5.1 (c) and (ii) the shares of Registrable Securities of the Series B
Holders or the Series C Holders (as the case may be) that may be included in the
registration and underwriting shall be allocated among the Series B Holders or
the Series C Holders (as the case may be) as nearly as practicable, to the
respective amounts of Registrable Securities held by such Series B Holders or
the Series C Holders (as the case may be) at the time of filing the Registration
Statement. To the extent that the managing underwriter advises the Initiating
Holders or the Series C Holders (as the case may be) that marketing factors
allow the Non Series B Purchasers or Non Series C Purchasers (as the case may
be) to participate in the registration and the underwriting and that marketing
factors require a limitation of the number of shares to be underwritten, then
the Company shall so advise all Non Series B Purchasers or Non Series C
Purchasers (as the case may be), and, in such case, the number of shares of
Registrable Securities of the Non Series B Purchasers or Non Series C Purchasers
(as the case may be) that may be included in the registration and underwriting
shall (x) be limited to that number of shares which can be included in the
registration and underwriting after all the shares of Series B Holders or Non
Series C Purchasers (as the case may be) are included and (y) to the extent
permitted by clause (x) of this sentence, be allocated among all Non Series B
Purchasers or Non Series C Purchasers (as the case may be) as nearly as
practicable, to the respective amounts of Registrable Securities held by such
Non Series B Purchasers or Non Series C Purchasers (as the case may be) at the
time of filing the registration statement. Neither the Company, the Non Series B
Purchasers or Non Series C Purchasers (as the case may be) nor any other holders
of registration rights may participate in the proposed offering if any Series B
Holders or the Series C Holders (as the case may be) have been cut back pursuant
to this Section 5.1(d). No Registrable Securities excluded from the underwriting
by reason of the underwriter's marketing limitation shall be included in such
registration. To facilitate the allocation of shares in accordance with the
above provisions, the Company or the underwriters may round the number of shares
allocated to any Holder to the nearest 100 shares.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the managing underwriter and the Initiating Holder or the Series C
Purchasers (as the case may be). The Registrable Securities and/or other
securities so withdrawn shall also be withdrawn from registration, and such
Registrable Securities shall continue to be subject to the terms of this
Agreement, including the restrictions set forth in Section 6, after the
effective date of such registration, or such other shorter period of time as the
underwriters may require.
4.2 COMPANY REGISTRATION.
(a) NOTICE OF REGISTRATION. If at any time or from
time to time the Company shall determine to register any of its equity
securities, either for its own account or the account of a security holder or
holders, other than (i) a registration relating solely to employee benefit
plans, (ii) a registration relating solely to a Rule 145 transaction, (iii) a
registration in which the only equity security being registered is capital stock
issuable upon conversion of convertible (or exchange of exchangeable) debt
securities which are also being registered or (iv) a registration pursuant to
Section 5.1 or Section 5.3 hereof, the Company will:
8
<PAGE>
(i) promptly give to each Holder written notice
thereof,
and
(ii) subject to Section 5.2(b) below, include in such
registration (and any related qualification under blue sky laws, or other
compliance), and in any underwriting involved therein, all the Registrable
Securities specified in a written request or requests, made within 10 days after
receipt of such written notice from the Company, by any Holder.
(b) UNDERWRITING. If the registration of which the
Company gives notice is for a registered public offering involving an
underwriting, the Company shall so advise the Holders as a part of the written
notice given pursuant to Section 5.2(a)(i). In such event, the right of any
Holder to registration pursuant to Section 5.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of Registrable
Securities in the underwriting shall be limited to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders distributing
their securities through such underwriting) enter into an underwriting agreement
in customary form with the managing underwriter selected for such underwriting
by the Company. Notwithstanding any other provision of this Section 5.2, if the
managing underwriter determines that marketing factors require a limitation of
the number of shares to be underwritten, the managing underwriter may exclude
some or all of the Registrable Securities. The Company shall so advise all
Holders and other holders distributing their securities through such
underwriting and the number of shares of Registrable Securities that may be
included in the registration and underwriting shall be allocated among all the
Holders in proportion, as nearly as practicable, to the respective amounts of
Registrable Securities that each such Holder specified in the written requests
made to the Company pursuant to Section 5.2(a)(ii). To facilitate the allocation
of shares in accordance with the above provisions, the Company may round the
number of shares allocated to any Holder or holder to the nearest 100 shares.
The Company shall not be required to register pursuant to this Section 5.2 the
shares of a Holder then eligible for sale pursuant to Rule 144 without
limitation as to volume.
If any of the Holders disapproves of the terms of any such
underwriting, such Holder may elect to withdraw therefrom by written notice to
the Company and the managing underwriter. Any securities excluded or withdrawn
from such underwriting shall be withdrawn from such registration and shall
continue to be subject to the terms of this Agreement including the restrictions
set forth in Section 6.
(c) RIGHT TO TERMINATE REGISTRATION. The Company
shall have the right, without liability therefore, to terminate or withdraw any
registration initiated by it under this Section 5.2 prior to the effectiveness
of such registration whether or not any Holder has elected to include securities
in such registration.
9
<PAGE>
4.3 REGISTRATION ON FORM S-3.
(a) If any of the Series B Holders or the Series C
Holders request that the Company file a registration statement on Form S-3 (or
any successor form to Form S-3) for a public offering of shares of the
Registrable Securities the reasonably anticipated aggregate price to the public
of which, net of underwriting discounts and commissions would exceed $500,000,
and the Company is a registrant entitled to use Form S-3 to register the
Registrable Securities for such an offering, the Company shall use its best
efforts to cause such Registrable Securities to be registered for the offering
on such form and to cause such Registrable Securities to be qualified in such
jurisdictions as such Holder or Holders may reasonably request; provided,
however, that the Company shall not be required to effect more than one
registration pursuant to this Section 5.3 in any six (6) month period. The
Series C Holders are entitled to one (1) registration on Form S-3 annually one
(1) year after the effective date of the Company's initial public offering. The
Company shall inform other Holders of the proposed registration and offer them
the opportunity to participate. In the event the registration is proposed to be
part of a firm commitment underwritten public offering, the substantive
provisions of Section 5.1 (d) shall be applicable to each such registration
initiated under this Section 5.3. The Non Series B Purchasers or Non Series C
Purchasers (as the case may be) may not include any of their Registrable
Securities in a registration effected pursuant to this Section 5.3. The Series B
Holders are entitled to an aggregate of two (2) registrations on Form S-3. The
Company may include for its own account other shares of Common Stock in any of
the registrations provided for in this Section 5.3, provided that such inclusion
will not interfere with the marketing of the Registrable Securities to be
registered by the Series B Holders or the Series C Holders (as the case may be).
(b) Notwithstanding the foregoing, the Company shall
not be obligated to take any action pursuant to this Section 5.3:
(i) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be required
under the Securities Act;
(ii) at any, time prior to the first anniversary of
the closing of an initial firm commitment underwritten public offering pursuant
to an effective registration statement under the Securities Act covering the
offer and sale of the Company's Common Stock;
(iii) during the period starting with the date sixty
(60) days prior to the Company's estimated date of filing of, and ending on the
date six (6) months immediately following, the effective date of any
registration statement pertaining to securities of the Company (other than a
registration of securities in a Rule 145 transaction or with respect to an
employee benefit plan), provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to become
effective; or
10
<PAGE>
(iv) if the Company shall furnish to the Series C
Holders or Series B Holders requesting registration pursuant to Section 5.3 a
certificate signed by the President of the Company stating that in the good
faith judgment of the Board of Directors it would be seriously detrimental to
the Company or its stockholders for registration statements to be filed in the
near future, then the Company's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed 120 days
from the receipt of the request to file such registration by such Series B
Holder or Series C Holders, provided that the Company may not exercise this
deferral right more than once per twelve month period.
4.4 LIMITATIONS ON SUBSEQUENT REGISTRATION RIGHTS. From and
after the Closing Date, the Company shall not enter into any agreement granting
any holder or prospective holder of any securities of the Company registration
rights with respect to such securities that are PARI PASSU or superior to the
rights granted to the Series B Holders or the Series C Holders hereunder without
the written consent of the Series B Holders or the Series C Purchasers
representing a majority in interest of all the shares of Registrable Securities
held by Series B Holders or the Series C Holders, respectively.
4.5 EXPENSES OF REGISTRATION. Except as provided in Section
5.1 (b)(iii), all Registration Expenses incurred in connection with the
registrations pursuant to Sections 5.1, 5.2 and 5.3 shall be borne by the
Company. All Selling Expenses relating to securities registered on behalf of the
Holders shall be borne by the Holders of such securities pro rata on the basis
of the number of shares so registered by such Holders.
4.6 REGISTRATION PROCEDURES. In the case of each registration,
qualification or compliance effected by the Company pursuant to this Agreement,
the Company will keep each of the Holders advised in writing as to the
initiation of each registration, qualification and compliance and as to the
completion thereof. At its expense the Company will:
(a) prepare and file with the Commission a
registration statement with respect to such securities and use its best efforts
to cause such registration statement to become and remain effective for at least
one hundred twenty (120) days or until the distribution described in the
registration statement has been completed, whichever first occurs;
(b) furnish to the Holders participating in such
registration and to the underwriters of the securities being registered such
reasonable number of copies of the registration statement, preliminary
prospectus, final prospectus and such other documents as such underwriters may
reasonably request in order to facilitate the public offering of such
securities.
4.7 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of
its officers and directors and partners, and each person controlling such Holder
within the meaning of Section 15 of the Securities Act, with respect to which
registration,
11
<PAGE>
qualification or compliance has been effected pursuant to this Agreement, and
each underwriter, if any, and each person who controls any underwriter within
the meaning of Section 15 of the Securities Act, against all expenses, claims,
losses, damages or liabilities (or actions in respect thereof), including any of
the foregoing incurred in settlement of any litigation, commenced or threatened,
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any registration statement, prospectus, offering
circular or other document, or any amendment or supplement thereto, incident to
any such registration, qualification or compliance, or based on any omission (or
alleged omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any violation by
the Company of the Securities Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), state securities law or any rule or regulation
promulgated under such laws applicable to the Company in connection with any
such registration, qualification or compliance, and the Company will reimburse
each such Holder, each of its officers and directors, and each person
controlling such Holder, each such underwriter and each person who controls any
such underwriter, for any legal and any other expenses reasonably incurred, as
such expenses are incurred, in connection with investigating, preparing or
defending any such claim, loss, damage, liability or action, provided that the
Company will not be liable in any such case to the extent that any such claim,
loss, damage, liability or expense arises out of or is based on any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder, controlling person or underwriter and
stated to be specifically for use therein.
(b) Each Holder will, if Registrable Securities held
by such Holder are included in the securities as to which such registration,
qualification or compliance is being effected, indemnify severally and not
jointly, the Company, each of its directors and officers, each underwriter, if
any, of the Company's securities covered by such a registration statement, each
person who controls the Company or such underwriter within the meaning of
Section 15 of the Securities Act, and each other such Holder, each of its
officers, directors and partners and each person controlling such Holder within
the meaning of Section 15 of the Securities Act, against all claims, losses,
expenses, damages and liabilities (or actions in respect thereof) including any
of the foregoing incurred in settlement of any litigation, commenced or
threatened, arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration statement,
prospectus, offering circular or other document, or any amendment or supplement
thereto incident to any such registration, qualification or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or any violation by such Holder of the Securities Act, the Exchange Act, state
securities law or any rule or regulation promulgated under such laws applicable
to such Holder and will reimburse the Company, such Holders, such directors,
officers, persons, underwriters or control persons for any legal or any other
expenses reasonably incurred, as such expenses are incurred, in connection with
investigating, preparing or defending any such claim, loss, damage, liability or
action, in each case to the extent, but only to the extent, that such untrue
statement (or alleged untrue statement) or omission (or alleged omission) is
made in such registration statement, prospectus, offering circular or other
document in reliance upon
12
<PAGE>
and in conformity with written information furnished to the Company by an
instrument duly executed by such Holder and stated to be specifically for use
therein. Notwithstanding the foregoing, the liability of each Holder under this
subsection 5.7(b) shall be limited to an amount equal to the initial public
offering price (net of any underwriting discounts or commissions) of the shares
of Registrable Securities sold by such Holder in such registered offering.
(c) Each party entitled to indemnification under this
Section 5.7 (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Agreement, unless the failure
to give such notice is materially prejudicial to an Indemnifying Party's ability
to defend such action, and provided further that the Indemnifying Party shall
not assume the defense for matters as to which there is a conflict of interest
or separate and different defenses. No Indemnifying Party, in the defense of any
such claim or litigation, shall, except with the consent of each Indemnified
Party, consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant or
plaintiff to such Indemnified Party of a release from all liability in respect
to such claim or litigation.
4.8 INFORMATION BY HOLDERS. The Holder or Holders of
Registrable Securities included in any registration shall furnish to the Company
such information regarding such Holder or Holders, the Registrable Securities
held by them and the distribution proposed by such Holder or Holders as the
Company may request in writing and as shall be required in connection with any
registration, qualification or compliance referred to in this Agreement.
4.9 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the Commission which may at any
time permit the sale of the Restricted Securities to the public without
registration, after such time as a public market exists for the Common Stock of
the Company, the Company agrees to use all reasonable efforts to:
(a) Make and keep public information available, as
those terms are understood and defined in Rule 144, at all times after the
effective date that the Company becomes subject to the reporting requirements of
the Securities Act or the Exchange Act;
(b) File with the Commission in a timely manner all
reports and other documents required of the Company under the Securities Act and
the Securities
13
<PAGE>
Exchange Act of 1934 (at any time after it has become subject to such reporting
requirements); and
(c) So long as any of the Holders owns any Restricted
Securities, to furnish to the Holders forthwith upon request a written statement
by the Company as to its compliance with the reporting requirements of Rule 144
(at any time after 90 days after the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
of the Company and other information in the possession of or reasonably
obtainable by the Company as the Holders may reasonably request in availing
itself of any rule or regulation of the Commission allowing the Holders to sell
any such securities without registration.
4.10 TRANSFER OF REGISTRATION RIGHTS.
(a) The rights to cause the Company to register
securities granted to the Series B Purchaser and the Series C Purchasers under
Sections 5.1, 5.2 and 5.3 may be assigned to a transferee or assignee in
connection with any transfer or assignment of Registrable Securities by the
Series B Purchaser or the Series C Purchasers provided that (i) such transfer
may otherwise be effected in accordance with applicable securities laws, (ii)
such transfer is of at least 840,000 shares of Common Stock, whether in the form
of Common Stock or Preferred Stock convertible into Common Stock or a warrant
exercisable for Preferred Stock and convertible into Common Stock (subject to
adjustment for any stock split, stock dividend, recapitalization, substitution
or similar event with respect to such shares), (iii) written notice is promptly
given to the Company, (iv) such transferee agrees to be bound by the provisions
of this Agreement and (v) the Series B Holder or the Series C Holder (as the
case may be) complies with the terms of the Stockholders' Agreement.
Notwithstanding the foregoing, the rights granted to the Series B Purchaser or
the Series C Purchasers (as the case may be) under Sections 5.1, 5.2 and 5.3 of
this Agreement to cause the Company to register securities may be assigned to
any majority-owned subsidiary or controlled affiliate of the Series B Purchaser
or the Series C Purchasers (as the case may be) (but only if and for so long as
such subsidiary or affiliate remains a majority owned subsidiary or controlled
affiliate of the Series B Purchaser or the Series C Purchaser (as the case may
be)) provided written notice thereof is promptly given to the Company and the
transferee agrees to be bound by the provisions of this Agreement.
(b) The rights granted to Holders other than the
Series C Holders or the Series B Holders under Sections 5.1 and 5.2 of this
Agreement to cause the Company to register securities may be assigned or
transferred to a transferee or assignee in connection with any permitted
transfer or assignment of Registrable Securities by such Holders, provided that
(i) such transfer may otherwise be effected in accordance with applicable
securities laws, (ii) such transfer is the lesser of (x) at least 300,000 shares
of Common Stock, whether in the form of Common Stock or Preferred Stock
convertible into Common Stock, (subject to adjustment for any stock split, stock
14
<PAGE>
dividend, recapitalization, substitution or similar event with respect to such
shares) or (y) all the shares of Common Stock and Preferred Stock then held by
such Holder, (iii) written notice of the transfer is promptly given to the
Company, (iv) such transferee agrees to be bound by the provisions of this
Agreement and (v) such Holder complies with the requirements of the Stockholders
Agreement.
5. STANDOFF AGREEMENT. In connection with any public offering of the
Company's securities in connection with an effective registration statement
under the Securities Act, each Holder agrees, upon the request of the Company or
the underwriters managing any underwritten offering of the Company's securities,
not to sell, make any short sale of, loan, grant any option for the purchase of,
or otherwise dispose of any securities of the Company (other than those included
in the registration) without the prior written consent of the, Company or such
underwriters, as the case may be, for such period of time (not to exceed one
hundred eighty (180) days after the effective date of such registration),
beginning ten (10) days prior to the effective date of such registration, as may
be requested by the underwriters, provided that the officers and directors of
the Company who own stock of the Company also agree to such restrictions. Each
Holder further agrees that the Company may instruct its transfer agent to place
stop-transfer notations in its records to enforce the provisions of this
Section 6.
6. RIGHT OF FIRST OFFER.
6.1 GRANT. The Company hereby grants to each of the Large
Holders the right of first offer with respect to its Pro Rata Share (as defined
below) of any proposed sale by the Company of New Securities (as defined below);
provided, however, that the Large Holders will not have a right of first offer
with respect to options granted, whether or not exercised, after the date of
this Agreement, to officers, directors, employees and consultants of the Company
if such sale (or grant) is approved by the Company's Board of Directors.
For purposes of this Section, "New Securities" shall mean any equity
securities, including Common Stock and Preferred Stock of the Company, whether
now authorized or not, and rights, options, or warrants to purchase such equity
securities, and securities of any type whatsoever that are, or may become
convertible into, exchangeable or exercisable for equity securities of the
Company; provided, however, that "New Securities" does not include shares of the
Company's Common Stock (A) issued pursuant to conversion or redemption of
Preferred Stock or upon exercise of options or warrants, (B) issued to all
holders of Common Stock as a stock split or stock dividend or (C) issued in
connection with a merger or consolidation of the Company.
6.2 OVER-ALLOTMENT OPTION. In the event that the Large Holders
together do not purchase all of the New Securities pursuant to the rights of
first offer granted in Section 7.1 hereof, then the Large Holders shall also
have the right to purchase up to all of the remaining New Securities (the
"Over-Allotment Option"), in addition to such New Securities as they shall
already have elected to purchase, if they shall have so elected as provided for
in Section 7.4 below. If more than one Holder elects to exercise its
Over-Allotment Option, and the aggregate number of shares of New Securities such
15
<PAGE>
Large Holders elect to purchase exceeds the aggregate number of shares of New
Securities then remaining, then the shares of New Securities to be purchased
pursuant to the Over-Allotment Option shall be divided among such Large Holders
according to their respective Pro Rata Share, or on such other basis as such
Large Holders electing their Over-Allotment Options may agree upon amongst
themselves in writing. Notwithstanding the foregoing, no Holder shall be
permitted to exercise its rights under this Section 7.2 to the extent the
purchase of such New Securities will subject the Company or any of its
subsidiaries to any substantial business risk under contracts or programs
restricting foreign ownership or control of the Company or any of its
subsidiaries as determined in good faith by the Board of Directors.
6.3 PRO RATA SHARE. Each Large Holder's "Pro Rata Share," for
purposes of this Article 7, is equal to the fraction obtained by dividing (a)
the sum of the total number of shares of any (i) Common Stock, (ii) Common Stock
issuable upon conversion of any Preferred Stock, and (iii) Common Stock issuable
upon exercise of any options or warrants (including warrants to purchase
Preferred Stock) then held by such Large Holder by (b) the sum of the total
number of shares of (i) Common Stock, (ii) Common Stock issuable upon the
conversion of Preferred Stock and (iii) Common Stock issuable upon any exercise
of any options or warrants (including warrants to purchase Preferred Stock) then
outstanding and held by all of the Large Holders; provided, however, for the
purposes of the second sentence of Section 7.2, clause (b) of this Section 7.3
shall include only those shares held by the Large Holders electing their
Over-Allotment Option.
6.4 NOTICES.
(a) In the event the Company proposes to undertake an
issuance of New Securities, it shall give each Large Holder written notice (the
"Notice") of its intention, describing the type of New Securities, the price and
the principal terms upon which the Company proposes to issue the same, and such
Large Holder's Pro Rata Share of New Securities that such Large Holder is
eligible to purchase pursuant to this Section 7. Each Large Holder shall have
fifteen (15) days from the delivery date of any Notice to agree to purchase any
amount of the New Securities up to such Large Holder's Pro Rata Share of such
New Securities for the price and upon the terms specified in the Notice by
giving written notice (a "Right of First Offer Election Notice") to the Company
and stating therein the amount of New Securities to be purchased; provided,
however, that in the event the Notice provides for payment for such New
Securities other than in cash, each Large Holder shall have the option of paying
for the New Securities by the cash equivalent (discounted on a present value
basis) of the consideration described in the Notice as set forth in the Notice
and as determined in good faith by the Board of Directors.
(b) If the Company shall have received one or more
Right of First Offer Election Notices within fifteen (15) days from the date all
the Large Holders are deemed to have received the Notice, in which any of the
Large Holders have elected not to purchase their Pro Rata Share of the New
Securities, the Company shall immediately give each Large Holder notice (the
"Over-Allotment Notice") indicating the
16
<PAGE>
aggregate amount of New Securities as to which the Large Holders shall not have
exercised their respective Rights of First Offer. Each Large Holder shall have
three (3) days from any delivery date of the OverAllotment Notice, to give
notice (the "Over-Allotment Election Notice") to the Company whether it elects
to exercise its Over-Allotment Option granted in Section 7.2 hereof (and, if so,
the maximum number of additional shares of New Securities it elects to purchase
pursuant thereto).
6.5 FAILURE TO EXERCISE RIGHT. In the event the Large Holders
do not exercise the right of first offer as to all of the New Securities that
the Large Holders are eligible to purchase pursuant to this Section 7 within the
later of fifteen (15) days from the delivery date of the Notice or three (3)
days from the delivery date of the Over-Allotment Notice, the Company shall have
ninety (90) days thereafter to enter into an agreement (pursuant to which the
sale of New Securities covered thereby shall be closed, if at all, within 60
days from the date of said agreement) to sell that number of New Securities
respecting which the Large Holder's right of first offer was not exercised, (i)
at or above the price and (ii) upon terms no more favorable taken as a whole to
the terms specified in the Notice given to the Large Holders. In the event the
Company has not sold the New Securities or entered into an agreement to sell the
New Securities within such 90-day period (or sold and issued such New Securities
in accordance with the foregoing within 60 days from the date of said
agreement), the Company shall not thereafter issue or sell any New Securities
without first offering such securities to the Large Holders in the manner
provided above.
6.6 TERMINATION. The right of first offer granted to the Large
Holders under this Section 7 shall expire upon the closing of the initial firm
commitment underwritten public offering pursuant to an effective registration
statement under the Securities Act covering the offer and sale of the Company's
Common Stock, provided that, with respect to a particular Large Holder, the
right of first offer shall expire on the date such Large Holder owns less than
534,000 shares of the Company's Common Stock, including shares of the Company's
capital stock convertible into Common Stock (adjusted for stock splits, stock
dividends and the like).
6.7 ASSIGNMENT. The right of first refusal granted to the
Large Holders under this Section 7 may only be assigned by a Large Holder if the
Large Holder transfers (i) to a transferee more than five percent (5%) of the
Company's Common Stock on a fully diluted as converted basis on the date of
determination or (ii) all of capital stock of Company it owns to any majority
owned subsidiary or controlled affiliate of such Holder (but only for so long as
such subsidiary or affiliate remains a majority owned subsidiary or controlled
affiliate of such Holder).
7. MISCELLANEOUS.
7.1 AMENDMENT. Section 5 (other than Section 5.2) of this
Agreement may be amended or the observance thereof may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
not less than one-half of the Registrable Securities held by the Series B
Holders and the Series C Holders (voting separately) then
17
<PAGE>
outstanding. Any other provision of this Agreement may be amended or the
observance thereof may be waived (either generally or in a particular instance
and either retroactively or prospectively), only with the written consent of the
Company, the holders of not less than a majority of the then outstanding
Registrable Securities held by the Series B Holders and the Series C Holders
(voting separately), and the holders of not less than a majority of all other
then outstanding Registrable Securities held by all Holders. Any amendment or
waiver effected in accordance with this Section 8 shall be binding upon each
Holder of Registrable Securities at the time outstanding (including securities
into which such securities are convertible), each future holder of all such
securities, and the Company.
7.2 GOVERNING LAW. This Agreement and the legal relations
between the parties arising hereunder shall be governed by and construed with
the laws of the State of Delaware, without giving effect to the conflicts of
laws provisions thereof.
7.3 ENTIRE AGREEMENT. This Agreement constitutes the full and
entire understanding and agreement between the parties regarding the matters set
forth herein. Except as otherwise expressly provided herein, the provisions
hereof shall inure to the benefit of, and be binding upon the successors,
assigns, heirs, executors and administrators of the parties hereto.
7.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or delivered by hand or by
messenger addressed as follows: (a) if to the Series B Purchaser, at 920 Disc
Drive, Scotts Valley, California 95066-4544, Attention: Stephen J. Luczo, (b) if
to the Existing Purchasers, at the address of such Existing Purchaser set forth
on EXHIBIT A hereto or such other address as the Existing Purchasers shall have
furnished to the Company in writing in accordance with this Section 8.4 with a
copy addressed to Golenbock, Eiseman, Assor & Bell, 437 Madison Avenue, New
York, New York 10022 Attention: Andrew C. Peskoe, Esq., (c) if to the Company,
at its principal office, to the attention of: the President with a copy
addressed to Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New
York, 10019, Attention: Frederick W. Kanner, Esq., (d) to the Series C
Purchasers at the address set forth on EXHIBIT B attached hereto, with a copy to
Hutchins, Wheeler & Dittmar, A Professional Corporation, 101 Federal Street,
Boston, Massachusetts 02110, Attention: Anthony J. Medaglia, Jr., P.C., or (e)
to the Commonwealth Purchaser, at 509 Tobacco Quay, Alexandria, Virginia 22314,
Attention: George R. Thompson, Jr..
Each such notice or other communication shall for all purposes of this
Agreement be treated as effective or having been given when received.
7.5 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
18
<PAGE>
IN WITNESS WHEREOF, this agreement has been duly executed by
the parties hereto as of the date first above written.
THE COMPANY
CVC, INC.
a Delaware Corporation
By:
------------------------------------
Name: Christine B. Whitman
Title: President
"THE SERIES B PURCHASER"
SEAGATE TECHNOLOGY, INC.
a Delaware Corporation
By:
------------------------------------
Name:
Title:
"THE SERIES C PURCHASERS"
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
By:Advent International Partnership, G.P.
By:Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
By:Advent International Partnership, G.P.
<PAGE>
By:Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
<PAGE>
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
By: Advent International
Partnership, G.P.
By: Advent International Corporation,
G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
By: Advent International
Partnership, G.P.
By: Advent International Corporation,
G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Limited Partnership,
General Partner
By: Advent International Corporation,
General Partner
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
<PAGE>
THE EXISTING PURCHASERS:
------------------------------------
Anne Whitman
------------------------------------
Catherine Whitman
------------------------------------
Bradley Whitman
------------------------------------
Sara Whitman
------------------------------------
LIVA & CO.
By:
------------------------------------
Name:
Title:
NIKKO TECNO CO., INC.
By:
------------------------------------
Name:
Title:
------------------------------------
David Pefley
------------------------------------
Diana Pefley
<PAGE>
------------------------------------
Christopher Mann
------------------------------------
Andrew Peskoe
------------------------------------
Patrick Borelli
------------------------------------
Phillip Chapados, Jr.
------------------------------------
Cecil Davis
------------------------------------
Jeff Dobbs
------------------------------------
Robert Fink
------------------------------------
James Geater
------------------------------------
George Heltz
------------------------------------
Jalil Kamali
------------------------------------
Yong Jin Lee
<PAGE>
------------------------------------
Victor Mann
------------------------------------
Mehrdad Moslehi
------------------------------------
Thomas Omstead
------------------------------------
Julie Peskoe
------------------------------------
Carla Reif
------------------------------------
Peter Schwartz
------------------------------------
Lino Velo
------------------------------------
Christine B. Whitman
------------------------------------
Ren Zhou
THE COMMONWEALTH PURCHASER
------------------------------------
George R. Thompson, Jr.
<PAGE>
Exhibit 10.33
CVC, INC.
STOCK PURCHASE AGREEMENT
Dated as of December 10, 1998
<PAGE>
CVC, INC.
STOCK PURCHASE AGREEMENT
Dated as of December 10, 1998
INDEX
ARTICLE I
PURCHASE AND SALE OF SHARES.................................................1
1.1 Purchase and Sale...............................................1
1.2 Purchase and Sale of Warrant....................................1
1.3 The Conversion Shares...........................................2
1.4 Initial Closing.................................................2
1.5 Second Closing..................................................2
1.6 Use of Proceeds.................................................2
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY.................................................................3
2.1 Organization and Corporate Power................................3
2.2 Authorization...................................................3
2.3 Government Approvals............................................4
2.4 Authorized and Outstanding Stock................................4
2.5 Subsidiaries....................................................5
2.6 Financial Information...........................................6
2.7 Events Subsequent to the Date of the Financial Statements.......6
2.8 Litigation......................................................7
2.9 Compliance with Laws and Other Instruments......................7
2.10 Taxes...........................................................7
2.11 Real Property...................................................8
2.12 Personal Property...............................................8
2.13 Patents, Trademarks, etc........................................8
2.14 Agreements of Directors, Officers and Employees.................9
2.15 Governmental and Industrial Approvals...........................9
2.16 Federal Reserve Regulations....................................10
2.17 Contracts and Commitments......................................10
2.18 Securities Act.................................................10
2.19 Registration Rights............................................10
2.20 Insurance Coverage.............................................10
2.21 Employee Matters ..............................................10
<PAGE>
2.22 No Brokers or Finders..........................................11
2.23 Transactions with Affiliates...................................11
2.24 Assumptions, Guarantees, etc. of Indebtedness of Other Persons.11
2.25 Restrictions on Subsidiaries...................................11
2.26 Environmental Matters..........................................11
2.27 U.S. Real Property Holding Corporation.........................12
2.28 Foreign Corrupt Practices Act..................................13
2.29 Corporate Records..............................................13
2.30 Management Presentation........................................13
2.31 Intentionally Omitted..........................................13
2.32 Disclosures....................................................13
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY.......................................14
3.1 Accounts and Reports...........................................14
3.2 Payment of Taxes...............................................15
3.3 Maintenance of Key Man Insurance...............................15
3.4 Compliance with Laws, etc......................................16
3.5 Inspection.....................................................16
3.6 Corporate Existence; Ownership of Subsidiaries.................16
3.7 Compliance with ERISA..........................................16
3.8 Board Approval.................................................17
3.9 Financings.....................................................17
3.10 Board of Directors Meetings....................................17
3.11 Rule 144A Information..........................................17
3.12 Regular Course of Business.....................................17
3.13 Intentionally Omitted..........................................18
3.14 Insurance......................................................18
3.15 Maintenance of Properties......................................18
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY..........................................18
4.1 Intentionally Omitted..........................................18
4.2 Dealings with Affiliates.......................................18
4.3 Limitation on Restrictions on Subsidiary Dividends and Other
Distributions................................................18
4.4 No Conflicting Agreements......................................19
4.5 Compensation; Consulting and Other Agreements..................19
4.6 Limitations on Indebtedness....................................19
4.7 Other Negative Covenants.......................................19
ii
<PAGE>
ARTICLE V
INVESTMENT REPRESENTATIONS.................................................20
5.1 Representations and Warranties.................................21
5.2 Permitted Sales; Legends.......................................22
ARTICLE VI
CONDITIONS OF PURCHASERS' OBLIGATION ......................................23
6.1 Effect of Conditions...........................................23
6.2 Representations and Warranties.................................23
6.3 Performance....................................................23
6.4 Amendment to Certificate of Incorporation......................23
6.5 Warrant Agreement..............................................23
6.6 Opinion of Counsel.............................................23
6.7 Certified Documents, etc.......................................23
6.8 No Material Adverse Change.....................................24
6.9 Stockholders Agreement.........................................24
6.10 Registration Rights Agreement..................................24
6.11 Employee Confidentiality and Invention Assignment Agreement....24
6.12 Board Election.................................................24
6.13 Consents and Waivers...........................................24
6.14 Series C Preferred Stock Certificates..........................24
ARTICLE VII
CONDITIONS OF THE COMPANY'S OBLIGATION.....................................25
7.1 Effect of Conditions...........................................25
7.2 Representations and Warranties; Performance....................25
7.3 Stockholders' Agreement........................................25
7.4 Registration Rights Agreement..................................25
7.5 Consideration for the Shares...................................25
ARTICLE VIII
[INTENTIONALLY OMITTED]....................................................25
iii
<PAGE>
ARTICLE IX
CERTAIN DEFINITIONS........................................................25
ARTICLE X
TERMINATION 29
10.1 Termination by Mutual Written Consent..........................29
10.2 Termination for Breach.........................................29
10.3 Termination for Delay..........................................29
10.4 Rights After Termination.......................................29
ARTICLE XI
MISCELLANEOUS..............................................................29
11.1 Survival of Representations....................................29
11.2 Parties in Interest............................................29
11.3 Shares Owned by Affiliates.....................................30
11.4 Amendments and Waivers.........................................30
11.5 Notices........................................................30
11.6 Expenses.......................................................31
11.7 Counterparts...................................................31
11.8 Effect of Headings.............................................31
11.9 Adjustments....................................................31
11.10 Governing Law..................................................31
11.11 Confidentiality................................................32
11.12 Assignment.....................................................32
11.13 Waiver of Jury Trial...........................................33
iv
<PAGE>
December 10, 1998
To: The Persons Listed on
Schedule 1.1 attached hereto
Re: Series C Senior Convertible Redeemable Preferred Stock
Gentlemen:
CVC, Inc., a Delaware corporation (the "Company"), hereby agrees with you
as follows:
ARTICLE I
PURCHASE AND SALE OF SHARES
1.1 Purchase and Sale. Subject to the terms and conditions hereinafter set
forth, at the Closing (as defined below) the Company shall issue and sell to
each of the persons listed on Schedule 1.1 hereto (collectively, the
"Purchasers" and individually, a "Purchaser"), and each Purchaser shall purchase
from the Company, the number of shares of the Company's Series C Senior
Convertible Redeemable Preferred Stock, $.01 par value per share (the "Series C
Preferred Stock"), set forth opposite the name of such Purchaser on Schedule
1.1, for the aggregate purchase price set forth opposite the name of such
Purchaser on such Schedule. The aggregate number of shares to be sold and
purchased pursuant to this Section 1.1 shall be One Hundred Thousand (100,000)
for an aggregate purchase price of Ten Million Dollars ($10,000,000) payable as
provided in Section 1.4. The Series C Preferred Stock shall have the rights,
terms and privileges set forth on Exhibit A attached hereto. The shares of
Series C Preferred Stock purchased pursuant to this Section 1.1, together with
the shares of Series C Preferred Stock purchased pursuant to Section 1.5, are
referred to herein as the "Purchased Shares." Terms used herein as defined terms
that are not defined in the context hereof shall have the meaning set forth in
Article IX.
1.2 Purchase and Sale of Warrant. At the Closing, the Company will sell to
the Purchasers a warrant (the "Warrant") at a price of $10.00 per warrant to
purchase 200,000 shares of the Company's Common Stock. The Warrant will be
issued pursuant to a Warrant Agreement in the form of Exhibit B attached hereto
(the "Warrant Agreement"). The warrants to be issued to each Purchaser is set
forth in Schedule 1.1. The number of shares of Common Stock issuable upon
exercise of the Warrant purchased pursuant to this Section 1.2 are referred to
herein as the "Warrant Shares." The Company has authorized and reserved and
hereby covenants that it will continue to reserve, free of any preemptive rights
or encumbrances, a sufficient number of authorized but unissued shares of Common
Stock for issuance upon exercise of the Warrant.
<PAGE>
1.3 The Conversion Shares. The Company has authorized and reserved and
hereby covenants that it will continue to reserve, free of any preemptive rights
or encumbrances, a sufficient number of its authorized but previously unissued
shares of common stock, $.01 par value per share (the "Common Stock") and shares
of Series D Redeemable Preferred Stock, $.01 par value per share ("Series D
Preferred Stock"), to satisfy the rights of conversion or redemption (as the
case may be) of the holders of the Purchased Shares and the Warrant Shares. The
shares of Common Stock and Series D Preferred Stock issued or issuable upon
conversion or exchange (as the case may be) of the Purchased Shares and Warrant
Shares are referred to herein as the "Conversion Shares."
1.4 Initial Closing. Subject to the satisfaction or waiver of the
conditions set forth in Articles VI and VII hereof, a closing (the "Initial
Closing") of the sale and purchase of the Purchased Shares specified in Section
1.1 above shall take place at the offices of Hutchins, Wheeler & Dittmar, A
Professional Corporation, 101 Federal Street, Boston, Massachusetts, at 10:00
A.M., on December 10, 1998, or such other date, time and place as shall be
mutually agreed upon by the Company and the Purchasers (the "Initial Closing
Date"). At the Initial Closing, the Company will deliver the Purchased Shares
being acquired by each Purchaser in the form of a certificate issued in such
Purchaser's name, upon receipt by the Company of payment of the full purchase
price therefor by or on behalf of each Purchaser to the Company by check or by
wire transfer of immediately available funds.
1.5 Second Closing. Upon the election of the Company, a second closing
(the "Second Closing") of the sale and purchase of up to 100,000 shares of
Series C Preferred Stock by Purchasers on the same terms and conditions set
forth herein for aggregate consideration to be determined by the Company, of
between five million dollars ($5,000,000) and ten million dollars ($10,000,000),
shall take place at the offices of Hutchins, Wheeler & Dittmar, located at 101
Federal Street, Boston, Massachusetts, at 10:00 A.M., on such date as determined
by the parties hereto (the "Second Closing Date"), which date shall be no later
than ninety (90) days after the Initial Closing Date. At the Second Closing, the
Company will deliver the Purchased Shares and the Warrant being acquired by the
Purchaser in the form of a certificate issued in such Purchaser's name upon
receipt by the Company of payment of the purchase price therefor by or on behalf
of each Purchaser to the Company by check or wire transfer of immediately
available funds. For the purposes of this Agreement, unless otherwise indicated,
the term "Closing" refers to the closing of the purchase and sale of the
Purchased Shares and the Warrant at the Initial Closing or the Second Closing,
as the case may be and the term "Closing Date" refers to the date of such
closing. Notwithstanding the foregoing, the Purchasers shall retain the right to
decline to participate in the Second Closing if, in Purchasers' sole discretion,
the Purchasers determine that there has occurred a material adverse change in
the business, operations and/or conditions (financial or otherwise) of the
Company subsequent to the Initial Closing.
1.6 Use of Proceeds. As an integral part of the purpose and structure of
the financing contemplated herein, the Company shall use the proceeds received
upon the sale of the Purchased Shares at the Closing to fund general working
capital, including, but not limited to, working
2
<PAGE>
capital for product development, possible acquisitions of businesses, repayment
of debt, enhancement of the Company's sales and marketing capabilities, and
research and development, all as determined by the Company's Board of Directors,
subject to the compliance with the covenants and agreements contained herein and
in the Company's Certificate of Incorporation, as amended. Notwithstanding the
foregoing, the Company may utilize up to all of the proceeds received from the
sale of Purchased Shares at the Second Closing to either (i) redeem any shares
of capital stock owned by any of the stockholders of the Company (but not to pay
a dividend with respect to such shares) or (ii) to acquire substantially all of
the assets, or a majority of the outstanding shares or other equity interests of
any corporation, partnership, limited liability company or other entity,
provided that if the proceeds from the Second Closing are to be used for the
purpose set forth this paragraph (ii), the Company must notify the Purchasers of
this intent in writing and must receive the written consent of the Purchasers to
consummate any such transaction prior to the Second Closing, and provided
further that if the Purchasers do not consent to any such transaction then the
Purchasers in their sole discretion may decline to participate in the Second
Closing.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF
THE COMPANY
In order to induce the Purchasers to purchase the Purchased Shares and the
Warrant, the Company makes the following representations and warranties which
shall be true, correct and complete in all respects on the date hereof and shall
be true, correct and complete in all respects as of the Initial Closing.
2.1 Organization and Corporate Power. The Company and each of its
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and has all
requisite corporate power and authority to own its properties and to carry on
its business as presently conducted. The Company and each of its Subsidiaries is
duly licensed or qualified to do business as a foreign corporation in each
jurisdiction wherein the character of its property, or the nature of the
activities presently conducted by it, makes such qualification necessary and
where the failure to so qualify would have a material adverse impact on the
business, condition (financial or otherwise) or operations of the Company.
2.2 Authorization. The Company has all necessary corporate power and has
taken all necessary corporate action required for the due authorization,
execution, delivery and performance by the Company of this Agreement, the
Warrant Agreement, the Amended and Restated Stockholders Agreement referred to
in Section 6.7 (the "Stockholders Agreement"), the Amended and Restated
Registration Rights Agreement referred to in Section 6.8 (the "Registration
Rights Agreement"), the Employee Confidentiality and Invention Assignment
Agreement referred to in Section 6.9 (the "Confidentiality and Invention
Assignment
3
<PAGE>
Agreement") and any other agreements or instruments executed by the Company in
connection herewith or therewith (collectively, the "Related Agreements"), and
the consummation of the transactions contemplated herein or therein, and for the
due authorization, issuance and delivery of the Purchased Shares, the Warrant,
the Warrant Shares issuable upon exercise of the Warrant and the Conversion
Shares issuable upon conversion of the Purchased Shares. Sufficient shares of
authorized but unissued Common Stock and sufficient shares of authorized but
unissued shares of Series D Preferred Stock have been reserved for issuance upon
conversion of the Purchased Shares and the Warrant Shares. The issuance of the
Purchased Shares and the Warrant does not, the Warrant Shares issuable upon
exercise of the Warrant and the Conversion Shares upon conversion of the
Purchased Shares will not, require any further corporate action and is not and
will not be subject to any preemptive right, right of first refusal or the like.
This Agreement, the Related Agreements and the other agreements and instruments
executed by the Company in connection herewith or therewith will each be a valid
and binding obligation of the Company enforceable in accordance with its terms.
2.3 Government Approvals. No consent, approval, license or authorization
of, or designation, declaration or filing with, any court or governmental
authority is or will be required on the part of the Company in connection with
the execution, delivery and performance by the Company of this Agreement, any of
the Related Agreements and any other agreements or instruments executed by the
Company in connection herewith or therewith, or in connection with the issuance
of the Purchased Shares and Warrant or the issuance of the Warrant Shares upon
exercise of the Warrant or the Conversion Shares upon conversion of the
Purchased Shares and Warrant Shares, except for (i) those which have already
been made or granted and (ii) the filing of registration statements with the
Securities and Exchange Commission (the "Commission") and any applicable state
securities commission.
2.4 Authorized and Outstanding Stock.
(a) The authorized capital stock of the Company (immediately prior
to the Closing and the transactions contemplated by Section 1.3 hereof) will
consist of (i) 50,000,000 shares of Common Stock, (ii) 2,500 shares of Series A
Preferred Stock, and (iii) 100,000 shares of Series B Preferred Stock, (iv)
200,000 shares of Series C Preferred Stock and (v) 200,000 shares of Series D
Preferred Stock.
(b) The issued and outstanding capital stock of the Company
(immediately prior to the Initial Closing and the transactions contemplated by
Section 1.3 hereof) will consist of (i) 1,586,897 shares of Common Stock, (ii)
1,685 shares of Series A Preferred Stock, (iii) 60,492 shares of Series B
Preferred Stock, (iv) no shares of Series C Preferred Stock, and (v) no shares
of Series D Preferred Stock. In addition, (i) 4,044,000 shares of Common Stock
have been reserved for issuance upon the conversion of the Series A Preferred
Stock, (ii) 3,629,520 shares of Common Stock have been reserved for issuance
upon the conversion of the Series B Preferred Stock, (iii) 3,048,780 shares have
been reserved for issuance upon the conversion of the Series C Preferred Stock,
(iv) options to purchase 2,650,460 shares of
4
<PAGE>
Common Stock have been granted and are unexercised under the Company's Stock
Option Plan and options for 1,350,993 shares of Common Stock are available for
future grants under the Company's Stock Option Plan and (v) 1,186,140 shares of
Common Stock has been reserved for issuance upon the exercise of a warrant,
dated May 22, 1995 (the "Seagate Warrant"), held by Seagate Technology, Inc., a
Delaware corporation ("Seagate"). Two Hundred Thousand (200,000) shares of
Series D Preferred Stock have been reserved for issuance upon conversion of the
Series C Preferred Stock. All of the issued and outstanding shares of Common
Stock are, and when issued in accordance with the terms hereof, the Purchased
Shares, the Warrant Shares and the Conversion Shares will be duly authorized and
validly issued and fully paid and non-assessable, with no personal liability
attaching to the ownership thereof and will be free and clear of all Liens,
claims, charges, Encumbrances, or transfer restrictions imposed by or through
the Company, except for restrictions imposed by Federal or state securities or
"blue sky" laws and except for those imposed pursuant to this Agreement, the
Stockholders Agreement or the Registration Rights Agreement. The designations,
powers, preferences, rights, qualifications, limitations and restrictions in
respect of each class or series of capital stock of the Company are as set forth
in the certified corporate charter of the Company delivered under Section 6.7
hereof and all such designations, powers, preferences, rights, qualifications,
limitations and restrictions are valid, binding and enforceable in accordance
with their terms and in accordance with applicable law.
(c) Except as set forth in Schedule 2.4(c) hereto or as provided in
this Agreement, (i) no subscription, warrant, option, convertible security or
other right (contingent or otherwise) to purchase or acquire any shares of
capital stock of the Company is authorized or outstanding, (ii) there is not any
commitment of the Company to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to holders of
any shares of its capital stock any evidences of indebtedness or assets of the
Company, (iii) the Company has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof and (iv) there are no agreements, written or oral, between the
Company and any holder of its capital stock or among any holders of its capital
stock, relating to the acquisition, disposition or voting of the capital stock
of the Company. Except as provided in this Agreement, no person or entity is
entitled to (i) any preemptive right, right of first refusal or similar rights
granted by the Company with respect to the issuance of any capital stock of the
Company, or (ii) any rights granted by the Company with respect to the
registration of any capital stock of the Company under the Securities Act of
1933, as amended (the "Act"). All of the issued and outstanding shares of the
Company's capital stock have been offered, issued and sold by the Company in
compliance with applicable Federal and state securities laws.
(d) Set forth on Schedule 2.4(d) is (i) a complete and accurate
table of the Company's capitalization, and (ii) a true and complete list of the
shareholders of the Company, showing the number of shares of Common Stock,
Series A Preferred Stock, Series B Preferred Stock or other securities of the
Company (including indebtedness convertible into capital stock)
5
<PAGE>
held by each shareholder immediately prior to the Closing (but without giving
effect to the consummation of the transactions contemplated hereby).
2.5 Subsidiaries. Except as set forth in Schedule 2.5, the Company has no
Subsidiaries nor any investment or other interest in, or any outstanding loan or
advance to or from, any Person, including, without limitation, any officer,
director or shareholder. Except as set forth on Schedule 2.5, the Company owns
of record and beneficially, free and clear of all Liens, charges, restrictions,
claims and Encumbrances of any nature, all of the issued and outstanding capital
stock of each of its Subsidiaries.
2.6 Financial Information. The Company has previously delivered to the
Purchasers the financial statements of the Company and each Subsidiary for each
of the fiscal years ended September 30, 1996, September 30, 1997 and September
30, 1998 audited by PriceWaterhouseCoopers, LLP, the Company's certified public
accountants (collectively, the "Financial Statements"). The Financial Statements
are complete and correct in all material respects, are in accordance with the
books and records of the Company, were prepared in accordance with GAAP and
present fairly, on a basis consistent with prior periods, the financial
condition and results of operations of the Company and each Subsidiary as of the
dates and for the periods shown. Neither the Company nor any Subsidiary has any
liability, contingent or otherwise, which is required to be reflected or
reserved against under GAAP, but is not so reflected in or reserved against in
the Financial Statements that could materially and adversely affect the
business, affairs, prospects, assets or financial condition of the Company or
such Subsidiary. Since September 30, 1998 there has been no change in the
business, assets, liabilities, condition (financial or otherwise) or operations
of the Company or any Subsidiary except for changes in the ordinary course of
business which, in the aggregate, have not been materially adverse.
2.7 Events Subsequent to the Date of the Financial Statements. Except as
set forth on Schedule 2.7, since September 30, 1998, neither the Company nor any
Subsidiary has (i) issued any stock, bond or other corporate security, (ii)
borrowed any amount or incurred or become subject to any liability (absolute,
accrued or contingent), except liabilities under contracts and borrowings
entered into in the ordinary course of business, (iii) discharged or satisfied
any Lien or Encumbrance or incurred or paid any obligation or liability
(absolute, accrued or contingent) other than current liabilities shown on the
Financial Statements and current liabilities incurred since September 30, 1998,
in the ordinary course of business, (iv) declared or made any payment or
distribution to stockholders or purchased or redeemed any shares of its capital
stock or other securities, (v) mortgaged, pledged or subjected to Lien any of
its assets, tangible or intangible, other than Liens of current real property
Taxes not yet due and payable, (vi) sold, assigned or transferred any of its
tangible assets except in the ordinary course of business, or canceled any debt
or claim, except in the ordinary course of business, (vii) sold, assigned,
transferred or granted any license with respect to any patent, trademark, trade
name, service mark, copyright, trade secret or other intangible asset, except
pursuant to license or other agreements entered into in the ordinary course of
business, (viii) suffered any loss of property or waived any right of
6
<PAGE>
substantial value whether or not in the ordinary course of business, (ix) made
any change in officer compensation, except in the ordinary course of business,
(x) made any material change in the manner of its business or operations, (xi)
entered into any transaction except in the ordinary course of business or as
otherwise contemplated hereby or (xii) entered into any commitment (contingent
or otherwise) to do any of the foregoing.
2.8 Litigation. Except as otherwise set forth on Schedule 2.8, there is no
litigation or governmental proceeding or investigation pending or, to the
knowledge of the Company, threatened, against the Company or any Subsidiary or
affecting any of the Company's or such Subsidiary's properties or assets, or to
the knowledge of the Company against any officer, key employee or shareholder of
the Company or any Subsidiary in his or her capacity as such, nor has there
occurred any event or does there exist any condition on the basis of which any
litigation, proceeding or investigation might properly be instituted with any
substantial chance of recovery. Neither the Company, any Subsidiary, nor any
officer, key employee or shareholder of the Company, any Subsidiary in his or
her capacity as such is, to the knowledge of the Company, in default with
respect to any order, writ, injunction, decree, ruling or decision of any court,
commission, board or other government agency.
2.9 Compliance with Laws and Other Instruments. The Company and its
Subsidiaries are in compliance with all of the provisions of this Agreement and
of its charter and by-laws, and in all material respects with the provisions of
each mortgage, indenture, lease, license, other agreement or instrument,
judgment, decree, judicial order, statute, and regulation by which any of them
is bound or to which any of them or any of their respective properties are
subject. Neither the execution, delivery or performance of this Agreement and
the Related Agreements, nor the offer, issuance, sale or delivery of the
Purchased Shares and Warrant, or the Warrant Shares upon exercise of the Warrant
or the Conversion Shares upon conversion of the Purchased Shares and Warrant
Shares, with or without the giving of notice or passage of time, or both, will
violate, or result in any breach of, or constitute a default under, or result in
the imposition of any encumbrance upon any asset of the Company or any
Subsidiary pursuant to any provision of the Company's or such Subsidiary's
charter or by-laws, or any statute, rule or regulation, contract, lease,
judgment, decree or other document or instrument by which the Company or any
Subsidiary is bound or to which the Company or any Subsidiary or any of their
respective properties are subject, or, to the knowledge of the Company, will
cause the Company or any Subsidiary to lose the benefit of any right or
privilege it presently enjoys or, to the knowledge of the Company, cause any
Person who is expected to normally do business with the Company or any
Subsidiary to discontinue to do so on the same basis.
2.10 Taxes. The Company and each Subsidiary has filed all Tax returns
(including statements of estimated Taxes owed) required to be filed within the
applicable periods for such filings and has paid all Taxes required to be paid,
and has established adequate reserves (net of estimated Tax payments already
made) for the payment of all Taxes payable in respect to the period subsequent
to the last periods covered by such returns. Except as set forth on
7
<PAGE>
Schedule 2.10, no deficiencies for any Tax are currently assessed against the
Company or any Subsidiary, and no Tax returns of the Company or any Subsidiary
have been audited during the last three (3) years, and, there is no such audit
pending or, to the knowledge of the Company, contemplated. There is no Tax Lien,
whether imposed by any federal, state or local Taxing authority, outstanding
against the assets, properties or business of the Company or any Subsidiary. For
the purposes of this Agreement, the terms "Tax" and "Taxes" shall include all
federal, state, local and foreign Taxes, including income, franchise, property,
sales, withholding, payroll and employment Taxes.
2.11 Real Property.
(a) Schedule 2.11 sets forth the addresses and uses of all real
property that the Company or any Subsidiary owns, leases or subleases, and any
Lien or Encumbrance of record on any such owned real property or the Company's
or Subsidiary's leasehold interest therein, specifying in the case of each such
lease or sublease, the name of the lessor or sublessor, as the case may be, the
lease term and the financial obligations of the lessee thereunder.
(b) Except as set forth on Schedule 2.11, the Company or its
Subsidiary, as the case may be, has good and marketable title to, and owns free
and clear of all Liens and Encumbrances, all property listed as owned by the
Company or any Subsidiary on Schedule 2.11, and, there is no material violation
of any law, regulation or ordinance (including without limitation laws,
regulations or ordinances relating to zoning, environmental, city planning or
similar matters) relating to any real property owned, leased or subleased by the
Company or any Subsidiary.
(c) There are no material defaults by the Company or any Subsidiary
or, to the knowledge of the Company, by any other party to a lease listed
thereon, which might curtail the present use of the Company's and such
Subsidiary's property listed on Schedule 2.11. The performance by the Company of
this Agreement and the Related Agreements will not result in the termination of,
or in any increase of any amounts payable under, any lease listed on Schedule
2.11.
2.12 Personal Property. Except as set forth on Schedule 2.12 and except
for property sold or otherwise disposed of in the ordinary course of business
since September 30, 1998, the Company and its Subsidiaries own free and clear of
any Liens or Encumbrances, all of the material personal property reflected as
owned by the Company and its Subsidiaries in the balance sheet contained in the
Financial Statements, and all other material items of personal property acquired
by the Company and its Subsidiaries through the date hereof. All items of such
material personal property necessary to the operation of the business of the
Company are in good operating condition, normal wear and tear excepted.
2.13 Patents, Trademarks, etc. Set forth on Schedule 2.13 is a list of all
patents, patent rights, patent applications, trademarks, trademark applications,
service marks, service mark
8
<PAGE>
applications trade names and registered copyrights, and all applications for
such that are in the process of being prepared, or that are owned by or
registered in the name of the Company or any Subsidiary, or of which the Company
or any Subsidiary is a licensor or licensee or in which the Company or any
Subsidiary has any right. The Company and its Subsidiaries own or possess
adequate licenses or other rights to use all patents, patent applications,
trademarks, trademark applications, service marks, service mark applications,
trade names, copyrights, manufacturing processes, formulae, trade secrets and
know how (collectively, "Intellectual Property") necessary to the conduct of
their business as conducted and as proposed to be conducted, and no claim is
pending or, to the knowledge of the Company, threatened to the effect that the
operations of the Company infringe upon or conflict with the asserted rights of
any other person under any Intellectual Property, and there is no known basis
for any such claim (whether or not pending or threatened). Except as set forth
in Schedule 2.13, no claim is pending or, to the knowledge of the Company,
threatened to the effect that any such Intellectual Property owned or licensed
by the Company, or which the Company or any Subsidiary otherwise has the right
to use, is invalid or unenforceable by the Company or such Subsidiary, and there
is no known basis for any such claim (whether, or not pending or threatened). To
the knowledge of the Company, all technical information developed by and
belonging to the Company and its Subsidiaries which has not been patented or
copywritten has been kept confidential. Neither the Company nor any Subsidiary
has granted or assigned to any other person or entity any right to manufacture,
have manufactured, assemble or sell the products or proposed products or to
provide the services or proposed services of the Company or such Subsidiary.
Except as set forth in Schedule 2.13, no current or former stockholder,
employee, officer or director of the Company or any of its Subsidiaries has
(directly or indirectly) any right, title or interest in any of the rights
described on Schedule 2.13 other than such right which such Person may enjoy as
a stockholder of the Company.
2.14 Agreements of Directors, Officers and Employees. To the knowledge of
the Company, no director, officer or employee of or consultant to the Company or
any Subsidiary is in violation of any terms of any employment contract,
non-competition agreement, non-disclosure agreement, patent disclosure or
assignment agreement or other contract or agreement containing restrictive
covenants relating to the right of any such director, officer, employee or
consultant to be employed or engaged by the Company or such Subsidiary because
of the nature of the business conducted or proposed to be conducted by the
Company or such Subsidiary, or relating to the use of trade secrets or
proprietary information of others. Schedule 2.14 hereto sets forth the name and
address of each person currently serving as a director and/or officer of the
Company, and each person listed on Schedule 2.14 was duly elected and is
presently serving as a director and/or officer, as the case may be. Set forth on
Schedule 2.14 is a list of all employees of the Company who have executed an
employee confidentiality agreement, invention assignment agreement or
non-competitive or non-solicitation agreement with the Company.
2.15 Governmental and Industrial Approvals. The Company and each of its
Subsidiaries has all the permits, licenses, orders, franchises and other rights
and privileges of all federal, state, local or foreign governmental or
regulatory bodies necessary for the Company and
9
<PAGE>
such Subsidiaries to conduct their respective businesses as presently conducted.
All such permits, licenses, orders, franchises and other rights and privileges
are in full force and effect and no suspension or cancellation of any of them is
threatened, and none of such permits, licenses, orders, franchises or other
rights and privileges will be affected by the consummation of the transactions
contemplated in this Agreement and the Related Agreements.
2.16 Federal Reserve Regulations. Neither the Company nor any of its
Subsidiaries has engaged in the business of extending credit for the purpose of
purchasing or carrying margin stock (within the meaning of Regulation G of the
Board of Governors of the Federal Reserve System), and no part of the proceeds
of the sale of the Purchased Shares will be used to purchase or carry any margin
security or to extend credit to others for the purpose of purchasing or carrying
any margin security or in any other manner which would involve a violation of
any of the regulations of the Board of Governors of the Federal Reserve System.
2.17 Contracts and Commitments. Except as set forth on Schedule 2.17
attached hereto, neither the Company nor any Subsidiary has any contract,
obligation or commitment which is material or which involves a potential
material commitment or any stock redemption or stock purchase agreement,
financing agreement, license or lease. For purposes of this Section 2.17, a
contract, obligation or commitment shall be deemed material if it requires
future expenditures by the Company or any Subsidiary in excess of $100,000 or
might result in payments to the Company or any Subsidiary in excess of $100,000.
2.18 Securities Act. The Company has complied and will comply with all
applicable federal or state securities laws in connection with the issuance and
sale of the Purchased Shares and Warrant and the issuance of the Warrant Shares
upon exercise of the Warrant and the issuance of the Conversion Shares upon
conversion of the Purchased Shares and Warrant Shares. Neither the Company nor
anyone acting on its behalf has offered any of the Purchased Shares or Warrant,
or similar securities, or solicited any offers to purchase any of such
securities, so as to bring the issuance and sale of the Purchased Shares and
Warrant under the registration provisions of the Act.
2.19 Registration Rights. The Company has not granted any rights relating
to registration of its capital stock under the Act or state securities laws
other than those contained in this Agreement and the Related Agreements and
those described on Schedule 2.19 hereto.
2.20 Insurance Coverage. Schedule 2.20 hereto contains an accurate summary
of the insurance policies currently maintained by the Company and its
Subsidiaries. Except as described on Schedule 2.20, there are currently no
claims pending against the Company or any Subsidiary under any insurance
policies currently in effect and covering the property, business or employees of
the Company and its Subsidiaries, and all premiums due and payable with respect
to the policies maintained by the Company and its Subsidiaries have been paid.
10
<PAGE>
2.21 Employee Matters. Except as set forth on Schedule 2.21, neither the
Company nor any Subsidiary has in effect any employment agreements, consulting
agreements, deferred compensation, pension or retirement agreements or
arrangements, bonus, incentive or profit-sharing plans or arrangements, or labor
or collective bargaining agreements, written or oral. The Company has no
knowledge that any of the officers or other key employees of the Company or any
Subsidiary presently intends to terminate his employment. The Company and its
Subsidiaries are in compliance in all material respects with all applicable laws
and regulations relating to labor, employment, fair employment practices, terms
and conditions of employment, and wages and hours. The Company and each
Subsidiary is in compliance in all material respects with the terms of all
plans, programs and agreements listed on Schedule 2.21, and each such plan,
program or agreement is in compliance in all material respects with all of the
requirements and provisions of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). No such plan or program has engaged in any
"prohibited transaction" as defined in Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"), or has incurred any "accumulated funding
deficiency" as defined in Section 302 of ERISA, nor has any reportable event as
defined in Section 4043(b) of ERISA occurred with respect to any such plan or
program. With respect to each plan listed on Schedule 2.21, all required
filings, including all filings required to be made with the United States
Department of Labor and Internal Revenue Service, have been timely filed.
2.22 No Brokers or Finders. Except as set forth on Schedule 2.22, no
person has or will have, as a result of the transactions contemplated by this
Agreement, any right, interest or claim against or upon the Company or any of
its Subsidiaries for any commission, fee or other compensation as a finder or
broker because of any act or omission by the Company or any of its Subsidiaries.
2.23 Transactions with Affiliates. Except as set forth on Schedule 2.23,
there are no loans, leases or other agreements, understandings or continuing
transactions between the Company or any Subsidiary on the one hand, and any
officer or director of the Company or any Subsidiary or any person owning one
percent (1%) or more of the Common Stock of the Company or any respective family
member or affiliate of such officer, director or shareholder on the other hand.
2.24 Assumptions, Guarantees, etc. of Indebtedness of Other Persons.
Except as set forth on Schedule 2.24, neither the Company nor any Subsidiary has
assumed, guaranteed, endorsed or otherwise become directly or contingently
liable on or for any indebtedness of any other Person, except guarantees by
endorsement of negotiable instruments for deposit or collection.
2.25 Restrictions on Subsidiaries. Except as set forth on Schedule 2.25,
there are no restrictions on the Company or any of its Subsidiaries which
prohibit or otherwise restrict the transfer of cash or other assets between the
Company and any of its Subsidiaries or between any Subsidiaries of the Company.
11
<PAGE>
2.26 Environmental Matters. Except as disclosed on Schedule 2.26:
(a) (i) Neither the Company nor any Subsidiary has ever generated,
transported, used, stored, treated, disposed of, or managed any hazardous waste
except in compliance with applicable law; (ii) no Hazardous Waste or Hazardous
Material, has ever been or, to the knowledge of the Company, is threatened to be
spilled, released, or disposed of by the Company or any Subsidiary at any site
presently or formerly owned, operated, leased, or used by the Company or any
Subsidiary or to the knowledge of the Company, has ever come to be located in
the soil or groundwater at any such site; (iii) except in compliance in all
material respects with applicable law, no Hazardous Waste or Hazardous Material
has ever been transported by the Company or any Subsidiary from any site
presently or formerly operated, leased, or used by the Company for treatment,
storage, or disposal at any other place; (iv) neither the Company or any
Subsidiary does presently own, operate, lease, or use, nor, to the knowledge of
the Company, has the Company or any Subsidiary previously owned, operated,
leased, or used any site on which underground storage tanks are or were located;
and (v) no Lien has been imposed and not subsequently released by any
governmental agency on any property, facility, machinery, or equipment owned,
operated, leased, or used by the Company or any Subsidiary in connection with
the presence of any Hazardous Waste or Hazardous Material.
(b) (i) Neither the Company or any Subsidiary has liability under,
nor has the Company or any Subsidiary ever violated in any material respect,
without remediation, any Environmental Laws; (ii) every property owned,
operated, leased, or used by the Company or any Subsidiary, and every facility
and operation thereon, are presently in compliance with all applicable
Environmental Laws in all material respects; and (iii) neither the Company or
any Subsidiary has ever entered into or been subject to any judgment, consent
decree, compliance order, or administrative order with respect to any
environmental or health and safety matter or received any request for
information, notice, demand letter, administrative inquiry, or formal complaint
or claim with respect to any environmental or health and safety matter or the
enforcement of any Environmental Law.
(c) No site owned, operated, leased, or used by the Company or any
Subsidiary contains any asbestos or asbestos-containing material, any
polychlorinated biphenyls ("PCBs") or equipment containing PCBs, or any urea
formaldehyde foam insulation.
(d) The Company has provided to the Purchasers or their
representatives copies of all documents, records, and information received or
generated by the Company after January 1, 1993 to the Company or any Subsidiary
concerning any environmental or health and safety matter relevant to the Company
or any Subsidiary whether generated by the Company, or others, in the nature of
environmental audits, environmental risk assessments, site assessments,
documentation regarding off-site disposal of Hazardous Waste or Hazardous
Material, spill control plans, and reports, permits, licenses, approvals,
consents, and other authorizations related to environmental or health and safety
matters issued by any governmental agency.
12
<PAGE>
2.27 U.S. Real Property Holding Corporation. Neither the Company nor any
Subsidiary is now and has ever been a "United States real property holding
corporation," as defined in Section 897(c)(2) of the Code and Section 1.897-2(b)
of the Regulations promulgated by the Internal Revenue Service, and the Company
or any Subsidiary has filed with the Internal Revenue Service all statements, if
any, with its United States income Tax returns which are required under Section
1.897-2(h) of such Regulations.
2.28 Foreign Corrupt Practices Act. Neither the Company nor any Subsidiary
has taken any action which would cause it to be in violation of the Foreign
Corrupt Practices Act of 1977, as amended, or any rules and regulations
thereunder. To the knowledge of the Company, there is not now, and there has
never been, any employment by the Company of, or beneficial ownership in the
Company or any Subsidiary by, any governmental or political official in any
country in the world.
2.29 Corporate Records. The minute books of the Company and each of its
Subsidiaries contain accurate, complete and current copies of all charter
documents and of all minutes of meetings, resolutions and other proceedings of
its board of directors and shareholders, duly signed by the Secretary, an
Assistant Secretary or another appropriate officer, all directors or all
shareholders, as appropriate. The stock record book of the Company and each of
its Subsidiaries are also complete, correct and current. The Company has made
available true, correct and complete copies of such minute books and stock
record books to the Purchasers.
2.30 Management Presentation. The Company has previously delivered to each
Purchaser a copy of the Company's Management Presentation attached hereto as
Exhibit 2.30. (the "Management Presentation"). The description in the Management
Presentation of the Company's business is true and correct in all material
respects as of the date of the specific document of the Management Presentation
in which such description is found. The pro forma financial information and
financial projections included in the Management Presentation were prepared with
due care based on assumptions believed by the Company to be reasonable, and
presents the Company's good faith estimate of future results based on
information available as of the date of the specific document of the Management
Presentation in which such financial information and/or projection is found (as
the case may be). The material entitled "Meeting" and dated August 25, 1998 and
the list entitled "Thin Film Head Fab Locations/World Wide" and dated August 25,
1998, describes the Company's reasonable assessment of the total market for its
products at the respective dates of such material and list. The list entitled
"CVC Data Storage and Semiconductor Equipment PNOR" (the "PNOR List") and dated
August 19, 1998 is the list of customers that the Company was soliciting at the
date of such list. A copy of the PNOR List has been previously delivered to the
Purchasers.
2.31 Intentionally Omitted.
2.32 Disclosures. Neither this Agreement, any Schedule or Exhibit to this
Agreement, the Related Agreements or the Financial Statements contains any
untrue statement of a material
13
<PAGE>
fact or omits a material fact necessary to make the statements made herein or
therein, in light of the circumstances in which made, not misleading. There is
no fact known to the Company which, in the Company's reasonable business
judgment on the date hereof, materially and adversely affects the business, or
financial condition of the Company or its properties or assets, which has not
been set forth herein or in any other document delivered in connection herewith.
ARTICLE III
AFFIRMATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that it will observe the following covenants on and after
the date hereof and until the consummation of the first Qualified Public
Offering unless the Advent Representative otherwise consents:
3.1 Accounts and Reports. The Company will, and will cause each of its
Subsidiaries to, maintain a standard system of accounts in accordance with GAAP
consistently applied and the Company will, and will cause each of its
Subsidiaries to, keep full and complete financial records. The Company will
furnish to each Purchaser the information set forth in this Section 3.1.
(a) Within one hundred twenty (120) days after the end of each
fiscal year, a copy of the audited annual consolidated financial statement
(including income statements balance sheets) and cash flow statements of the
Company and its Subsidiaries as of the end of such year, prepared in accordance
with GAAP, duly certified by an independent public accountant of national
recognition selected by the Board of Directors of the Company.
(b) Within thirty (30) days after the end of each calendar month in
each fiscal year (other than the last month in each fiscal year) an unaudited
consolidated monthly financial statement (including income statements, balance
sheets, cash flow statements, and comparisons to budget) of the Company and its
Subsidiaries as of the end of such month, setting forth in each case in
comparative form (i) the corresponding figures for the corresponding period of
the preceding fiscal year for the Company and each of its Subsidiaries, as the
case may be, and (ii) the corresponding figures for the corresponding period set
forth in the Management Presentation, all in reasonable detail and prepared in
accordance with GAAP (except for normal year end adjustments and the absence of
footnotes).
(c) No later than thirty (30) days prior to the commencement of each
fiscal year consolidated capital and operating expense budgets, cash flow
projections and income and loss projections for the Company and its Subsidiaries
in respect of such fiscal year; provided, however, that all such budgets,
projections and revisions shall be subject to the prior approval of a majority
of the Board of Directors of the Company;
14
<PAGE>
(d) At the time of delivery of each annual statement, a certificate,
executed by either the president or chief financial officer of the Company
stating (i) that such officer has caused this Agreement to be reviewed and has
no knowledge of any default by the Company or any Subsidiary in the performance
or observance of any of the provisions of this Agreement or, if such officer has
such knowledge, specifying such default, and (ii) with respect to the delivery
of annual statements, a statement as to the then conversion value of the
Purchased Shares and the number of Conversion Shares into which each share of
Series C Preferred Stock may then be converted.
(e) Promptly upon receipt thereof and review by the Company's Board
of Directors, any written report, so called "management letter," and any other
communication submitted to the Company or any Subsidiary by its independent
public accountants relating to the business, prospects or financial condition of
the Company and its Subsidiaries;
(f) Promptly after the commencement thereof, notice of (i) all
actions, suits and proceedings before any court or governmental department,
commission, board, bureau, agency or instrumentality, domestic or foreign,
affecting the Company or any Subsidiary which, if successful, could have a
material adverse effect on the Company and its Subsidiaries, taken as a whole;
and (ii) all material defaults by the Company or any Subsidiary (whether or not
declared) under any agreement for money borrowed (unless waived or cured within
applicable grace periods);
(g) Promptly upon sending, making available, or filing the same, all
reports and financial statements which the Company (or any Subsidiary) shall
send or make available generally to the shareholders of the Company as such or
to the Commission; and
(h) Such other information with regard to the business, properties
or the condition or operations, financial or otherwise, of the Company or its
Subsidiaries as the Purchasers may from time to time reasonably request.
3.2 Payment of Taxes. The Company will pay and discharge (and cause any
Subsidiary to pay and discharge) all Taxes, assessments and governmental charges
or levies imposed upon it, the Company and the Subsidiaries or upon their
respective income or profits, or upon any properties belonging to each of them,
prior to the date on which penalties attach thereto, and all lawful claims
which, if unpaid, might become a Lien or charge upon any properties of the
Company (or any Subsidiary), provided that neither the Company nor any
Subsidiary shall be required to pay any such Tax, assessment, charge, levy or
claim which is being contested in good faith and by proper proceedings if the
Company or such Subsidiary shall have set aside on its books adequate reserves
with respect thereto.
3.3 Maintenance of Key Man Insurance. The Company will, at its expense,
obtain within sixty (60) days of the date hereof, and continue to maintain a
life insurance policy with a responsible and reputable insurance company payable
to the Company on the life of Christine B.
15
<PAGE>
Whitman in the face amount of at least One Million Dollars ($1,000,000). The
Company will maintain such policy and will not cause or permit any assignment of
the proceeds of such policy and will not borrow against such policy.
3.4 Compliance with Laws, etc. The Company will comply (and cause each of
its Subsidiaries to comply) with all applicable laws, rules, regulations and
orders of any governmental authority, the noncompliance with which could
materially adversely affect the business, assets, or condition, financial or
otherwise, of the Company and its Subsidiaries, taken as a whole.
3.5 Inspection. Upon prior notice, at any reasonable time during normal
business hours and from time to time, the Company (and each of its Subsidiaries)
will permit any one or more of the Purchasers, or any of their authorized agents
or representatives, to examine and make copies of and extracts from the records
and books of account of and visit the properties of the Company (and any of its
Subsidiaries) and to discuss the Company's affairs, finances and accounts with
any of its officers or directors; provided that any Person or Persons exercising
rights under this Section 3.5 shall (i) use all reasonable efforts to ensure
that any such examination or visit results in a minimum of disruption to the
operations of the Company and (ii) prior to the Company disclosing or providing
access to information with respect to the Company, shall agree in writing to
keep all proprietary information of the Company disclosed to him in the course
of such inspection confidential in a manner consistent with prudent business
practices and treatment of such Person's or Persons' own confidential
information. The rights granted under this Section 3.5 shall be in addition to
any rights which any Purchaser may have under applicable law in its capacity as
a shareholder of the Company.
3.6 Corporate Existence; Ownership of Subsidiaries. The Company will, and
will cause its Subsidiaries to, at all times preserve and keep in full force and
effect their corporate existence, and rights and franchises material to the
business of the Company and its Subsidiaries, taken as a whole, and will
qualify, and will cause each of its Subsidiaries to qualify, to do business as a
foreign corporation in any jurisdiction where the failure to do so would have a
material adverse effect on the business, condition (financial or other), assets,
properties or operations of the Company and its Subsidiaries, taken as a whole;
provided, however, that the Company may merge or liquidate one or more of its
Subsidiaries into the Company or into another Subsidiary. Except for entities in
which the value of the Company's equity interests are less than $1,000,000, the
Company or a Subsidiary shall at all times own of record and beneficially, free
and clear of all Liens, charges, restrictions, claims and Encumbrances of any
nature, all of the issued and outstanding capital stock of each of its
Subsidiaries.
3.7 Compliance with ERISA. The Company will comply, (and cause each of its
Subsidiaries to comply) in all material respects with all minimum funding
requirements applicable to any pension or other employee benefit plans which are
subject to ERISA or to the Code, and comply in all other material respects with
the provisions of ERISA and the Code, and the rules and regulations thereunder,
which are applicable to any such plan. Neither the
16
<PAGE>
Company nor any of its Subsidiaries will permit any event or condition to exist
which could permit any such plan to be terminated under circumstances which
cause the Lien provided for in Section 3068 of ERISA to attach to the assets of
the Company or any of its Subsidiaries.
3.8 Board Approval. No later than thirty (30) days after the commencement
of each fiscal year, the Company will prepare and submit to its Board of
Directors for its approval prior to such year end a business plan, which shall
include an operating plan and budget, cash flow projections and profit and loss
projections, all itemized in reasonable detail for the immediately following
year.
3.9 Financings. The Company will promptly provide to the Board of
Directors the details and terms of, and any brochures or investment memoranda
prepared by the Company related to, any possible financing of any nature for the
Company (or any of its Subsidiaries), whether initiated by the Company or any
other Person.
3.10 Board of Directors Meetings. The Company shall use its best efforts
to fix the number of members of its Board of Directors at nine (9) and to cause
the election of the Advent Representative (as such term is defined in the
Stockholders Agreement) as a member of its Board of Directors. The Advent
Representative will be nominated by Global Private Equity III Limited
Partnership. The Certificate of Incorporation of or By-laws of the Company shall
at all times provide for indemnification of the directors and limitations on the
liability of the directors to the fullest extent permitted under applicable
state law. The Company agrees to the fullest extent permitted by law to
indemnify the Advent Representative on the Board of Directors pursuant to its
Certificate of Incorporation and By-Laws. The Company shall ensure that meetings
of its Board of Directors are held at least four (4) times each year, and will
reimburse the Advent Representative for his reasonable travel expenses,
including the cost of airfare and any necessary meals and lodging, incurred in
connection with attending meetings of the Board of Directors. In addition, the
Company shall maintain at all times a Compensation Committee and an Audit
Committee of the Board of Directors. The Advent Representative shall be a member
of the Audit Committee and shall have those responsibilities set forth in the
Stockholders Agreement or as may be determined from time to time by a majority
of the entire Board of Directors. In addition to the four (4) meetings of the
Board of Directors to be held annually as described herein, the Company
covenants and agrees that it shall cause each of the Chief Executive Officer and
the Chief Financial Officer of the Company to be available to meet with the
Advent Representative either in person or by telephone upon the reasonable
request of the Advent Representative while the Advent Representative is a member
of the Board of Directors.
3.11 Rule 144A Information. The Company shall, upon the written request of
any Purchaser, provide to such Purchaser and to any prospective institutional
transferee of the Purchased Shares or Conversion Shares designated by such
Purchaser, such financial and other information as is available to the Company
or can be reasonably obtained by the Company without material expense and as
such Purchaser may reasonably determine is required to permit such transfer to
comply with the requirements of Rule 144A promulgated under the Act.
17
<PAGE>
3.12 Regular Course of Business. The Company agrees that on and after the
date hereof and prior to the Closing that it and each of its Subsidiaries will
carry on its business diligently and in the ordinary course and substantially in
the same manner as heretofore carried on and will use its best efforts to
preserve its present business organization intact, keep available the services
of its present officers, agents and employees and preserve its present
relationships with suppliers, customers and other persons having business
dealings with it.
3.13 Intentionally Omitted.
3.14 Insurance. The Company and each Subsidiary will keep its insurable
properties insured, upon reasonable business terms, by financially sound and
reputable insurers against liability, and the perils of casualty, fire and
extended coverage in amounts of coverage sufficient in the reasonable business
judgment of the Company to protect the Company. The Company will also maintain,
upon reasonable business terms, with such insurers insurance against other
hazards and risks and liability to persons and property sufficient in the
reasonable business judgment of the Company to protect the Company and each
Subsidiary. Notwithstanding the foregoing, within six (6) months from the date
of the Closing and prior to a Qualified Public Offering, the Company shall, at
its sole expense, obtain and continue to maintain director and officer liability
insurance coverage for each of its officers and directors with a responsible and
reputable insurance company at reasonable commercial rates.
3.15 Maintenance of Properties. The Company will and will cause each of
its Subsidiaries to maintain all properties used or useful in the conduct of its
business in good repair, working order and continue as necessary to permit such
business to be properly conducted.
ARTICLE IV
NEGATIVE COVENANTS OF THE COMPANY
Without limiting any other covenants and provisions hereof, the Company
covenants and agrees that it will comply (and will cause each Subsidiary to
comply) with each of the provisions of this Article IV on and after the date
hereof until the earlier of the conversion of all the Series C Preferred Stock
or the closing of a Qualified Public Offering.
4.1 Intentionally Omitted.
4.2 Dealings with Affiliates. Except as set forth on Schedule 4.2 and
except for transactions made on an arms-length basis, or through the Company's
normal and customary dealings, the Company will not enter into any transaction
including, without limitation, any loans or extensions of credit or royalty
agreements with any officer or director of the Company or any Subsidiary or
holder of any class of capital stock of the Company, or any member of their
respective immediate families or any corporation or other entity directly or
indirectly controlled by one or more of such officers, directors or shareholders
or members of their immediate
18
<PAGE>
families, except for (i) advances in reasonable amounts made to employees of the
Company or any Subsidiary for valid business purposes, provided that such
advances are repaid to the Company within 90 days, and (ii) advances made to
employees of the Company, upon approval of the Board of Directors, related to
such employees' exercise of stock options.
4.3 Limitation on Restrictions on Subsidiary Dividends and Other
Distributions. Except as set forth on Schedule 4.3, the Company shall not permit
any of its Subsidiaries, directly or indirectly, to create or suffer to exist or
become effective any Encumbrances or restrictions on the ability of any of its
Subsidiaries to (i) pay dividends or make any other distributions on its capital
stock or any other interest or participation in its profit owned by any of the
Company or any of its Subsidiaries, or pay any indebtedness owed by any of the
Subsidiaries, (ii) make loans or advances to the Company, or (iii) transfer any
of its properties or assets to the Company.
4.4 No Conflicting Agreements. The Company agrees that neither it nor any
Subsidiary will, without the consent of a majority in interest of the
Purchasers, enter into or amend any agreement, contract, commitment or
understanding which would restrict or prohibit the exercise by the Purchasers of
any of their rights under this Agreement.
4.5 Compensation; Consulting and Other Agreements. The Company's
Compensation Committee, established pursuant to the Stockholders Agreement,
shall determine the base salary and other compensation and benefit arrangements
of the Company's Chief Executive Officer and each member of the Company's senior
management who report directly to the Chief Executive Officer.
4.6 Limitations on Indebtedness. Without the consent of the Board of
Directors, the Company will not create, incur, assume or permit to exist any
debt for borrowed money in excess of One Million Dollars ($1,000,000), except
for (i) all deferred Taxes, and (ii) all unfunded pension fund and other
employee benefit plan obligations and liabilities, but only to the extent they
are permitted to remain unfunded under applicable law.
4.7 Other Negative Covenants. The Company hereby further covenants and
agrees that it will not:
(a) Create or authorize the creation of any additional class or
series of shares of stock or equity unless the same ranks junior to the Series C
Preferred Stock as to conversion, redemption, the distribution of assets on the
liquidation, dissolution or winding up of the Company, or increase the
authorized amount of the Series C Preferred Stock or any series thereof or
increase the authorized amount of any additional class or series of shares of
stock unless the same ranks junior to the Series C Preferred Stock as to
conversion, redemption, or the distribution of assets on the liquidation,
dissolution or winding up of the Company, or create or authorize any obligation
or security convertible into shares of Series C Preferred Stock or into shares
of any other class or series of stock unless the same ranks junior to the Series
C Preferred
19
<PAGE>
Stock as to conversion, redemption or the distribution of assets on the
liquidation, dissolution or winding up of the Company, whether any such
creation, authorization or increase shall be by means of amendment to the
Certificate of Incorporation or by merger, consolidation or otherwise, provided,
however, that unless the Second Closing has occurred, then the foregoing is not
applicable unless the creation of any additional class or series of shares is
done in contemplation of an investment in the Company by a third party for an
aggregate amount equal to or greater than $10,000,000;
(b) Amend, alter or repeal its Certificate of Incorporation, By-laws
or other organizational documents in any manner, or take any other corporate
action, that would alter, change or adversely affect the terms, conditions,
rights or privileges of the Series C Preferred Stock, except any amendment to
its Certificate of Incorporation in connection with the creation of an
additional class or series of shares permitted pursuant to Section 4.7(a);
(c) Prior to the closing of a Qualified Public Offering, declare or
pay (or set aside any amounts for the payment of) dividends on any of the Common
Stock or of any class or classes of stock of the Company other than dividends
paid solely in shares of Common Stock;
(d) Increase or decrease (other than by conversion as permitted
hereby) the total number of authorized shares of Series C Preferred Stock;
(e) Redeem, purchase or otherwise acquire for value (or pay into or
set aside for a sinking fund for such purpose) any of the Common Stock of any
class, any other capital stock of the Company, or any of the Company's options,
warrants or convertible or exchangeable securities except that these provisions
will not prohibit the Company from completing any redemption contemplated by
Section 1.6 or the redemption required by the Certificate of Incorporation or
Amended and Restated Stockholders Agreement and except for acquisitions of
securities of employees of the Company or its affiliates;
(f) acquire a controlling or significant equity position in, or
purchase all or substantially all of the assets of (in each case whether by
merger, consolidation, private sale or otherwise) any business, person or entity
("Target") where the Target has a valuation of more than $10,000,000 for cash
acquisitions or more than $10,000,000 for acquisitions by the corporation using
its equity securities (provided in all cases under this Clause (f), the holders
of Series C Preferred Stock will not apply their own judgment unreasonably in
making their determination); or
(g) make any investment, through the direct or indirect holding of
securities or otherwise, other than (i) investments in obligations issued or
guaranteed by the United States of America or any department or agency thereof
or marketable municipal obligations of any state or local government, in each
case having a maturity not in excess of one year or money market funds
consisting (in substantial portion) of the foregoing; (ii) deposits, bankers
acceptances and repurchase agreements maturing not more than one year from the
date of such purchase or
20
<PAGE>
acquisition and evidencing direct obligations of any bank or trust company
having capital surplus and undivided profits in excess of $50,000,000, (iii)
commercial paper of issuers which are United States domestic corporations
bearing a rating by a national credit agency of not less than A-1 or P-1, (iv)
any investments not to exceed $50,000, either individually or in the aggregate,
at any time outstanding (v) investments permitted by Section 3.6, and (vi)
investments permitted by Section 4.7(f); or
(h) within one (1) year following the Initial Closing, the Company
may not merge or consolidate with or into any other corporation or sell, lease
or convey all or substantially all of its property or business without obtaining
the prior written consent of the Purchasers, provided that such consent shall
not be required in the event that the consideration to be received by the
Purchasers as a result of such transaction is equal to or greater than the
product of $200 and the number of Purchased Shares owned by Purchaser
immediately prior to such transaction.
ARTICLE V
INVESTMENT REPRESENTATIONS
5.1 Representations and Warranties. Each Purchaser hereby represents and
warrants to the Company, understanding and agreeing that the Company is entering
into this Agreement in part in reliance on such representations and warranties,
as follows:
(a) Such Purchaser is an "Accredited Investor" as that term is
defined in Rule 501(a) of Regulation D promulgated under the Act.
(b) Such Purchaser is duly authorized to execute this Agreement and
the Related Agreements, and assuming due execution and delivery by the Company
of the Agreement and the Related Agreements, this Agreement and the Related
Agreements to which such Purchaser is a party constitute legal, valid and
binding obligations of such Purchaser, enforceable against such Purchaser in
accordance with their respective terms;
(c) Such Purchaser has been advised by the Company that none of the
Purchased Shares or Warrant Shares have been registered under the Act, that the
Purchased Shares and Warrant Shares will be issued on the basis of the statutory
exemption provided by Section 4(2) of the Act or Regulation D promulgated
thereunder, or both, relating to transactions by an issuer not involving any
public offering and under similar exemptions under certain state securities
laws, that this transaction has not been reviewed by, passed on or submitted to
any federal or state agency or self-regulatory organization where an exemption
is being relied upon, and that the Company's reliance thereon is based in part
upon the representations made by such Purchaser in this Agreement and the
Related Agreements. Such Purchaser acknowledges that he, she or it has been
informed by the Company of, or is
21
<PAGE>
otherwise familiar with, the nature of the limitations imposed by the Act and
the rules and regulations thereunder on the transfer of securities;
(d) Such Purchaser has been further advised and understands that no
public market now exists for any of the securities issued by the Company and
that a public market may never exist for the Purchased Shares, Warrant, Warrant
Shares or Conversion Shares;
(e) Such Purchaser is purchasing the Purchased Shares and Warrant
for investment purposes, for its own account and not with a view to, or for sale
in connection with, any distribution thereof in violation of federal or state
securities laws;
(f) By reason of its business or financial experience, such
Purchaser has the capacity to protect its own interest in connection with the
transactions contemplated hereunder;
(g) Such Purchaser is aware of the Company's business affairs and
financial condition and has acquired sufficient information about the Company to
reach an informed and knowledgeable decision to acquire the Purchased Shares and
Warrant; provided, however, that nothing in this Section 6.1 shall be deemed to
vitiate or limit the representations, warranties and covenants of the Company
contained in this Agreement; and
(h) No person has or will have, as a result of the transaction
contemplated by this Agreement, any right, interest or claim against or upon any
Purchaser, the Company, or any of its Subsidiaries for any commission, fee or
other compensation as a finder or broker because of any act or omission by such
Purchaser.
5.2 Permitted Sales; Legends. Notwithstanding the foregoing
representations, the Company agrees that it will permit (i) a distribution of
Purchased Shares or Conversion Shares by a partnership to one or more of its
partners or investors or a limited liability company and its members, where no
consideration is exchanged therefor by such members, partners, or to a retired
or withdrawn partner who retires or withdraws after the date hereof in full or
partial distribution of his interest in such partnership, or to the estate of
any such partner or the transfer by gift, will or intestate succession of any
partner to his spouse or to the siblings, lineal descendants or ancestors of
such partner or his spouse, or to a trust created for the benefit of one or more
of the foregoing, if the transferee agrees in writing to be subject to the terms
hereof to the same extent as if it were an original Purchaser hereunder and (ii)
a sale or other transfer of any of the Purchased Shares, the Warrant Shares or
Conversion Shares upon obtaining assurance satisfactory to the Company that such
transaction is exempt from the registration requirements of, or is covered by an
effective registration statement under, the Act and applicable state securities
or "blue-sky" laws, including, without limitation, receipt of an unqualified
opinion to such effect of counsel reasonably satisfactory to the Company. The
certificates representing the Purchased Shares and any Conversion Shares
issuable upon conversion thereof shall bear a legend evidencing such restriction
on transfer substantially in the following form:
22
<PAGE>
The shares represented by this certificate have not been registered under
the Securities Act of 1933, as amended ("the Act"), and have been acquired
for investment and not with a view to, or in connection with, the sale or
distribution thereof. Such shares may not be sold, offered for sale,
pledged or hypothecated in the absence of such registration unless (a) the
Corporation receives an opinion of counsel reasonably satisfactory to it
stating that such sale or transfer is exempt from the registration and
prospectus delivery requirements of the act, (b) it is established to the
satisfaction of the Corporation that such sale or transfer is in a
transaction which is exempt under, or otherwise in compliance with, such
laws or (c) the Corporation receives a "no action" letter or similar
declaration from the securities and exchange commission to the effect that
such sale or transfer without registration will not result in a
recommendation by said commission that action be taken with respect
thereto. Copies of the agreements covering the purchase of these shares
and restricting the sale, assignment, transfer, or other disposition of,
or the voting of, the shares represented by this certificate may be
obtained at no cost by written request made by the holder of record of
this certificate to the Secretary of the Corporation at the principal
executive offices of the Corporation.
The Corporation is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions granted
to or imposed upon each class or series of shares authorized to be issued
and upon the holders thereof from the principal office of the Corporation.
ARTICLE VI
CONDITIONS OF PURCHASERS' OBLIGATION
6.1 Effect of Conditions. The obligation of the Purchasers to purchase and
pay for the Purchased Shares at the Initial Closing, if any, shall be subject at
their election to the satisfaction of each of the conditions stated in the
following Sections of this Article VI.
6.2 Representations and Warranties. The representations and warranties of
the Company contained in this Agreement shall be true and correct on the date of
the Closing with the same effect as though made on and as of that date, and the
Purchasers shall have received a certificate dated as of such Closing and signed
on behalf of the Company to that effect.
6.3 Performance. The Company shall have performed and complied with all of
the agreements, covenants and conditions contained in this Agreement required to
be performed or complied with by it at or prior to the Closing, and the
Purchasers shall have received a certificate dated as of such Closing and signed
on behalf of the Company to that effect.
23
<PAGE>
6.4 Amendment to Certificate of Incorporation. The Certificate of
Incorporation of the Company shall have been amended to provide for the
authorization of the Purchased Stock with the terms set forth in Exhibit A
hereto.
6.5 Warrant Agreement. A Warrant Agreement in the form attached hereto as
Exhibit B shall have been executed by the Company and each of the Purchasers.
6.6 Opinion of Counsel. The Purchasers shall have received an opinion,
dated the date of the Closing, from Dewey Ballantine LLP, counsel to the
Company, in the form attached hereto as Exhibit C.
6.7 Certified Documents, etc. Counsel for the Purchasers shall have
received a copy of the Company's Certificate of Incorporation, as amended,
certified by the Secretary of State of the State of Delaware and copies of the
Company's By-Laws certified by its Secretary, as well as any and all other
documents, including certificates as to votes adopted and incumbency of officers
and certificates from appropriate authorities as to the legal existence and good
standing of the Company and its Subsidiaries, which the Purchasers or their
counsel may reasonably request.
6.8 No Material Adverse Change. The business, properties, assets or
condition (financial or otherwise) of the Company and its Subsidiaries shall not
have been materially adversely affected since the date of this Agreement,
whether by fire, casualty, act of God or otherwise, and there shall have been no
other changes in the business, properties, assets, condition (financial or
otherwise), management or prospects of the Company or any of its Subsidiaries
that would have a material adverse effect on their respective businesses or
assets.
6.9 Stockholders Agreement. The Company, each Purchaser, and certain
shareholders of the Company shall have executed the Stockholders Agreement in
the form of Exhibit D attached hereto.
6.10 Registration Rights Agreement. The Company, each Purchaser and
certain shareholders of the Company shall have executed the Registration Rights
Agreement in the form of Exhibit E attached hereto.
6.11 Employee Confidentiality and Invention Assignment Agreement. Each key
technical and management personnel of the Company, designated by the Purchasers,
shall have executed an Confidentiality and Invention Assignment Agreement in the
form of Exhibit F attached hereto.
6.12 Board Election. Concurrently with the Closing, the Board of Directors
of the Company shall have been fixed at nine (9) members to be designated as
provided for in the Stockholders Agreement.
24
<PAGE>
6.13 Consents and Waivers. The Company shall have obtained all consents or
waivers necessary to execute this Agreement and the other agreements and
documents contemplated herein, to issue the Purchased Shares, and to carry out
the transactions contemplated hereby and thereby. All corporate and other action
and governmental filings necessary to effectuate the terms of this Agreement,
the Related Agreements, the Purchased Shares, and the Conversion Shares and
other agreements and instruments executed and delivered by the Company in
connection herewith shall have been made or taken.
6.14 Series C Preferred Stock Certificates. The Company shall have
delivered a stock certificate to each Purchaser representing that number of
shares of Series C Preferred Stock and set Purchaser's name on Schedule 1.1
attached hereto.
ARTICLE VII
CONDITIONS OF THE COMPANY'S OBLIGATION
7.1 Effect of Conditions. The Company's obligation to sell the Purchased
Shares shall be subject at its election to the satisfaction of each of the
conditions stated in the following Sections of this Article VII.
7.2 Representations and Warranties; Performance. The representations and
warranties of the Purchasers contained in this Agreement shall be true and
correct on the date of the Closing with the same effect as though made on and as
of that date and, with respect to the Company's obligation to issue and deliver
Purchased Shares of any Purchaser, such Purchaser shall have tendered payment
for the Purchased Shares at the Closing in accordance with Section 1.4 hereof.
7.3 Stockholders' Agreement. The Company, each Purchaser, and certain
shareholders of the Company shall have executed the Stockholders' Agreement in
the form of Exhibit C attached hereto.
7.4 Registration Rights Agreement. The Company, each Purchaser, and
certain shareholders of the Company shall have executed the Registration Rights
Agreement in the form of Exhibit D attached hereto.
7.5 Consideration for the Shares. Each of the Purchasers shall pay the
purchase price of the Purchased Shares each is purchasing, as set forth on
Schedule 1.1 attached hereto, in full at the Closing either by check or by wire
transfer to an account designated in writing by the Company.
25
<PAGE>
ARTICLE VIII
[INTENTIONALLY OMITTED]
ARTICLE IX
CERTAIN DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings (such meanings to be equally applicable to both the singular and plural
forms of the terms defined):
"Act" shall have the meaning set forth in Section 2.4(c).
"Advent Representative" shall have the meaning set forth in the
Stockholders Agreement.
"Agreement" means this Stock Purchase Agreement as from time to time
amended and in effect between the parties.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Commission" shall have the meaning set forth in Section 2.3.
"Common Stock" will include (a) the Company's Common Stock as authorized
on the date of this Agreement, (b) any other capital stock of any class or
classes of the Company authorized on or after the date hereof, the holders of
which shall have the right, without limitation as to amount, either to all or to
a share of the balance of current dividends and liquidating dividends after the
payment of dividends and distributions on any shares entitled to preference, and
(c) any other securities of the Company into which or for which any of the
securities described in (a) or (b) may be converted or exchanged pursuant to a
plan of recapitalization, reorganization, merger, sale of assets or otherwise.
"Company" means and shall include CVC, Inc., a Delaware corporation, its
predecessors, successors and assigns.
"Confidential Information" shall have the meaning set forth in Section
11.11.
"Confidentiality and Invention Assignment Agreement" shall have the
meaning set forth in Section 2.2.
"Conversion Shares" shall have the meaning set forth in Section 1.3.
26
<PAGE>
"Encumbrances" means any lien, mortgage, security interest, pledge,
restriction on transferability, defect of title or other claim, charge or
encumbrance of any nature whatsoever on any property or property interest.
"Environmental Laws" shall mean all foreign, federal, state and local
laws, regulations, rules and ordinances relating to pollution or protection of
the environment and worker health and safety, including, without limitation,
laws relating to releases or threatened releases of hazardous waste or materials
(and permits, licenses and approvals which may be required under such laws,
regulations, rules and ordinances) into the indoor or outdoor environment
(including, without limitation, ambient air, surface water, groundwater, land,
surface and subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, release, transport or
handling of Hazardous Waste or Hazardous Material and all laws and regulations
with regard to record keeping, notification, disclosure and reporting
requirements respecting hazardous waste or materials.
"ERISA" shall have the meaning set forth in Section 2.21.
"Financial Statements" shall have the meaning set forth in Section 2.6.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession, which are applicable to the circumstances as of the date of
determination.
"Hazardous Waste or Hazardous Material" shall include any hazardous,
toxic, infectious, or radioactive substances, including petroleum products
including without limitation, those substances regulated pursuant to the Federal
Comprehensive Environmental Response, Compensation and Liability Act, 42 USC
ss.9601 et seq., the Federal Resource Conservation and Recovery Act, 42 USC
ss.6901 et seq., the Federal Water Pollution Contract Act, 33 USC ss.1251 USC
ss.2601, et seq., and any applicable state environmental statutes and
regulation, all present and future amendments to such statutes, and all
regulations promulgated thereunder.
"Initial Closing" and "Initial Closing Date" shall have the meaning set
forth in Section 1.4.
"Intellectual Property" shall have the meaning set forth in Section 2.13.
"Knowledge" of the Company and similar terms shall mean the actual
knowledge of the Company's Chief Executive Officer and those members of the
Company's senior management who report directly to the Company's Chief Executive
Officer.
27
<PAGE>
"Lien" means, with respect to any asset, any mortgage, deed of trust,
pledge, hypothecation, assignment, security interest, lien, charge, restriction,
adverse claim by a third party, title defect or encumbrance of any kind
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any assignment or other conveyance of any right to receive
income and any assignment of receivables with recourse against assignor), any
filing of any financing statement as debtor under the Uniform Commercial Code or
comparable law of any jurisdiction and any agreement to give or make any of the
foregoing.
"Management Presentation" shall have the meaning set forth in Section
2.30.
"Permitted Recipients" shall have the meaning set forth in Section 11.11.
"Person" means an individual, corporation, partnership, limited liability
company, joint venture, trust or unincorporated organization or a government or
agency or political subdivision thereof.
"Purchased Shares" shall have the meaning set forth in Section 1.1.
"Purchaser" shall have the meaning set forth in Section 1.1.
"Qualified Public Offering" means the closing of an underwritten public
offering by the Company pursuant to a registration statement filed and declared
effective under the Act covering the offer and sale of Common Stock for the
account of the Company in which the aggregate net proceeds to the Company equal
at least $20,000,000.
"Registration Rights Agreement" shall have the meaning set forth in
Section 2.2.
"Related Agreements" shall have the meaning set forth in Section 2.2.
"Seagate Warrant" shall have the meaning set forth in Section 2.4.
"Second Closing" and "Second Closing Date" shall have the meaning set
forth in Section 1.5.
"Series C Preferred Stock" shall have the meaning set forth in Section
1.1.
"Stockholders Agreement" shall have the meaning set forth in Section 2.2.
"Stock Option Plan" means the Company's 1996 Stock Option Plan and 1997
Stock Option Plan in effect as of the date hereof.
"Subsidiary" or "Subsidiaries" means any corporation, association or other
business entity of which the Company and/or any of its other Subsidiaries (as
herein defined), directly or
28
<PAGE>
indirectly owns at the time more than fifty percent (50%) of the outstanding
voting shares of every class of such corporation or trust other than directors'
qualifying shares.
"Target" shall have the meaning set forth in Section 4.7.
"Tax" and "Taxes" shall have the meaning set forth in Section 2.10.
"Warrant Agreement" shall have the meaning set forth in Section 1.2.
"Warrant" shall have the meaning set forth in Section 1.2.
"Warrant Shares" shall have the meaning set forth in Section 1.2.
ARTICLE X
TERMINATION
10.1 Termination by Mutual Written Consent. This Agreement may be
terminated, and the transactions contemplated hereby abandoned, at any time
prior to the Initial Closing by the written agreement of the Company and the
Purchasers.
10.2 Termination for Breach. This Agreement may be terminated and the
transactions contemplated hereby may be abandoned at any time before the Initial
Closing (or any date to which such Initial Closing may have been extended by the
written agreement of the parties obligated to perform on such Initial Closing)
by any party obligated to perform on such Initial Closing if the conditions for
its benefit set forth in Article VI or VII, as the case may be, have not been
satisfied on or prior to such Initial Closing and if the conditions for the
benefit of the other parties have been satisfied or waived, and if such
performing party shall have given written notice of termination to the
non-performing party.
10.3 Termination for Delay. Unless earlier terminated in accordance with
Section 10.1 or 10.2, this Agreement may be terminated and the transactions
contemplated hereby may be abandoned by the Company or the Purchasers if the
Initial Closing does not occur by December 15, 1998, provided, however, that the
right to terminate this Agreement under this Section 10.3 shall not be available
to any party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Initial Closing to occur
on or before such date.
10.4 Rights After Termination. Upon termination of this Agreement under
this Article X, the parties shall be released from all obligations arising
hereunder, except as to any liability for misrepresentations, breach or default
in connection with any warranty, representation, covenant, duty or obligation
given, occurring or arising prior to the date of termination and except as to
the Company's obligations under Section 11.6 hereof.
29
<PAGE>
ARTICLE XI
MISCELLANEOUS
11.1 Survival of Representations. The representations, warranties,
covenants and agreements made herein or in any certificates or documents
executed in connection herewith shall survive the execution and delivery hereof
and the Closing of the transaction contemplated hereby.
11.2 Parties in Interest. Except as otherwise set forth herein, all
covenants, agreements, representations, warranties and undertakings contained in
this Agreement shall be binding on and shall inure to the benefit of the
respective successors and assigns of the parties hereto (including permitted
transferees of any of the Purchased Shares). Except as may be required to be
disclosed by order of a court or otherwise required by law, the parties agree to
maintain in confidence the terms of the purchase of the Purchased Shares
hereunder, except that the Purchasers may disclose such terms to their investors
in the ordinary course and except that the Company may disclose such terms to
its shareholders, accountants, bankers and advisors in the ordinary course.
11.3 Shares Owned by Affiliates. For the purposes of applying all
provisions of this Agreement which condition the receipt of information or
access to information or exercise of any rights upon ownership of a specified
number or percentage of shares, the shares owned of record by any affiliate of a
Purchaser shall be deemed to be owned by such Purchaser. For the purpose of this
Agreement, the term "affiliate" shall mean any Person controlling, controlled by
or under common control with, a Purchaser and any general or limited partner of
a Purchaser. Without limiting the foregoing, each Purchaser shall be considered
an affiliate of each other Purchaser.
11.4 Amendments and Waivers. Amendments or additions to this Agreement may
be made and compliance with any term, covenant, agreement, condition or
provision set forth herein may be omitted or waived (either generally or in a
particular instance and either retroactively or prospectively) upon the written
consent of the Company (or the consent of the Advent Representative as herein
provided) and the holders of a majority of the Conversion Shares, assuming for
such purposes the conversion of all shares. Prompt notice of any such amendment
or waiver shall be given to any Person who did not consent thereto. This
Agreement (including the Schedules and Exhibits annexed hereto, which are an
integral part of this Agreement) constitutes the full and complete agreement of
the parties with respect to the subject matter hereof.
11.5 Notices. All notices, requests, consents, reports and demands shall
be in writing and shall be hand delivered, sent by facsimile or other electronic
medium, or mailed, postage prepaid, to the Company or to the Purchasers at the
address set forth below or to such other address as may be furnished in writing
to the other parties hereto:
30
<PAGE>
The Company: CVC, Inc.
525 Lee Road
Rochester, New York 14606
Attention: President
Tel: (716) 458-2550
Fax: (716) 458-0426
with copy to: Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York
Attention: Frederick W. Kanner, Esq.
Tel: (212) 259-7300
Fax: (212) 259-7302
The Purchasers: The address set forth opposite the Purchaser's name on
Schedule 1.1 attached hereto.
with copy to: Hutchins, Wheeler & Dittmar
A Professional Corporation
101 Federal Street
Boston, Massachusetts 02110
Attention: Anthony J. Medaglia, Jr., P.C.
Tel: (617) 951-6600
Fax: (617) 951-1295
11.6 Expenses. Each party hereto will pay its own expenses in connection
with the transactions contemplated hereby, provided, however, that the Company
shall pay (i) the Purchasers' reasonable costs and expenses, for legal counsel
and accounting review (not including audit procedures performed by such
accountants), in connection with the investigation, preparation, execution and
delivery of this Agreement (and due diligence related thereto) and the other
instruments and documents to be delivered hereunder and the transactions
contemplated hereby and thereby; provided, however, that Advent shall use its
best efforts to keep such costs and expenses to a minimum, and in no case shall
such costs and expenses exceed $40,000.
11.7 Counterparts. This Agreement and any exhibit hereto may be executed
in multiple counterparts, each of which shall constitute an original but all of
which shall constitute but one and the same instrument. One or more counterparts
of this Agreement or any exhibit hereto may be delivered via telecopier, with
the intention that they shall have the same effect as an original counterpart
hereof.
11.8 Effect of Headings. The article and section headings herein are for
convenience only and shall not affect the construction or interpretation hereof.
31
<PAGE>
11.9 Adjustments. All provisions of this Agreement shall be automatically
adjusted to reflect any stock dividend, stock split or other such form of
recapitalization.
11.10 Governing Law. This Agreement shall be deemed a contract made under
the laws of the State of Delaware and together with the rights and obligations
of the parties hereunder, shall be construed under and governed by the laws of
such state. Each of the parties hereto agrees that any action or proceeding
brought to enforce the rights or obligations of any party hereto under this
Agreement may be commenced and maintained in any court of competent jurisdiction
located in the State of Delaware, and that the United States District Court for
Delaware County, Delaware shall have non-exclusive jurisdiction over any such
action, suit or proceeding brought by any of the parties hereto. Each of the
parties hereto further agrees that process may be served upon it by certified
mail, return receipt requested, addressed as more generally provided in Section
11.5 hereof, and consents to the exercise of jurisdiction over it and its
properties with respect to any action, suit or proceeding arising out of or in
connection with this agreement or the transactions contemplated hereby or the
enforcement of any rights under this Agreement.
11.11 Confidentiality. Each Purchaser covenants and agrees that such
Purchaser shall maintain the confidentiality of all financial, confidential and
proprietary information of the Company ("Confidential Information") that is
provided to such Purchaser under this Agreement or that is otherwise provided to
such Purchaser by the Company and identified by the Company in writing to such
Purchaser as being of a confidential nature. For purposes hereof, "Confidential
Information" shall not include any information which (i) was available to or in
possession of such Purchaser or any employees thereof or any beneficial owner of
a partnership interest in such Purchaser (collectively referred to herein as
"Permitted Recipients") prior to the time of disclosure to such Purchaser by the
Company or its representatives, (ii) is or becomes generally available to the
public other than as a result of a disclosure by any of such Permitted
Recipients, or (iii) is or becomes available to such Permitted Recipients on a
nonconfidential basis by a third party which is not bound by a confidentiality
agreement with the Company. Notwithstanding the preceding sentence, a Purchaser
may (a) disclose such confidential information when required by law or
governmental order or regulation or when required by a subpoena or other
process, provided that such Purchaser shall use reasonable efforts to give the
Company prior notice thereof; (b) disclose such confidential information to the
extent necessary to enforce this Agreement; (c) disclose such confidential
information to its attorneys, accountants, consultants and other professionals
to the extent necessary to obtain their services in connection with its
investment in the Company, provided that the requirements of this Section 11.11
shall in turn be binding on any such attorney, accountant consultant or other
professional; (d) disclose such confidential information as may be required by
any prospective purchaser of any Shares or Conversion Shares from such
Purchaser, provided that such proposed sale is in compliance with the
restrictions imposed by this Agreement and the Related Agreements and such
prospective purchaser agrees in writing to be bound by the provisions of this
Section 11.11; and (e) disclose such confidential information to any of its
affiliates, provided that the requirements of this Section 11.11 shall in turn
be binding on such affiliates.
32
<PAGE>
11.12 Assignment. Each Purchaser has the right to assign or transfer any
of its rights pursuant to this Agreement in connection with (and in proportion
to) its transfer of securities purchased hereunder, in all cases subject to the
terms of the Stockholders Agreement. The Company may not assign or transfer any
of its rights pursuant to this Agreement unless the Company first obtains the
express written consent of a majority of the Purchasers.
11.13 Waiver of Jury Trial. Each of the Company and the purchasers hereby
expressly waives its respective rights to a jury trial of any claim or cause of
action based upon or arising out of this agreement, any other related agreements
or any dealings between them relating to the subject matter of this agreement.
The Company and Purchasers also waive any bond or surety or security upon such
bond which might, but for this waiver, be required of any party. The scope of
this waiver is intended to be all encompassing of any and all disputes that may
be filed in any court and that relate to the subject matter of this transaction,
including without limitation, contract claims, tort claims, breach of duty
claims, and all other common law and statutory claims. The Company and the
Purchasers further warrant and represent that each has reviewed this waiver with
its legal counsel, and that each voluntarily waives its jury trial rights
following consultation with legal counsel. This waiver is irrevocable and may
only be modified either orally or in amendments, renewals, supplements or
modifications to this agreement, any other related agreement or the purchased
shares. In the event of litigation, this agreement may be filed as a written
consent to a trial (without a jury) by the court.
*******
33
<PAGE>
CVC, INC.
COUNTERPART SIGNATURE PAGE
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon, this letter shall become a binding agreement among us.
CVC. INC.
By: /s/ Christine B. Whitman
------------------------------------
Name: CHRISTINE B. WHITMAN
Title: President & Chief Executive
Officer
Global Private Equity III Limited
Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent PGGM Global Limited Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent Partners GPE III Limited
Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent Partners (NA) GPE III Limited
Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By:
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent Partners Limited Partnership
By: Advent International Limited
Partnership, G.P.
By: Advent International Corporation,
G.P.
By:
------------------------------------
Douglas A. Kingsley,
Senior V.P.
S-1
<PAGE>
CVC, INC.
COUNTERPART SIGNATURE PAGE
If you are in agreement with the foregoing, please sign the form of
acceptance on the enclosed counterpart of this letter and return the same to the
Company, whereupon, this letter shall become a binding agreement among us.
CVC. INC.
By:
------------------------------------
Name:
Title:
Global Private Equity III Limited
Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Douglas A. Kingsley
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent PGGM Global Limited Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Douglas A. Kingsley
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent Partners GPE III Limited
Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Douglas A. Kingsley
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent Partners (NA) GPE III Limited
Partnership
By: Advent International Limited
Partnership, General Partner
By: Advent International Corporation,
General Partner
By: /s/ Douglas A. Kingsley
------------------------------------
Douglas A. Kingsley,
Senior Vice President
Advent Partners Limited Partnership
By: Advent International Limited
Partnership, G.P.
By: Advent International Corporation,
G.P.
By: /s/ Douglas A. Kingsley
------------------------------------
Douglas A. Kingsley, Senior V.P.
S-1
<PAGE>
Schedule 1.1
Purchaser Purchased Shares Consideration
- --------- ---------------- -------------
Global Private Equity III 84,000 $8,400,000
Limited Partnership
Advent PGGM 12,870 $1,287,000
Global Limited Partnership
Advent Partners GPE III 1,270 $127,000
Limited Partnership
Advent Partners (NA) GPE III 380 $38,000
Limited Partnership
Advent Partners 1,480 $148,000
Limited Partnership
c/o Advent International Corporation
75 State Street
Boston, MA 02109
Attention: Douglas A. Kingsley
<PAGE>
Exhibit 10.34
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS (A) THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT,
(B) IT IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY THAT SUCH SALE OR
TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT UNDER, OR OTHERWISE IN COMPLIANCE
WITH, SUCH LAWS OR (C) THE COMPANY RECEIVES A "NO ACTION" LETTER OR SIMILAR
DECLARATION FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT SUCH
SALE OR TRANSFER WITHOUT REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY
SAID COMMISSION THAT ACTION BE TAKEN WITH RESPECT THERETO. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY.
NO. W-01 VOID AFTER DECEMBER 10, 2005
FORM OF
WARRANT
TO PURCHASE 168,000 SHARES OF COMMON STOCK OF
CVC, INC.
Dated as of December 10, 1998
THIS CERTIFIES THAT, for value received, Global Private Equity III
Limited Partnership or its permitted transferees or assigns (the "Holder") is
entitled to purchase from CVC, Inc., a Delaware corporation (the "Company"),
168,000 fully paid and nonassessable shares (the "Shares") (as adjusted pursuant
to Section 3 below) of common stock, $.01 par value ("Common Stock"), of the
Company, at the price of $10.00 per
<PAGE>
share (the "Exercise Price") (as adjusted pursuant to Section 3 below), subject
to the provisions and upon the terms and conditions set forth below.
Capitalized terms used and not otherwise defined in this warrant shall
have the meanings assigned in the Stock Purchase Agreement, dated as of December
10, 1998 between the Company and the Purchasers named therein (the "Stock
Purchase Agreement").
1. EXERCISE AND PAYMENT.
1.1 EXERCISE. On or after December 10, 2001, the purchase
rights represented by this Warrant may be exercised by the Holder, in whole or
in part, by the surrender of this Warrant (together with a duly executed
exercise notice (the "Notice of Exercise") in the form attached hereto as
EXHIBIT A) at the principal office of the Company, and by the payment to the
Company, by wire transfer, of an amount equal to the aggregate Exercise Price of
the Shares being purchased.
1.2 STOCK CERTIFICATES. In the event of the exercise of all or
any portion of this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder by the Company at its own expense
(including the payment by it of any applicable issue taxes) within a reasonable
time, which shall in no event be later than ten (10) days thereafter and, unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the Shares with respect to which this Warrant shall not have been exercised
shall also be issued to the Holder within such time.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for shares of the Common Stock or other
securities purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening of
said transfer books.
2. STOCK FULLY PAID; RESERVATION OF SHARES. All of the Shares issuable
upon the exercise of this Warrant will, upon issuance and receipt of the
Exercise Price therefor, be fully paid and nonassessable, and free from all
taxes, liens, encumbrances and charges with respect to the issue thereof. During
the period within which this Warrant may be exercised, the Company shall at all
times have authorized and reserved for issuance sufficient shares of its Common
Stock to provide for the exercise of this Warrant.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
3.1 RECLASSIFICATION. In case of any reclassification of the
Common Stock (other than a change in par value, or as a result of a subdivision
or combination), the Company, shall execute a new warrant, providing that the
Holder shall have the right to exercise such new warrant, and procure upon such
exercise and payment of the same
2
<PAGE>
aggregate Exercise Price, in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification by a
holder of an equivalent number of shares of Common Stock had the holder
exercised the Warrant immediately prior thereto. Such new warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 3.
3.2 DIVIDENDS, STOCK SPLITS AND COMBINATIONS. If the number of shares
of Common Stock outstanding at any time is increased by a stock dividend payable
in shares of Common Stock or by a subdivision or split up of stock, then the
Exercise Price shall, concurrently with the effectiveness of such dividend,
subdivision or split up, be proportionately decreased so that the number of
shares of Common Stock issuable on exercise of this Warrant shall be increased
in proportion to such increase of outstanding shares of Common Stock. If the
number of shares of Common Stock outstanding at any time is decreased by a
combination of the outstanding shares of Common Stock, then the Exercise Price
shall, concurrently with the effectiveness of such combination, be
proportionately increased so that the number of shares of Common Stock issuable
on exercise of this Warrant shall be decreased in proportion to such decrease of
outstanding shares of Common Stock.
3.3 ADJUSTMENT FOR LIQUIDATION, REDEMPTION OR CONVERSION OF SERIES C
PREFERRED STOCK. Upon a liquidation, redemption or conversion on or after
December 10, 2001 and prior to December 10, 2003 of all of the then outstanding
shares of the Company's Series C Senior Convertible Redeemable Preferred Stock,
$.01 par value (the "Series C Preferred Stock") and Series D Redeemable
Preferred Stock, $.01 par value (the "Series D Preferred Stock") in accordance
with Article IV, Section 2, Section 3 or Section 4 of the Company's Restated
Certificate of Incorporation, as amended, if a Holder has not previously
exercised in accordance with Section 1 hereto, the Exercise Price shall be
adjusted to $12.00 per share and if a Holder has previously exercised in
accordance with Section 1 hereto, such Holder shall pay to the Company an amount
equal to the product of $2.00 per share multiplied by the number of Shares of
Common Stock purchased by such Holder upon such exercise (including Shares
applied to pay the Exercise Price in accordance with Section 4 hereof).
3.4 ANTIDILUTION ADJUSTMENT. The Exercise Price shall be subject to
adjustment from time to time as follows:
(a) SPECIAL DEFINITIONS. For purposes of this Section 3.4, the
following definitions shall apply:
(1) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all shares
of Common Stock issued (or, pursuant to Section 3.4(c) below, deemed to be
issued) by the Company after the Original Issue Date other than shares of Common
Stock issued or issuable:
(A) upon conversion of shares of the Preferred Stock
or the exercise or conversion of any Options outstanding on the Original Issue
Date;
3
<PAGE>
(B) to officers, directors, employees and
consultants of the Company or any subsidiary thereof, pursuant to a stock option
plan, stock purchase plan or other employee stock incentive plan approved by the
Board of Directors of the Company or other stock arrangements which have been
approved by the Board of Directors of the Company;
(C) pursuant to any event for which
adjustment has already been made pursuant to this Section 3.4;
(D) as a dividend or distribution on the
Preferred Stock;
(E) as a dividend or distribution on the
Common Stock;
(F) upon any subdivision or split up of
Common Stock;
or
(G) upon any capital reorganization of the
Company.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(3) "OPTIONS" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(4) "ORIGINAL ISSUE DATE" shall mean the date on
which this Warrant was issued.
(5) "PREFERRED STOCK" shall mean collectively, the
Company's 8% Non-Cumulative Convertible Preferred Stock, $.01 par value, Series
B Non-Cumulative Convertible Preferred Stock, $.01 par value, Series C Preferred
Stock and Series D Preferred Stock.
(b) NO ADJUSTMENT OF EXERCISE PRICE. No adjustment in the
Exercise Price shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Company is less than the
Exercise Price in effect on the date or and immediately prior to such issue.
(c) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. Except
as provided in Section 3.4(a)(1) above, if the Company at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein
4
<PAGE>
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 3.4(e) below) of such Additional Shares of
Common Stock would be less than the Exercise Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Exercise Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or increase or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Exercise Price computed upon the initial Exercise Price
thereof set forth in the first paragraph of this Warrant (or upon the occurrence
of a record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective , be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(3) on the expiration or cancellation of any Options
or the termination of the right to convert or exchange any Convertible
Securities which shall have not been exercised, if the Exercise Price shall have
been adjusted upon the original issuance thereof or shall have been subsequently
adjusted pursuant to clause (2) above, the Exercise Price shall be recomputed as
if the only Additional Shares of Common Stock issued were shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefore was the consideration actually received by the Company for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged plus the
consideration actually received by the Company upon such conversion or exchange,
if any; and
(4) no readjustment pursuant to clause (2) or clause
(3) above shall have the effect of increasing the Exercise Price to an amount
which exceeds the lower of (i) the initial Exercise Price on the original
adjustment date (unless the Exercise Price is increased above the initial
Exercise Price pursuant to Section 3.1 or 3.2, or (ii) the Exercise Price that
would have resulted from any issuances of Additional Shares of
5
<PAGE>
Common Stock (other than those the subject of such adjustments) between the
original adjustment date and such readjustment date; and
(d) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event the Company shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3.4(c), but excluding stock dividends, subdivisions or
split-ups that are the subject of adjustment pursuant to Section 3.1 or 3.2
without consideration or for a consideration per share less than the Exercise
Price applicable on and immediately prior to such issue, then and in such event,
the Exercise Price shall be reduced concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the Exercise Price in
effect on the date of and immediately prior to such issue by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue (on a fully diluted as converted
basis), including without limitation the number of shares of Common Stock
issuable upon conversion of the Preferred Stock outstanding immediately prior to
such issue and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at the Exercise Price in effect on the
date of and immediately prior to such issue; and the denominator of which shall
be the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issue (on a fully diluted as converted basis), including without
limitation the number of shares of Common Stock issuable upon conversion of the
Preferred Stock outstanding immediately prior to such issue and (ii) the number
of such Additional Shares of Common Stock so issued.
(e) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3.4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors of the Company; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors of the Company.
6
<PAGE>
(2) OPTIONS AND CONVERTIBLE SECURITIES. The consideration per
share received by the Company for Additional Shares of Common Stock deemed to
have been issued pursuant to Section 3.4(b) and 3.4(c), relating to Options and
Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the (ii) aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
4. NET ISSUE ELECTION. The holder hereof may elect to receive, without
the payment by such holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant or
such portion to the Company, at the office of the Company. Thereupon, the
Company shall issue to such holder such number of fully paid and nonassessable
shares of Common Stock as is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to such holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in accordance with the following provisions, as at the time the net issue
election is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the net
issue election is made pursuant to this Section 4.
For purposes of this Section 4, "fair market value" of one share of
Common Stock shall be determined as follows:
7
<PAGE>
(1) Where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per
share shall be the average of the closing bid and asked prices of the
Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on
the NASDAQ System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in THE WALL STREET
JOURNAL for the five (5) trading days prior to the date to the date of
determination of fair market value. Notwithstanding the foregoing, in
the event the Warrants are exercised in connection with the Company's
initial public offering of Common Stock, the fair market value per
share shall be the per share offering price to the public of the
Company's initial public offering.
(2) If no public market for the Common Stock exists at the
time of such exercise, the Company and the holder hereof shall
negotiate in good faith in an effort to reach agreement upon the fair
market value of one share of Common Stock for a period of ten (10) days
after delivery of the executed subscription.
(3) If the Company and the holder hereof are unable to reach
agreement under the foregoing subparagraph (2), the fair market value
of one share of Common Stock shall be determined by appraisal. The
Company and the holder hereof shall each select an appraiser (the
"Selected Appraisers") within thirty (30) days after the expiration of
the ten-day period in subparagraph (2) above. Each Selected Appraiser
shall render its appraisal within thirty (30) days of its appointment
hereunder. In the event that either Selected Appraiser fails to render
an appraisal within such thirty-day period, the first appraisal
rendered shall be conclusive. In the event that the values determined
by the Selected Appraisers differ by less than ten percent (10%) of the
lower value, the fair market value shall be the average of the
appraisals made by each of the Selected Appraisers. In the event that
the values differ by ten percent (10%) or more of the lower value, the
Selected Appraisers shall within ten (10) days select a third appraiser
(the "Neutral Appraiser") to conduct an appraisal. The Neutral
Appraiser shall render its appraisal within thirty (30) days of its
appointment hereunder. The fair market value of one share of Common
Stock shall be equal to the appraisal made by the Neutral Appraiser if
such appraisal is between the two appraisals made by the Selected
Appraisers or, if such appraisal by the Neutral Appraiser is not
between the two appraisals made by the Selected Appraisers, then the
fair market value of one share of Common Stock shall be that one of the
two appraisals made by the Selected Appraisers that is closer to the
appraisal made by the Neutral Appraiser. All appraisals delivered
pursuant to this subparagraph (3) shall be in writing and signed by the
appraiser. The fees, costs and expenses of each of the Selected
Appraisers will be borne by the party who selected such appraiser, and
the fees, costs and expenses of the Neutral Appraiser will be borne
equally by the Company and the holder hereof.
8
<PAGE>
(4) In appraising the fair market value of one share of Common
Stock, there shall be no discount for minority interests.
(5) The fair market value as determined in accordance with
this Section 4 shall be conclusive, final and binding upon the Company
and the holder hereof, and shall be enforceable in any court having
jurisdiction over a proceeding to enforce the terms of this Warrant.
5. NOTICE. In the event of the occurrence of any one or more of the following
(each, a "Liquidity Event"): (i) a liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary; (ii) a sale, merger,
recapitalization, reorganization or consolidation involving the Company, as the
result of which those persons who hold at least 50% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; or (iii) the sale of all or substantially all of the
assets of the Company; then in connection with each such Liquidity Event, the
Company shall send to the Holder:
(a) At least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution, subscription rights (specifying the date on which the
Holder shall be entitled thereto) or for determining rights to vote in respect
of such Liquidity Event; and
(b) In the case of any such Liquidity Event, at least ten (10)
days prior written notice of the date when the same shall take place (and
specifying the date on which the Holder shall be entitled to exchange its Common
Stock for securities or other property deliverable upon such Liquidity Event).
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder. In lieu of such fractional
shares the Company shall make a cash payment therefor based upon the Exercise
Price then in effect.
7. RESTRICTIONS ON TRANSFER.
7.1 RESTRICTIVE LEGEND. Each certificate representing (i) the
Shares and (ii) any other securities issued in respect of the Shares upon any
stock split, stock dividend or recapitalization (collectively, the "Restricted
Securities"), shall be endorsed as follows:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Company receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the act, (b)
it is
9
<PAGE>
established to the satisfaction of the Company that such sale or
transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Company receives a "no action"
letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Company at the principal executive offices of the
Company.
The Company is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Company.
7.2 OWNERSHIP OF WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Section 7.
7.3 TRANSFER OF THE WARRANT. Subject to the provisions of the
Amended and Restated Stockholders' Agreement dated as of December 10, 1998,
among the Company and the stockholders party thereto, this Warrant may be
transferred in whole or in part to one or more parties at the option of the
Holder; PROVIDED, HOWEVER, that prior to any transfer of this Warrant, the
Holder shall give written notice to the Company of the Holder's intention to
effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, contain a
representation in writing from the proposed transferee that the Warrant is being
acquired for investment not with a view to any sale or distribution thereof and
shall be accompanied by the Assignment form attached hereto as EXHIBIT B duly
executed by the Holder. Upon transfer of the Warrant pursuant to this Section 7,
the Company shall at the request of Holder and upon surrender of the Warrant to
the Company, promptly issue new Warrants in the names and amounts requested by
the Holder to replace the surrendered Warrant.
8. NO RIGHTS OF STOCKHOLDERS. This Warrant does not entitle the Holder
to any voting rights as a stockholder of the Company prior to the exercise of
the Warrant; further, the Holder has no liability as to the Exercise Price.
9. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but it will at
all times in good faith assist in the carrying out
10
<PAGE>
of all of the provisions of this Warrant and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant or like tenor and dated as of such cancellation, in
lieu of this Warrant.
11. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a Saturday or a Sunday or a legal holiday.
12. EXPIRATION OF WARRANT. Notwithstanding any other provision of this
Warrant, this Warrant shall expire and shall no longer be exercisable upon the
earlier of (i) payment by the Company prior to December 10, 2001 with respect to
all of the then outstanding Series C Preferred Stock and Series D Preferred
Stock held by the Holder in accordance with Article IV, Section 2, Section 3 or
Section 4 of the Company's Amended and Restated Certificate of Incorporation or
(ii) at 12:00 a.m., New York time, on December 10, 2005.
13. MISCELLANEOUS.
13.1 GOVERNING LAW. This Warrant shall be governed by and
construed in all respects in accordance with the laws of the State of Delaware
without giving effect to the conflicts of laws provisions thereof.
13.2 ENTIRE AGREEMENT; AMENDMENT. This Warrant constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof, except as may be provided in (i) the Amended and Restated
Stockholders' Agreement dated as of December 10, 2005, by and among the Company
and certain stockholders of the Company, (ii) the Stock Purchase Agreement and
(iii) the Amended and Restated Registration Rights Agreement dated as of
December 10, 2005, by and among the Company and certain stockholders of the
Company. Neither this Warrant nor any term hereof may be amended, waived,
discharged, or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the permitted successors and assigns, heirs, executors, and administrators
of the Company and the Holder.
11
<PAGE>
13.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, by overnight courier, or
otherwise delivered by hand or by messenger or sent by facsimile and confirmed
by mail, addressed (a) if to the Company, 525 Lee Road, Rochester, New York
14603, telephone (716) 458-2550, facsimile (716) 458-0424, and addressed to the
attention of the President, with a copy to Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York 10019 (Attention: Frederick W. Kanner, Esq.),
telephone: (212) 259-7300, facsimile: (212) 259-7202, and (b) to Holder at the
address set forth on EXHIBIT C attached hereto, with a copy to Hutchins, Wheeler
& Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts
02110 (Attention: Anthony J. Medaglia, Jr., P.C.), telephone: (617) 951-6600,
facsimile: (617) 951-1295. Each of such notice or other communication shall for
all purposes of this Agreement be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail or by Federal Express or
other reputable overnight carrier, upon receipt.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
12
<PAGE>
Issued this ____ day of December, 1998.
CVC, INC.
By:
------------------------------------
Title:
---------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
------------------------------
Title:
---------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
Issued this th day of December, 1998.
CVC, INC.
By:
---------------------------------
Title:
-------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- --------------------------
By:
------------------------------
Title:
-----------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: CVC, INC.
525 Lee Road
Post Office Box 1886
Rochester, New York 14603-1886
Attention: President
1. The undersigned hereby elects to purchase _________ shares of Common Stock of
CVC, INC. pursuant to the terms of this Warrant, and tenders herewith payment of
the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares of Common
Stock in the name of the undersigned or in such other name as is specified
below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned hereby represents and warrants that the aforesaid shares of
Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
------------------------------------
(Signature)
Title:
-------------------------------
- ------------------------
(Date)
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________________, whose address is _____________________, the
right represented by the attached Warrant to purchase _________ shares of Common
Stock of CVC, INC., to which the attached Warrant relates.
Dated:____________________
------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
------------------------------------------
(Address)
Signed in the presence of:
- -----------------------------
<PAGE>
Exhibit 10.35
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS (A) THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT,
(B) IT IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY THAT SUCH SALE OR
TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT UNDER, OR OTHERWISE IN COMPLIANCE
WITH, SUCH LAWS OR (C) THE COMPANY RECEIVES A "NO ACTION" LETTER OR SIMILAR
DECLARATION FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT SUCH
SALE OR TRANSFER WITHOUT REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY
SAID COMMISSION THAT ACTION BE TAKEN WITH RESPECT THERETO. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY.
NO. W-02 VOID AFTER DECEMBER 10, 2005
FORM OF
WARRANT
TO PURCHASE 25,740 SHARES OF COMMON STOCK OF
CVC, INC.
Dated as of December 10, 1998
THIS CERTIFIES THAT, for value received, Advent PGGM Global Limited
Partnership or its permitted transferees or assigns (the "Holder") is entitled
to purchase from CVC, Inc., a Delaware corporation (the "Company"), 25,740 fully
paid and nonassessable shares (the "Shares") (as adjusted pursuant to Section 3
below) of common stock, $.01 par value ("Common Stock"), of the Company, at the
price of $10.00 per
<PAGE>
share (the "Exercise Price") (as adjusted pursuant to Section 3 below), subject
to the provisions and upon the terms and conditions set forth below.
Capitalized terms used and not otherwise defined in this warrant shall
have the meanings assigned in the Stock Purchase Agreement, dated as of December
10, 1998 between the Company and the Purchasers named therein (the "Stock
Purchase Agreement").
1. EXERCISE AND PAYMENT.
1.1 EXERCISE. On or after December 10, 2001, the purchase
rights represented by this Warrant may be exercised by the Holder, in whole or
in part, by the surrender of this Warrant (together with a duly executed
exercise notice (the "Notice of Exercise") in the form attached hereto as
EXHIBIT A) at the principal office of the Company, and by the payment to the
Company, by wire transfer, of an amount equal to the aggregate Exercise Price of
the Shares being purchased.
1.2 STOCK CERTIFICATES. In the event of the exercise of all or
any portion of this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder by the Company at its own expense
(including the payment by it of any applicable issue taxes) within a reasonable
time, which shall in no event be later than ten (10) days thereafter and, unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the Shares with respect to which this Warrant shall not have been exercised
shall also be issued to the Holder within such time.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for shares of the Common Stock or other
securities purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening of
said transfer books.
2. STOCK FULLY PAID; RESERVATION OF SHARES. All of the Shares issuable
upon the exercise of this Warrant will, upon issuance and receipt of the
Exercise Price therefor, be fully paid and nonassessable, and free from all
taxes, liens, encumbrances and charges with respect to the issue thereof. During
the period within which this Warrant may be exercised, the Company shall at all
times have authorized and reserved for issuance sufficient shares of its Common
Stock to provide for the exercise of this Warrant.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
3.1 RECLASSIFICATION. In case of any reclassification of the
Common Stock (other than a change in par value, or as a result of a subdivision
or combination), the Company, shall execute a new warrant, providing that the
Holder shall have the right to exercise such new warrant, and procure upon such
exercise and payment of the same
2
<PAGE>
aggregate Exercise Price, in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification by a
holder of an equivalent number of shares of Common Stock had the holder
exercised the Warrant immediately prior thereto. Such new warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 3.
3.2 DIVIDENDS, STOCK SPLITS AND COMBINATIONS. If the number of
shares of Common Stock outstanding at any time is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split up of stock, then
the Exercise Price shall, concurrently with the effectiveness of such dividend,
subdivision or split up, be proportionately decreased so that the number of
shares of Common Stock issuable on exercise of this Warrant shall be increased
in proportion to such increase of outstanding shares of Common Stock. If the
number of shares of Common Stock outstanding at any time is decreased by a
combination of the outstanding shares of Common Stock, then the Exercise Price
shall, concurrently with the effectiveness of such combination, be
proportionately increased so that the number of shares of Common Stock issuable
on exercise of this Warrant shall be decreased in proportion to such decrease of
outstanding shares of Common Stock.
3.3 ADJUSTMENT FOR LIQUIDATION, REDEMPTION OR CONVERSION OF
SERIES C PREFERRED STOCK. Upon a liquidation, redemption or conversion on or
after December 10, 2001 and prior to December 10, 2003 of all of the then
outstanding shares of the Company's Series C Senior Convertible Redeemable
Preferred Stock, $.01 par value (the "Series C Preferred Stock") and Series D
Redeemable Preferred Stock, $.01 par value (the "Series D Preferred Stock") in
accordance with Article IV, Section 2, Section 3 or Section 4 of the Company's
Restated Certificate of Incorporation, as amended, if a Holder has not
previously exercised in accordance with Section 1 hereto, the Exercise Price
shall be adjusted to $12.00 per share and if a Holder has previously exercised
in accordance with Section 1 hereto, such Holder shall pay to the Company an
amount equal to the product of $2.00 per share multiplied by the number of
Shares of Common Stock purchased by such Holder upon such exercise (including
Shares applied to pay the Exercise Price in accordance with Section 4 hereof).
3.4 ANTIDILUTION ADJUSTMENT. The Exercise Price shall be
subject to adjustment from time to time as follows:
(a) SPECIAL DEFINITIONS. For purposes of this Section 3.4, the
following definitions shall apply:
(1) "ADDITIONAL SHARES OF COMMON STOCK" shall mean
all shares of Common Stock issued (or, pursuant to Section 3.4(c) below, deemed
to be issued) by the Company after the Original Issue Date other than shares of
Common Stock issued or issuable:
(A) upon conversion of shares of the
Preferred Stock or the exercise or conversion of any Options outstanding on the
Original Issue Date;
3
<PAGE>
(B) to officers, directors, employees and
consultants of the Company or any subsidiary thereof, pursuant to a stock option
plan, stock purchase plan or other employee stock incentive plan approved by the
Board of Directors of the Company or other stock arrangements which have been
approved by the Board of Directors of the Company;
(C) pursuant to any event for which
adjustment has already been made pursuant to this Section 3.4;
(D) as a dividend or distribution on the
Preferred Stock;
(E) as a dividend or distribution on the
Common Stock;
(F) upon any subdivision or split up of
Common Stock; or
(G) upon any capital reorganization of the
Company.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(3) "OPTIONS" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(4) "ORIGINAL ISSUE DATE" shall mean the date on
which this Warrant was issued.
(5) "PREFERRED STOCK" shall mean collectively, the
Company's 8% Non-Cumulative Convertible Preferred Stock, $.01 par value, Series
B Non-Cumulative Convertible Preferred Stock, $.01 par value, Series C Preferred
Stock and Series D Preferred Stock.
(b) NO ADJUSTMENT OF EXERCISE PRICE. No adjustment in the
Exercise Price shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Company is less than the
Exercise Price in effect on the date or and immediately prior to such issue.
(c) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. Except
as provided in Section 3.4(a)(1) above, if the Company at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein
4
<PAGE>
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 3.4(e) below) of such Additional Shares of
Common Stock would be less than the Exercise Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Exercise Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or increase or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Exercise Price computed upon the initial Exercise Price
thereof set forth in the first paragraph of this Warrant (or upon the occurrence
of a record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective , be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(3) on the expiration or cancellation of any Options
or the termination of the right to convert or exchange any Convertible
Securities which shall have not been exercised, if the Exercise Price shall have
been adjusted upon the original issuance thereof or shall have been subsequently
adjusted pursuant to clause (2) above, the Exercise Price shall be recomputed as
if the only Additional Shares of Common Stock issued were shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefore was the consideration actually received by the Company for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged plus the
consideration actually received by the Company upon such conversion or exchange,
if any; and
(4) no readjustment pursuant to clause (2) or clause
(3) above shall have the effect of increasing the Exercise Price to an amount
which exceeds the lower of (i) the initial Exercise Price on the original
adjustment date (unless the Exercise Price is increased above the initial
Exercise Price pursuant to Section 3.1 or 3.2, or (ii) the Exercise Price that
would have resulted from any issuances of Additional Shares of
5
<PAGE>
Common Stock (other than those the subject of such adjustments) between the
original adjustment date and such readjustment date; and
(d) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event the Company shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3.4(c), but excluding stock dividends, subdivisions or
split-ups that are the subject of adjustment pursuant to Section 3.1 or 3.2
without consideration or for a consideration per share less than the Exercise
Price applicable on and immediately prior to such issue, then and in such event,
the Exercise Price shall be reduced concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the Exercise Price in
effect on the date of and immediately prior to such issue by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue (on a fully diluted as converted
basis), including without limitation the number of shares of Common Stock
issuable upon conversion of the Preferred Stock outstanding immediately prior to
such issue and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at the Exercise Price in effect on the
date of and immediately prior to such issue; and the denominator of which shall
be the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issue (on a fully diluted as converted basis), including without
limitation the number of shares of Common Stock issuable upon conversion of the
Preferred Stock outstanding immediately prior to such issue and (ii) the number
of such Additional Shares of Common Stock so issued.
(e) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3.4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors of the Company; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors of the Company.
6
<PAGE>
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 3.4(b) and 3.4(c), relating
to Options and Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the (ii) aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
4. NET ISSUE ELECTION. The holder hereof may elect to receive, without
the payment by such holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant or
such portion to the Company, at the office of the Company. Thereupon, the
Company shall issue to such holder such number of fully paid and nonassessable
shares of Common Stock as is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to such holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in accordance with the following provisions, as at the time the net issue
election is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the net
issue election is made pursuant to this Section 4.
For purposes of this Section 4, "fair market value" of one share of
Common Stock shall be determined as follows:
7
<PAGE>
(1) Where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per
share shall be the average of the closing bid and asked prices of the
Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on
the NASDAQ System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in THE WALL STREET
JOURNAL for the five (5) trading days prior to the date to the date of
determination of fair market value. Notwithstanding the foregoing, in
the event the Warrants are exercised in connection with the Company's
initial public offering of Common Stock, the fair market value per
share shall be the per share offering price to the public of the
Company's initial public offering.
(2) If no public market for the Common Stock exists at the
time of such exercise, the Company and the holder hereof shall
negotiate in good faith in an effort to reach agreement upon the fair
market value of one share of Common Stock for a period of ten (10) days
after delivery of the executed subscription.
(3) If the Company and the holder hereof are unable to reach
agreement under the foregoing subparagraph (2), the fair market value
of one share of Common Stock shall be determined by appraisal. The
Company and the holder hereof shall each select an appraiser (the
"Selected Appraisers") within thirty (30) days after the expiration of
the ten-day period in subparagraph (2) above. Each Selected Appraiser
shall render its appraisal within thirty (30) days of its appointment
hereunder. In the event that either Selected Appraiser fails to render
an appraisal within such thirty-day period, the first appraisal
rendered shall be conclusive. In the event that the values determined
by the Selected Appraisers differ by less than ten percent (10%) of the
lower value, the fair market value shall be the average of the
appraisals made by each of the Selected Appraisers. In the event that
the values differ by ten percent (10%) or more of the lower value, the
Selected Appraisers shall within ten (10) days select a third appraiser
(the "Neutral Appraiser") to conduct an appraisal. The Neutral
Appraiser shall render its appraisal within thirty (30) days of its
appointment hereunder. The fair market value of one share of Common
Stock shall be equal to the appraisal made by the Neutral Appraiser if
such appraisal is between the two appraisals made by the Selected
Appraisers or, if such appraisal by the Neutral Appraiser is not
between the two appraisals made by the Selected Appraisers, then the
fair market value of one share of Common Stock shall be that one of the
two appraisals made by the Selected Appraisers that is closer to the
appraisal made by the Neutral Appraiser. All appraisals delivered
pursuant to this subparagraph (3) shall be in writing and signed by the
appraiser. The fees, costs and expenses of each of the Selected
Appraisers will be borne by the party who selected such appraiser, and
the fees, costs and expenses of the Neutral Appraiser will be borne
equally by the Company and the holder hereof.
8
<PAGE>
(4) In appraising the fair market value of one share of Common
Stock, there shall be no discount for minority interests.
(5) The fair market value as determined in accordance with
this Section 4 shall be conclusive, final and binding upon the Company
and the holder hereof, and shall be enforceable in any court having
jurisdiction over a proceeding to enforce the terms of this Warrant.
5. NOTICE. In the event of the occurrence of any one or more of the
following (each, a "Liquidity Event"): (i) a liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary; (ii) a sale, merger,
recapitalization, reorganization or consolidation involving the Company, as the
result of which those persons who hold at least 50% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; or (iii) the sale of all or substantially all of the
assets of the Company; then in connection with each such Liquidity Event, the
Company shall send to the Holder:
(a) At least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution, subscription rights (specifying the date on which the
Holder shall be entitled thereto) or for determining rights to vote in respect
of such Liquidity Event; and
(b) In the case of any such Liquidity Event, at least ten (10)
days prior written notice of the date when the same shall take place (and
specifying the date on which the Holder shall be entitled to exchange its Common
Stock for securities or other property deliverable upon such Liquidity Event).
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder. In lieu of such fractional
shares the Company shall make a cash payment therefor based upon the Exercise
Price then in effect.
7. RESTRICTIONS ON TRANSFER.
7.1 RESTRICTIVE LEGEND. Each certificate representing (i) the
Shares and (ii) any other securities issued in respect of the Shares upon any
stock split, stock dividend or recapitalization (collectively, the "Restricted
Securities"), shall be endorsed as follows:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Company receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the act, (b)
it is
9
<PAGE>
established to the satisfaction of the Company that such sale or
transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Company receives a "no action"
letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Company at the principal executive offices of the
Company.
The Company is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Company.
7.2 OWNERSHIP OF WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Section 7.
7.3 TRANSFER OF THE WARRANT. Subject to the provisions of the
Amended and Restated Stockholders' Agreement dated as of December 10, 1998,
among the Company and the stockholders party thereto, this Warrant may be
transferred in whole or in part to one or more parties at the option of the
Holder; PROVIDED, HOWEVER, that prior to any transfer of this Warrant, the
Holder shall give written notice to the Company of the Holder's intention to
effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, contain a
representation in writing from the proposed transferee that the Warrant is being
acquired for investment not with a view to any sale or distribution thereof and
shall be accompanied by the Assignment form attached hereto as EXHIBIT B duly
executed by the Holder. Upon transfer of the Warrant pursuant to this Section 7,
the Company shall at the request of Holder and upon surrender of the Warrant to
the Company, promptly issue new Warrants in the names and amounts requested by
the Holder to replace the surrendered Warrant.
8. NO RIGHTS OF STOCKHOLDERS. This Warrant does not entitle the
Holder to any voting rights as a stockholder of the Company prior to the
exercise of the Warrant; further, the Holder has no liability as to the
Exercise Price.
9. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but it will at
all times in good faith assist in the carrying out
10
<PAGE>
of all of the provisions of this Warrant and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant or like tenor and dated as of such cancellation, in
lieu of this Warrant.
11. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a Saturday or a Sunday or a legal holiday.
12. EXPIRATION OF WARRANT. Notwithstanding any other provision of this
Warrant, this Warrant shall expire and shall no longer be exercisable upon the
earlier of (i) payment by the Company prior to December 10, 2001 with respect to
all of the then outstanding Series C Preferred Stock and Series D Preferred
Stock held by the Holder in accordance with Article IV, Section 2, Section 3 or
Section 4 of the Company's Amended and Restated Certificate of Incorporation or
(ii) at 12:00 a.m., New York time, on December 10, 2005.
13. MISCELLANEOUS.
13.1 GOVERNING LAW. This Warrant shall be governed by and
construed in all respects in accordance with the laws of the State of Delaware
without giving effect to the conflicts of laws provisions thereof.
13.2 ENTIRE AGREEMENT; AMENDMENT. This Warrant constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof, except as may be provided in (i) the Amended and Restated
Stockholders' Agreement dated as of December 10, 2005, by and among the Company
and certain stockholders of the Company, (ii) the Stock Purchase Agreement and
(iii) the Amended and Restated Registration Rights Agreement dated as of
December 10, 2005, by and among the Company and certain stockholders of the
Company. Neither this Warrant nor any term hereof may be amended, waived,
discharged, or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the permitted successors and assigns, heirs, executors, and administrators
of the Company and the Holder.
11
<PAGE>
13.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, by overnight courier, or otherwise delivered by
hand or by messenger or sent by facsimile and confirmed by mail, addressed (a)
if to the Company, 525 Lee Road, Rochester, New York 14603, telephone (716)
458-2550, facsimile (716) 458-0424, and addressed to the attention of the
President, with a copy to Dewey Ballantine LLP, 1301 Avenue of the Americas, New
York, New York 10019 (Attention: Frederick W. Kanner, Esq.), telephone: (212)
259-7300, facsimile: (212) 259-7202, and (b) to Holder at the address set forth
on EXHIBIT C attached hereto, with a copy to Hutchins, Wheeler & Dittmar, A
Professional Corporation, 101 Federal Street, Boston, Massachusetts 02110
(Attention: Anthony J. Medaglia, Jr., P.C.), telephone: (617) 951-6600,
facsimile: (617) 951-1295. Each of such notice or other communication shall for
all purposes of this Agreement be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail or by Federal Express or
other reputable overnight carrier, upon receipt.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
12
<PAGE>
Issued this ____ day of December, 1998.
CVC, INC.
By:
---------------------------------
Title:
-------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
------------------------------
Title:
-----------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
Issued this th day of December, 1998.
CVC, INC.
By:
---------------------------------
Title:
-------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- --------------------------
By:
------------------------------
Title:
-----------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: CVC, INC.
525 Lee Road
Post Office Box 1886
Rochester, New York 14603-1886
Attention: President
1. The undersigned hereby elects to purchase _________ shares of Common Stock of
CVC, INC. pursuant to the terms of this Warrant, and tenders herewith payment of
the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares of Common
Stock in the name of the undersigned or in such other name as is specified
below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned hereby represents and warrants that the aforesaid shares of
Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
------------------------------------
(Signature)
Title:
-------------------------------
- ------------------------
(Date)
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________________, whose address is _____________________, the
right represented by the attached Warrant to purchase _________ shares of Common
Stock of CVC, INC., to which the attached Warrant relates.
Dated:
--------------------
------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
------------------------------------------
(Address)
Signed in the presence of:
- -----------------------------
<PAGE>
Exhibit 10.36
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS (A) THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT,
(B) IT IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY THAT SUCH SALE OR
TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT UNDER, OR OTHERWISE IN COMPLIANCE
WITH, SUCH LAWS OR (C) THE COMPANY RECEIVES A "NO ACTION" LETTER OR SIMILAR
DECLARATION FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT SUCH
SALE OR TRANSFER WITHOUT REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY
SAID COMMISSION THAT ACTION BE TAKEN WITH RESPECT THERETO. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY.
NO. W-03 VOID AFTER DECEMBER 10, 2005
FORM OF
WARRANT
TO PURCHASE 2,540 SHARES OF COMMON STOCK OF
CVC, INC.
Dated as of December 10, 1998
THIS CERTIFIES THAT, for value received, Advent Partners GPE III
Limited Partnership or its permitted transferees or assigns (the "Holder") is
entitled to purchase from CVC, Inc., a Delaware corporation (the "Company"),
2,540 fully paid and nonassessable shares (the "Shares") (as adjusted pursuant
to Section 3 below) of common stock, $.01 par value ("Common Stock"), of the
Company, at the price of $10.00 per
<PAGE>
share (the "Exercise Price") (as adjusted pursuant to Section 3 below), subject
to the provisions and upon the terms and conditions set forth below.
Capitalized terms used and not otherwise defined in this warrant shall
have the meanings assigned in the Stock Purchase Agreement, dated as of December
10, 1998 between the Company and the Purchasers named therein (the "Stock
Purchase Agreement").
1. EXERCISE AND PAYMENT.
1.1 EXERCISE. On or after December 10, 2001, the purchase
rights represented by this Warrant may be exercised by the Holder, in whole or
in part, by the surrender of this Warrant (together with a duly executed
exercise notice (the "Notice of Exercise") in the form attached hereto as
EXHIBIT A) at the principal office of the Company, and by the payment to the
Company, by wire transfer, of an amount equal to the aggregate Exercise Price of
the Shares being purchased.
1.2 STOCK CERTIFICATES. In the event of the exercise of all or
any portion of this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder by the Company at its own expense
(including the payment by it of any applicable issue taxes) within a reasonable
time, which shall in no event be later than ten (10) days thereafter and, unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the Shares with respect to which this Warrant shall not have been exercised
shall also be issued to the Holder within such time.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for shares of the Common Stock or other
securities purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening of
said transfer books.
2. STOCK FULLY PAID; RESERVATION OF SHARES. All of the Shares issuable
upon the exercise of this Warrant will, upon issuance and receipt of the
Exercise Price therefor, be fully paid and nonassessable, and free from all
taxes, liens, encumbrances and charges with respect to the issue thereof. During
the period within which this Warrant may be exercised, the Company shall at all
times have authorized and reserved for issuance sufficient shares of its Common
Stock to provide for the exercise of this Warrant.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
3.1 RECLASSIFICATION. In case of any reclassification of the
Common Stock (other than a change in par value, or as a result of a subdivision
or combination), the Company, shall execute a new warrant, providing that the
Holder shall have the right to exercise such new warrant, and procure upon such
exercise and payment of the same
2
<PAGE>
aggregate Exercise Price, in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification by a
holder of an equivalent number of shares of Common Stock had the holder
exercised the Warrant immediately prior thereto. Such new warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 3.
3.2 DIVIDENDS, STOCK SPLITS AND COMBINATIONS. If the number of
shares of Common Stock outstanding at any time is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split up of stock, then
the Exercise Price shall, concurrently with the effectiveness of such dividend,
subdivision or split up, be proportionately decreased so that the number of
shares of Common Stock issuable on exercise of this Warrant shall be increased
in proportion to such increase of outstanding shares of Common Stock. If the
number of shares of Common Stock outstanding at any time is decreased by a
combination of the outstanding shares of Common Stock, then the Exercise Price
shall, concurrently with the effectiveness of such combination, be
proportionately increased so that the number of shares of Common Stock issuable
on exercise of this Warrant shall be decreased in proportion to such decrease of
outstanding shares of Common Stock.
3.3 ADJUSTMENT FOR LIQUIDATION, REDEMPTION OR CONVERSION OF
SERIES C PREFERRED STOCK. Upon a liquidation, redemption or conversion on or
after December 10, 2001 and prior to December 10, 2003 of all of the then
outstanding shares of the Company's Series C Senior Convertible Redeemable
Preferred Stock, $.01 par value (the "Series C Preferred Stock") and Series D
Redeemable Preferred Stock, $.01 par value (the "Series D Preferred Stock") in
accordance with Article IV, Section 2, Section 3 or Section 4 of the Company's
Restated Certificate of Incorporation, as amended, if a Holder has not
previously exercised in accordance with Section 1 hereto, the Exercise Price
shall be adjusted to $12.00 per share and if a Holder has previously exercised
in accordance with Section 1 hereto, such Holder shall pay to the Company an
amount equal to the product of $2.00 per share multiplied by the number of
Shares of Common Stock purchased by such Holder upon such exercise (including
Shares applied to pay the Exercise Price in accordance with Section 4 hereof).
3.4 ANTIDILUTION ADJUSTMENT. The Exercise Price shall be
subject to adjustment from time to time as follows:
(a) SPECIAL DEFINITIONS. For purposes of this Section 3.4, the
following definitions shall apply:
(1) "ADDITIONAL SHARES OF COMMON STOCK" shall mean
all shares of Common Stock issued (or, pursuant to Section 3.4(c) below, deemed
to be issued) by the Company after the Original Issue Date other than shares of
Common Stock issued or issuable:
(A) upon conversion of shares of the
Preferred Stock or the exercise or conversion of any Options outstanding on the
Original Issue Date;
3
<PAGE>
(B) to officers, directors, employees and
consultants of the Company or any subsidiary thereof, pursuant to a stock option
plan, stock purchase plan or other employee stock incentive plan approved by the
Board of Directors of the Company or other stock arrangements which have been
approved by the Board of Directors of the Company;
(C) pursuant to any event for which
adjustment has already been made pursuant to this Section 3.4;
(D) as a dividend or distribution on the
Preferred Stock;
(E) as a dividend or distribution on the
Common Stock;
(F) upon any subdivision or split up of
Common Stock; or
(G) upon any capital reorganization of the
Company.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(3) "OPTIONS" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(4) "ORIGINAL ISSUE DATE" shall mean the date on
which this Warrant was issued.
(5) "PREFERRED STOCK" shall mean collectively, the
Company's 8% Non-Cumulative Convertible Preferred Stock, $.01 par value, Series
B Non-Cumulative Convertible Preferred Stock, $.01 par value, Series C Preferred
Stock and Series D Preferred Stock.
(b) NO ADJUSTMENT OF EXERCISE PRICE. No adjustment in the
Exercise Price shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Company is less than the
Exercise Price in effect on the date or and immediately prior to such issue.
(c) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. Except
as provided in Section 3.4(a)(1) above, if the Company at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein
4
<PAGE>
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 3.4(e) below) of such Additional Shares of
Common Stock would be less than the Exercise Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Exercise Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or increase or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Exercise Price computed upon the initial Exercise Price
thereof set forth in the first paragraph of this Warrant (or upon the occurrence
of a record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective , be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(3) on the expiration or cancellation of any Options
or the termination of the right to convert or exchange any Convertible
Securities which shall have not been exercised, if the Exercise Price shall have
been adjusted upon the original issuance thereof or shall have been subsequently
adjusted pursuant to clause (2) above, the Exercise Price shall be recomputed as
if the only Additional Shares of Common Stock issued were shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefore was the consideration actually received by the Company for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged plus the
consideration actually received by the Company upon such conversion or exchange,
if any; and
(4) no readjustment pursuant to clause (2) or clause
(3) above shall have the effect of increasing the Exercise Price to an amount
which exceeds the lower of (i) the initial Exercise Price on the original
adjustment date (unless the Exercise Price is increased above the initial
Exercise Price pursuant to Section 3.1 or 3.2, or (ii) the Exercise Price that
would have resulted from any issuances of Additional Shares of
5
<PAGE>
Common Stock (other than those the subject of such adjustments) between the
original adjustment date and such readjustment date; and
(d) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event the Company shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3.4(c), but excluding stock dividends, subdivisions or
split-ups that are the subject of adjustment pursuant to Section 3.1 or 3.2
without consideration or for a consideration per share less than the Exercise
Price applicable on and immediately prior to such issue, then and in such event,
the Exercise Price shall be reduced concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the Exercise Price in
effect on the date of and immediately prior to such issue by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue (on a fully diluted as converted
basis), including without limitation the number of shares of Common Stock
issuable upon conversion of the Preferred Stock outstanding immediately prior to
such issue and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at the Exercise Price in effect on the
date of and immediately prior to such issue; and the denominator of which shall
be the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issue (on a fully diluted as converted basis), including without
limitation the number of shares of Common Stock issuable upon conversion of the
Preferred Stock outstanding immediately prior to such issue and (ii) the number
of such Additional Shares of Common Stock so issued.
(e) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3.4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors of the Company; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors of the Company.
6
<PAGE>
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 3.4(b) and 3.4(c), relating
to Options and Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the (ii) aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard to any
provision contained therein for a subsequent adjustment of such number) issuable
upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
4. NET ISSUE ELECTION. The holder hereof may elect to receive, without
the payment by such holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant or
such portion to the Company, at the office of the Company. Thereupon, the
Company shall issue to such holder such number of fully paid and nonassessable
shares of Common Stock as is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to such holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in accordance with the following provisions, as at the time the net issue
election is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the net
issue election is made pursuant to this Section 4.
For purposes of this Section 4, "fair market value" of one share of
Common Stock shall be determined as follows:
7
<PAGE>
(1) Where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per
share shall be the average of the closing bid and asked prices of the
Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on
the NASDAQ System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in THE WALL STREET
JOURNAL for the five (5) trading days prior to the date to the date of
determination of fair market value. Notwithstanding the foregoing, in
the event the Warrants are exercised in connection with the Company's
initial public offering of Common Stock, the fair market value per
share shall be the per share offering price to the public of the
Company's initial public offering.
(2) If no public market for the Common Stock exists at the
time of such exercise, the Company and the holder hereof shall
negotiate in good faith in an effort to reach agreement upon the fair
market value of one share of Common Stock for a period of ten (10) days
after delivery of the executed subscription.
(3) If the Company and the holder hereof are unable to reach
agreement under the foregoing subparagraph (2), the fair market value
of one share of Common Stock shall be determined by appraisal. The
Company and the holder hereof shall each select an appraiser (the
"Selected Appraisers") within thirty (30) days after the expiration of
the ten-day period in subparagraph (2) above. Each Selected Appraiser
shall render its appraisal within thirty (30) days of its appointment
hereunder. In the event that either Selected Appraiser fails to render
an appraisal within such thirty-day period, the first appraisal
rendered shall be conclusive. In the event that the values determined
by the Selected Appraisers differ by less than ten percent (10%) of the
lower value, the fair market value shall be the average of the
appraisals made by each of the Selected Appraisers. In the event that
the values differ by ten percent (10%) or more of the lower value, the
Selected Appraisers shall within ten (10) days select a third appraiser
(the "Neutral Appraiser") to conduct an appraisal. The Neutral
Appraiser shall render its appraisal within thirty (30) days of its
appointment hereunder. The fair market value of one share of Common
Stock shall be equal to the appraisal made by the Neutral Appraiser if
such appraisal is between the two appraisals made by the Selected
Appraisers or, if such appraisal by the Neutral Appraiser is not
between the two appraisals made by the Selected Appraisers, then the
fair market value of one share of Common Stock shall be that one of the
two appraisals made by the Selected Appraisers that is closer to the
appraisal made by the Neutral Appraiser. All appraisals delivered
pursuant to this subparagraph (3) shall be in writing and signed by the
appraiser. The fees, costs and expenses of each of the Selected
Appraisers will be borne by the party who selected such appraiser, and
the fees, costs and expenses of the Neutral Appraiser will be borne
equally by the Company and the holder hereof.
8
<PAGE>
(4) In appraising the fair market value of one share of Common
Stock, there shall be no discount for minority interests.
(5) The fair market value as determined in accordance with
this Section 4 shall be conclusive, final and binding upon the Company
and the holder hereof, and shall be enforceable in any court having
jurisdiction over a proceeding to enforce the terms of this Warrant.
5. NOTICE. In the event of the occurrence of any one or more of the
following (each, a "Liquidity Event"): (i) a liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary; (ii) a sale, merger,
recapitalization, reorganization or consolidation involving the Company, as the
result of which those persons who hold at least 50% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; or (iii) the sale of all or substantially all of the
assets of the Company; then in connection with each such Liquidity Event, the
Company shall send to the Holder:
(a) At least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution, subscription rights (specifying the date on which the
Holder shall be entitled thereto) or for determining rights to vote in respect
of such Liquidity Event; and
(b) In the case of any such Liquidity Event, at least ten (10)
days prior written notice of the date when the same shall take place (and
specifying the date on which the Holder shall be entitled to exchange its Common
Stock for securities or other property deliverable upon such Liquidity Event).
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder. In lieu of such fractional
shares the Company shall make a cash payment therefor based upon the Exercise
Price then in effect.
7. RESTRICTIONS ON TRANSFER.
7.1 RESTRICTIVE LEGEND. Each certificate representing (i) the
Shares and (ii) any other securities issued in respect of the Shares upon any
stock split, stock dividend or recapitalization (collectively, the "Restricted
Securities"), shall be endorsed as follows:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Company receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the act, (b)
it is
9
<PAGE>
established to the satisfaction of the Company that such sale or
transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Company receives a "no action"
letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Company at the principal executive offices of the
Company.
The Company is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Company.
7.2 OWNERSHIP OF WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Section 7.
7.3 TRANSFER OF THE WARRANT. Subject to the provisions of the
Amended and Restated Stockholders' Agreement dated as of December 10, 1998,
among the Company and the stockholders party thereto, this Warrant may be
transferred in whole or in part to one or more parties at the option of the
Holder; PROVIDED, HOWEVER, that prior to any transfer of this Warrant, the
Holder shall give written notice to the Company of the Holder's intention to
effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, contain a
representation in writing from the proposed transferee that the Warrant is being
acquired for investment not with a view to any sale or distribution thereof and
shall be accompanied by the Assignment form attached hereto as EXHIBIT B duly
executed by the Holder. Upon transfer of the Warrant pursuant to this Section 7,
the Company shall at the request of Holder and upon surrender of the Warrant to
the Company, promptly issue new Warrants in the names and amounts requested by
the Holder to replace the surrendered Warrant.
8. NO RIGHTS OF STOCKHOLDERS. This Warrant does not entitle the Holder
to any voting rights as a stockholder of the Company prior to the exercise of
the Warrant; further, the Holder has no liability as to the Exercise Price.
9. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but it will at
all times in good faith assist in the carrying out
10
<PAGE>
of all of the provisions of this Warrant and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant or like tenor and dated as of such cancellation, in
lieu of this Warrant.
11. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a Saturday or a Sunday or a legal holiday.
12. EXPIRATION OF WARRANT. Notwithstanding any other provision of this
Warrant, this Warrant shall expire and shall no longer be exercisable upon the
earlier of (i) payment by the Company prior to December 10, 2001 with respect to
all of the then outstanding Series C Preferred Stock and Series D Preferred
Stock held by the Holder in accordance with Article IV, Section 2, Section 3 or
Section 4 of the Company's Amended and Restated Certificate of Incorporation or
(ii) at 12:00 a.m., New York time, on December 10, 2005.
13. MISCELLANEOUS.
13.1 GOVERNING LAW. This Warrant shall be governed by and
construed in all respects in accordance with the laws of the State of Delaware
without giving effect to the conflicts of laws provisions thereof.
13.2 ENTIRE AGREEMENT; AMENDMENT. This Warrant constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof, except as may be provided in (i) the Amended and Restated
Stockholders' Agreement dated as of December 10, 2005, by and among the Company
and certain stockholders of the Company, (ii) the Stock Purchase Agreement and
(iii) the Amended and Restated Registration Rights Agreement dated as of
December 10, 2005, by and among the Company and certain stockholders of the
Company. Neither this Warrant nor any term hereof may be amended, waived,
discharged, or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the permitted successors and assigns, heirs, executors, and administrators
of the Company and the Holder.
11
<PAGE>
13.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, by overnight courier, or
otherwise delivered by hand or by messenger or sent by facsimile and confirmed
by mail, addressed (a) if to the Company, 525 Lee Road, Rochester, New York
14603, telephone (716) 458-2550, facsimile (716) 458-0424, and addressed to the
attention of the President, with a copy to Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York 10019 (Attention: Frederick W. Kanner, Esq.),
telephone: (212) 259-7300, facsimile: (212) 259-7202, and (b) to Holder at the
address set forth on EXHIBIT C attached hereto, with a copy to Hutchins, Wheeler
& Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts
02110 (Attention: Anthony J. Medaglia, Jr., P.C.), telephone: (617) 951-6600,
facsimile: (617) 951-1295. Each of such notice or other communication shall for
all purposes of this Agreement be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail or by Federal Express or
other reputable overnight carrier, upon receipt.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
12
<PAGE>
Issued this ____ day of December, 1998.
CVC, INC.
By:
------------------------------------
Title:
---------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
------------------------------
Title:
-----------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
Issued this th day of December, 1998.
CVC, INC.
By:
------------------------------------
Title:
---------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
------------------------------
Title:
-----------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
TO: CVC, INC.
525 Lee Road
Post Office Box 1886
Rochester, New York 14603-1886
Attention: President
1. The undersigned hereby elects to purchase _________ shares of Common
Stock of CVC, INC. pursuant to the terms of this Warrant, and tenders herewith
payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned hereby represents and warrants that the aforesaid
shares of Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
------------------------------------
(Signature)
Title:
-------------------------------
- ------------------------
(Date)
<PAGE>
EXHIBIT B
ASSIGNMENT FORM
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________________, whose address is _____________________, the
right represented by the attached Warrant to purchase _________ shares of Common
Stock of CVC, INC., to which the attached Warrant relates.
Dated:
--------------------------
------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
------------------------------------------
(Address)
Signed in the presence of:
- -----------------------------
<PAGE>
Exhibit 10.37
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS (A) THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT,
(B) IT IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY THAT SUCH SALE OR
TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT UNDER, OR OTHERWISE IN COMPLIANCE
WITH, SUCH LAWS OR (C) THE COMPANY RECEIVES A "NO ACTION" LETTER OR SIMILAR
DECLARATION FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT SUCH
SALE OR TRANSFER WITHOUT REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY
SAID COMMISSION THAT ACTION BE TAKEN WITH RESPECT THERETO. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY.
NO. W-04 VOID AFTER DECEMBER 10, 2005
FORM OF
WARRANT
TO PURCHASE 760 SHARES OF COMMON STOCK OF
CVC, INC.
Dated as of December 10, 1998
THIS CERTIFIES THAT, for value received, Advent Partners (NA) GPE III
Limited Partnership or its permitted transferees or assigns (the "Holder") is
entitled to purchase from CVC, Inc., a Delaware corporation (the "Company"), 760
fully paid and nonassessable shares (the "Shares") (as adjusted pursuant to
Section 3 below) of common stock, $.01 par value ("Common Stock"), of the
Company, at the price of $10.00 per
<PAGE>
share (the "Exercise Price") (as adjusted pursuant to Section 3 below), subject
to the provisions and upon the terms and conditions set forth below.
Capitalized terms used and not otherwise defined in this warrant shall
have the meanings assigned in the Stock Purchase Agreement, dated as of December
10, 1998 between the Company and the Purchasers named therein (the "Stock
Purchase Agreement").
1. EXERCISE AND PAYMENT.
1.1 EXERCISE. On or after December 10, 2001, the purchase
rights represented by this Warrant may be exercised by the Holder, in whole or
in part, by the surrender of this Warrant (together with a duly executed
exercise notice (the "Notice of Exercise") in the form attached hereto as
EXHIBIT A) at the principal office of the Company, and by the payment to the
Company, by wire transfer, of an amount equal to the aggregate Exercise Price of
the Shares being purchased.
1.2 STOCK CERTIFICATES. In the event of the exercise of all or
any portion of this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder by the Company at its own expense
(including the payment by it of any applicable issue taxes) within a reasonable
time, which shall in no event be later than ten (10) days thereafter and, unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the Shares with respect to which this Warrant shall not have been exercised
shall also be issued to the Holder within such time.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for shares of the Common Stock or other
securities purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening of
said transfer books.
2. STOCK FULLY PAID; RESERVATION OF SHARES. All of the Shares issuable
upon the exercise of this Warrant will, upon issuance and receipt of the
Exercise Price therefor, be fully paid and nonassessable, and free from all
taxes, liens, encumbrances and charges with respect to the issue thereof. During
the period within which this Warrant may be exercised, the Company shall at all
times have authorized and reserved for issuance sufficient shares of its Common
Stock to provide for the exercise of this Warrant.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
3.1 RECLASSIFICATION. In case of any reclassification of the
Common Stock (other than a change in par value, or as a result of a subdivision
or combination), the Company, shall execute a new warrant, providing that the
Holder shall have the right to exercise such new warrant, and procure upon such
exercise and payment of the same
2
<PAGE>
aggregate Exercise Price, in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification by a
holder of an equivalent number of shares of Common Stock had the holder
exercised the Warrant immediately prior thereto. Such new warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 3.
3.2 DIVIDENDS, STOCK SPLITS AND COMBINATIONS. If the number of
shares of Common Stock outstanding at any time is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split up of stock, then
the Exercise Price shall, concurrently with the effectiveness of such dividend,
subdivision or split up, be proportionately decreased so that the number of
shares of Common Stock issuable on exercise of this Warrant shall be increased
in proportion to such increase of outstanding shares of Common Stock. If the
number of shares of Common Stock outstanding at any time is decreased by a
combination of the outstanding shares of Common Stock, then the Exercise Price
shall, concurrently with the effectiveness of such combination, be
proportionately increased so that the number of shares of Common Stock issuable
on exercise of this Warrant shall be decreased in proportion to such decrease of
outstanding shares of Common Stock.
3.3 ADJUSTMENT FOR LIQUIDATION, REDEMPTION OR CONVERSION OF
SERIES C PREFERRED STOCK. Upon a liquidation, redemption or conversion on or
after December 10, 2001 and prior to December 10, 2003 of all of the then
outstanding shares of the Company's Series C Senior Convertible Redeemable
Preferred Stock, $.01 par value (the "Series C Preferred Stock") and Series D
Redeemable Preferred Stock, $.01 par value (the "Series D Preferred Stock") in
accordance with Article IV, Section 2, Section 3 or Section 4 of the Company's
Restated Certificate of Incorporation, as amended, if a Holder has not
previously exercised in accordance with Section 1 hereto, the Exercise Price
shall be adjusted to $12.00 per share and if a Holder has previously exercised
in accordance with Section 1 hereto, such Holder shall pay to the Company an
amount equal to the product of $2.00 per share multiplied by the number of
Shares of Common Stock purchased by such Holder upon such exercise (including
Shares applied to pay the Exercise Price in accordance with Section 4 hereof).
3.4 ANTIDILUTION ADJUSTMENT. The Exercise Price shall be
subject to adjustment from time to time as follows:
(a) SPECIAL DEFINITIONS. For purposes of this Section 3.4, the
following definitions shall apply:
(1) "ADDITIONAL SHARES OF COMMON STOCK" shall mean
all shares of Common Stock issued (or, pursuant to Section 3.4(c) below, deemed
to be issued) by the Company after the Original Issue Date other than shares of
Common Stock issued or issuable:
(A) upon conversion of shares of the
Preferred Stock or the exercise or conversion of any Options outstanding on the
Original Issue Date;
3
<PAGE>
(B) to officers, directors, employees and
consultants of the Company or any subsidiary thereof, pursuant to a stock option
plan, stock purchase plan or other employee stock incentive plan approved by the
Board of Directors of the Company or other stock arrangements which have been
approved by the Board of Directors of the Company;
(C) pursuant to any event for which
adjustment has already been made pursuant to this Section 3.4;
(D) as a dividend or distribution on the
Preferred Stock;
(E) as a dividend or distribution on the
Common Stock;
(F) upon any subdivision or split up of
Common Stock;
or
(G) upon any capital reorganization of the
Company.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(3) "OPTIONS" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(4) "ORIGINAL ISSUE DATE" shall mean the date on
which this Warrant was issued.
(5) "PREFERRED STOCK" shall mean collectively, the
Company's 8% Non-Cumulative Convertible Preferred Stock, $.01 par value, Series
B Non-Cumulative Convertible Preferred Stock, $.01 par value, Series C Preferred
Stock and Series D Preferred Stock.
(b) NO ADJUSTMENT OF EXERCISE PRICE. No adjustment in the
Exercise Price shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Company is less than the
Exercise Price in effect on the date or and immediately prior to such issue.
(c) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. Except
as provided in Section 3.4(a)(1) above, if the Company at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein
4
<PAGE>
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 3.4(e) below) of such Additional Shares of
Common Stock would be less than the Exercise Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Exercise Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or increase or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Exercise Price computed upon the initial Exercise Price
thereof set forth in the first paragraph of this Warrant (or upon the occurrence
of a record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective , be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(3) on the expiration or cancellation of any Options
or the termination of the right to convert or exchange any Convertible
Securities which shall have not been exercised, if the Exercise Price shall have
been adjusted upon the original issuance thereof or shall have been subsequently
adjusted pursuant to clause (2) above, the Exercise Price shall be recomputed as
if the only Additional Shares of Common Stock issued were shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefore was the consideration actually received by the Company for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged plus the
consideration actually received by the Company upon such conversion or exchange,
if any; and
(4) no readjustment pursuant to clause (2) or clause
(3) above shall have the effect of increasing the Exercise Price to an amount
which exceeds the lower of (i) the initial Exercise Price on the original
adjustment date (unless the Exercise Price is increased above the initial
Exercise Price pursuant to Section 3.1 or 3.2, or (ii) the Exercise Price that
would have resulted from any issuances of Additional Shares of
5
<PAGE>
Common Stock (other than those the subject of such adjustments) between the
original adjustment date and such readjustment date; and
(d) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event the Company shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3.4(c), but excluding stock dividends, subdivisions or
split-ups that are the subject of adjustment pursuant to Section 3.1 or 3.2
without consideration or for a consideration per share less than the Exercise
Price applicable on and immediately prior to such issue, then and in such event,
the Exercise Price shall be reduced concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the Exercise Price in
effect on the date of and immediately prior to such issue by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue (on a fully diluted as converted
basis), including without limitation the number of shares of Common Stock
issuable upon conversion of the Preferred Stock outstanding immediately prior to
such issue and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at the Exercise Price in effect on the
date of and immediately prior to such issue; and the denominator of which shall
be the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issue (on a fully diluted as converted basis), including without
limitation the number of shares of Common Stock issuable upon conversion of the
Preferred Stock outstanding immediately prior to such issue and (ii) the number
of such Additional Shares of Common Stock so issued.
(e) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3.4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors of the Company; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors of the Company.
6
<PAGE>
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 3.4(b) and 3.4(c), relating
to Options and Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the (ii) aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
4. NET ISSUE ELECTION. The holder hereof may elect to receive, without
the payment by such holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant or
such portion to the Company, at the office of the Company. Thereupon, the
Company shall issue to such holder such number of fully paid and nonassessable
shares of Common Stock as is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to such holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in accordance with the following provisions, as at the time the net issue
election is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the net
issue election is made pursuant to this Section 4.
For purposes of this Section 4, "fair market value" of one share of
Common Stock shall be determined as follows:
7
<PAGE>
(1) Where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per
share shall be the average of the closing bid and asked prices of the
Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on
the NASDAQ System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in THE WALL STREET
JOURNAL for the five (5) trading days prior to the date to the date of
determination of fair market value. Notwithstanding the foregoing, in
the event the Warrants are exercised in connection with the Company's
initial public offering of Common Stock, the fair market value per
share shall be the per share offering price to the public of the
Company's initial public offering.
(2) If no public market for the Common Stock exists at the
time of such exercise, the Company and the holder hereof shall
negotiate in good faith in an effort to reach agreement upon the fair
market value of one share of Common Stock for a period of ten (10) days
after delivery of the executed subscription.
(3) If the Company and the holder hereof are unable to reach
agreement under the foregoing subparagraph (2), the fair market value
of one share of Common Stock shall be determined by appraisal. The
Company and the holder hereof shall each select an appraiser (the
"Selected Appraisers") within thirty (30) days after the expiration of
the ten-day period in subparagraph (2) above. Each Selected Appraiser
shall render its appraisal within thirty (30) days of its appointment
hereunder. In the event that either Selected Appraiser fails to render
an appraisal within such thirty-day period, the first appraisal
rendered shall be conclusive. In the event that the values determined
by the Selected Appraisers differ by less than ten percent (10%) of the
lower value, the fair market value shall be the average of the
appraisals made by each of the Selected Appraisers. In the event that
the values differ by ten percent (10%) or more of the lower value, the
Selected Appraisers shall within ten (10) days select a third appraiser
(the "Neutral Appraiser") to conduct an appraisal. The Neutral
Appraiser shall render its appraisal within thirty (30) days of its
appointment hereunder. The fair market value of one share of Common
Stock shall be equal to the appraisal made by the Neutral Appraiser if
such appraisal is between the two appraisals made by the Selected
Appraisers or, if such appraisal by the Neutral Appraiser is not
between the two appraisals made by the Selected Appraisers, then the
fair market value of one share of Common Stock shall be that one of the
two appraisals made by the Selected Appraisers that is closer to the
appraisal made by the Neutral Appraiser. All appraisals delivered
pursuant to this subparagraph (3) shall be in writing and signed by the
appraiser. The fees, costs and expenses of each of the Selected
Appraisers will be borne by the party who selected such appraiser, and
the fees, costs and expenses of the Neutral Appraiser will be borne
equally by the Company and the holder hereof.
8
<PAGE>
(4) In appraising the fair market value of one share of Common
Stock, there shall be no discount for minority interests.
(5) The fair market value as determined in accordance with
this Section 4 shall be conclusive, final and binding upon the Company
and the holder hereof, and shall be enforceable in any court having
jurisdiction over a proceeding to enforce the terms of this Warrant.
5. NOTICE. In the event of the occurrence of any one or more of the
following (each, a "Liquidity Event"): (i) a liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary; (ii) a sale, merger,
recapitalization, reorganization or consolidation involving the Company, as the
result of which those persons who hold at least 50% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; or (iii) the sale of all or substantially all of the
assets of the Company; then in connection with each such Liquidity Event, the
Company shall send to the Holder:
(a) At least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution, subscription rights (specifying the date on which the
Holder shall be entitled thereto) or for determining rights to vote in respect
of such Liquidity Event; and
(b) In the case of any such Liquidity Event, at least ten (10)
days prior written notice of the date when the same shall take place (and
specifying the date on which the Holder shall be entitled to exchange its Common
Stock for securities or other property deliverable upon such Liquidity Event).
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder. In lieu of such fractional
shares the Company shall make a cash payment therefor based upon the Exercise
Price then in effect.
7. RESTRICTIONS ON TRANSFER.
7.1 RESTRICTIVE LEGEND. Each certificate representing (i) the
Shares and (ii) any other securities issued in respect of the Shares upon any
stock split, stock dividend or recapitalization (collectively, the "Restricted
Securities"), shall be endorsed as follows:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Company receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the act, (b)
it is
9
<PAGE>
established to the satisfaction of the Company that such sale or
transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Company receives a "no action"
letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Company at the principal executive offices of the
Company.
The Company is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Company.
7.2 OWNERSHIP OF WARRANT. The Company may deem and treat the
person in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Section 7.
7.3 TRANSFER OF THE WARRANT. Subject to the provisions of the
Amended and Restated Stockholders' Agreement dated as of December 10, 1998,
among the Company and the stockholders party thereto, this Warrant may be
transferred in whole or in part to one or more parties at the option of the
Holder; PROVIDED, HOWEVER, that prior to any transfer of this Warrant, the
Holder shall give written notice to the Company of the Holder's intention to
effect such transfer. Each such notice shall describe the manner and
circumstances of the proposed transfer in sufficient detail, contain a
representation in writing from the proposed transferee that the Warrant is being
acquired for investment not with a view to any sale or distribution thereof and
shall be accompanied by the Assignment form attached hereto as EXHIBIT B duly
executed by the Holder. Upon transfer of the Warrant pursuant to this Section 7,
the Company shall at the request of Holder and upon surrender of the Warrant to
the Company, promptly issue new Warrants in the names and amounts requested by
the Holder to replace the surrendered Warrant.
8. NO RIGHTS OF STOCKHOLDERS. This Warrant does not entitle the Holder
to any voting rights as a stockholder of the Company prior to the exercise of
the Warrant; further, the Holder has no liability as to the Exercise Price.
9. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but it will at
all times in good faith assist in the carrying out
10
<PAGE>
of all of the provisions of this Warrant and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant or like tenor and dated as of such cancellation, in
lieu of this Warrant.
11. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a Saturday or a Sunday or a legal holiday.
12. EXPIRATION OF WARRANT. Notwithstanding any other provision of this
Warrant, this Warrant shall expire and shall no longer be exercisable upon the
earlier of (i) payment by the Company prior to December 10, 2001 with respect to
all of the then outstanding Series C Preferred Stock and Series D Preferred
Stock held by the Holder in accordance with Article IV, Section 2, Section 3 or
Section 4 of the Company's Amended and Restated Certificate of Incorporation or
(ii) at 12:00 a.m., New York time, on December 10, 2005.
13. MISCELLANEOUS.
13.1 GOVERNING LAW. This Warrant shall be governed by and
construed in all respects in accordance with the laws of the State of Delaware
without giving effect to the conflicts of laws provisions thereof.
13.2 ENTIRE AGREEMENT; AMENDMENT. This Warrant constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof, except as may be provided in (i) the Amended and Restated
Stockholders' Agreement dated as of December 10, 2005, by and among the Company
and certain stockholders of the Company, (ii) the Stock Purchase Agreement and
(iii) the Amended and Restated Registration Rights Agreement dated as of
December 10, 2005, by and among the Company and certain stockholders of the
Company. Neither this Warrant nor any term hereof may be amended, waived,
discharged, or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the permitted successors and assigns, heirs, executors, and administrators
of the Company and the Holder.
11
<PAGE>
13.4 NOTICES, ETC. All notices and other communications
required or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, by overnight courier, or
otherwise delivered by hand or by messenger or sent by facsimile and confirmed
by mail, addressed (a) if to the Company, 525 Lee Road, Rochester, New York
14603, telephone (716) 458-2550, facsimile (716) 458-0424, and addressed to the
attention of the President, with a copy to Dewey Ballantine LLP, 1301 Avenue of
the Americas, New York, New York 10019 (Attention: Frederick W. Kanner, Esq.),
telephone: (212) 259-7300, facsimile: (212) 259-7202, and (b) to Holder at the
address set forth on EXHIBIT C attached hereto, with a copy to Hutchins, Wheeler
& Dittmar, A Professional Corporation, 101 Federal Street, Boston, Massachusetts
02110 (Attention: Anthony J. Medaglia, Jr., P.C.), telephone: (617) 951-6600,
facsimile: (617) 951-1295. Each of such notice or other communication shall for
all purposes of this Agreement be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail or by Federal Express or
other reputable overnight carrier, upon receipt.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
12
<PAGE>
Issued this ____ day of December, 1998.
CVC, INC.
By:
----------------------------------------
Title:
-------------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
---------------------------------
Title:
------------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
Issued this th day of December, 1998.
CVC, INC.
By:
----------------------------------------
Title:
-------------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
---------------------------------
Title:
------------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
EXHIBIT A
NOTICE OF EXERCISE
------------------
TO: CVC, INC.
525 Lee Road
Post Office Box 1886
Rochester, New York 14603-1886
Attention: President
1. The undersigned hereby elects to purchase _________ shares of Common Stock of
CVC, INC. pursuant to the terms of this Warrant, and tenders herewith payment of
the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares of Common
Stock in the name of the undersigned or in such other name as is specified
below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned hereby represents and warrants that the aforesaid shares of
Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
------------------------------------
(Signature)
Title:
-------------------------------
- ------------------------
(Date)
<PAGE>
EXHIBIT B
---------
ASSIGNMENT FORM
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________________, whose address is _____________________, the
right represented by the attached Warrant to purchase _________ shares of Common
Stock of CVC, INC., to which the attached Warrant relates.
Dated:
--------------------------
------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
------------------------------------------
(Address)
Signed in the presence of:
- -----------------------------
<PAGE>
Exhibit 10.38
COMMON STOCK PURCHASE WARRANT
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED PURSUANT TO
THE EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933, AS AMENDED (THE "ACT"), AND HAVE BEEN ACQUIRED FOR INVESTMENT AND NOT
WITH A VIEW TO OR IN CONNECTION WITH, THE SALE OR DISTRIBUTION THEREOF. SUCH
SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE
ABSENCE OF SUCH REGISTRATION UNLESS (A) THE COMPANY RECEIVES AN OPINION OF
COUNSEL REASONABLY SATISFACTORY TO IT STATING THAT SUCH SALE OR TRANSFER IS
EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT,
(B) IT IS ESTABLISHED TO THE SATISFACTION OF THE COMPANY THAT SUCH SALE OR
TRANSFER IS IN A TRANSACTION WHICH IS EXEMPT UNDER, OR OTHERWISE IN COMPLIANCE
WITH, SUCH LAWS OR (C) THE COMPANY RECEIVES A "NO ACTION" LETTER OR SIMILAR
DECLARATION FROM THE SECURITIES AND EXCHANGE COMMISSION TO THE EFFECT THAT SUCH
SALE OR TRANSFER WITHOUT REGISTRATION WILL NOT RESULT IN A RECOMMENDATION BY
SAID COMMISSION THAT ACTION BE TAKEN WITH RESPECT THERETO. COPIES OF THE
AGREEMENTS COVERING THE PURCHASE OF THESE SECURITIES AND RESTRICTING THEIR
TRANSFER MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE BY THE HOLDER OF
RECORD OF THIS CERTIFICATE TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL
EXECUTIVE OFFICES OF THE COMPANY.
NO. W-05 VOID AFTER DECEMBER 10, 2005
FORM OF
WARRANT
TO PURCHASE 2,960 SHARES OF COMMON STOCK OF
CVC, INC.
Dated as of December 10, 1998
THIS CERTIFIES THAT, for value received, Advent Partners Limited
Partnership or its permitted transferees or assigns (the "Holder") is entitled
to purchase from CVC, Inc., a Delaware corporation (the "Company"), 2,960 fully
paid and nonassessable shares (the "Shares") (as adjusted pursuant to Section 3
below) of common stock, $.01 par value ("Common Stock"), of the Company, at the
price of $10.00 per
<PAGE>
share (the "Exercise Price") (as adjusted pursuant to Section 3 below), subject
to the provisions and upon the terms and conditions set forth below.
Capitalized terms used and not otherwise defined in this warrant shall
have the meanings assigned in the Stock Purchase Agreement, dated as of December
10, 1998 between the Company and the Purchasers named therein (the "Stock
Purchase Agreement").
1. EXERCISE AND PAYMENT.
1.1 EXERCISE. On or after December 10, 2001, the purchase
rights represented by this Warrant may be exercised by the Holder, in whole or
in part, by the surrender of this Warrant (together with a duly executed
exercise notice (the "Notice of Exercise") in the form attached hereto as
EXHIBIT A) at the principal office of the Company, and by the payment to the
Company, by wire transfer, of an amount equal to the aggregate Exercise Price of
the Shares being purchased.
1.2 STOCK CERTIFICATES. In the event of the exercise of all or
any portion of this Warrant, certificates for the shares of Common Stock so
purchased shall be delivered to the Holder by the Company at its own expense
(including the payment by it of any applicable issue taxes) within a reasonable
time, which shall in no event be later than ten (10) days thereafter and, unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the Shares with respect to which this Warrant shall not have been exercised
shall also be issued to the Holder within such time.
If this Warrant shall be surrendered for exercise within any
period during which the transfer books for shares of the Common Stock or other
securities purchasable upon the exercise of this Warrant are closed for any
purpose, the Company shall not be required to make delivery of certificates for
the securities purchasable upon such exercise until the date of the reopening of
said transfer books.
2. STOCK FULLY PAID; RESERVATION OF SHARES. All of the Shares issuable
upon the exercise of this Warrant will, upon issuance and receipt of the
Exercise Price therefor, be fully paid and nonassessable, and free from all
taxes, liens, encumbrances and charges with respect to the issue thereof. During
the period within which this Warrant may be exercised, the Company shall at all
times have authorized and reserved for issuance sufficient shares of its Common
Stock to provide for the exercise of this Warrant.
3. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF SHARES. The number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time upon
the occurrence of certain events, as follows:
3.1 RECLASSIFICATION. In case of any reclassification of the
Common Stock (other than a change in par value, or as a result of a subdivision
or combination), the Company, shall execute a new warrant, providing that the
Holder shall have the right to exercise such new warrant, and procure upon such
exercise and payment of the same
2
<PAGE>
aggregate Exercise Price, in lieu of the shares of Common Stock theretofore
issuable upon exercise of this Warrant, the kind and amount of shares of stock,
other securities, money and property receivable upon such reclassification by a
holder of an equivalent number of shares of Common Stock had the holder
exercised the Warrant immediately prior thereto. Such new warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 3.
3.2 DIVIDENDS, STOCK SPLITS AND COMBINATIONS. If the number of
shares of Common Stock outstanding at any time is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split up of stock, then
the Exercise Price shall, concurrently with the effectiveness of such dividend,
subdivision or split up, be proportionately decreased so that the number of
shares of Common Stock issuable on exercise of this Warrant shall be increased
in proportion to such increase of outstanding shares of Common Stock. If the
number of shares of Common Stock outstanding at any time is decreased by a
combination of the outstanding shares of Common Stock, then the Exercise Price
shall, concurrently with the effectiveness of such combination, be
proportionately increased so that the number of shares of Common Stock issuable
on exercise of this Warrant shall be decreased in proportion to such decrease of
outstanding shares of Common Stock.
3.3 ADJUSTMENT FOR LIQUIDATION, REDEMPTION OR CONVERSION OF
SERIES C PREFERRED STOCK. Upon a liquidation, redemption or conversion on or
after December 10, 2001 and prior to December 10, 2003 of all of the then
outstanding shares of the Company's Series C Senior Convertible Redeemable
Preferred Stock, $.01 par value (the "Series C Preferred Stock") and Series D
Redeemable Preferred Stock, $.01 par value (the "Series D Preferred Stock") in
accordance with Article IV, Section 2, Section 3 or Section 4 of the Company's
Restated Certificate of Incorporation, as amended, if a Holder has not
previously exercised in accordance with Section 1 hereto, the Exercise Price
shall be adjusted to $12.00 per share and if a Holder has previously exercised
in accordance with Section 1 hereto, such Holder shall pay to the Company an
amount equal to the product of $2.00 per share multiplied by the number of
Shares of Common Stock purchased by such Holder upon such exercise (including
Shares applied to pay the Exercise Price in accordance with Section 4 hereof).
3.4 ANTIDILUTION ADJUSTMENT. The Exercise Price shall be
subject to adjustment from time to time as follows:
(a) SPECIAL DEFINITIONS. For purposes of this Section 3.4, the
following definitions shall apply:
(1) "ADDITIONAL SHARES OF COMMON STOCK" shall mean
all shares of Common Stock issued (or, pursuant to Section 3.4(c) below, deemed
to be issued) by the Company after the Original Issue Date other than shares of
Common Stock issued or issuable:
(A) upon conversion of shares of the
Preferred Stock or the exercise or conversion of any Options outstanding on the
Original Issue Date;
3
<PAGE>
(B) to officers, directors, employees and
consultants of the Company or any subsidiary thereof, pursuant to a stock option
plan, stock purchase plan or other employee stock incentive plan approved by the
Board of Directors of the Company or other stock arrangements which have been
approved by the Board of Directors of the Company;
(C) pursuant to any event for which
adjustment has already been made pursuant to this Section 3.4;
(D) as a dividend or distribution on the
Preferred Stock;
(E) as a dividend or distribution on the
Common Stock;
(F) upon any subdivision or split up of
Common Stock;
or
(G) upon any capital reorganization of the
Company.
(2) "CONVERTIBLE SECURITIES" shall mean any evidences
of indebtedness, shares (other than Common Stock and Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(3) "OPTIONS" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(4) "ORIGINAL ISSUE DATE" shall mean the date on
which this Warrant was issued.
(5) "PREFERRED STOCK" shall mean collectively, the
Company's 8% Non-Cumulative Convertible Preferred Stock, $.01 par value, Series
B Non-Cumulative Convertible Preferred Stock, $.01 par value, Series C Preferred
Stock and Series D Preferred Stock.
(b) NO ADJUSTMENT OF EXERCISE PRICE. No adjustment in the
Exercise Price shall be made in respect of the issuance of Additional Shares of
Common Stock unless the consideration per share for an Additional Share of
Common Stock issued or deemed to be issued by the Company is less than the
Exercise Price in effect on the date or and immediately prior to such issue.
(c) DEEMED ISSUE OF ADDITIONAL SHARES OF COMMON STOCK. Except
as provided in Section 3.4(a)(1) above, if the Company at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein
4
<PAGE>
for a subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and Options
therefor, the conversion or exchange of such Convertible Securities, shall be
deemed to be Additional Shares of Common Stock issued as of the time of such
issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to Section 3.4(e) below) of such Additional Shares of
Common Stock would be less than the Exercise Price in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Exercise Price shall
be made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by
their terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or increase or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Exercise Price computed upon the initial Exercise Price
thereof set forth in the first paragraph of this Warrant (or upon the occurrence
of a record date with respect thereto), and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective , be
recomputed to reflect such increase or decrease insofar as it affects such
Options or the rights of conversion or exchange under such Convertible
Securities;
(3) on the expiration or cancellation of any Options
or the termination of the right to convert or exchange any Convertible
Securities which shall have not been exercised, if the Exercise Price shall have
been adjusted upon the original issuance thereof or shall have been subsequently
adjusted pursuant to clause (2) above, the Exercise Price shall be recomputed as
if the only Additional Shares of Common Stock issued were shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefore was the consideration actually received by the Company for
the issue of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged plus the
consideration actually received by the Company upon such conversion or exchange,
if any; and
(4) no readjustment pursuant to clause (2) or clause
(3) above shall have the effect of increasing the Exercise Price to an amount
which exceeds the lower of (i) the initial Exercise Price on the original
adjustment date (unless the Exercise Price is increased above the initial
Exercise Price pursuant to Section 3.1 or 3.2, or (ii) the Exercise Price that
would have resulted from any issuances of Additional Shares of
5
<PAGE>
Common Stock (other than those the subject of such adjustments) between the
original adjustment date and such readjustment date; and
(d) ADJUSTMENT OF EXERCISE PRICE UPON ISSUANCE OF ADDITIONAL
SHARES OF COMMON STOCK. In the event the Company shall issue Additional Shares
of Common Stock (including Additional Shares of Common Stock deemed to be issued
pursuant to Section 3.4(c), but excluding stock dividends, subdivisions or
split-ups that are the subject of adjustment pursuant to Section 3.1 or 3.2
without consideration or for a consideration per share less than the Exercise
Price applicable on and immediately prior to such issue, then and in such event,
the Exercise Price shall be reduced concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying the Exercise Price in
effect on the date of and immediately prior to such issue by a fraction, the
numerator of which shall be the sum of (i) the number of shares of Common Stock
outstanding immediately prior to such issue (on a fully diluted as converted
basis), including without limitation the number of shares of Common Stock
issuable upon conversion of the Preferred Stock outstanding immediately prior to
such issue and (ii) the number of shares of Common Stock which the aggregate
consideration received by the Company for the total number of Additional Shares
of Common Stock so issued would purchase at the Exercise Price in effect on the
date of and immediately prior to such issue; and the denominator of which shall
be the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issue (on a fully diluted as converted basis), including without
limitation the number of shares of Common Stock issuable upon conversion of the
Preferred Stock outstanding immediately prior to such issue and (ii) the number
of such Additional Shares of Common Stock so issued.
(e) DETERMINATION OF CONSIDERATION. For purposes of this
Section 3.4(d), the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) CASH AND PROPERTY. Such consideration shall:
(A) insofar as it consists of cash, be
computed at the aggregate amount of cash received by the Company;
(B) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the Board of Directors of the Company; and
(C) in the event Additional Shares of Common
Stock are issued together with other shares or securities or other assets of the
Company for consideration which covers both, be the proportion of such
consideration so received, computed as provided in clauses (A) and (B) above, as
determined in good faith by the Board of Directors of the Company.
6
<PAGE>
(2) OPTIONS AND CONVERTIBLE SECURITIES. The
consideration per share received by the Company for Additional Shares of Common
Stock deemed to have been issued pursuant to Section 3.4(b) and 3.4(c), relating
to Options and Convertible Securities, shall be determined by dividing
(A) the total amount, if any, received or
receivable by the Company as consideration for the issue of such Options or
Convertible Securities, plus the (ii) aggregate amount of additional
consideration (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
consideration) payable to the Company upon the exercise of such Options or the
conversion or exchange of such Convertible Securities, or in the case of Options
for Convertible Securities, the exercise of such options for Convertible
Securities and the conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
4. NET ISSUE ELECTION. The holder hereof may elect to receive, without
the payment by such holder of any additional consideration, shares equal to the
value of this Warrant or any portion hereof by the surrender of this Warrant or
such portion to the Company, at the office of the Company. Thereupon, the
Company shall issue to such holder such number of fully paid and nonassessable
shares of Common Stock as is computed using the following formula:
X = Y (A-B)
-------
A
where X = the number of shares to be issued to such holder pursuant to this
Section 4.
Y = the number of shares covered by this Warrant in respect of which
the net issue election is made pursuant to this Section 4.
A = the fair market value of one share of Common Stock, as determined
in accordance with the following provisions, as at the time the net issue
election is made pursuant to this Section 4.
B = the Purchase Price in effect under this Warrant at the time the net
issue election is made pursuant to this Section 4.
For purposes of this Section 4, "fair market value" of one share of
Common Stock shall be determined as follows:
7
<PAGE>
(1) Where there exists a public market for the Company's
Common Stock at the time of such exercise, the fair market value per
share shall be the average of the closing bid and asked prices of the
Common Stock quoted in the Over-The-Counter Market Summary or the last
reported sale price of the Common Stock or the closing price quoted on
the NASDAQ System or on any exchange on which the Common Stock is
listed, whichever is applicable, as published in THE WALL STREET
JOURNAL for the five (5) trading days prior to the date to the date of
determination of fair market value. Notwithstanding the foregoing, in
the event the Warrants are exercised in connection with the Company's
initial public offering of Common Stock, the fair market value per
share shall be the per share offering price to the public of the
Company's initial public offering.
(2) If no public market for the Common Stock exists at the
time of such exercise, the Company and the holder hereof shall
negotiate in good faith in an effort to reach agreement upon the fair
market value of one share of Common Stock for a period of ten (10) days
after delivery of the executed subscription.
(3) If the Company and the holder hereof are unable to reach
agreement under the foregoing subparagraph (2), the fair market value
of one share of Common Stock shall be determined by appraisal. The
Company and the holder hereof shall each select an appraiser (the
"Selected Appraisers") within thirty (30) days after the expiration of
the ten-day period in subparagraph (2) above. Each Selected Appraiser
shall render its appraisal within thirty (30) days of its appointment
hereunder. In the event that either Selected Appraiser fails to render
an appraisal within such thirty-day period, the first appraisal
rendered shall be conclusive. In the event that the values determined
by the Selected Appraisers differ by less than ten percent (10%) of the
lower value, the fair market value shall be the average of the
appraisals made by each of the Selected Appraisers. In the event that
the values differ by ten percent (10%) or more of the lower value, the
Selected Appraisers shall within ten (10) days select a third appraiser
(the "Neutral Appraiser") to conduct an appraisal. The Neutral
Appraiser shall render its appraisal within thirty (30) days of its
appointment hereunder. The fair market value of one share of Common
Stock shall be equal to the appraisal made by the Neutral Appraiser if
such appraisal is between the two appraisals made by the Selected
Appraisers or, if such appraisal by the Neutral Appraiser is not
between the two appraisals made by the Selected Appraisers, then the
fair market value of one share of Common Stock shall be that one of the
two appraisals made by the Selected Appraisers that is closer to the
appraisal made by the Neutral Appraiser. All appraisals delivered
pursuant to this subparagraph (3) shall be in writing and signed by the
appraiser. The fees, costs and expenses of each of the Selected
Appraisers will be borne by the party who selected such appraiser, and
the fees, costs and expenses of the Neutral Appraiser will be borne
equally by the Company and the holder hereof.
8
<PAGE>
(4) In appraising the fair market value of one share of Common
Stock, there shall be no discount for minority interests.
(5) The fair market value as determined in accordance with
this Section 4 shall be conclusive, final and binding upon the Company
and the holder hereof, and shall be enforceable in any court having
jurisdiction over a proceeding to enforce the terms of this Warrant.
5. NOTICE. In the event of the occurrence of any one or more of the
following (each, a "Liquidity Event"): (i) a liquidation, dissolution or winding
up of the Company, whether voluntary or involuntary; (ii) a sale, merger,
recapitalization, reorganization or consolidation involving the Company, as the
result of which those persons who hold at least 50% of the voting stock of the
Company immediately prior to such transaction do not hold more than 50% of the
voting stock of the Company (or the surviving or resulting entity) after giving
effect to such transaction; or (iii) the sale of all or substantially all of the
assets of the Company; then in connection with each such Liquidity Event, the
Company shall send to the Holder:
(a) At least ten (10) days prior written notice of the date on
which the books of the Company shall close or a record shall be taken for such
dividend, distribution, subscription rights (specifying the date on which the
Holder shall be entitled thereto) or for determining rights to vote in respect
of such Liquidity Event; and
(b) In the case of any such Liquidity Event, at least ten (10)
days prior written notice of the date when the same shall take place (and
specifying the date on which the Holder shall be entitled to exchange its Common
Stock for securities or other property deliverable upon such Liquidity Event).
6. FRACTIONAL SHARES. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder. In lieu of such fractional
shares the Company shall make a cash payment therefor based upon the Exercise
Price then in effect.
7. RESTRICTIONS ON TRANSFER.
7.1 RESTRICTIVE LEGEND. Each certificate representing (i) the
Shares and (ii) any other securities issued in respect of the Shares upon any
stock split, stock dividend or recapitalization (collectively, the "Restricted
Securities"), shall be endorsed as follows:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Company receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the act, (b)
it is
9
<PAGE>
established to the satisfaction of the Company that such sale or
transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Company receives a "no action"
letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Company at the principal executive offices of the
Company.
The Company is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Company.
7.2 OWNERSHIP OF WARRANT. The Company may deem and treat the person in
whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by any person
other than the Company) for all purposes and shall not be affected by any notice
to the contrary, until presentation of this Warrant for registration of transfer
as provided in this Section 7.
7.3 TRANSFER OF THE WARRANT. Subject to the provisions of the Amended
and Restated Stockholders' Agreement dated as of December 10, 1998, among the
Company and the stockholders party thereto, this Warrant may be transferred in
whole or in part to one or more parties at the option of the Holder; PROVIDED,
HOWEVER, that prior to any transfer of this Warrant, the Holder shall give
written notice to the Company of the Holder's intention to effect such transfer.
Each such notice shall describe the manner and circumstances of the proposed
transfer in sufficient detail, contain a representation in writing from the
proposed transferee that the Warrant is being acquired for investment not with a
view to any sale or distribution thereof and shall be accompanied by the
Assignment form attached hereto as EXHIBIT B duly executed by the Holder. Upon
transfer of the Warrant pursuant to this Section 7, the Company shall at the
request of Holder and upon surrender of the Warrant to the Company, promptly
issue new Warrants in the names and amounts requested by the Holder to replace
the surrendered Warrant.
8. NO RIGHTS OF STOCKHOLDERS. This Warrant does not
entitle the Holder to any voting rights as a stockholder of the Company prior to
the exercise of the Warrant; further, the Holder has no liability as to the
Exercise Price.
9. NO IMPAIRMENT. The Company will not, by amendment of its Certificate
of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but it will at
all times in good faith assist in the carrying out
10
<PAGE>
of all of the provisions of this Warrant and in the taking of all such action as
may be necessary or appropriate in order to protect the rights of the holder of
this Warrant against impairment.
10. LOSS, THEFT, DESTRUCTION OR MUTILATION OF WARRANT. Upon receipt by
the Company of evidence reasonably satisfactory to it of the loss, theft,
destruction or mutilation of this Warrant, and in case of loss, theft or
destruction, of indemnity or security reasonably satisfactory to it, and upon
surrender and cancellation of this Warrant, if mutilated, the Company will make
and deliver a new Warrant or like tenor and dated as of such cancellation, in
lieu of this Warrant.
11. SATURDAYS, SUNDAYS, HOLIDAYS, ETC. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday or a Sunday or shall be a legal holiday, then such
action may be taken or such right may be exercised on the next succeeding day
not a Saturday or a Sunday or a legal holiday.
12. EXPIRATION OF WARRANT. Notwithstanding any other provision of this
Warrant, this Warrant shall expire and shall no longer be exercisable upon the
earlier of (i) payment by the Company prior to December 10, 2001 with respect to
all of the then outstanding Series C Preferred Stock and Series D Preferred
Stock held by the Holder in accordance with Article IV, Section 2, Section 3 or
Section 4 of the Company's Amended and Restated Certificate of Incorporation or
(ii) at 12:00 a.m., New York time, on December 10, 2005.
13. MISCELLANEOUS.
13.1 GOVERNING LAW. This Warrant shall be governed by and
construed in all respects in accordance with the laws of the State of Delaware
without giving effect to the conflicts of laws provisions thereof.
13.2 ENTIRE AGREEMENT; AMENDMENT. This Warrant constitutes the
full and entire understanding and agreement between the parties with regard to
the subjects hereof, except as may be provided in (i) the Amended and Restated
Stockholders' Agreement dated as of December 10, 2005, by and among the Company
and certain stockholders of the Company, (ii) the Stock Purchase Agreement and
(iii) the Amended and Restated Registration Rights Agreement dated as of
December 10, 2005, by and among the Company and certain stockholders of the
Company. Neither this Warrant nor any term hereof may be amended, waived,
discharged, or terminated other than by a written instrument signed by the party
against whom enforcement of any such amendment, waiver, discharge or termination
is sought.
13.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the permitted successors and assigns, heirs, executors, and administrators
of the Company and the Holder.
11
<PAGE>
13.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be mailed by registered or
certified mail, postage prepaid, by overnight courier, or otherwise delivered by
hand or by messenger or sent by facsimile and confirmed by mail, addressed (a)
if to the Company, 525 Lee Road, Rochester, New York 14603, telephone (716)
458-2550, facsimile (716) 458-0424, and addressed to the attention of the
President, with a copy to Dewey Ballantine LLP, 1301 Avenue of the Americas, New
York, New York 10019 (Attention: Frederick W. Kanner, Esq.), telephone: (212)
259-7300, facsimile: (212) 259-7202, and (b) to Holder at the address set forth
on EXHIBIT C attached hereto, with a copy to Hutchins, Wheeler & Dittmar, A
Professional Corporation, 101 Federal Street, Boston, Massachusetts 02110
(Attention: Anthony J. Medaglia, Jr., P.C.), telephone: (617) 951-6600,
facsimile: (617) 951-1295. Each of such notice or other communication shall for
all purposes of this Agreement be treated as effective or having been given when
delivered if delivered personally, or, if sent by mail or by Federal Express or
other reputable overnight carrier, upon receipt.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK.]
<PAGE>
Issued this ____ day of December, 1998.
CVC, INC.
By:
------------------------------------
Title:
---------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
---------------------------------
Title:
------------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
Issued this th day of December, 1998.
CVC, INC.
By:
------------------------------------
Title:
---------------------------------
Address: 525 Lee Road
Post Office Box 1886
Rochester, NY 14603-1886
WARRANT HOLDER:
- ---------------------------
By:
---------------------------------
Title:
------------------------------
Address: 75 State Street
Boston, MA 02109
<PAGE>
EXHIBIT A
---------
NOTICE OF EXERCISE
------------------
TO: CVC, INC.
525 Lee Road
Post Office Box 1886
Rochester, New York 14603-1886
Attention: President
1. The undersigned hereby elects to purchase _________ shares of Common
Stock of CVC, INC. pursuant to the terms of this Warrant, and tenders herewith
payment of the purchase price of such shares in full.
2. Please issue a certificate or certificates representing said shares
of Common Stock in the name of the undersigned or in such other name as is
specified below:
------------------------------
(Name)
------------------------------
------------------------------
(Address)
3. The undersigned hereby represents and warrants that the aforesaid shares of
Common Stock are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
------------------------------------
(Signature)
Title:
------------------------------
- ------------------------
(Date)
<PAGE>
EXHIBIT B
---------
ASSIGNMENT FORM
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto ______________________________, whose address is _____________________, the
right represented by the attached Warrant to purchase _________ shares of Common
Stock of CVC, INC., to which the attached Warrant relates.
Dated:____________________
------------------------------------------
(Signature must conform in all respects to
name of Holder as specified on the face of
the Warrant)
------------------------------------------
(Address)
Signed in the presence of:
- -----------------------------
<PAGE>
Exhibit 10.39
AGREEMENT AND PLAN OF MERGER
among
CVC, INC.,
CVC ACQUISITION CORP.,
COMMONWEALTH SCIENTIFIC CORPORATION
and
CERTAIN STOCKHOLDERS THEREOF
Dated as of April 1, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER ...............................................................................1
Section 1.1. The Merger.....................................................................1
Section 1.2. The Closing....................................................................1
Section 1.3. The Effective Time.............................................................1
Section 1.4. Organizational Documents.......................................................2
Section 1.5. Directors and Officers.........................................................2
Section 1.6. Conversion of Capital Stock....................................................2
Section 1.7. Company Stock Options..........................................................3
Section 1.8. Dissenting Shares..............................................................3
Section 1.9. Exchange of Certificates.......................................................4
Section 1.10. Escrow Fund....................................................................6
Section 1.11. Registration Rights Agreement..................................................6
Section 1.12. Post Closing Adjustment........................................................6
Section 1.13. Officers.......................................................................6
ARTICLE II REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................................6
Section 2.1. Organization...................................................................7
Section 2.2. Capitalization.................................................................7
Section 2.3. Authority Relative to this Agreement...........................................8
Section 2.4. Consents and Approvals; No Violations..........................................8
Section 2.5. Financial Statements...........................................................9
Section 2.6. Absence of Certain Changes.....................................................9
Section 2.7. No Undisclosed Liabilities....................................................10
Section 2.8. Litigation....................................................................10
Section 2.9. No Default....................................................................10
Section 2.10. Permits; Compliance with Applicable Law.......................................10
Section 2.11. Taxes and Tax Returns.........................................................10
Section 2.12. Employee Benefit Plans........................................................13
Section 2.13. Intellectual Property.........................................................15
Section 2.14. Tax Free Reorganization.......................................................16
Section 2.15. Transactions with Affiliates..................................................16
Section 2.16. Contracts.....................................................................16
Section 2.17. Labor Relations...............................................................18
Section 2.18. Environmental.................................................................18
Section 2.19. Assets Necessary to Business..................................................19
Section 2.20. Insurance.....................................................................19
Section 2.21. Inventory.....................................................................20
Section 2.22. Accounts Receivable...........................................................20
Section 2.23. Product Returns and Warranties................................................20
Section 2.24. Customers and Suppliers.......................................................20
Section 2.25. Real Property.................................................................20
Section 2.26. No Misleading Statements......................................................20
ii
<PAGE>
<S> <C>
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE 5% STOCKHOLDERS..................................21
Section 3.1. Binding Nature of this Agreement..............................................21
Section 3.2. Consents and Approvals; No Violations.........................................21
Section 3.3. Share Ownership...............................................................21
Section 3.4. Investment....................................................................22
Section 3.5. Accredited Investor...........................................................22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB........................................22
Section 4.1. Organization..................................................................22
Section 4.2. Capitalization................................................................22
Section 4.3. Authority Relative to this Agreement..........................................23
Section 4.4. Consents and Approvals; No Violations.........................................24
Section 4.5. Financial Statements..........................................................24
Section 4.6. Absence of Certain Changes....................................................25
Section 4.7. No Undisclosed Liabilities....................................................25
Section 4.8. Litigation....................................................................25
Section 4.9. Tax Free Reorganization.......................................................25
Section 4.10. Environmental.................................................................25
Section 4.11. No Default....................................................................26
Section 4.12. Permits; Compliance with Applicable Law.......................................26
Section 4.13. Taxes and Tax Returns.........................................................26
Section 4.14. Employee Benefit Plans........................................................28
Section 4.15. Intellectual Property.........................................................30
Section 4.16. Transactions with Affiliates..................................................31
Section 4.17. Assets Necessary to Business..................................................31
Section 4.18. Insurance.....................................................................31
Section 4.19. Accounts Receivable...........................................................31
Section 4.20. Contracts.....................................................................31
Section 4.21. Inventory.....................................................................32
Section 4.22. No Misleading Statements......................................................32
ARTICLE V COVENANTS.............................................................................. 32
Section 5.1. Interim Operations of the Company.............................................32
Section 5.2. Interim Operations of Parent..................................................34
Section 5.3. Investigation.................................................................34
Section 5.4. Disclosure Supplements........................................................35
Section 5.5. Reasonable Efforts............................................................35
Section 5.6. Stockholder Meeting...........................................................36
Section 5.7. Further Assurances............................................................36
Section 5.8. Brokers or Finders............................................................36
Section 5.9. No Solicitation...............................................................36
Section 5.10. Performance of Obligations....................................................37
Section 5.11. Tax Treatment.................................................................37
Section 5.12. 5% Stockholders...............................................................37
Section 5.13. Tax Covenants.................................................................39
Section 5.14. March 31, 1999 Audit..........................................................39
iii
<PAGE>
<S> <C>
Section 5.15. Employee Benefit Matters......................................................40
Section 5.16. Consulting and Non-Competition Agreements.....................................40
Section 5.17. Year 2000.....................................................................40
Section 5.18. Stockholders of the Company...................................................40
Section 5.19. Underwriting Lockup...........................................................40
Section 5.20. Archbold Trust................................................................41
ARTICLE VI CONDITIONS..............................................................................41
Section 6.1. Conditions to Each Party's Obligations........................................41
Section 6.2. Conditions to Obligations of Parent and Sub...................................41
Section 6.3. Conditions to Obligations of the Company......................................42
ARTICLE VII TERMINATION AND AMENDMENT..............................................................43
Section 7.1. Termination...................................................................43
Section 7.2. Effect of Termination.........................................................44
Section 7.3. Amendment.....................................................................44
Section 7.4. Extension; Waiver.............................................................44
ARTICLE VIII SURVIVAL; INDEMNIFICATION.............................................................45
Section 8.1. Survival Periods..............................................................45
Section 8.2. Indemnification...............................................................45
Section 8.3. Indemnification Amounts.......................................................46
Section 8.4. Claims........................................................................46
Section 8.5. Indemnification with Respect to Taxes.........................................47
Section 8.6. Exclusive Remedy..............................................................49
ARTICLE IX MISCELLANEOUS...........................................................................49
Section 9.1. Notices.......................................................................49
Section 9.2. Headings......................................................................50
Section 9.3. Counterparts..................................................................50
Section 9.4. Entire Agreement; Assignment..................................................50
Section 9.5. Governing Law.................................................................51
Section 9.6. Specific Performance..........................................................51
Section 9.7. Publicity.....................................................................51
Section 9.8. Binding Nature; No Third Party Beneficiaries..................................51
Section 9.9. Severability..................................................................51
Section 9.10. Interpretation................................................................51
Section 9.11. Payment of Expenses...........................................................52
Exhibits
Exhibit A: Valuation Schedule
Exhibit B: Stockholder Letter
Exhibit C: Escrow Agreement
Exhibit D: Registration Rights Agreement
Exhibit E-1: Form of Salary Continuation and Non-Competition Agreement
Exhibit E-2: Form of Stockholder Non-Competition Agreement
Exhibit F: Form of Consulting Agreement
</TABLE>
iv
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated as of April 1, 1999 among CVC, Inc,
a Delaware corporation ("Parent"), CVC Acquisition Corp., a Virginia corporation
and a wholly owned subsidiary of Parent ("Sub"), Commonwealth Scientific
Corporation, a Virginia corporation (the "Company"), George R. Thompson, Jr.
(the "Stockholder") and the John D. Archbold GST Trust (the "Archbold Trust,"
and, together with the Stockholder, the "5% Stockholders").
WHEREAS, the Boards of Directors of Parent and the Company each have
determined that a business combination between Parent and the Company is in the
best interests of their respective companies and stockholders;
WHEREAS, for federal income tax purposes, it is intended that the
merger provided for herein shall qualify as a reorganization within the meaning
of Section 368(a) of the Internal Revenue Code of 1986, as amended; and
WHEREAS, in order to induce Parent and Sub to execute this Agreement,
simultaneously with the execution hereof, Parent and the Company are entering
into a Stock Option Agreement.
NOW, THEREFORE, the parties hereto agree as follows:
ARTICLE I
THE MERGER
Section 1.1. THE MERGER. Upon the terms and subject to the conditions
of this Agreement, at the Effective Time (as defined in Section 1.3), Sub shall
be merged with and into the Company (the "Merger") and the separate corporate
existence of Sub shall cease. The Company shall be the surviving corporation in
the Merger (sometimes hereinafter referred to as the "Surviving Corporation").
The Merger shall have the effects specified in the Virginia Stock Corporation
Act (the "VSCA").
Section 1.2. THE CLOSING. Upon the terms and subject to the conditions
of this Agreement, the closing of the Merger (the "Closing") shall take place
(a) at the offices of Dewey Ballantine LLP, 1301 Avenue of the Americas, New
York, New York, at 10:00 a.m., local time, on the first business day following
the day on which the last to be satisfied or waived of the conditions set forth
in Article VI (other than those conditions that by their nature are to be
satisfied at the Closing, but subject to the satisfaction or waiver of those
conditions) shall be satisfied or waived in accordance herewith or (b) at such
other time, date or place as Parent and the Company may agree. The date on which
the Closing occurs is hereinafter referred to as the "Closing Date."
Section 1.3. THE EFFECTIVE TIME. Upon the terms and subject to the
conditions of this Agreement, at the Closing the parties shall cause Articles of
Merger to be executed and filed in accordance with the requirements of the VSCA.
The Merger shall become effective upon the filing of the Articles of Merger and
any other appropriate documents with the State Corporation Commission of
Virginia in accordance with the VSCA or at
<PAGE>
such later time which the parties hereto shall have agreed upon and designated
in such filing as the effective time of the Merger (the "Effective Time").
Section 1.4. ORGANIZATIONAL DOCUMENTS. The Articles of Incorporation of
Sub in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation (provided that the name of the
Surviving Corporation shall be "Commonwealth Scientific Corporation"), until
duly amended in accordance with applicable law. The by-laws of the Sub in effect
immediately prior to the Effective Time shall be the by-laws of the Surviving
Corporation, until duly amended in accordance with applicable law.
Section 1.5. DIRECTORS AND OFFICERS. (a) The directors of Sub
immediately prior to the Effective Time shall be the directors of the Surviving
Corporation as of the Effective Time and until the earlier of their resignation
or removal or until their successors are duly appointed or elected in accordance
with applicable law. The officers of the Company immediately prior to the
Effective Time shall be the officers of the Surviving Corporation as of the
Effective Time and until the earlier of their resignation or removal or until
their successors are duly appointed or elected in accordance with applicable
law.
(b) Effective as of the Effective Time, Parent shall cause the
Stockholder to be elected a director of Parent.
Section 1.6. CONVERSION OF CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of any holder thereof:
(a) Except as otherwise provided in this Article I, each share
of common stock, par value $1.00 per share (the "Shares") of the Company
outstanding immediately prior to the Effective Time shall be converted into the
right to receive 6.03601(the "Exchange Number") shares of common stock, par
value $.01 per share (the "Parent Shares"), of Parent. The Parent Shares
issuable pursuant to this Section 1.6(a) are sometimes referred to as the
"Merger Consideration." The Exchange Number was calculated as set forth on
Exhibit A hereto. In case of any stock splits, stock dividends,
recapitalizations or other events affecting the capital stock of Parent or the
Company (including any rights to acquire such stock), or other events affecting
the amounts set forth on Exhibit A, amounts hereunder shall be appropriately
adjusted.
(b) Each share of common stock of Sub outstanding immediately
prior to the Effective Time shall be converted into and become one share of
common stock of the Surviving Corporation.
(c) Each Share held by the Company as treasury stock shall be
cancelled, and no payment shall be made in respect thereof.
2
<PAGE>
(d) Notwithstanding the foregoing, no fractional Parent Shares
shall be issued in the Merger. The number of Parent Shares issuable to each
holder of Shares shall be rounded to the nearest whole share.
Section 1.7. COMPANY STOCK OPTIONS. At the Effective Time, each option
to purchase Shares (each, a "Company Option") outstanding under any stock option
or compensation plan or arrangement of the Company, whether or not vested or
exercisable, shall be assumed by Parent and shall be deemed to be adjusted to
provide that it shall constitute an option (each a "Parent Option") to acquire,
on the same terms and conditions as were applicable under such Company Option,
including term, vesting, exercisability, and termination provisions, the same
number of Parent Shares as the holder of such Company Option would have been
entitled to receive pursuant to Section 1.6(a) of this Agreement had such holder
exercised such Company Option in full immediately prior to the Effective Time
(rounded to the nearest whole number), at a price per share (rounded to the
nearest whole cent) equal to (x) the aggregate exercise price for Shares
otherwise purchasable pursuant to such Company Option divided by (y) the number
of full Parent Shares deemed purchasable pursuant to such Company Option in
accordance with the foregoing adjustment of exercise price. Notwithstanding the
above, each optionee shall have the right to exercise a Parent Option during the
three-month period following separation from service with Parent for any reason.
Any Company Options granted in 1999 shall be vested and immediately exercisable
at the time of their assumption and conversion by Parent, and otherwise shall be
subject to the terms and conditions noted in Schedule 2.2(a). Other than as
explicitly set forth in this Section 1.7, the Company Options shall not be
affected by the execution of this Agreement, the Merger or the other
transactions contemplated hereby. Notwithstanding the foregoing, it shall be a
condition to the issuance of any shares pursuant to the Company Options that the
holder execute a letter in the form of Exhibit B hereto. The Company has taken
all action necessary to give effect to the transactions contemplated by this
Section 1.7 and to ensure that no holder of an option, warrant, right or
convertible security issued by the Company has any rights to acquire any
securities of the Surviving Corporation or any affiliate thereof, other than as
explicitly set forth herein. Parent shall take all corporate action necessary to
reserve for issuance a sufficient number of Parent Shares for delivery upon
exercise of Parent options as set forth above.
Section 1.8. DISSENTING SHARES. Notwithstanding anything in this
Agreement to the contrary, Shares that are outstanding immediately prior to the
Effective Time and that are held by stockholders of the Company who have
perfected dissenters' rights in accordance with the VSCA (the "Dissenting
Shares") shall not be converted into or represent the right to receive the
Exchange Number of Parent Shares, unless and until such holder shall have failed
to perfect or shall have effectively withdrawn or lost such holder's rights to
appraisal under the VSCA. Any payments to any holder who has exercised
dissenter's rights shall be made by Company out of its own funds. If any such
holder shall have failed to perfect or shall have effectively withdrawn or lost
such holder's rights to appraisal of such Shares under the VSCA, such holder's
shares shall thereupon be deemed to have been converted into and to have become
exchangeable for, at the Effective Time, the right to receive the Merger
Consideration. The Company shall
3
<PAGE>
not make any payment to or settle any dispute with the holder of any Dissenting
Shares without the prior written consent of Parent.
Section 1.9. EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Parent shall act as exchange agent (the
"Exchange Agent") for the purpose of exchanging certificates ("Certificates")
that immediately prior to the Effective Time represented outstanding Shares
which were converted into the right to receive the Merger Consideration.
(b) EXCHANGE PROCEDURES. As promptly as practicable after the
Effective Time, Parent shall send, or will cause the Exchange Agent to send, to
each holder of record of a Certificate or Certificates a letter of transmittal
and instructions (which shall be in customary form and specify that delivery
shall be effected, and risk of loss and title shall pass, only upon delivery of
the Certificates to the Exchange Agent), for use in the exchange contemplated by
this Section 1.9. Upon surrender of a Certificate to the Exchange Agent,
together with a duly executed letter of transmittal, the holder of such
Certificate shall be entitled to receive in exchange therefor the Merger
Consideration and unpaid dividends and distributions thereon, if any, as
provided in this Section 1.9 in respect of the Shares represented by such
Certificate (after giving effect to any required withholding tax). Until
surrendered as contemplated by this Section 1.9 each Certificate shall be deemed
at any time after the Effective Time to represent only the right to receive the
Merger Consideration and unpaid dividends and distributions thereon, if any, as
provided in this Section 1.9. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen or destroyed and, if required by Parent, the
posting by such person of a bond, in such reasonable amount as Parent may
direct, as indemnity against any claim that may be made against it with respect
to such Certificate, the Exchange Agent will deliver, in exchange for such lost,
stolen or destroyed Certificate, the proper amount of the Merger Consideration,
together with any unpaid dividends and distributions on any such Parent Shares,
as contemplated by this Section 1.9.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. Whenever
a dividend or other distribution is declared by Parent in respect of the Parent
Shares, the record date for which is at or after the Effective Time, that
declaration shall include dividends or other distributions in respect of all
Parent Shares issuable pursuant to this Agreement. No dividends or other
distributions declared or made after the Effective Time with respect to Parent
Shares constituting part of the Merger Consideration shall be paid to the holder
of any unsurrendered Certificate until such Certificate is surrendered as
provided in this Section 1.9. Following such surrender, there shall be paid,
without interest, to the person in whose name the Parent Shares have been
registered (i) at the time of such surrender, the amount of dividends or other
distributions with a record date at or after the Effective Time previously paid
or payable on the date of such surrender with respect to such whole Parent
Shares, LESS the amount of any withholding taxes that may be required thereon,
and (ii) at the appropriate payment date subsequent to surrender, the amount of
dividends or other distributions with a record date at or after the
4
<PAGE>
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole Parent Shares, LESS the amount of any
withholding taxes which may be required thereon.
(d) NO FURTHER OWNERSHIP RIGHTS IN THE SHARES. All Parent
Shares issued upon surrender of Certificates in accordance with the terms hereof
(including any cash paid pursuant to this Section 1.9) shall be deemed to have
been issued in full satisfaction of all rights pertaining to such Shares
represented thereby, and, as of the Effective Time, the stock transfer books of
the Company shall be closed and there shall be no further registration of
transfers on the Company's stock transfer books of Shares outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation for any reason, they
shall be canceled and exchanged as provided in this Section 1.9.
(e) RETURN OF MERGER CONSIDERATION. Upon demand by Parent, the
Exchange Agent shall deliver to Parent any portion of the Merger Consideration
made available to the Exchange Agent pursuant to this Section 1.9 that remains
undistributed to holders of Shares six months after the Effective Time. Holders
of Certificates who have not complied with this Section 1.9 prior to such demand
shall thereafter look only to Parent for payment of any claim to the Merger
Consideration and dividends or distributions, if any, in respect thereof.
(f) NO LIABILITY. None of Parent, the Surviving Corporation or
the Exchange Agent shall be liable to any person in respect of any Shares (or
dividends or distributions with respect thereto) for any amounts paid to a
public official pursuant to any applicable abandoned property, escheat or
similar law. Any amounts remaining unclaimed by any holder of Shares immediately
prior to such time when such amounts would otherwise escheat to or become the
property of any Governmental Entity, shall, to the extent permitted by
applicable laws, become the property of Parent, free and clear of all claims or
interest of any person previously entitled thereto.
(g) WITHHOLDING RIGHTS. Each of the Surviving Corporation and
Parent shall be entitled to deduct and withhold from the Merger Consideration
(and any dividends or distributions thereon) otherwise payable hereunder to any
person such amounts as it is required to deduct and withhold with respect to the
making of such payment under any provision of federal, state, local or foreign
income tax law. To the extent that the Surviving Corporation or Parent so
withholds those amounts, such withheld amounts shall be treated for all purposes
of this Agreement as having been paid to the holder of Shares in respect of
which such deduction and withholding was made by the Surviving Corporation or
Parent, as the case may be.
(h) PRIVATE PLACEMENT. Notwithstanding anything herein to the
contrary, no Parent Shares or other amounts payable under this Section 1.9 shall
be issued to any holder of Shares unless and until such person shall have agreed
to be bound by the provisions set forth in Exhibit B. The 5% Stockholders hereby
agree to be bound by such provisions. All certificates representing Parent
Shares shall bear a legend reflecting that
5
<PAGE>
the shares were issued in a transaction not registered under the Securities Act
of 1933 (the "Securities Act") and any resale restrictions applicable thereto.
If Parent determines that the issuance of the Merger Consideration to any holder
of Shares would be reasonably likely to result in a violation of any provision
of the Securities Act or state securities laws, Parent shall have the right (but
shall not be obligated) to pay such holder $24.38 in cash per Share in lieu of
any other consideration provided for herein; provided however, Parent shall not
make any such cash payment which would prevent the Merger from constituting a
reorganization within the meaning of Section 368(a) of the Code.
Section 1.10. ESCROW FUND. At the Closing, Parent, a representative
(the "Representative") of holders of Shares as of immediately prior to the
Effective Time (the "Former Commonwealth Stockholders"), and M&T Bank, as escrow
agent, shall execute the Escrow Agreement in the form of Exhibit C hereto. Prior
to the Closing Date, the Company will notify Parent of the identity of the
Representative. Notwithstanding anything in this Article I to the contrary, the
Escrow Number of Parent Shares which would otherwise be issuable to the Former
Commonwealth Stockholders pursuant to Section 1.6 hereof shall not be issued or
distributed to such holders, but shall be held in escrow pursuant to the Escrow
Agreement. The "Escrow Number" shall equal 975,000 Parent Shares.
Section 1.11. REGISTRATION RIGHTS AGREEMENT. At the Closing, Parent and
the Stockholder shall execute the Registration Rights Agreement in the form of
Exhibit D hereto.
Section 1.12. POST CLOSING ADJUSTMENT . If the Closing Date Net Worth
(as defined below) is less than $7,337,000, the Former Commonwealth Stockholders
shall pay the 54.0% of the difference between $7,337,000 and such lesser amount
to Parent. Any expenses of the type contemplated by Section 9.11(a) hereof in
excess of $450,000 shall reduce the Closing Date Net Worth on a dollar for
dollar basis. Any payment shall be accompanied by interest on such amount from
the Closing Date to the date of payment at a floating rate equal to the publicly
announced prime lending rate of 7.75%. Any payment by the Stockholders under
this Section 1.12 shall be paid from the Escrow and shall be limited in the
aggregate to the value of the amount held in the Escrow. "Closing Date Net
Worth" will be equal to the total assets less the total liabilities set forth on
the audited balance sheet prepared pursuant to Section 5.14 hereof.
Section 1.13. OFFICERS. Simultaneously with the execution hereof, the
Company is (i) electing Christine Whitman, Chief Executive Officer of Parent, as
its Chief Executive Officer and Emilio DiCataldo, Chief Financial Officer of
Parent, as its Chief Financial Officer (ii) is entering into indemnity
agreements with such individuals and (iii) is electing such individuals to the
Board of Directors of the Company.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
6
<PAGE>
The Company represents and warrants to Parent and Sub as
follows, except as set forth in the disclosure schedule being delivered by the
Company to Parent concurrently herewith (the "Disclosure Schedule") (which
Disclosure Schedule identifies the section or subsection of this Agreement to
which each entry relates):
Section 2.1. ORGANIZATION. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization and has all requisite corporate power and authority and all
necessary governmental approvals to own, lease and operate its properties and to
carry on its business as now being conducted, and except where the failure to be
so organized, existing and in good standing or to have such power, authority,
and governmental approvals would not have a Material Adverse Effect on the
Company. As used herein with respect to an entity, "Material Adverse Effect"
shall mean an event, change or effect which, individually or together with all
other events, changes or effects, has had, or is reasonably likely to have, a
material adverse effect on the financial condition, assets, liabilities, results
of operations or business of that entity and its subsidiaries taken as a whole
or prevent, impair or delay such entity from performing its obligations under
this Agreement. The Company is duly qualified or licensed to do business and in
good standing in each jurisdiction in which the property owned, leased or
operated by it or the nature of the business conducted by it makes such
qualification or licensing necessary, except where the failure to be so duly
qualified or licensed and in good standing would not in the aggregate have a
Material Adverse Effect on the Company. The Company has made available to Parent
true and complete copies of its articles of incorporation and bylaws.
Section 2.2. CAPITALIZATION. (a) The authorized capital stock of the
Company consists of 10,000,000 Shares . As of the date hereof 329,780 Shares
were issued and outstanding, and an aggregate of 71,654 Shares were issuable
pursuant to outstanding Company Options. A true and complete list of such
options, including the Shares issuable pursuant thereto, the exercise or
conversion price and the holder, is set forth in Section 2.2(a) of the Company
Disclosure Schedule. All of the outstanding shares of the Company's capital
stock are, and all Company Shares which may be issued pursuant to the exercise
of outstanding Company Options will be, when issued in accordance with the
respective terms thereof, duly authorized, validly issued, fully paid and
non-assessable. Except as set forth above (i) there are no shares of capital
stock of the Company authorized, issued or outstanding and (ii) there are no
options, warrants, calls, pre-emptive rights, subscriptions or other rights,
agreements, arrangements or commitments of any character, relating to the issued
or unissued capital stock of the Company, obligating the Company or any of its
subsidiaries to issue, transfer or sell or cause to be issued, transferred or
sold any shares of capital stock of, or other equity interest in, the Company or
any of its subsidiaries or securities convertible into or exchangeable for such
shares or equity interests, or obligating the Company or any of its subsidiaries
to grant, extend or enter into any such option, warrant, call, subscription or
other right, agreement, arrangement or commitment and (iii) there are no
outstanding obligations of the Company to vote or to repurchase, redeem or
otherwise acquire any shares of capital stock of the Company, or any affiliate
of the Company or to provide funds to make any
7
<PAGE>
investment (in the form of a loan, capital contribution or otherwise) in any
subsidiary or any other entity. Other than Shares, no securities of the Company
have the right to vote.
(b) The Company has delivered to Parent true and complete
copies of all instruments governing or defining rights under the Shares and the
Company Options. The Company has delivered a true and complete list of all
holders of securities of the Company. All such securities were issued in
compliance with all applicable laws, including federal or state securities laws.
(c) All of the outstanding shares of capital stock of each of
the Company's subsidiaries are owned by the Company, directly or indirectly, and
all such shares have been validly issued and are fully paid and nonassessable
and are owned by either the Company or one of its subsidiaries free and clear of
all liens, charges, claims or encumbrances. The Company does not have and has
not had, directly or indirectly, any equity or ownership interest in any
business. The Company acknowledges that the representations herein covering the
Company would have covered subsidiaries of the Company if the Company had any
subsidiaries.
Section 2.3. AUTHORITY RELATIVE TO THIS AGREEMENT. (a) The Company has
full corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
the Company of this Agreement, and the consummation by it of the transactions
contemplated hereby, have been duly and validly authorized by its Board of
Directors and, except for the approval of this Agreement by the stockholders of
the Company (the "Company Stockholder Approval"), no other corporate action on
the part of the Company is necessary to authorize the execution and delivery by
the Company of this Agreement and the consummation by it of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Company and, assuming that this Agreement constitutes a valid and binding
obligation of Parent and Sub, is a valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms. The affirmative
vote of the holders of any number greater than two-thirds of the outstanding
Shares, voting together as a single class, is the only vote of the holders of
any class or series of the Company's capital stock necessary to approve this
Agreement and the transactions contemplated hereby. The 5% Stockholders hold a
sufficient number of Shares to approve this Agreement without the vote of any
other shareholder.
(b) The Board of Directors of the Company has taken all
necessary action so that no "Affiliated Transaction" or "Control Share
Acquisition" or other takeover or similar statute is applicable to the Merger
and the other transactions contemplated hereby.
Section 2.4. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for such
filings as may be required under, and other applicable requirements of, the
VSCA, neither the execution, delivery or performance of this Agreement by the
Company nor the consummation by the Company of the transactions contemplated
hereby nor compliance by the Company with any of the provisions hereof will (i)
conflict with or result in any breach of any provision of the articles of
incorporation or the bylaws (or similar
8
<PAGE>
organizational instrument) of the Company or of any of its subsidiaries, (ii)
require any filing with, or permit, authorization, consent or approval of, any
court, tribunal, administrative agency or commission or other governmental or
other regulatory authority or agency (a "Governmental Entity") or any other
person or entity, (iii) result in a violation or breach of, or constitute (with
or without due notice or lapse of time or both) a default (or give rise to any
right of termination, amendment, cancellation or acceleration), result in the
termination of or a right of termination or cancellation of, modification of any
benefit under, accelerate the performance required by, result in the triggering
of any payment or other material obligation pursuant to, result in the creation
of any lien, security interest, charge or encumbrance upon any of the material
properties of the Company or its subsidiaries under, or result in being declared
void, voidable or without further binding effect any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, lease, license, contract,
permit, deed of trust agreement or other instrument or commitment obligation to
which the Company or any of its subsidiaries is a party or by which any of them
or any of their properties or assets may be bound or affected or (iv) violate
any order, writ, injunction, decree, statute, rule or regulation applicable to
the Company, any of its subsidiaries or any of their properties or assets,
excluding from the foregoing clauses (ii), (iii) and (iv) such violations,
breaches or defaults which would not, in the aggregate, have a Material Adverse
Effect on the Company.
Section 2.5. FINANCIAL STATEMENTS. Section 2.5 of the Disclosure
Schedule sets forth (a) the audited balance sheets, income statements and
statements of cash flow of the Company at and for the years ending March 31,
1996, 1997 and 1998, each accompanied by the unqualified audit report of Arthur
Andersen LLP, and (b) the unaudited balance sheets, income statements and
statements of cash flow of the Company at and for the quarters ended June 30,
1998, September 30, 1998 and December 31, 1998 ((a) and (b) collectively, the
"Financial Statements"). Each of the balance sheets (including the related
notes) included in the Financial Statements fairly presents the financial
position of the Company as of the respective dates thereof and each of the
statements of income and cash flow (including the related notes) included in the
Financial Statements fairly presents the results of operations of the Company
for the respective periods then ended, except as otherwise noted therein. The
audited balance sheet of the Company as of March 31, 1998 is sometimes referred
to as the "Company Balance Sheet" and such date as the "Balance Sheet Date."
Each of the audited Financial Statements has been (i) prepared in accordance
with U.S. generally accepted accounting principles ("GAAP") consistently applied
during the periods involved, except as otherwise noted therein and (ii) prepared
in accordance with the books and records of the Company. The balance sheet of
the Company as of March 31, 1999 set forth in Section 2.5 of the Disclosure
Schedule (the "Forecast March 31 Balance Sheet") fairly presents the items set
forth therein, in a manner consistent with the balance sheets contained in the
Financial Statements.
Section 2.6. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date,
(a) Company has operated in the ordinary and usual course of business, (b)
neither the Company nor any of its subsidiaries has taken, or agreed to take,
any of the actions
9
<PAGE>
contemplated by Section 5.1 hereof and (c) there have not occurred any events,
changes or effects which have had or which would have a Material Adverse Effect
on the Company.
Section 2.7. NO UNDISCLOSED LIABILITIES. There are no liabilities,
debts, obligations or claims (absolute, contingent, known, unknown or otherwise)
against the Company or its subsidiaries, except liabilities, debts, obligations
or claims (a) reflected or reserved in the Company Balance Sheet or reflected in
the Financial Statements, (b) incurred after the Balance Sheet Date in the
ordinary course of business or (c) which would not be reasonably likely to have
a Material Adverse Effect.
Section 2.8. LITIGATION. There is no suit, claim, action, proceeding or
investigation pending or, to the Knowledge (as defined herein) of the Company,
threatened against the Company that would be reasonably likely to have a
Material Adverse Effect and the Company is not subject to any outstanding order,
writ, injunction or decree that would be reasonably likely to have a Material
Adverse Effect or that restricts the Company or any of its subsidiaries in any
material respect.
As used herein with respect to an entity, "Knowledge" means the actual
knowledge of the executive officers of that entity and any other knowledge
implied or imputed by applicable law. Section 2.8 of the Disclosure Schedule
sets forth a list of all persons deemed to have "Knowledge" with respect to the
Company.
Section 2.9. NO DEFAULT. There exists no default or violation (and no
event has occurred which with notice or lapse of time would constitute a default
or violation or loss of material benefits) of any term, condition or provision
of (i) any note, bond, mortgage, indenture, contract, agreement, permit,
license, lease, purchase order, sales order, arrangement or other commitment or
obligation to which the Company is a party or may be subject or (ii) any order,
writ, injunction, decree, statute, treaty, rule or regulation applicable to the
Company, except for violations or defaults which would not have a Material
Adverse Effect.
Section 2.10. PERMITS; COMPLIANCE WITH APPLICABLE LAW. (a) The Company
possesses all permits, licenses, variances, exemptions, orders, approvals and
authorizations of all Governmental Entities necessary for the lawful conduct of
the business of the Company. All such permits have been legally obtained and
maintained and are in full force and effect, except for lack of permits or
defaults which would not have a Material Adverse Effect.
(b) The business of the Company is being and has been
conducted in compliance with all permits, orders, writs, judgments, injunctions,
decrees and settlements and all applicable laws, ordinances, codes, rules,
regulations and policies of any Governmental Entity, except for non-compliance
which would not have a Material Adverse Effect.
Section 2.11. TAXES AND TAX RETURNS.
10
<PAGE>
(a) Definitions:
"Code" means the Internal Revenue Code of 1986, as amended.
All citations to provisions of the Code, or to the Treasury Regulations
promulgated thereunder, shall include any amendments thereto and any substitute
or successor provisions thereto.
"Taxes" means any and all federal, state, local and foreign
taxes, assessments and other governmental charges, duties, impositions, levies
and liabilities, including, without limitation, taxes based upon or measured by
gross receipts, income, profits, sales, use and occupation, and value added, ad
valorem, transfer, gains, franchise, withholding, payroll, recapture,
employment, excise, unemployment, insurance, social security, business license,
occupation, business organization, stamp, environmental and property taxes,
together with all interest, penalties and additions imposed with respect to such
amounts. For purposes of this Agreement, "Taxes" also includes any obligations
under any agreements or arrangements with any person with respect to the
liability for, or sharing of, Taxes (including, without limitation, pursuant to
Treas. Reg. ss. 1.1502-6 or comparable provisions of state, local or foreign Tax
law) and including, without limitation, any liability for Taxes as a transferee
or successor, by contract or otherwise.
"Taxable Period" means any taxable year or any other period
that is treated as a taxable year (or other period, or portion thereof, in the
case of a Tax imposed with respect to such period or portion thereof, e.g., a
quarter) with respect to which any Tax may be imposed under any applicable
statute, rule, or regulation.
"Tax Return" means any report, return, election, notice,
estimate, declaration, information statement and other forms and documents
(including, without limitation, all schedules, exhibits and other attachments
thereto) relating to and filed or required to be filed with a taxing authority
in connection with any Taxes (including, without limitation, estimated Taxes).
(b) All Tax Returns required to be filed by or with respect to
the Company for all Taxable Periods have been timely filed. All such Tax Returns
(i) were prepared in the manner required by applicable law, (ii) are true,
correct and complete in all material respects, and (iii) accurately reflect the
material liability for Taxes of the Company. All Taxes shown to be payable on
such Tax Returns, and all assessments of Tax made against the Company with
respect to such Tax Returns, have been paid when due. No adjustment relating to
any such Tax Return has been proposed in writing by any taxing authority and no
reasonable basis exists for any such written adjustment.
(c) The Company has made (or there has been made on its
behalf) all required current estimated Tax payments sufficient to avoid any
underpayment penalties.
(d) The Company has (i) timely paid or caused to be paid all
Taxes that are or were due, whether or not shown (or required to be shown) on a
Tax Return and (ii) provided a sufficient reserve, as of the date thereof, for
the payment of all accrued
11
<PAGE>
Taxes not yet due and payable (without regard to deferred Tax assets and
liabilities) on the Forecast March 31 Balance Sheet. There are no material Taxes
that would be due if asserted by a taxing authority, except with respect to
which the Company is maintaining adequate reserves.
(e) The Company has complied (and until the Closing Date will
comply) in all material respects with the provisions of the Code relating to the
withholding and payment of Taxes, including, without limitation, the withholding
and reporting requirements under Code sections 1441 through 1464, 3401 through
3406, and 6041 through 6049, as well as similar provisions under any other laws,
and have, within the time and in the manner prescribed by law, withheld from
employee wages and paid over to the proper governmental authorities all amounts
required.
(f) None of the Tax Returns of the Company has been or is
currently being examined by the Internal Revenue Service (the "IRS") or relevant
state, local or foreign taxing authorities. There are no examinations or other
administrative or court proceedings relating to Taxes in progress or pending,
nor has the Company received a revenue agent's or similar written report
asserting a Tax deficiency. There are no current actions, suits, proceedings,
investigations, audits or claims relating to or asserted for Taxes of the
Company.
(g) No material claim has ever been made in writing by any
taxing authority with respect to the Company in a jurisdiction where the Company
does not file Tax Returns that the Company is or may be subject to taxation by
that jurisdiction. There are no security interests on any of the assets of the
Company that arose in connection with any failure (or alleged failure) to pay
any Taxes and, except for liens for Taxes that are not yet due and payable,
there are no liens for any Tax upon any asset of the Company.
(h) The Company has made available (or, in the case of Tax
Returns filed after the date hereof, will make available at such time and place
as Sub may request) to Sub complete and accurate copies of such Tax Returns, and
amendments thereto, filed by the Company as Sub may request. Since the date of
the most recent Financial Statement, the Company has not incurred any liability
for Taxes that would result in the net worth of the Company on the Closing Date
to be materially less than the net worth of the Company on March 31, 1999.
(i) The Company is not, or has not been, a party to any
agreement relating to allocating or sharing the payment of, or liability for,
Taxes with respect to any Taxable Period.
(j) The Company has not distributed the stock of any
corporation in a transaction satisfying the requirements of Section 355 of the
Code since April 16, 1997. The stock of the Company has not been distributed in
a transaction satisfying the requirements of Section 355 of the Code since April
16, 1997.
12
<PAGE>
(k) There is no contract, agreement, plan or arrangement
covering any person that, individually or collectively, could give rise to, nor
will the consummation of the transactions contemplated hereby obligate the
Company or Sub to make, the payment of any amount that would not be deductible
by the Company by reason of Section 280G of the Code.
(l) The Company has not executed any outstanding waivers or
comparable consents, that are currently in effect, regarding the application of
the statute of limitations with respect to any Taxes or Tax Returns. No
extension of time with respect to any date on which a Tax Return was or is to be
filed by the Company is in force. The Company has not granted a power of
attorney to any person with respect to any Taxable Period that is currently in
effect.
(m) The Company does not own an interest in a partnership nor
could it be treated as a partner in a partnership for U.S. federal income tax
purposes.
(n) The Company has not been a member of an (i) affiliated
group (within the meaning of Section 1504 of the Code) or (ii) affiliated,
combined, consolidated, unitary, or similar group for state, local or foreign
Tax purposes.
(o) The Company has not agreed nor is it required to include
in income any adjustment under either Section 481(a) or Section 482 of the Code
(or an analogous provision of state, local, or foreign law) by reason of a
change in accounting method or otherwise.
(p) There are no proposed written reassessments of any
property owned by the Company or other written proposals that could increase the
amount of any Tax to which the Company could be subject.
(q) The Company does not have any deferred income reportable
for a period ending after the Closing Date but that is attributable to a
transaction (e.g., an installment sale) occurring in a period ending on or prior
to the Closing Date.
(r) None of the indebtedness of the Company constitutes
"corporate acquisition indebtedness" (as defined in Section 279(b) of the Code)
or other indebtedness with respect to which any interest deductions may be
disallowed under Section 279 of the Code or otherwise.
(s) The Company does not have an overall foreign loss within
the meaning of Section 904 of the Code.
Section 2.12. EMPLOYEE BENEFIT PLANS.
(a) Section 2.12 of the Company Disclosure Schedule sets forth
each pension, retirement, profit sharing, health, disability, life, group
insurance, deferred compensation, stock option, stock purchase, restricted
stock, bonus or incentive,
13
<PAGE>
severance pay, employment or termination, and other employee benefit or
compensation plan, trust, arrangement, contract, agreement, policy, written
commitment or oral commitment (if known to the Company), including, without
limitation, each "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA") whether
formal or informal, written or oral under which (i) current or former employees,
directors or independent contractors of the Company or any of its Subsidiaries
participate or are entitled to participate by reason of their relationship with
the Company or any of its Subsidiaries, (ii) to which the Company or any of its
Subsidiaries is a party or a sponsor or a fiduciary thereof or by which the
Company or any of its Subsidiaries (or any of their rights, properties or
assets) is currently bound or (iii) with respect to which the Company or any of
its Subsidiaries has any obligation to make payments or contributions (the
"Benefit Plans").
(b) Each Benefit Plan has at all times been operated and
administered in compliance in all material respects with its terms, the
applicable requirements of ERISA and the Code and all other applicable laws.
Each Benefit Plan that is intended to be tax qualified under Section 401(a) of
the Code has received a favorable determination letter from the IRS stating that
it is so qualified and that any trust associated with such Benefit Plan is tax
exempt under Section 501(a) of the Code, and, to the knowledge of the Company,
there is no reason why the qualified status of any such Benefit Plan or trust
would be denied or revoked, whether retroactively or prospectively.
(c) No pending or, to the knowledge of the Company, threatened
disputes, lawsuits, claims (other than routine claims for benefits),
investigations, audits or complaints to, or by, any person or governmental
entity have been filed or are pending with respect to the Benefit Plans or the
Company or any of its Subsidiaries in connection with any Benefit Plan or the
fiduciaries or administrators thereof, and to the knowledge of the Company, no
state of facts or conditions exist under the terms of the Benefit Plan or
applicable law that would have a Material Adverse Effect. With respect to each
Benefit Plan, there has not occurred, and no person or entity is contractually
bound to enter into, any nonexempt "prohibited transaction" within the meaning
of Section 4975 of the Code or Section 406 of ERISA, nor any transaction that
would result in a civil penalty being imposed under Section 409 or 502(i) of
ERISA.
(d) Neither the Company, its Subsidiaries, nor any trade or
business (whether or not incorporated) which, together with the Company or any
of its Subsidiaries, would be deemed a "single employer" under Section 4001(b)
of ERISA (an "ERISA Affiliate") has or at any time in the past has had (i) any
liability, contingent or otherwise, under Title IV of ERISA or Section 412 of
the Code, (ii) an obligation to contribute to any "multiemployer plan" (as
defined in Section 3(37) of ERISA).
(e) All contributions to and payments with respect to or under
the Benefit Plans that are required to be made with respect to periods ending on
or before the Effective Time have been made or accrued before the Effective Time
by the Company in all material respects to the extent such funding is required
by the Benefit Plan or otherwise, and in accordance with the appropriate plan
documents, financial statements,
14
<PAGE>
actuarial reports, collective bargaining agreements or insurance contracts or
arrangements.
(f) Except as set forth on Schedule 2.12 of the Company
Disclosure Schedule, no Benefit Plan that is an "employee welfare benefit plan"
under Section 3(1) of ERISA (a "Welfare Plan") is partially or fully funded
through a trust. No Welfare Plan providing welfare benefits (whether or not
insured) with respect to current or former employees of the Company continues
such coverage or provides such benefits beyond their date of retirement or other
termination of service (other than (i) coverage mandated by Section 601 of
ERISA, the cost of which is fully paid by the former employee or his or her
dependents, (ii) death benefits payable following termination of employment
earned for service prior to termination of employment and (iii) any health
insurance coverage which in the ordinary course extends coverage through the end
of the month in which the termination of employment occurs).
(g) With respect to each Benefit Plan, the Company has made
available to Sub complete and correct copies of the following documents, to the
extent in each case that such documents exist or are required by law: (1)
current plan documents, subsequent plan amendments, or any and all other
documents that establish or describe the existence of the plan, trust,
arrangement, contract, policy or commitment; (2) the most recent tax qualified
determination letters, if any, received from or applications pending with the
IRS; and (3) the three most recent Form 5500 Annual Reports, including related
schedules and audited and financial statements and opinions of independent
certified public accountants.
(h) The execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence of
any additional or subsequent events) constitute an event under any plan, policy,
arrangement or agreement or any trust or loan that will or would reasonably be
expected to result in any payment (whether of severance pay or otherwise),
acceleration of, forgiveness of indebtedness owing from, vesting of,
distribution of, or increase in or obligation to fund, any benefits with respect
to any current or former employee, director or consultant of the Company.
Section 2.13. INTELLECTUAL PROPERTY. Except for commercially available
"off the shelf" software, the Company owns or has a valid license, with no
required royalty or other monetary payments and otherwise on commercially
reasonable terms, to use all U.S. and foreign, registered and unregistered,
patents, trademarks, trade names, copyrights, technology (including software),
trade secrets, know-how, inventions, data, processes and other intellectual
property rights (collectively, "Intellectual Property Rights") material to or
necessary for the conduct of the business of the Company. No claims are pending
or, to the Company's Knowledge, threatened, by any person as to the use of any
Intellectual Property Rights by the Company and, to the Knowledge of the
Company, the use by the Company of all Intellectual Property Rights which are
owned by the Company (collectively, the "Owned IP Rights") or which are licensed
from Kaufman and Robinson, Inc. (together with the Owned IP Rights, the "Subject
IP Rights") does not infringe on the valid U.S. patent, copyright, trademark,
trade secret or
15
<PAGE>
similar intellectual property rights of any person. To the Knowledge of the
Company, no third person is infringing on the Subject IP Rights. The Owned IP
Rights are owned exclusively by the Company and not subject to any licenses or
other encumbrances. The Company has taken and, prior to Closing will continue to
take, all measures reasonably necessary to preserve and protect the Subject IP
Rights. To the Company's Knowledge, all patents and registered trademarks,
service marks, and other company product or service identifiers and registered
copyrights owned by the Company, and all patents licensed from Kaufman and
Robinson, Inc., are valid and enforceable. The Company has not entered into any
agreement to indemnify any other person against any charge of infringement of
any third party intellectual property right by any Intellectual Property Right.
All employees, agents, consultants or contractors who have contributed to or
participated in the creation or development of any Owned IP Rights on behalf of
the Company or any predecessor in interest thereto either: (i) is a party to a
"work-for-hire" agreement under which the Company is deemed to be the original
owner/author of all property rights therein or (ii) has executed an assignment
or any agreement to assign in favor of the Company (or such predecessor in
interest, as applicable) of all right, title and interest in such material.
Section 2.13 of the Disclosure Schedule sets forth a list of all material
Intellectual Property Rights, Owned IP Rights and Subject IP Rights.
Section 2.14. TAX FREE REORGANIZATION. Neither the Company nor either
of the 5% Stockholders has taken any action or failed to take any action, and to
the Company's Knowledge, there is no fact or circumstance, which would prevent
the Merger from constituting a reorganization within the meaning of Section
368(a) of the Code.
Section 2.15. TRANSACTIONS WITH AFFILIATES. No present or former
officer, director, stockholder or other affiliate of the Company has (i) any
interest in the assets, properties or rights used in the business of the Company
(other than solely through the ownership of Shares or Company Options), (ii) any
contract, agreement or understanding with the Company, or (iii) engaged in any
transactions with the Company since the Balance Sheet Date.
Section 2.16. CONTRACTS.
(a) Section 2.16 of the Disclosure Schedule sets forth a
complete and accurate list of each of the following to which the Company is a
party to or is bound:
(i) each mortgage, indenture, note, installment
obligation or other instrument, contract, agreement or arrangement relating to
the borrowing of money by the Company or any of its subsidiaries in an amount
exceeding $25,000;
(ii) each guaranty, direct or indirect, by the
Company of any obligation for borrowed money in an amount exceeding $10,000 of
any person or entity;
(iii) each obligation to sell or to register the sale
of any of the shares of capital stock or other securities of the Company or any
of its subsidiaries;
16
<PAGE>
(iv) each obligation to make payments, contingent or
otherwise, arising out of the prior acquisition or disposition of a business;
(v) each contract that limits the freedom of the
Company to compete in its lines of business as presently conducted or with any
person or in any geographical area or otherwise to conduct its business as
presently conducted;
(vi) each contract relating to Intellectual Property
Rights;
(vii) each collective bargaining or union contract;
(viii) each contract for the purchase of capital
equipment, materials or supplies, except those contracts terminable without
material penalty on 60 or fewer days' notice and those involving the receipt or
payment of less than $25,000 per year;
(ix) each contract for the acquisition or disposition
of material assets, other than in the ordinary course of business;
(x) each contract relating to the leasing of or other
arrangement for use of material real or personal property;
(xi) each limited partnership, joint venture or other
unincorporated business organization or similar arrangement or agreement.
(xii) each agreement with any officer, director,
consultant, employee, stockholder or affiliate;
(xiii) each contract with a term in excess of one
year from the date hereof which is not otherwise terminable upon 60 days advance
notice without cause and without financial penalty; (xiv) (xv) each contract
which involves the payment or receipt of an amount (in one or a series of
transactions) in excess of $25,000 in any year; and
(xvi) each other contract which is material to the
business of the Company;
(b) Each such contract or agreement is legal, valid, binding
and enforceable against the Company, and to the Company's Knowledge, against
each other party thereto, is in full force and effect and will continue to be so
legal, valid, binding, enforceable and in full force and effect following the
Closing. Neither the Company, nor to the Company's Knowledge, any other party,
is in breach or default, and no event has occurred which would constitute (with
or without notice or lapse of time or both) a breach or default (or give rise to
any right of termination, modification, cancellation or acceleration) or
modification of benefits under any such contract.
17
<PAGE>
(c) The Company has delivered or made available for review by
Parent true and complete copies of each such contract or agreement. Since the
Balance Sheet Date, there has been no material modification, breach or
termination of any such contract or agreement nor, to the Company's Knowledge,
is any such modification, breach or termination contemplated.
Section 2.17. LABOR RELATIONS. (a) There is no unfair labor practice,
charge or complaint or other proceeding pending or, to the Knowledge of the
Company, threatened, against the Company before the National Labor Relations
Board or any other Governmental Entity.
(b) There is no labor strike, slowdown or stoppage pending or,
to the Knowledge of the Company, threatened, against or affecting the Company,
nor has there been any such activity within the past two years.
(c) There are no pending collective bargaining negotiations
relating to the employees of the Company.
(d) (i) there are no agreements with, or pending petitions for
recognition of, a labor union or association as the exclusive bargaining agent
for any or all of the employees of the Company, (ii) no such petitions have been
pending within the past five years and (iii) to the Knowledge of the Company,
there has not been any general solicitation of representation cards by any union
seeking to represent the employees of the Company as their exclusive bargaining
agent at any time within the past five years.
Section 2.18. ENVIRONMENTAL. (a) Except to the extent that any of the
following would not be reasonably likely to have a Material Adverse Effect on
the Company: (i) the Company complies and at all times has complied with all
applicable Environmental Laws (as defined below), (ii) no Hazardous Substances
(as defined below) are present at or have been disposed on or released or
discharged from, onto or under any of the properties currently owned, leased,
operated or otherwise used by the Company (including soils, groundwater, surface
water, buildings or other structures), (iii) no Hazardous Substances were
present at or disposed on or released or discharged from, onto or under any of
the properties formerly owned, leased, operated or otherwise used by the Company
during the period of ownership, lease, operation or use by the Company, (iv) the
Company is not subject to any liability or obligation in connection with
Hazardous Substances present at any location owned, leased, operated or
otherwise used by any third party, (v) the Company has not received any notice,
demand, letter, claim or request for information alleging that any of the
Company or its subsidiaries is or may be in violation of or liable under any
Environmental Law, (vi) the Company is not subject to any order, decree,
injunction or other directive of any governmental authority and the Company is
not subject to any indemnity or other agreement with any person or entity
relating to Hazardous Substances and (vii) there are no circumstances or
conditions involving the Company, any assets (including real property) or
businesses previously owned, leased, operated or otherwise used by the Company,
or any of the assets (including real property) or businesses of any predecessors
of the Company that would
18
<PAGE>
result in any damages to the Company arising under or pursuant to Environmental
Law or in any restriction on the ownership, use or transfer of any of the assets
of the Company arising under or pursuant to any Environmental Law.
(b) As used herein, the term "Environmental Law" means any
international, national, provincial, regional, federal, state, municipal or
local law, regulation, order, judgement, decree, permit, authorization, opinion,
common or decisional law (including, without limitation, principles of
negligence and strict liability) or agency requirement relating to the
protection, investigation or restoration of the environment (including, without
limitation, natural resources) or the health or safety of human or other living
organisms, including, without limitation, the manufacture, introduction into
commerce, export, import, handling, use, presence, disposal, release or
threatened release of any Hazardous Substance or noise, odor, wetlands,
pollution, contamination or any injury or threat of injury to persons or
property.
(c) As used herein, the term "Hazardous Substance" means any
element, compound, substance or other material (including any pollutant,
contaminant, hazardous waste, hazardous substance, chemical substance, or
product) that is listed, classified or regulated pursuant to any Environmental
Law, including, without limitation, any petroleum product, by-product or
additive, asbestos, presumed asbestos-containing material, asbestos-containing
material, medical waste, chloroflourocarbon, hydrochloroflourocarbon,
lead-containing paint or plumbing, polychlorinated biphenyls, radioactive
material or radon.
Section 2.19. ASSETS NECESSARY TO BUSINESS. The assets, properties and
rights of the Company include all assets, properties and rights used in, or
necessary for, the business of the Company and are held by the Company free and
clear of any liens, claims or encumbrances, other than Permitted Liens.
"Permitted Liens" means (i) liens for current taxes not yet due and payable or
(ii) mechanics', carriers', workers' and other similar liens arising or incurred
in the ordinary course of business, which, individually or in the aggregate, are
not substantial in amount, do not materially detract from the value of or
materially interfere with the present use of any of the assets subject thereto
or materially impair the conduct of the business of the Company.
Section 2.20. INSURANCE. The insurance policies of the Company are
current, are in full force and effect, all premiums due thereon have been paid,
and the Company has complied in all material respects with the provisions of
such policies, and all such policies either specifically include the Company as
a named insured or include omnibus named insured language which generally
includes the Company. No proceeding is pending or, to the Knowledge of the
Company, threatened, to revoke, cancel or limit such policies and no notice of
cancellation of any of such policies has been received by the Company. The
Company is in full compliance with all material recommendations for the
prevention of loss made by all insurance carriers and is in compliance with all
warranties contained in all insurance policies. The insurance carried by the
Company is adequate in light of industry standards.
19
<PAGE>
Section 2.21. INVENTORY. The inventory of the Company reflected on the
Forecast March 31 Balance Sheet is of a quality usable or saleable in the
ordinary course of business, except for dated or defective materials (including
raw materials, work-in-process and finished goods), which is written down or
reserved against on the Forecast March 31 Balance Sheet.
Section 2.22. ACCOUNTS RECEIVABLE. All accounts receivable, notes
receivable and other receivables of the Company reflected on the Forecast March
31 Balance Sheet represents sales actually made or services actually delivered
in the ordinary course of business. Except to the extent reserved against and
reflected in the Forecast March 31 Balance Sheet, the Company knows of no reason
why such accounts receivable would not be collectible in the ordinary course of
business.
Section 2.23. PRODUCT RETURNS AND WARRANTIES. There are no liabilities
for product returns or warranties other than those arising in the ordinary
course of business and reflected on the Forecast March 31 Balance Sheet. To the
Knowledge of the Company, there are no threatened claims for (i) product
returns, (ii) warranty obligations or (iii) product services other than in the
ordinary course of business.
Section 2.24. CUSTOMERS AND SUPPLIERS. Section 2.25 of the Disclosure
Schedule sets forth a true and complete list of (i) the top 10 customers of the
Company based upon net sales for the period April 1, 1998 through March 15,
1999, (ii) the top 10 suppliers for the Company based upon net purchases for the
period April 1, 1998 through March 15, 1999 and (iii) in each case, the
aggregate net sales for the Company to, or the aggregate purchases from, such
customer or supplier for the period April 1, 1998 through March 15, 1999. The
Company believes that its relations with such customers and suppliers are good
and no such customer or supplier has informed the Company of an intent to change
such relationship in a manner adverse to the Company.
Section 2.25. REAL PROPERTY. Each of the Company have good and
marketable title to, or a valid leasehold interest in, all of their real
properties, and, other than the properties in which they hold leasehold
interests, own such properties free and clear of all liens, claims and
encumbrances, other than Permitted Liens. All real property owned or leased by
the Company is set forth on Section 2.26 of the Company Disclosure Schedule. The
Company is in compliance with the material terms of all leases to which it is a
party and all such leases are in full force and effect.
Section 2.26. NO MISLEADING STATEMENTS. The representations and
warranties made by the Company in or pursuant to this Agreement do not include
any untrue statement of a material fact or, to the Knowledge of the Company,
omit to state any fact which would be reasonably likely to have a Material
Adverse Effect on the Company.
20
<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE 5% STOCKHOLDERS
The 5% Stockholders represent and warrant to Parent and Sub as
follows, except as set forth in the disclosure schedule being delivered by the
5% Stockholders to Parent and Sub concurrently herewith (the "5% Stockholder
Disclosure Schedule") (which Disclosure Schedule identifies the section or
subsection of this Agreement to which each entry relates):
Section 3.1. BINDING NATURE OF THIS AGREEMENT. This Agreement has been
duly executed and delivered by the 5% Stockholders and, assuming that this
Agreement constitutes a valid and binding obligation of Parent and Sub, is a
valid and binding obligation of the 5% Stockholders, enforceable against the 5%
Stockholders in accordance with its terms.
Section 3.2. CONSENTS AND APPROVALS; NO VIOLATIONS. Neither the
execution, delivery or performance of this Agreement by the 5% Stockholders nor
the consummation by the 5% Stockholders of the transactions contemplated hereby
nor compliance by the 5% Stockholders with any of the provisions hereof will (i)
require any filing with, or permit, authorization, consent or approval of, any
Governmental Entity or any other person or entity, (ii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, amendment, cancellation or
acceleration), result in the termination of or a right of termination or
cancellation of, modification of any benefit under, accelerate the performance
required by, result in the triggering of any payment or other material
obligation pursuant to, result in the creation of any lien, security interest,
charge or encumbrance upon any of the material properties of the 5% Stockholders
under, or result in being declared void, voidable or without further binding
effect any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, lease, license, contract, permit, deed of trust agreement or other
instrument or commitment obligation to which the 5% Stockholders is a party or
(iv) violate any order, writ, injunction, decree, statute, rule or regulation
applicable to the 5% Stockholders, or any of their properties or assets,
excluding from the foregoing clauses (ii), (iii) and (iv) such violations,
breaches or defaults which would not, in the aggregate, have a material adverse
effect on the 5% Stockholders or prevent, impair or delay the consummation of
the transactions contemplated hereby. The Stockholder is the "ultimate parent
entity" of the Company and is not a "$100 million person" for purposes of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
Section 3.3. SHARE OWNERSHIP. The Stockholder owns an aggregate of
223,800 Shares (including Shares held in trust for the benefit of his children),
free and clear of all liens, claims and encumbrances, including any restrictions
on or sharing of rights to vote or dispose of such shares. The Archbold Trust
owns an aggregate of 50,000 Shares, free and clear of all liens, claims and
encumbrances, including any restrictions on or sharing of rights to vote or
dispose of such shares. Such Shares are the only equity interests in the Company
beneficially owned by either of the 5% Stockholders.
21
<PAGE>
Section 3.4. INVESTMENT. Each of the 5% Stockholders is acquiring the
Parent Shares for investment and not with a view toward, or for sale in
connection with, any sales or distribution thereof. Each of the 5% Stockholders
agrees that neither the Parent Shares nor any interest therein may be offered,
sold, transferred, pledged, hypothecated or otherwise disposed of except
pursuant to (i) an effective registration statement under the Securities Act and
any applicable state securities laws or (ii) an exemption from the registration
requirements of the Securities Act and any applicable state securities laws,
such exemption to be evidenced by such documentation as Parent may reasonably
request, including an opinion of counsel (which counsel and opinion shall be
reasonably satisfactory to Parent) that such transfer is not in violation of the
Securities Act and any applicable state laws.
Section 3.5. ACCREDITED INVESTOR. Each of the 5% Stockholders is an
"accredited investor" within the meaning of Rule 501 under the Securities Act.
Each of the 5% Stockholders has been given an adequate opportunity to
investigate Parent and has been given access to all information he deems
appropriate. Each of the 5% Stockholders understands that no public market
exists for the Parent Shares and that no public market may ever exist for such
shares.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Parent and Sub jointly and severally represent and warrant to
the Company and the 5% Stockholders as follows, except as set forth in the
disclosure schedule being delivered by Parent to the Company concurrently
herewith (the "Parent Disclosure Schedule") (which Disclosure Schedule
identifies the section or subsection of this Agreement to which each entry
relates):
Section 4.1. ORGANIZATION. Each of Parent and its subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of the jurisdiction of its organization and has all requisite corporate power
and authority and all necessary governmental approvals to own, lease and operate
its properties and to carry on its business as now being conducted, except where
the failure to be so organized, existing and in good standing or to have such
power, authority, and governmental approvals would not have a Material Adverse
Effect on Parent. Parent and each of its subsidiaries is duly qualified or
licensed to do business and in good standing in each jurisdiction in which the
property owned, leased or operated by it or the nature of the business conducted
by it makes such qualification or licensing necessary, except where the failure
to be so duly qualified or licensed and in good standing would not in the
aggregate have a Material Adverse Effect on Parent. Parent and Sub have each
made available to the Company copies of their respective articles of
incorporation and bylaws, both as amended to date.
Section 4.2. CAPITALIZATION. (a) The authorized capital stock of Parent
consists of 50,000,000 Parent Shares, 2,500 shares of Series A Preferred Stock,
100,000 shares of
22
<PAGE>
Series B Preferred Stock, 200,000 shares of Series C Preferred Stock and 200,000
shares of Series D Preferred Stock. As of the date hereof 1,586,897 Parent
Shares, 1,685 shares of Series A Preferred Stock (convertible into 4,044,000
Parent Shares), 60,492 shares of Series B Preferred Stock (convertible into
3,629,520 Parent Shares), 100,000 shares of Series C Preferred Stock
(convertible into 1,524,390 Parent Shares) and 200,000 shares of Series D
Preferred Stock were issued and outstanding, an aggregate of 1,386,140 Parent
Shares were issuable pursuant to outstanding warrants and an aggregate of
2,713,560 Parent Shares were issuable pursuant to outstanding Parent Options.
All the outstanding shares of Parent's capital stock are, and all Parent Shares
which may be issued pursuant to the exercise of outstanding Parent Options will
be, when issued in accordance with the respective terms thereof, duly
authorized, validly issued, fully paid and non-assessable. Except as set forth
above (i) there are no shares of capital stock of Parent authorized, issued or
outstanding and (ii) there are no options, warrants, calls, pre-emptive rights,
subscriptions or other rights, agreements, arrangements or commitments of any
character, relating to the issued or unissued capital stock of Parent or any of
its subsidiaries, obligating Parent or any of its subsidiaries to issue,
transfer or sell or cause to be issued, transferred or sold any shares of
capital stock of, or other equity interest in, Parent or any of its subsidiaries
or securities convertible into or exchangeable for such shares or equity
interests, or obligating Parent or any of its subsidiaries to grant, extend or
enter into any such option, warrant, call, subscription or other right,
agreement, arrangement or commitment and (iii) there are no outstanding
obligations of Parent or any of its subsidiaries to vote or to repurchase,
redeem or otherwise acquire any shares of capital stock of Parent, or any
subsidiary or affiliate of Parent or to provide funds to make any investment (in
the form of a loan, capital contribution or otherwise) in any subsidiary or any
other entity. Other than Parent Shares, no securities of Parent have the right
to vote. Parent has delivered to the Company true and complete copies of all
instruments governing or defining rights under Parent Shares.
(b) All of the outstanding shares of capital stock of each of
Parent's subsidiaries are owned by Parent, directly or indirectly, and all such
shares have been validly issued and are fully paid and nonassessable and are
owned by either Parent or one of its subsidiaries free and clear of all liens,
charges, claims or encumbrances. Parent does not, directly or indirectly, have
any equity or ownership interest in any business.
(c) The Parent Shares to be issued pursuant to Section 1.6
hereof have been duly authorized and, upon issuance in accordance with the terms
hereof, shall be validly issued, fully paid and nonassessable.
(d) All of the outstanding shares of capital stock of Parent
were issued in compliance with all applicable laws, including federal or state
securities laws.
Section 4.3. AUTHORITY RELATIVE TO THIS AGREEMENT. Parent has full
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery by
Parent of this Agreement, and the consummation by it of the transactions
contemplated hereby, have been duly and validly authorized by its Board of
Directors and no other corporate action
23
<PAGE>
on the part of Parent is necessary to authorize the execution and delivery by
Parent of this Agreement and the consummation by it of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by
Parent and is a valid and binding obligation of Parent, enforceable against
Parent in accordance with its terms.
Section 4.4. CONSENTS AND APPROVALS; NO VIOLATIONS. Except for such
filings as may be required under, and other applicable requirements of, the
VSCA, neither the execution, delivery or performance of this Agreement by Parent
nor the consummation by Parent of the transactions contemplated hereby nor
compliance by Parent with any of the provisions hereof will (i) conflict with or
result in any breach of any provision of the certificate of incorporation or the
bylaws (or similar organizational instrument) of Parent or of any of its
subsidiaries, (ii) require any filing with, or permit, authorization, consent or
approval of, any Governmental Entity or any other person or entity, (iii) result
in a violation or breach of, or constitute (with or without due notice or lapse
of time or both) a default (or give rise to any right of termination, amendment,
cancellation or acceleration), result in the termination of or a right of
termination or cancellation of, modification of any benefit under, accelerate
the performance required by, result in the triggering of any payment or other
material obligation pursuant to, result in the creation of any lien, security
interest, charge or encumbrance upon any of the material properties of Parent or
its subsidiaries under, or result in being declared void, voidable or without
further binding effect any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, contract, permit, deed of trust
agreement or other instrument or commitment obligation to which Parent or any of
its subsidiaries is a party or by which any of them or any of their properties
or assets may be bound or affected or (iv) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to Parent, any of its
subsidiaries or any of their properties or assets, excluding from the foregoing
clauses (ii), (iii) and (iv) such violations, breaches or defaults which would
not, in the aggregate, have a Material Adverse Effect on Parent.
Section 4.5. FINANCIAL STATEMENTS. Section 4.5 of the Disclosure
Schedule sets forth the consolidated balance sheets, income statements and
statements of cash flow of Parent and its consolidated subsidiaries at and for
(a) the years ending September 30, 1996, 1997 and 1998, each accompanied by the
unqualified audit report of Price Waterhouse LLP/PricewaterhouseCoopers LLP, and
(b) the unaudited quarter ended December 31, 1998 (collectively, the "Parent
Financial Statements"). Each of the balance sheets (including the related notes)
included in the Parent Financial Statements fairly presents the financial
position of Parent and its consolidated subsidiaries as of the respective dates
thereof and each of the statements of income and cash flow (including the
related notes) included in the Parent Financial Statements fairly presents the
results of operations of Parent and its consolidated subsidiaries for the
respective periods then ended, except as otherwise noted therein. The audited
consolidated balance sheet of Parent and its consolidated subsidiaries as of
September 30, 1998 is sometimes referred to as the "Parent Balance Sheet" and
such date as the "Balance Sheet Date." Each of the Parent Financial Statements
has been (i) prepared in accordance with GAAP consistently applied during the
periods involved, except as otherwise noted therein or in the notes thereto and
(ii) prepared in accordance with the books and records of Parent.
24
<PAGE>
Section 4.6. ABSENCE OF CERTAIN CHANGES. Since the Balance Sheet Date,
(a) each of Parent and its subsidiaries has operated in the ordinary and usual
course of business, (b) neither Parent nor any of its subsidiaries has taken, or
agreed to take, any of the actions contemplated by Section 5.2 hereof and (c)
there have not occurred any events, changes or effects which have had or which
would, in the aggregate, a Material Adverse Effect on Parent.
Section 4.7. NO UNDISCLOSED LIABILITIES. There are no liabilities,
debts, obligations or claims (absolute, contingent, known, unknown or otherwise)
against Parent or its subsidiaries, except liabilities, debts, obligations or
claims (a) reflected or reserved in the Parent Balance Sheet, (b) incurred after
the Balance Sheet Date in the ordinary course of business or (c) which would not
be reasonably likely to have a Material Adverse Effect.
Section 4.8. LITIGATION. There is no suit, claim, action, proceeding or
investigation pending or, to the Knowledge of Parent, threatened against Parent
or any of its subsidiaries that would be reasonably likely to have a Material
Adverse Effect and neither Parent nor any of its subsidiaries is subject to any
outstanding order, writ, injunction or decree that would be reasonably likely to
have a Material Adverse Effect or that restricts Parent or any of its
subsidiaries in any material respect.
Section 4.9. TAX FREE REORGANIZATION. Parent has not taken any action
or failed to take any action, and to Parent's Knowledge, there is no fact or
circumstance, which would prevent the Merger from constituting a reorganization
within the meaning of Section 368(a) of the Code.
Section 4.10. ENVIRONMENTAL. (a) Except to the extent that any of the
following would not be reasonably likely to have a Material Adverse Effect on
Parent: (i) Parent complies and at all times has complied with all applicable
Environmental Laws, (ii) no Hazardous Substances are present at or have been
disposed on or released or discharged from, onto or under any of the properties
currently owned, leased, operated or otherwise used by Parent or its
subsidiaries (including soils, groundwater, surface water, buildings or other
structures), (iii) no Hazardous Substances were present at or disposed on or
released or discharged from, onto or under any of the properties formerly owned,
leased, operated or otherwise used by Parent during the period of ownership,
lease, operation or use by Parent, (iv) Parent is not subject to any liability
or obligation in connection with Hazardous Substances present at any location
owned, leased, operated or otherwise used by any third party, (v) Parent has not
received any notice, demand, letter, claim or request for information alleging
that Parent is or may be in violation of or liable under any Environmental Law,
(vi) Parent is not subject to any order, decree, injunction or other directive
of any governmental authority and Parent is not subject to any indemnity or
other agreement with any person or entity relating to Hazardous Substances and
(vii) there are no circumstances or conditions involving Parent, any assets
(including real property) or businesses previously owned, leased, operated or
otherwise used by Parent, or any of the assets (including real property) or
businesses of any predecessors of Parent that would result in any damages to
Parent arising under or pursuant to Environmental
25
<PAGE>
Law or in any restriction on the ownership, use or transfer of any of the assets
of Parent arising under or pursuant to any Environmental Law.
Section 4.11. NO DEFAULT. There exists no default or violation (and no
event has occurred which with notice or lapse of time would constitute a default
or violation or loss of material benefits) of any term, condition or provision
of (i) any note, bond, mortgage, indenture, contract, agreement, permit,
license, lease, purchase order, sales order, arrangement or other commitment or
obligation to which Parent is a party or may be subject or (ii) any order, writ,
injunction, decree, statute, treaty, rule or regulation applicable to Parent,
except for violations or defaults which would not have a Material Adverse
Effect.
Section 4.12. PERMITS; COMPLIANCE WITH APPLICABLE LAW. (a) Parent
possesses all permits, licenses, variances, exemptions, orders, approvals and
authorizations of all Governmental Entities necessary for the lawful conduct of
the business of Parent. All such permits have been legally obtained and
maintained and are in full force and effect, except for lack of permits or
defaults which would not have a Material Adverse Effect.
(b) The business of Parent and its subsidiaries is being and
has been conducted in compliance with all permits, orders, writs, judgments,
injunctions, decrees and settlements and all applicable laws, ordinances, codes,
rules, regulations and policies of any Governmental Entity, except for
non-compliance which would not have a Material Adverse Effect.
Section 4.13. TAXES AND TAX RETURNS.
(a) All Tax Returns required to be filed by or with respect to
Parent or any of its subsidiaries for all Taxable Periods have been timely
filed. All such Tax Returns (i) were prepared in the manner required by
applicable law, (ii) are true, correct and complete in all material respects,
and (iii) accurately reflect the material liability for Taxes of Parent and each
of its subsidiaries. All Taxes shown to be payable on such Tax Returns, and all
assessments of Tax made against Parent with respect to such Tax Returns, have
been paid when due. No adjustment relating to any such Tax Return has been
proposed in writing by any taxing authority and no basis exists for any such
adjustment.
(b) Parent has made (or there has been made on its behalf) all
required current estimated Tax payments sufficient to avoid any underpayment
penalties.
(c) Parent has (i) timely paid or caused to be paid all Taxes
that are or were due, whether or not shown (or required to be shown) on a Tax
Return and (ii) provided a sufficient reserve, as of the date thereof, for the
payment of all accrued Taxes not yet due and payable (without regard to deferred
Tax assets and liabilities) (the "Tax Reserve") on the balance sheet included in
Parent Financial Statements for the Taxable Period ended September 30, 1998.
There are no material Taxes that would be
26
<PAGE>
due if asserted by a taxing authority, except with respect to which Parent is
maintaining adequate reserves.
(d) Parent has complied (and until the Closing Date will
comply) in all material respects with the provisions of the Code relating to the
withholding and payment of Taxes, including, without limitation, the withholding
and reporting requirements under Code sections 1441 through 1464, 3401 through
3406, and 6041 through 6049, as well as similar provisions under any other laws,
and have, within the time and in the manner prescribed by law, withheld from
employee wages and paid over to the proper governmental authorities all amounts
required.
(e) None of the Tax Returns of Parent has been or is currently
being examined by the IRS or relevant state, local or foreign taxing
authorities. There are no examinations or other administrative or court
proceedings relating to Taxes in progress or pending, nor has Parent received a
revenue agent's or similar written report asserting a Tax deficiency. There are
no current actions, suits, proceedings, investigations, audits or claims
relating to or asserted for Taxes of Parent.
(f) No material claim has ever been made in writing by any
taxing authority with respect to Parent in a jurisdiction where Parent does not
file Tax Returns that Parent is or may be subject to taxation by that
jurisdiction. There are no security interests on any of the assets of Parent
that arose in connection with any failure (or alleged failure) to pay any Taxes
and, except for liens for Taxes that are not yet due and payable, there are no
liens for any Tax upon any asset of Parent or any of its subsidiaries.
(g) Parent has made available (or, in the case of Tax Returns
filed after the date hereof, will make available at such time and place as
Company may request) to Company complete and accurate copies of such Tax
Returns, and amendments thereto, filed by Parent as Company may request. Since
the date of the most recent Financial Statement, the Parent has not incurred any
liability for Taxes that would result in the net worth of Parent on the Closing
Date to be materially less than the net worth of the Company on the date of the
most recent financial statement.
(h) Parent is not, or has not been, a party to any agreement
relating to allocating or sharing the payment of, or liability for, Taxes with
respect to any Taxable Period.
(i) Parent has not distributed the stock of any corporation in
a transaction satisfying the requirements of Section 355 of the Code since April
16, 1997. The stock of Parent has not been distributed in a transaction
satisfying the requirements of Section 355 of the Code since April 16, 1997.
(j) There is no contract, agreement, plan or arrangement
covering any person that, individually or collectively, could give rise to, nor
will the consummation of the transactions contemplated hereby obligate Parent or
Sub to make, the payment of any amount that would not be deductible by Parent by
reason of Section 280G of the Code.
27
<PAGE>
(k) Parent has not executed any outstanding waivers or
comparable consents, that are currently in effect, regarding the application of
the statute of limitations with respect to any Taxes or Tax Returns. No
extension of time with respect to any date on which a Tax Return was or is to be
filed by Parent is in force. Parent has not granted a power of attorney to any
person with respect to any Taxable Period that is currently in effect.
(l) Parent does not own an interest in a partnership nor could
it be treated as a partner in a partnership for U.S. federal income tax
purposes.
(m) Parent has not been a member of an (i) affiliated group
(within the meaning of Section 1504 of the Code) or (ii) affiliated, combined,
consolidated, unitary, or similar group for state, local or foreign Tax purposes
other than the group of which Parent is the common parent.
(n) Parent has not agreed nor is it required to include in
income any adjustment under either Section 481(a) or Section 482 of the Code (or
an analogous provision of state, local, or foreign law) by reason of a change in
accounting method or otherwise.
(o) There are no proposed written reassessments of any
property owned by Parent or other written proposals that could increase the
amount of any Tax to which Parent could be subject.
(p) Parent does not have any deferred income reportable for a
period ending after the Closing Date but that is attributable to a transaction
(e.g., an installment sale) occurring in a period ending on or prior to the
Closing Date.
(q) None of the indebtedness of Parent constitutes "corporate
acquisition indebtedness" (as defined in Section 279(b) of the Code) or other
indebtedness with respect to which any interest deductions may be disallowed
under Section 279 of the Code or otherwise.
(r) Parent does not have an overall foreign loss within the
meaning of Section 904 of the Code.
Section 4.14. EMPLOYEE BENEFIT PLANS.
(a) Section 4.14 of Parent Disclosure Schedule sets forth each
pension, retirement, profit sharing, health, disability, life, group insurance,
deferred compensation, stock option, stock purchase, restricted stock, bonus or
incentive, severance pay, employment or termination, and other employee benefit
or compensation plan, trust, arrangement, contract, agreement, policy, written
commitment or oral commitment (if known to the Company), including, without
limitation, each "employee benefit plan" as defined in Section 3(3) of the
Employee Retirement Income Security Act of 1974, as
28
<PAGE>
amended ("ERISA") whether formal or informal, written or oral under which (i)
current or former employees, directors or independent contractors of Parent or
any of its Subsidiaries participate or are entitled to participate by reason of
their relationship with Parent or any of its Subsidiaries, (ii) to which Parent
or any of its Subsidiaries is a party or a sponsor or a fiduciary thereof or by
which Parent or any of its Subsidiaries (or any of their rights, properties or
assets) is currently bound or (iii) with respect to which Parent or any of its
Subsidiaries has any obligation to make payments or contributions (the "Benefit
Plans").
(b) Each Benefit Plan has at all times been operated and
administered in compliance in all material respects with its terms, the
applicable requirements of ERISA and the Code and all other applicable laws.
Each Benefit Plan that is intended to be tax qualified under Section 401(a) of
the Code has received a favorable determination letter from the IRS stating that
it is so qualified and that any trust associated with such Benefit Plan is tax
exempt under Section 501(a) of the Code, and, to the knowledge of Parent, there
is no reason why the qualified status of any such Benefit Plan or trust would be
denied or revoked, whether retroactively or prospectively.
(c) No pending or, to the knowledge of Parent, threatened
disputes, lawsuits, claims (other than routine claims for benefits),
investigations, audits or complaints to, or by, any person or governmental
entity have been filed or are pending with respect to the Benefit Plans or
Parent or any of its Subsidiaries in connection with any Benefit Plan or the
fiduciaries or administrators thereof, and to the knowledge of Parent, no state
of facts or conditions exist under the terms of the Benefit Plan or applicable
law that would have a Material Adverse Effect. With respect to each Benefit
Plan, there has not occurred, and no person or entity is contractually bound to
enter into, any nonexempt "prohibited transaction" within the meaning of Section
4975 of the Code or Section 406 of ERISA, nor any transaction that would result
in a civil penalty being imposed under Section 409 or 502(i) of ERISA.
(d) Neither Parent, its Subsidiaries, nor any trade or
business (whether or not incorporated) which, together with Parent or any of its
Subsidiaries, would be deemed a "single employer" under Section 4001(b) of ERISA
(an "ERISA Affiliate") has or at any time in the past has had (i) any liability,
contingent or otherwise, under Title IV of ERISA or Section 412 of the Code,
(ii) an obligation to contribute to any "multiemployer plan" (as defined in
Section 3(37) of ERISA).
(e) All contributions to and payments with respect to or under
the Benefit Plans that are required to be made with respect to periods ending on
or before the Effective Time have been made or accrued before the Effective Time
by Parent in all material respects to the extent such funding is required by the
Benefit Plan or otherwise, and in accordance with the appropriate plan
documents, financial statements, actuarial reports, collective bargaining
agreements or insurance contracts or arrangements.
(f) Except as set forth on Schedule 2.12 of Parent Disclosure
Schedule, no Benefit Plan that is an "employee welfare benefit plan" under
Section 3(1) of ERISA (a
29
<PAGE>
"Welfare Plan") is partially or fully funded through a trust. No Welfare Plan
providing welfare benefits (whether or not insured) with respect to current or
former employees of Parent continues such coverage or provides such benefits
beyond their date of retirement or other termination of service (other than (i)
coverage mandated by Section 601 of ERISA, the cost of which is fully paid by
the former employee or his or her dependents, (ii) death benefits payable
following termination of employment earned for service prior to termination of
employment and (iii) any health insurance coverage which in the ordinary course
extends through the end of the month in which termination of employment occurs).
(g) With respect to each Benefit Plan, Parent has made
available to the Company complete and correct copies of the following documents,
to the extent in each case that such documents exist or are required by law: (1)
current plan documents, subsequent plan amendments, or any and all other
documents that establish or describe the existence of the plan, trust,
arrangement, contract, policy or commitment; (2) the most recent tax qualified
determination letters, if any, received from or applications pending with the
IRS; and (3) the three most recent Form 5500 Annual Reports, including related
schedules and audited and financial statements and opinions of independent
certified public accountants.
(h) The execution of, and performance of the transactions
contemplated in, this Agreement will not (either alone or upon the occurrence of
any additional or subsequent events) constitute an event under any plan, policy,
arrangement or agreement or any trust or loan that will or would reasonably be
expected to result in any payment (whether of severance pay or otherwise),
acceleration of, forgiveness of indebtedness owing from, vesting of,
distribution of, or increase in or obligation to fund, any benefits with respect
to any current or former employee, director or consultant of Parent.
Section 4.15. INTELLECTUAL PROPERTY. Except for commercially available
"off the shelf" software, Parent owns or has a valid license, with no required
royalty or other monetary payments and otherwise on commercially reasonable
terms, to use all Intellectual Property Rights material to or necessary for the
conduct of the business of Parent. No claims are pending or, to Parent's
Knowledge, threatened, by any person as to the use of any Intellectual Property
Rights by the Company and, to the Knowledge of Parent, the use by Parent of all
Intellectual Property Rights which are owned by Parent (collectively, the
"Parent Owned IP Rights") does not infringe on the valid U.S. patent, copyright,
trademark, trade secret or similar intellectual property rights of any person.
To the Knowledge of Parent, no third person is infringing on the Parent Owned IP
Rights. The Parent Owned IP Rights are owned exclusively by Parent and not
subject to any licenses or other encumbrances. Parent has taken and, prior to
Closing will continue to take, all measures reasonably necessary to preserve and
protect the Parent Owned IP Rights. To Parent's Knowledge, all patents and
registered trademarks, service marks, and other company product or service
identifiers and registered copyrights owned by Parent are valid and enforceable.
Parent has not entered into any agreement to indemnify any other person against
any charge of infringement of any third party intellectual property right by any
Intellectual Property Right. All employees, agents, consultants or
30
<PAGE>
contractors who have contributed to or participated in the creation or
development of any Parent Owned IP Rights on behalf of Parent or any
predecessor in interest thereto either: (i) is a party to a "work-for-hire"
agreement under which Parent is deemed to be the original owner/author of all
property rights therein or (ii) has executed an assignment or any agreement
to assign in favor of Parent (or such predecessor in interest, as applicable)
of all right, title and interest in such material.
Section 4.16. TRANSACTIONS WITH AFFILIATES. No present or former
officer, director, stockholder or other affiliate of Parent has (i) any interest
in the assets, properties or rights used in the business of Parent (other than
solely through the ownership of Shares or Parent Options), (ii) any contract,
agreement or understanding with Parent, or (iii) engaged in any transactions
with Parent since the Balance Sheet Date.
Section 4.17. ASSETS NECESSARY TO BUSINESS. The assets, properties
and rights of Parent include all assets, properties and rights used in, or
necessary for, the business of Parent and are held by Parent free and clear
of any liens, claims or encumbrances, other than Permitted Liens.
Section 4.18. INSURANCE. The insurance policies of Parent are current,
are in full force and effect, all premiums due thereon have been paid, and
Parent has complied in all material respects with the provisions of such
policies, and all such policies either specifically include Parent as a named
insured or include omnibus named insured language which generally includes
Parent. No proceeding is pending or, to the Knowledge of Parent, threatened, to
revoke, cancel or limit such policies and no notice of cancellation of any of
such policies has been received by Parent. Parent is in full compliance with all
material recommendations for the prevention of loss made by all insurance
carriers and is in compliance with all warranties contained in all insurance
policies. The insurance carried by Parent is adequate in light of industry
standards.
Section 4.19. ACCOUNTS RECEIVABLE. All accounts receivable, notes
receivable and other receivables of Parent represents sales actually made or
services actually delivered in the ordinary course of business. Except to the
extent reserved against and reflected in the Parent Financial Statements, Parent
knows of no reason why such accounts receivable would not be collectible in the
ordinary course of business.
Section 4.20. CONTRACTS.
(a) Each contract or agreement which is material to Parent and
its subsidiaries is legal, valid, binding and enforceable against Parent, and to
Parent's Knowledge, against each other party thereto, is in full force and
effect and will continue to be so legal, valid, binding, enforceable and in full
force and effect following the Closing. Neither Parent, nor to Parent's
Knowledge, any other party, is in breach or default, and no event has occurred
which would constitute (with or without notice or lapse of time or both) a
breach or default (or give rise to any right of termination, modification,
cancellation or acceleration) or modification of benefits under any such
contract.
31
<PAGE>
(b) Parent has delivered or made available for review by the
Company true and complete copies of each such contract or agreement. Since the
Balance Sheet Date, there has been no material modification, breach or
termination of any such contract or agreement nor, to Parent's Knowledge, is any
such modification, breach or termination contemplated.
Section 4.21. INVENTORY. The inventory of Parent is of a quality usable
or saleable in the ordinary course of business, except for dated or defective
materials (including raw materials, work-in-process and finished goods), which
is written down or reserved against on Parent Financial Statements in accordance
with GAAP and the past practices of Parent.
Section 4.22. NO MISLEADING STATEMENTS. The representations and
warranties made by Parent in or pursuant to this Agreement do not include any
untrue statement of a material fact or, to the Knowledge of Parent, omit to
state any fact which would be reasonably likely to have a Material Adverse
Effect on Parent.
ARTICLE V
COVENANTS
Section 5.1. INTERIM OPERATIONS OF THE COMPANY. The Company covenants
and agrees from the date of this Agreement to the Effective Time or the earlier
termination of this Agreement as provided herein that, except (i) as expressly
contemplated by this Agreement, (ii) as set forth in Section 5.1 of the Company
Disclosure Schedule or (iii) as agreed in writing by Parent, the business of the
Company and its subsidiaries shall be conducted only in the ordinary and usual
course, consistent with past practice, and, to the extent consistent therewith,
the Company shall use reasonable efforts to preserve its business organization
intact and maintain its existing relations with customers, suppliers, employees,
creditors and business partners and the Company shall not:
(a) amend its Articles of Incorporation or By-laws or similar
organizational documents;
(b) (i) declare, set aside or pay any dividend or other
distribution with respect its capital stock, (ii) redeem, purchase or otherwise
acquire directly or indirectly any of its securities, (iii) issue, sell, pledge,
dispose of or encumber any securities (or any rights to acquire such
securities), other than Shares issued upon the exercise of Company Options
outstanding on the date hereof in accordance with the terms of such options as
in effect on the date hereof or (iv) split, combine or reclassify its
outstanding capital stock;
(c) acquire or agree to acquire, any material assets or
securities either by purchase, merger or otherwise, or acquire or agree to
acquire any subsidiaries;
32
<PAGE>
(d) transfer, lease, license, sell, mortgage, pledge, dispose
of, or encumber any material assets or securities other than in the ordinary and
usual course of business and consistent with past practice, or authorize,
propose or announce an intention to authorize or propose, or enter into an
agreement with respect to, any merger, consolidation or business combination
(other than the Merger);
(e) (i) grant any increase in the compensation payable or to
become payable to any of its executive officers or key employees, (ii) (A) adopt
any new, or (B) amend or otherwise increase, or accelerate the payment or
vesting of the amounts payable or to become payable under any existing, bonus,
incentive compensation, deferred compensation, severance, profit sharing, stock
option, stock purchase, insurance, pension, retirement or other employee benefit
plan agreement or arrangement, (iii) enter into any employment or severance
agreement with or, except in accordance with the existing written agreements,
grant any severance or termination pay to any officer, director or employee or
(iv) except in the ordinary course of business, consistent with past practice,
increase the compensation or benefits of any employee;
(f) modify, amend or terminate any of its material contracts
or waive, release or assign any material rights or claims, except in the
ordinary course of business and consistent with past practice or modify or amend
the terms of any outstanding securities;
(g) (i) incur or assume any long-term debt, or except in the
ordinary course of business, incur or assume any short-term indebtedness in
amounts not consistent with past practice, (ii) incur or modify any material
indebtedness or other liability, (iii) assume, guarantee, endorse or otherwise
become liable or responsible (whether directly, contingently or otherwise) for
the obligations of any other person, except in the ordinary course of business
and consistent with past practice, (iv) make any loans, advances or capital
contributions to, or investments in, any other person (other than to wholly
owned subsidiaries of the Company or customary loans or advances to employees in
accordance with past practice) or (v) except in the ordinary course of business,
enter into any material commitment or transaction;
(h) change any of the financial accounting methods used by it
unless required by GAAP;
(i) make (or permit to be made) any material Tax election or
settle or compromise any material liability for taxes or change (or permit to be
changed) any material tax accounting method;
(j) pay, discharge or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction of any such
claims, liabilities or obligations, in the ordinary course of business and
consistent with past practice, of claims, liabilities or obligations reflected
or reserved against in, or contemplated by, the consolidated financial
statements (or the notes thereto) of the Company and its consolidated
subsidiaries;
33
<PAGE>
(k) engage in any transactions with any stockholders or other
affiliates of the Company or enter into any agreements with such stockholders or
affiliates;
(l) take, or agree to commit to take, any action that would
make any representation or warranty of the Company contained herein inaccurate
in any respect at, or as of any time prior to, the Effective Time (as if made at
such time); and
(m) enter into an agreement, contract, commitment or
arrangement to do any of the foregoing, or to authorize, recommend, propose or
announce an intention to do any of the foregoing.
Section 5.2. INTERIM OPERATIONS OF PARENT. Parent covenants and agrees
that, except (i) as expressly contemplated by this Agreement, (ii) as set forth
in Section 5.2 of the Parent Disclosure Schedule or (iii) as agreed in writing
by the Company, the business of Parent and its subsidiaries shall be conducted
only in the ordinary and usual course, consistent with past practice, and, to
the extent consistent therewith, each of Parent and its subsidiaries shall use
its best efforts to preserve its business organization intact and maintain its
existing relations with customers, suppliers, employees, creditors and business
partners and neither Parent nor any of its subsidiaries shall:
(a) amend its Certificate of Incorporation or By-laws or
similar organizational documents;
(b) (i) declare, set aside or pay any dividend or other
distribution with respect its capital stock, (ii) redeem, purchase or otherwise
acquire directly or indirectly any of its capital stock, (iii) issue, sell,
pledge, dispose of or encumber any securities (or any rights to acquire such
securities), other than Parent Shares issued upon the exercise of Parent Options
outstanding on the date hereof in accordance with the terms of such options as
in effect on the date hereof or (iv) split, combine or reclassify its
outstanding capital stock;
(c) take, or agree to commit to take, any action that would
make any representation or warranty of Parent contained herein inaccurate in any
respect at, or as of any time prior to, the Effective Time (as if made at such
time); and
(d) enter into an agreement, contract, commitment or
arrangement to do any of the foregoing, or to authorize, recommend, propose or
announce an intention to do any of the foregoing.
Section 5.3. INVESTIGATION. Each of the Company and Parent shall afford
to the other and to the other's officers, employees, accountants, counsel and
other authorized representatives full and complete access during normal business
hours, throughout the period prior to the earlier of the Effective Time or the
date of termination of this Agreement, to its and its subsidiaries', if
applicable, plants, properties, contracts, commitments, books, and records and
shall use its reasonable best efforts to cause its
34
<PAGE>
representatives to furnish such additional financial and operating data and
other information as to its and its subsidiaries', if applicable, respective
businesses and properties as the other or its duly authorized representatives
may from time to time reasonably request. The parties hereby agree that each of
them will treat any such information in accordance with the Bilateral
Confidentiality Agreement, dated as of February 9, 1998, between the Company and
Parent (the "Confidentiality Agreement").
Section 5.4. DISCLOSURE SUPPLEMENTS. From time to time prior to the
Closing, each party hereto shall supplement or amend its Disclosure Schedule
with respect to any matter hereafter arising or any information obtained after
the date hereof of which, if existing, occurring or known at or prior to the
date of this Agreement, would have been required to be set forth or described in
its Disclosure Schedule or which is necessary to complete or correct any
information in such schedule or in any representation and warranty of such party
which has been rendered inaccurate thereby. The Company shall promptly inform
Parent of any claim by a third party that a contract has been breached, is in
default, may not be renewed or that a consent would be required as a result of
the transactions contemplated by this Agreement. For purposes of determining the
satisfaction of the conditions set forth in Article VI and the indemnification
obligations set forth in Article VIII hereof, no such supplement, amendment or
information shall be considered.
Section 5.5. REASONABLE EFFORTS. (a) Upon the terms and subject to the
conditions of this Agreement, each of the parties hereto shall use all
reasonable efforts to take, or cause to be taken, all actions, and to do, or
cause to be done, all things necessary, proper or advisable under applicable
laws and regulations to consummate and make effective the transactions
contemplated by this Agreement as promptly as practicable including, but not
limited to, (i) the preparation and filing of all forms, registrations and
notices required to be filed to consummate the transactions contemplated by this
Agreement and the taking of such commercially reasonable actions as are
necessary to obtain any requisite approvals, consents, orders, exemptions or
waivers by any third party or Governmental Entity and (ii) using all reasonable
efforts to cause the satisfaction of all conditions to Closing. Each party shall
promptly consult with the other with respect to, provide any necessary
information with respect to and provide the other (or its counsel) copies of,
all filings made by such party with any Governmental Entity or any other
information supplied by such party to a Governmental Entity in connection with
this Agreement and the transactions contemplated by this Agreement.
(b) Each party hereto shall promptly inform the others of any
communication from any Governmental Entity regarding any of the transactions
contemplated by this Agreement. If any party or affiliate thereof receives a
request for additional information or documentary material from any such
Governmental Entity with respect to the transactions contemplated by this
Agreement, then such party will endeavor in good faith to make, or cause to be
made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request.
35
<PAGE>
Section 5.6. STOCKHOLDER MEETING. The Company shall cause a meeting of
its stockholders to be duly called and held within 25 days of the date hereof
for the purpose of obtaining the Company Stockholder Approval. The Company shall
ensure that all materials transmitted to stockholders in connection with the
Company Stockholder Approval comply in all material respects with applicable
law. Parent shall supply all information reasonably requested in connection
therewith. Parent will have the right to review and consent to such materials
prior to transmission to stockholders, such consent not to be unreasonably
withheld or delayed. Subject to Section 7.1 hereof, the Company shall use all
reasonable efforts to obtain the Company Stockholder Approval and shall not take
any action or fail to take any action which would prevent the Company's approval
of this Agreement and the transactions contemplated hereby to be effective at
the earliest possible date.
Section 5.7. FURTHER ASSURANCES. From time to time after the Closing,
without additional consideration, each of the parties hereto will (or, if
appropriate, cause their affiliates to) promptly execute and deliver such
further instruments and take such other action as may be necessary to make
effective the transactions contemplated by this Agreement.
Section 5.8. BROKERS OR FINDERS. Each party hereto represents, as to
itself and its affiliates that no agent, broker, investment banker, financial
advisor or other firm or person is or will be entitled to any broker's or
finder's fee or any other commission or similar fee in connection with any of
the transactions contemplated by this Agreement, other than Shipley, Raidy
Capital Partners, LP in the case of the Company.
Section 5.9. NO SOLICITATION. (a) The Company will, and will cause its
officers, directors, employees, subsidiaries, affiliates, stockholders, agents
and representatives to, immediately cease any existing discussions or
negotiations with respect to any Takeover Proposal (as defined below) and will
not, and will cause such persons and entities not to, directly or indirectly,
encourage, solicit, facilitate, participate in or initiate discussions or
negotiations with, or provide any information to, any corporation, partnership,
person or other entity or group (other than Parent and Sub or their directors,
officers, employees or other affiliates) concerning any Takeover Proposal. The
Company will communicate to Parent within 8 hours of any such inquiries or
proposals regarding a Takeover Proposal including the terms thereof (including
any amendments or proposed amendments thereto) and the identity of the person
making the inquiry or proposal.
(b) Notwithstanding anything in Section 5.9(a) to the
contrary, the Company may furnish information to and engage in negotiations with
any person making an unsolicited bona fide Takeover Proposal, but only if all of
the following conditions are satisfied, (i) such proposal is a Superior
Proposal, (ii) the Board of Directors of the Company, based on advice of outside
counsel, determines that such actions are required in order for the Board to
comply with its fiduciary duties to stockholders under applicable law and (iii)
the Company and such person enter into a confidentiality agreement in a form
approved by Parent (such consent not to be unreasonably withheld).
36
<PAGE>
(c) "Takeover Proposal" shall mean any of the following
involving the Company (other than the transactions contemplated by this
Agreement): any inquiry or proposal relating to a sale of stock (whether by the
Company or any stockholder), merger, consolidation, share exchange, tender
offer, business combination, disposition or assets (or any interest therein) or
other similar transaction.
(d) "Superior Proposal" means a proposal involving the
acquisition of the entire equity interest in the Company or all or substantially
of the assets of the Company which (i) represents higher value to the
stockholders of the Company than the transactions contemplated hereby, (ii) is
reasonably capable of being consummated on a prompt basis and (iii) to the
extent that it requires financing, all such financing is committed, subject only
to customary conditions.
(e) So long as this Agreement is in effect, (i) the Board of
Directors of the Company shall not withdraw or modify (or propose to withdraw or
modify) its recommendation of this Agreement and the transactions contemplated
hereby and (ii) the Company shall not enter into any agreement regarding a
Takeover Proposal, other than the confidentiality agreement contemplated by
Section 5.9(b)(iii).
Section 5.10. PERFORMANCE OF OBLIGATIONS. Parent shall cause Sub to
timely perform its obligations under this Agreement. The Stockholder shall cause
the Company to timely perform its obligations under this Agreement.
Section 5.11. TAX TREATMENT. (a) Each of Parent, the Company and the 5%
Stockholders shall not take any action and shall not fail to take any action
which action or failure to act would prevent, or would be reasonably likely to
prevent, the Merger from qualifying as a reorganization within the meaning of
Code Section 368(a).
(b) Each party shall use all reasonable efforts to obtain the
opinion referred to in Section 6.1(d).
Section 5.12. 5% STOCKHOLDERS. Each of the 5% Stockholders hereby
agrees as follows:
(a) At any meeting of stockholders of the Company called to
vote upon the Merger and the Merger Agreement or at any adjournment thereof or
in any other circumstances upon which a vote, consent or other approval
(including by written consent) with respect to the Merger and the Merger
Agreement is sought, the 5% Stockholders shall, including by initiating a
written consent solicitation if requested by Parent, vote (or cause to be voted)
the 5% Stockholder Shares in favor of the Merger, the adoption by the Company of
the Merger Agreement and the approval of the other transactions contemplated by
the Merger Agreement. The 5% Stockholders hold a sufficient number of Shares to
approve this Agreement without the vote of any other shareholder.
37
<PAGE>
(b) At any meeting of stockholders of the Company or at any
adjournment thereof or in any other circumstances upon which either or both of
the 5% Stockholders' vote, consent or other approval is sought, each such 5%
Stockholder shall vote (or cause to be voted) such 5% Stockholder's Shares
against (i) any merger agreement or merger (other than the Merger Agreement and
the Merger), consolidation, combination, sale of substantial assets,
reorganization, recapitalization, dissolution, liquidation or winding up of or
by the Company or its Subsidiaries or any other Takeover Proposal (collectively,
"Alternative Transactions") or (ii) any amendment of the Company's Articles of
Incorporation or by-laws or other proposal or transaction involving the Company
or any of its subsidiaries, which amendment or other proposal or transaction
would in any manner impede, frustrate, prevent or nullify, the Merger, the
Merger Agreement or any of the other transactions contemplated by the Merger
Agreement (collectively, "Frustrating Transactions").
(c) The 5% Stockholders shall not, (i) sell, transfer, pledge,
assign or otherwise dispose of, or enter into any contract, option or other
arrangement (including any profit sharing arrangement) or understanding with
respect to the sale, transfer, pledge, assignment or other disposition of, the
Shares to any person other than Parent or Parent's designee, (ii) enter into any
voting arrangement, whether by proxy, voting agreement, voting trust,
power-of-attorney or otherwise, with respect to the Shares or (iii) take any
other action that would in any way restrict, limit or interfere with the
performance of its obligations hereunder or the transactions contemplated
hereby.
(d) Each of the 5% Stockholders hereby irrevocably grants to
and appoints any individual who shall hereafter be designated by Parent, and
each of them, such 5% Stockholder's proxy and attorney-in-fact (with full power
of substitution), for and in the name, place and stead of such Stockholder, to
vote such 5% Stockholder Shares, or grant a consent or approval in respect of
such Shares, at any meeting of stockholders of the Company or at any adjournment
thereof or in any other circumstances upon which their vote, consent or other
approval is sought, (i) in favor of the Merger, the adoption by the Company of
the Merger Agreement and the approval of the other transactions contemplated by
the Merger Agreement and (ii) against any Alternative Transaction or Frustrating
Transaction. This proxy does not apply to removing or replacing any existing
member of the Board of Directors of the Company.
(e) Each of the 5% Stockholders represents that any proxies
heretofore given in respect of such 5% Stockholder Shares are not irrevocable,
and that any such proxies are hereby revoked. Each of the 5% Stockholders hereby
affirms that the proxy set forth in this Section 5.12 is coupled with an
interest and is irrevocable until such time as this Agreement terminates in
accordance with its terms. Each of the 5% Stockholders hereby further affirms
that the irrevocable proxy is given in connection with the execution of the
Merger Agreement, and that such irrevocable proxy is given to secure the
performance of the duties of each such Stockholder under this Agreement. Each of
the 5% Stockholders hereby ratifies and confirms all that each such irrevocable
proxy may lawfully do or cause to be done by virtue hereof. Each such
irrevocable proxy is intended to be irrevocable in accordance with the
provisions of Section 13.1-663 of the
38
<PAGE>
VSCA. Simultaneously herewith, reference to such proxy and to the limitations on
transfer contemplated by this Section 5.12 are being added as legends to the
certificates representing the 5% Stockholder's Shares.
(f) The foregoing provisions of this Section 5.12 shall
terminate upon the termination of this Agreement, provided however, that if
prior to such termination any person shall have made a Takeover Proposal, such
provisions shall survive until the first anniversary of such termination unless
at the time of such termination, Parent is in material breach of this Agreement.
Section 5.13. TAX COVENANTS.
(a) The Company shall prepare and file or cause to be prepared
and filed in a manner consistent with past practice, and in good faith
cooperation with Parent, all Tax Returns (whether separate or consolidated,
combined, group or unitary Tax Returns that include the Company) that are
required to be filed (with extensions) on or before the Closing Date; PROVIDED,
HOWEVER, that (i) the Company shall deliver any such Tax Return to Parent at
least 15 days prior to the due date thereof and (ii) subject to the other
provisions of this Agreement, the Company may file any such Tax Return without
the consent or approval of Parent. The Company shall pay or cause to be paid all
Taxes shown as due, or required to be shown as due, on such Tax Returns.
(b) All transfer, documentary, sales, use, registration and
other such Taxes (including, without limitation, all applicable real estate
transfer or gains Taxes and stock transfer Taxes), any penalties, interest and
additions to Tax and fees incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the Stockholder. Each party to
this Agreement shall cooperate in the timely making of all filings, returns,
reports and forms as may be required in connection therewith.
(c) If the Stockholder receives any written notice from any
taxing authority proposing any adjustment to any Tax relating to the Company or
any of its subsidiaries, the Stockholder shall give prompt written notice
thereof to either Parent or the Company.
(d) At the Closing, the Stockholder shall deliver, pursuant to
Section 1445(b)(2) of the Code and Treas. Reg. ss. 1.1445-2(b)(2), a duly
executed certification of non-foreign status. Such certification shall conform
to the model certification provided in Treas. Reg. ss. 1.1445-2(b)(2)(iii)(A) or
(B), as appropriate.
(e) Parent shall deliver (or cause to be delivered) to the
Stockholder a copy of the Company's Tax Returns filed after the Closing Date for
any taxable year ending on or before the Closing Date within 20 days of the
filing of such return.
Section 5.14. MARCH 31, 1999 AUDIT. As promptly as possible, but in no
event later than June 15, 1999, the Company shall deliver to Parent the audited
consolidated balance sheet, income statement and statement of cash flow of the
Company and its
39
<PAGE>
consolidated subsidiaries, together with related notes, at and for the year
ending March 31, 1999, accompanied by the unqualified audit report of Arthur
Andersen LLP. These financial statements will fairly present the consolidated
financial position and results of operations of the Company and its subsidiaries
as of March 31, 1999 and will be in conformity with GAAP. The Company and Parent
will cooperate with each other and Arthur Andersen in the preparation of such
financial statements and shall provide all information that is reasonably
requested in connection therewith. The Stockholder shall be responsible for all
fees and expenses in connection with the preparation of these financial
statements, including the fees and expenses of Arthur Andersen.
Section 5.15. EMPLOYEE BENEFIT MATTERS. To the extent Company Employees
participate in any Parent Plan after the Effective Time, Parent shall take all
action, if any, required to ensure that such Company Employees be credited with
all continuous periods of service with the Company immediately prior to the
Effective Time for purposes of eligibility and vesting under such Parent Plans
to the extent such service was credited for purposes of eligibility and vesting
under the corresponding Company Plans.
Section 5.16. CONSULTING AND NON-COMPETITION AGREEMENTS. Simultaneously
with the execution of this Agreement, Parent and the persons set forth on
Schedule 5.16 are executing Non-Competition and Consulting Agreements in the
form of Exhibits E-1, E-2 and F hereof.
Section 5.17. YEAR 2000. The Company shall (i) review and assess prior
to the Closing Date all areas within the business and operations of the Company
(including those areas affected by suppliers and vendors) that could be
adversely affected by the "Year 2000 Problem" (that is, the risk that computer
software and systems used by the Company (or its respective suppliers and
vendors) may be unable to recognize and perform properly date-sensitive
functions involving certain dates prior to and any date after December 31, 1999)
and (ii) cooperate with Parent and use its reasonable efforts to timely ensure
that all computer software and systems owned by the Company are Year 2000
Compliant and that any non-compliant third party software will be replaced with
Year 200 Compliant software to the extent commercially practicable.
Section 5.18. STOCKHOLDERS OF THE COMPANY. The Company reasonably
believes that it has fewer than 35 securityholders who are not "accredited
investors" within the meaning of Rule 501 of the Securities Act. The Company
will not issue or transfer any securities if the effect would be to render the
prior sentence inaccurate. The Company has no reason to believe that the
transactions contemplated hereby can not be consummated without registration
under the Securities Act or state securities laws. The Company will provide such
information, and take such actions as Parent may reasonably request, to
demonstrate compliance with this Section.
Section 5.19. UNDERWRITING LOCKUP. Each of the 5% Stockholders hereby
agrees to execute such "lock-up" and other agreements as the underwriter for any
public offering of Parent Shares may require in connection therewith, provided
that any such "lock-up"
40
<PAGE>
and other agreements shall be the same in all material respects to the "lock-up"
and other agreements to be executed by stockholders of Parent .
Section 5.20. ARCHBOLD TRUST. Archbold Trust agrees that it will not
exercise any options to purchase the common stock of the Company.
Section 5.21. AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT. Parent
agrees that Section 5.1 of the Amended and Restated Stockholders' Agreement,
dated as of December 10, 1998, among Parent and stockholders thereof, shall be
amended to provide that (i) one director of Parent will be a person nominated
and elected by the Former Commonwealth Stockholders who are holders of Parent
Shares and their permitted successors and assigns and (ii) the Board of
Directors of Parent shall be increased to take into account the right of such
holders to elect such director.
ARTICLE VI
CONDITIONS
Section 6.1. CONDITIONS TO EACH PARTY'S OBLIGATIONS. The respective
obligation of each party to effect the transactions contemplated by this
Agreement shall be subject to the satisfaction or waiver of the following
conditions:
(a) The Company Stockholder Approval shall have been obtained.
(b) All necessary consents and approvals of any Governmental
Entity required for the consummation of the transactions contemplated by this
Agreement shall have been obtained.
(c) No statute, rule, regulation, order, decree or injunction
shall have been enacted, entered, promulgated or enforced by a Governmental
Entity which prohibits the consummation of the transactions contemplated by this
Agreement and shall be in effect.
Section 6.2. CONDITIONS TO OBLIGATIONS OF PARENT AND SUB. The
obligation of Parent and Sub to effect the transactions contemplated by this
Agreement are further subject to the satisfaction or waiver of the following
conditions:
(a) The representations and warranties of the Company and of
the 5% Stockholders in this Agreement shall be true and correct (without regard
for any materiality, Material Adverse Effect or similar qualifiers) as of the
date hereof and at and as of the Closing Date with the same force and effect as
though such representations and warranties had been made at and as of such time,
other than representations and warranties which speak as of another specific
date or time prior to the date hereof (which need only be true and correct as of
such date or time), except for failures to be true and correct, in the
aggregate, which have not had and could not reasonably be expected to have a
Material Adverse Effect on the Company and except for failures to be true and
41
<PAGE>
correct, in the aggregate, which would not materially increase the costs or
decrease the benefits expected to be derived from the transactions contemplated
hereby.
(b) Each of the Company, the Stockholder and the Archbold
Trust shall have performed in all material respects all obligations required to
be performed by it under this Agreement at or prior to the Closing.
(c) There shall not have occurred any events that have had or
are reasonably likely to have a Material Adverse Effect on the Company.
(d) All consents or approvals listed in Section 2.4 of the
Disclosure Schedule shall have been obtained and any other consents or
approvals, the absence of which would have a Material Adverse Effect, shall have
been obtained.
(e) Holders of no more than 5% of the outstanding Shares shall
have exercised dissenter's rights.
(f) Parent shall have received from the Company a certificate,
dated the Closing Date, duly executed by an executive officer of the Company and
by each of the 5% Stockholders, to the effect of (a)-(e) above.
(g) Parent shall have received "Phase I" and limited "Phase
II" environmental reports regarding the Company and such reports shall be in
form and substance satisfactory to Parent.
(h) Parent shall have received a title report covering the
real property owned by the Company and such report shall be in form and
substance satisfactory to Parent.
(i) Parent shall, in its sole and absolute discretion, be
satisfied that the issuance of Parent Shares as contemplated by this Agreement
does not require registration under the Securities Act or state securities laws.
(j) Parent shall have received an executed copy of the
Clarification Addendum to the 1981 Memorandum of Agreement between Kaufman &
Robinson, Inc. and the Company and such executed addendum shall be in form and
substance satisfactory to Parent.
Section 6.3. CONDITIONS TO OBLIGATIONS OF THE COMPANY. The obligation
of the Company to effect the transactions contemplated by this Agreement are
further subject to the satisfaction or waiver of the following conditions:
(a) The representations and warranties of Parent in this
Agreement shall be true and correct (without regard for any materiality,
Material Adverse Effect or similar qualifiers) as of the date hereof and at and
as of the Closing Date with the same force and effect as though such
representations and warranties had been made at and as of such
42
<PAGE>
time, other than representations and warranties which speak as of another
specific date or time prior to the date hereof (which need only be true and
correct as of such date or time), except for failures to be true and correct, in
the aggregate, which have not had and could not reasonably be expected to have a
Material Adverse Effect on Parent and except for failures to be true and
correct, in the aggregate, which would not materially increase the costs or
decrease the benefits expected to be derived from the transactions contemplated
hereby.
(b) Parent and Sub shall have performed in all material
respects all obligations required to be performed by them under this Agreement
at or prior to the Closing.
(c) The Company shall have received from Parent a certificate,
dated the Closing Date, duly executed by an executive officer of Parent, to the
effect of (a) and (b).
(d) The Company shall have received an opinion of Hunton &
Williams, in form and substance reasonably satisfactory to the Company, dated as
of the Closing Date, to the effect that the Merger will constitute a
reorganization within the meaning of Code Section 368(a).
(e) There shall not have occurred any events that have had or
are reasonably likely to have a Material Adverse Effect on Parent.
ARTICLE VII
TERMINATION AND AMENDMENT
Section 7.1. TERMINATION. This Agreement may be terminated at any time
prior to the Closing by:
(a) Mutual consent of Parent and the Company;
(b) Either Parent or the Company if the Closing shall not have
occurred on or before June 30, 1999 (unless the failure to consummate the
Closing by such date shall be due to the action or failure to act of the party
(or its affiliates) seeking to terminate this Agreement);
(c) Parent if the Board of Directors of the Company shall have
withdrawn or modified (or proposed to withdraw or modify) its recommendation of
this Agreement and the transactions contemplated hereby;
(d) The Company in order to execute a definitive agreement
contemplating a Superior Proposal immediately following such termination,
provided that the Company (i) is in compliance with the terms hereof, (ii) the
Company has given Parent ten business days' notice of the terms of the Superior
Proposal, including the identity of the person making the proposal and a copy of
the proposed definitive agreement and (iii) has paid Parent the fee contemplated
by Section 9.11(b) hereof.
43
<PAGE>
(e) Either Parent or the Company if any court of competent
jurisdiction or other competent Governmental Entity shall have issued a statute,
rule, regulation, order, decree or injunction or taken any other action
permanently restraining, enjoining or otherwise prohibiting the transactions
contemplated by this Agreement and such statute, rule, regulation, order, decree
or injunction or other action shall have become final and nonappealable.
(f) By Parent or the Company if there shall have been a breach
by the other of any of its representations, warranties, covenants or agreements
contained in this Agreement which would cause the condition set forth in Section
6.3(a) or (b) or Section 6.2(a) or (b), as the case may be, not to be satisfied
and such breach shall not have been cured within 30 days after notice thereof
shall have been received by the party alleged to be in breach.
(g) By Parent if the Company shall (w) remove Christine
Whitman or Emilio Dicataldo from the Board of Directors of the Company (x)
terminate Christine Whitman as its Chief Executive Officer or Emilio DiCataldo
as its Chief Financial Officer (each an Officer and collectively, "the
Officers"), in either case without Cause, (y) violate any term of either of
their indemnity agreements or (z) prevent either of them from taking any actions
they deem necessary or appropriate in the course of their duties. For purposes
of this Section 7.1(g), "Cause" shall mean (i) willful fraud or material
dishonesty in connection with the Officer's performance of duties or (ii) the
conviction for, or plea of nolo contendere, to a charge of commission of a
felony. It shall be a condition precedent to the Company's right to terminate
employment for "Cause" that (i) written notice stating with specificity the
reason (the "breach") for the termination be given to the Officer, and (ii) if
such breach is susceptible of cure or remedy, the Officer shall have 10 days
from receipt of such notice to cure or remedy such breach.
Section 7.2. EFFECT OF TERMINATION. In the event of the termination and
abandonment of this Agreement pursuant to Section 7.1 hereof, this Agreement
shall forthwith become void and have no effect, without any liability on the
part of any party hereto or its affiliates, directors, officers or stockholders,
other than the provisions of Article IX hereof. Nothing contained in this
Section 7.2 shall relieve any party from liability for any breach of this
Agreement.
Section 7.3. AMENDMENT. This Agreement may be amended or modified at
any time by the parties hereto, but only by an instrument in writing signed on
behalf of each of the parties hereto.
Section 7.4. EXTENSION; WAIVER. At any time prior to the Closing, the
parties hereto may (i) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (ii) waive any
inaccuracies in the representations and warranties contained herein or in any
document delivered pursuant hereto and (iii) waive compliance with any of the
agreements or conditions contained herein. Any agreement on the part of a party
hereto to any such extension or waiver shall be valid only if set
44
<PAGE>
forth in a written instrument signed on behalf of such party. Neither the
failure nor the delay on the part of any party to exercise any right, remedy,
power or privilege under this Agreement shall operate as a waiver thereof.
ARTICLE VIII
SURVIVAL; INDEMNIFICATION
Section 8.1. SURVIVAL PERIODS. (a) All representations and warranties
of the parties contained in this Agreement, the Disclosure Schedule or any
certificate delivered in connection herewith shall survive until the third
anniversary of the Closing Date; provided that if notice of a claim is provided
by such date, such representations and warranties shall survive until the final
resolution thereof. All covenants and agreements hereunder shall survive without
limit (unless by their terms they are to survive for a shorter period).
(b) For purposes of this Agreement, a party's representations
and warranties shall be deemed to include such party's Disclosure Schedule and
all other documents or certificates delivered by or on behalf of such party in
connection with this Agreement. None of the Closing, any party's waiver of any
condition to Closing or an party's knowledge of any breach prior to the Closing
shall constitute a waiver of any rights such party may have hereunder.
Section 8.2. INDEMNIFICATION. Subject to the other provisions of this
Article VIII, from and after the Closing:
(a) The Former Commonwealth Stockholders shall jointly and
severally indemnify and hold harmless Parent, Sub, their affiliates, their and
their affiliates employees, officers, directors, agents and other
representatives from and against any costs or expenses (including reasonable
attorneys', experts' and consultants' fees), judgments, fines, penalties,
losses, claims, liabilities and damages (collectively, "Damages") that are the
result of, arise out of or relate to any breach of any representation or
warranty or failure to perform any covenant made by or on behalf of the Company
or the 5% Stockholders under this Agreement. Without limiting the generality of
the foregoing, the Former Commonwealth Stockholders shall indemnify Parent for
the amount, if any, by which (x) the total assets less the total liabilities
shown on the audited balance sheet delivered pursuant to Section 5.14 hereof is
less than (y) the total assets less the total liabilities shown on the Forecast
March 31 Balance Sheet.
(b) Parent and Sub shall jointly and severally indemnify and
hold harmless the Former Commonwealth Stockholders from and against any Damages
that are the result of, arise out of or relate to any breach of any
representation or warranty or the failure to perform any covenant made by or on
behalf of Parent or Sub under this Agreement.
45
<PAGE>
(c) The persons to whom indemnification is provided hereunder
are referred to herein as the "Indemnified Parties" and the persons providing
indemnification are referred to as the "Indemnifying Parties."
Section 8.3. INDEMNIFICATION AMOUNTS. (a) Notwithstanding any provision
to the contrary contained in this Agreement, the Former Commonwealth
Stockholders shall not be obligated to indemnify Parent or Sub for Damages
pursuant to this Article VIII to the extent they are the result of any breach of
any representation or warranty made by or on behalf of the Company or either or
both of the 5% Stockholders unless and until the dollar amount of all Damages
shall equal in the aggregate $100,000, in which case the Former Commonwealth
Stockholders will be obligated, jointly and severally, to indemnify Parent and
Sub for the total amount of Damages subject to Section 8.6 hereof, including any
amounts which would otherwise not be required to be paid by reason of this
Section 8.3(a). For purposes of this Article VIII, all materiality, Material
Adverse Effect and similar qualifications in any representation, warranty,
covenant or other provision hereof shall be ignored.
(b) Notwithstanding any provision to the contrary contained in
this Agreement, Parent and Sub shall not be obligated to indemnify the Former
Commonwealth Stockholders for any Damages pursuant to this Article VIII to the
extent they are the result of any breach of any representation or warranty made
by or on behalf of Parent or Sub, unless and until the dollar amount of all such
Damages shall equal in the aggregate $100,000, in which case Parent and Sub will
be obligated to indemnify the Former Commonwealth Stockholders for the total
amount of Damages, including any amounts which would otherwise not be required
to be paid by reason of this Section 8.3(b). In no event shall the liability of
Parent and Sub under Section 1.12 and this Article VIII (the "Indemnified
Amount") exceed in the aggregate $3,930,000. On each of the first, second and
third anniversary of the Closing, the Indemnified Amount shall be reduced by
$1,310,000, less the amount of any pending claims. All amounts to be paid by
Parent pursuant to this Article VIII shall be payable in Parent Shares valued,
for these purposes, at $4.04 per share.
Section 8.4. CLAIMS. (a) If an Indemnified Party intends to seek
indemnification pursuant to this Article VIII, such Indemnified Party shall
promptly notify the Indemnifying Party in writing of such claim and provide
reasonably detail regarding such claim; provided, however, with respect to any
indemnity under Section 8.5, such notice shall be provided within 20 days of the
Indemnified Party's receipt of written notice of such claim. The Indemnified
Party will provide the Indemnifying Party with prompt notice of any third party
claim in respect of which indemnification is sought. The failure to provide
either such notice will not affect any rights hereunder except to the extent the
Indemnifying Party is materially prejudiced thereby.
(b) If such claim involves a claim by a third party against the
Indemnified Party, the Indemnifying Party may, within 20 days after receipt of
such notice and upon notice to the Indemnified Party, assume, through counsel of
its own choosing and at its own expense, the settlement or defense thereof, and
the Indemnified Party shall cooperate with
46
<PAGE>
it in connection therewith, provided, that the Indemnified Party may participate
in such settlement or defense through counsel chosen by it. If the Indemnified
Party reasonably determines that representation by the Indemnifying Party's
counsel of both the Indemnifying Party and the Indemnified Party may present
such counsel with a conflict of interest, then the Indemnifying Party shall pay
the reasonable fees and expenses of the Indemnified Party's counsel.
Notwithstanding anything in this Section 8.4 to the contrary, the Indemnifying
Party may not, without the consent of the Indemnified Party, settle or
compromise any action or consent to the entry of any judgment, such consent not
to be unreasonably withheld. So long as the Indemnifying Party is contesting any
such claim in good faith, the Indemnified Party shall not pay or settle any such
claim without the Indemnifying Party's consent, such consent not to be
unreasonably withheld. If the Indemnifying Party is not contesting such claim in
good faith (including if it does not notify the Indemnified Party of its
assumption of the defense of such claim within the 20 day period set forth
above), then the Indemnified Party may conduct and control, through counsel of
its own choosing and at the expense of the Indemnifying Party, the settlement or
defense thereof, and the Indemnifying Party shall cooperate with it in
connection therewith. The failure of the Indemnified Party to participate in,
conduct or control such defense shall not relieve the Indemnifying Party of any
obligation it may have hereunder.
Section 8.5. INDEMNIFICATION WITH RESPECT TO TAXES.
(a) Notwithstanding any other provision in this Article VIII
(other than Section 8.3, 8.4(a) and 8.6), the Former Commonwealth Stockholders
shall indemnify, defend and hold harmless Parent, Sub and, after the Effective
Time, the Company, and their respective officers, directors, employees,
affiliates, controlling persons, agents and representatives, and their
respective successors and assigns (each, a "TAX INDEMNITEE") from and against,
and shall reimburse each Tax Indemnitee for, any and all Taxes (including,
without limitation, reasonable expenses of investigation and reasonable
attorneys' and accountants' fees and expenses in connection with any action,
suit or proceeding) actually incurred or suffered at any time by any Tax
Indemnitee arising out of or attributable to (i) any misrepresentation,
inaccuracy or breach of any representation, warranty, covenant, agreement or
promise related to Taxes by either of the 5% Stockholders and/or the Company
contained in this Agreement (or in any certificate, document, list or schedule
delivered to Parent by either of the 5% Stockholders or the Company), (ii) any
and all unpaid Taxes for any Taxable Period ending on or before March 31, 1999,
except to the extent that such Taxes are specifically set forth in the reserve
for Taxes accrued on the financial statements described in Section 5.14 or (iii)
any and all unpaid Taxes, whether determined on a separate, consolidated,
combined, group or unitary basis, including any penalties and interest in
respect thereof, of the Company or any of its subsidiaries (A) pursuant to
Treas. Reg. ss.1.1502-6 or any comparable provision of state, local, or foreign
law with respect to any Taxable Period beginning before the Closing Date and (B)
pursuant to any guaranty, indemnification, Tax sharing, or similar agreement
made on or before the Closing Date relating to the sharing of liability for, or
payment of, Taxes; provided however, that no Tax Indemnitee shall be entitled to
indemnity hereunder for Taxes that are solely attributable to Tax elections,
amended Tax Returns or changes in Tax accounting methods, in each case,
47
<PAGE>
with respect to pre-closing periods that are made or filed after the Closing
Date by the Company. In addition to the foregoing, no Tax Indemnitee shall be
entitled to indemnity from the Former Commonwealth Stockholders for increases in
Taxes attributable to the pre-closing portion of the taxable period that will
include the Closing Date, to the extent (and only to the extent), such increases
in Taxes are solely attributable to a position taken by the Company on a Tax
Return that is filed after the Closing Date, if and only if, such position is
(i) not required by applicable law and (ii) inconsistent with positions taken on
Tax Returns filed by the Company in pre-closing periods (and if inconsistent
positions were taken during such periods, with the last such position taken).
This Section 8.5(a) shall continue in effect until the third anniversary of the
Closing Date; provided, however, that if a claim has been made pursuant hereto
by such date the indemnity set forth in this Section 8.5(a) shall continue in
effect until a final resolution of such claim.
(b) Any Tax or other amount for which indemnification is
provided under this Agreement shall be (i) increased to take account of any Tax
detriment incurred by any Tax Indemnitee arising from the receipt of indemnity
payments hereunder (I.E., grossed-up for any Tax incurred on such increase) and
(ii) reduced to take account of any Tax benefit realized by any Tax Indemnitee
arising from the receipt of indemnity payments hereunder.
(c) Notwithstanding any other provision in this Article VIII,
the indemnitor and its duly appointed representatives shall have the sole right
to negotiate, resolve, settle, or contest any claim for Tax made by a taxing
authority with respect to which the indemnitor has agreed to indemnify a Tax
Indemnitee under this Section 8.5 and with respect to which the indemnitor has
acknowledged in writing such indemnification obligation; PROVIDED, HOWEVER, that
the indemnitor shall not initiate any claim, settle any issue, file any amended
Tax Return, take or advocate any position or otherwise take any action that
could adversely affect the Tax Indemnitee or any of its affiliates without the
written consent of the Tax Indemnitee, which consent shall not be unreasonably
withheld. If the indemnitor does not assume the defense of a claim for the Tax
made by a taxing authority with respect to which the indemnitor has indemnified
a Tax Indemnitee under this Section 8.5, the Tax Indemnitee may defend the same
at the reasonable expense of the indemnitor in such manner as it may deem
appropriate, including, but not limited to, settling such audit or proceeding
with the consent of the indemnitor, which consent shall not be unreasonably
withheld.
(d) Parent and the 5% Stockholders agree to reasonably
cooperate (and Parent agrees to cause the Company to reasonably cooperate) with
each other to the extent reasonably requested after the Closing Date (at the
expense of the requesting party) in connection with (i) the preparation,
execution, and filing of all Tax Returns with respect to any taxable period of
the Company ending on or prior to the Closing Date, (ii) contests concerning the
application of any Tax or the amount of Tax due for any such taxable period, and
(iii) audits and other proceedings conducted by any Tax authority with respect
to any such taxable period.
48
<PAGE>
Section 8.6. EXCLUSIVE REMEDY. Prior to the Closing Date, the maximum
liability of the Company, on the one hand, and Parent and Sub, on the other
hand, shall be $10,000,000, payable in cash. Following the Closing Date, the
provisions of this Article VIII shall be the exclusive remedy for the matters
covered hereby, provided that nothing herein shall relieve any party from any
liability for fraud. All amounts to be paid by the Former Commonwealth
Stockholders under this Article VIII shall be paid solely from the escrow
contemplated by Section 1.10 hereof and such amounts shall be limited to such
escrow. Notwithstanding any other provision in this Article VIII, following the
Closing Date, each party's indemnification obligations pursuant to this Article
VIII shall be limited to 54% of Damages. Following the Closing, (i) all notices
to the Former Commonwealth Stockholders shall be made to the Representative,
(ii) all notices from the Former Commonwealth Stockholders shall be made by the
Representative and (iii) the Representative shall have the power to act for the
Former Commonwealth Stockholders in all matters related to this Agreement.
ARTICLE IX
MISCELLANEOUS
Section 9.1. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given upon receipt by the parties at the
following addresses (or at such other address for a party as shall be specified
by like notice):
(a) if to Parent or Sub, to:
CVC, Inc
525 Lee Road
Rochester, New York 14606
Attention: Emilio O. DiCataldo
Telecopy: (716) 458-2550
with a copy to:
Dewey Ballantine LLP
1301 Avenue of the Americas
New York, New York 10019
Attention: Frederick W. Kanner
Telecopy: 212-259-6333
49
<PAGE>
(b) if to the Company to:
Mr. Thomas Hennigan
500 Pendleton Street
Alexandria, Virginia 22315
with a copy to:
Hunton & Williams
1751 Pinnacle Dr.
Suite 1700
McLean, Virginia 22102
Attention: Joseph Conroy
Telecopy: 703-714-7410
(c) If to the Stockholder to:
Mr. George R. Thompson, Jr.
500 Pendleton Street
Alexandria, Virginia 22315
with a copy to:
Hunton & Williams
1751 Pinnacle Dr.
Suite 1700
McLean, Virginia 22102
Attention: Joseph Conroy
Telecopy: 703-714-7410
(d) If to the Archbold Trust to:
Mr. Farnham Collins
Crescent Road
RFD #1, Box #64
Millbrook, NY 12545
Section 9.2. HEADINGS. The headings herein are inserted for convenience
only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement.
Section 9.3. COUNTERPARTS. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same instrument.
Section 9.4. ENTIRE AGREEMENT; ASSIGNMENT. (a) This Agreement and the
exhibits and schedules hereto and the documents and certificates delivered in
connection
50
<PAGE>
herewith, the Stock Option Agreement and the Confidentiality Agreement,
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof, and supersedes all prior and contemporaneous agreements
and understandings, both written and oral, among the parties with respect to the
subject matter hereof.
(b) This Agreement shall not be assigned by a party hereto by
operation of law or otherwise; PROVIDED, that Parent or Sub may assign its
rights and obligations hereunder to any wholly owned subsidiary of Parent or
Sub, but no such assignment shall relieve Parent or Sub of its obligations
hereunder if such assignee does not perform such obligations.
Section 9.5. GOVERNING LAW. Except to the extent that Virginia law is
applicable to the Merger, this Agreement shall be governed and construed in
accordance with the laws of the State of Delaware, without regard to any
applicable conflicts of law principles.
Section 9.6. SPECIFIC PERFORMANCE. The parties hereto agree that if any
of the provisions of this Agreement were not performed in accordance with their
specific terms or were otherwise breached, irreparable damage would occur, no
adequate remedy at law would exist and damages would be difficult to determine,
and that the parties shall be entitled to specific performance of the terms
hereof, in addition to any other remedy at law or equity.
Section 9.7. PUBLICITY. Except as otherwise required by law or the
rules and regulations of any national securities exchange, no party hereto shall
issue any press release or otherwise make any public statement with respect to
the transactions contemplated by this Agreement without prior consultation with
the other parties hereto.
Section 9.8. BINDING NATURE; NO THIRD PARTY BENEFICIARIES. This
Agreement shall be binding upon and inure solely to the benefit of each party
hereto and their permitted successors and assigns, and nothing in this
Agreement, express or implied, is intended to or shall confer upon any other
person or persons any rights, benefits or remedies of any nature whatsoever
under or by reason of this Agreement.
Section 9.9. SEVERABILITY. This Agreement shall be deemed severable;
the invalidity or unenforceability of any term or provision of this Agreement
shall not affect the validity or enforceability of this Agreement or of any
other term hereof, which shall remain in full force and effect.
Section 9.10. INTERPRETATION. As used in this Agreement, (a)
"including" (or similar terms) shall be deemed followed by "without limitation"
and shall not be deemed to be limited to matters of a similar nature to those
enumerated, (b) "contract" shall include any note, bond, mortgage, indenture,
contract, agreement, permit, license, lease, purchase order, sales order,
arrangement or other commitment, obligation or understanding, (c) "subsidiary"
of any person means another person, an amount of the voting securities, other
voting ownership or voting partnership interests of which is
51
<PAGE>
sufficient to elect at least a majority of its Board of Directors or other
governing body (or, if there are no such voting interests, 50% or more of the
equity interests of which) is owned directly or indirectly by such first person,
(d) "ordinary course of business" (or similar terms) shall be deemed followed by
"consistent with past practice" and (e) "assets" shall include "rights"
including rights under contracts. In determining whether a fact, event or other
item has a Material Adverse Effect, such fact, event or other item shall be
considered individually and in the aggregate with all other facts, events or
other items.
Section 9.11. PAYMENT OF EXPENSES. (a) Whether or not the transactions
contemplated by this Agreement shall be consummated, each party hereto shall pay
its own expenses incident to preparing for, entering into and carrying out this
Agreement. The Company's expenses in connection with this Agreement and the
transactions contemplated hereby (including the negotiation and investigation
hereof), including legal, investment banking and accounting fees and expenses,
shall not exceed $450,000.
(b) Notwithstanding the foregoing, if this Agreement is
terminated (i) pursuant to Section 7.1(c) or (d) hereof, or (ii) following a
material breach hereof by the Company or either of the 5% Stockholders, then
within one business day of such termination (or prior to such termination in the
case of a termination pursuant to Section 7.1(d) hereof), the Company shall
deliver to Parent, in immediately available funds, the sum of $1,000,000 plus
Parent's reasonable expenses in connection with this Agreement and the
transactions contemplated hereby (including the negotiation and investigation
hereof), including legal, investment banking and accounting fees and expenses,
such expense reimbursement not to exceed $450,000. The Company acknowledges that
the agreements contained in this Section 9.11(b) are an integral part of the
transactions contemplated in this Agreement, and that, without these agreements,
Parent would not enter into this Agreement. Accordingly, if the Company fails to
pay the amount due pursuant to this Section 9.11(b) when it is required to be
paid, the Company shall pay to Parent its costs and expenses (including
reasonable attorneys' fees) in connection with the collection of such amount,
together with interest on the amount of the fee at the rate of 12% per annum
from the date such fee was required to be paid.
52
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first written above.
CVC, INC.
By:
-------------------------------
Name:
Title:
CVC ACQUISITION CORP.
By:
-------------------------------
Name:
Title:
COMMONWEALTH SCIENTIFIC
CORPORATION
By:
-------------------------------
Name:
Title:
JOHN D. ARCHBOLD GST TRUST
By:
-------------------------------
Name:
Title:
GEORGE R. THOMPSON, JR.
By:
-------------------------------
Name:
Title:
53
<PAGE>
Exhibit 10.40
ESCROW AGREEMENT
ESCROW AGREEMENT, dated as of May 10, 1999, among CVC, Inc., a Delaware
corporation ("Parent"), George R. Thompson, Jr., as representative (the
"Representative") of certain former stockholders of Commonwealth Scientific
Corporation (the "Former Commonwealth Stockholders"), and M&T Bank (the "Escrow
Agent").
WHEREAS, on April 1, 1999, Parent, CVC Acquisition Corp., a Virginia
corporation and wholly owned subsidiary of Parent, Commonwealth Scientific
Corporation, a Virginia corporation, and the 5% Stockholders entered into an
Agreement and Plan of Merger (the "Merger Agreement") (capitalized terms not
otherwise defined herein shall have the meanings set forth in the Merger
Agreement); and
WHEREAS, pursuant to Section 1.10 of the Merger Agreement, certain of
the Parent Shares the Former Commonwealth Stockholders would otherwise be
entitled to receive are to be held in escrow in accordance herewith.
NOW, THEREFORE, the parties agree as follows:
1. FORMATION OF ESCROW FUND. Simultaneously with the execution of this
Agreement, Parent is delivering to the Escrow Agent 975,000 Parent Shares
(together with any distributions and dividends of Parent Shares thereon, the
"Escrow Fund"). The Escrow Agent acknowledges receipt of the Escrow Fund and
agrees to act as Escrow Agent hereunder.
2. CLAIMS.
(a) INDEMNIFICATION. From time to time Parent may give notice
(a "Claim Notice") to the Representative and the Escrow Agent that it is making
a claim (a "Claim") under Article VIII of the Merger Agreement. The Escrow Agent
shall give the Representative notice of any Claim it receives, including a copy
of the Claim Notice. If the Escrow Agent does not receive a notice (an
"Objection Notice") from the Representative objecting to such Claim within 15
business days following the date of the notice of the Claim, the Escrow Agent
will pay the amount specified in the Claim Notice out of the Escrow Fund to
Parent within two business days following such 15 business-day period by
delivering Parent Shares with a Fair Market Value (as defined in (b) below)
equal to the amount of the Claim. If within such 15 business-day period the
Representative delivers to the Escrow Agent and Parent an Objection Notice, the
matter in dispute will be resolved as set forth in (c) below. The Escrow Agent
shall give Parent notice of any Objection Notice it receives, including a copy
of the Objection Notice.
(b) VALUATION OF PARENT SHARES. For purposes of this
Agreement, the "Fair Market Value" of a Parent Share shall be equal to $4.04.
<PAGE>
(c) RESOLUTION. If the Representative delivers an Objection Notice to
Parent and Escrow Agent within the period specified above, the Escrow Agent
shall refrain from disbursing any portion of the Escrow Fund covered by such
Objection Notice until resolution of such dispute in the form of (x) a final
non-appealable order of a court of competent jurisdiction or (y) joint direction
of Parent and the Representative.
3. TERMINATION OF ESCROW.
(a) 1/3 of the amount of the Escrow Fund, less the aggregate
amount of any pending Claims against any portion of the Escrow Fund, shall be
paid to the Representative on the first anniversary of the Closing Date.
(b) 1/3 of the amount of the Escrow Fund, less the aggregate
amount of any pending Claims against any portion of the Escrow Fund, shall be
paid to the Representative on the second anniversary of the Closing Date.
(c) The balance of the Escrow Fund, less the aggregate amount
of any pending Claims against any portion of the Escrow Fund, shall be paid to
the Representative on the third anniversary of the Closing Date.
(d) All remaining amounts shall be held pending resolution of
such Claims as set forth in Section 2(c) above.
4. VOTING AND INVESTMENT. So long as Parent Shares are held in any
portion of the Escrow Fund, the Escrow Agent will be the record holder thereof,
provided that the Former Commonwealth Stockholders will be the beneficial owners
thereof, and shall have the right to direct, through the Representative, the
Escrow Agent in the voting thereof and to receive all cash dividends and
distributions with respect thereto. All Parent Shares held in any portion of the
Escrow Fund will be voted in the same proportion as all other outstanding shares
of capital stock of Parent are voted. All dividends and distributions of Parent
Shares in respect of the Parent Shares held in any portion of the Escrow Fund
shall be deposited into the escrow account. The Escrow Agent is authorized and
instructed to invest any portion of the Escrow Fund in the form of cash or cash
equivalents in obligations issued or guaranteed by the United States of America
or any agency or instrumentality thereof whose remaining maturities are no
greater than 45 days, or as otherwise specified by the Representative.
5. DUTIES OF THE ESCROW AGENT.
(a) INDEMNIFICATION. Parent and the Representative jointly
agree to indemnify and hold harmless the Escrow Agent from and against any
losses, claims, damages and liabilities, including reasonable attorney's fees
and disbursements ("Losses"), which may arise from or are based upon this
Agreement, unless such Losses arise from or are based upon a claim of willful
neglect, negligence or bad faith of Escrow Agent.
2
<PAGE>
(b) RELIANCE. Subject to the foregoing, Escrow Agent may rely
upon, and shall be protected in acting or refraining from acting upon, any
written notice, instruction, certificate, request, consent or other instrument
furnished to it in connection with its duties as Escrow Agent and reasonably
believed by Escrow Agent to be genuine.
(c) ADVICE OF COUNSEL. As to any legal questions arising in
connection with Escrow Agent's performance of its duties and responsibilities
hereunder, Escrow Agent may consult or obtain opinions from legal counsel
selected by it and reasonably satisfactory to Parent and the Representative, and
Escrow Agent shall be free from any liability for acting in reliance on such
advice of counsel so long as in doing so Escrow Agent shall not have acted with
willful neglect, negligence or bad faith.
(d) DISPUTE. If there is any disagreement between Parent and
the Representative as to the disposition of any portion of the Escrow Fund or if
the Escrow Agent is in doubt as to what action it should take hereunder, the
Escrow Agent shall be entitled to retain such portion of the Escrow Fund until
the Escrow Agent shall have received (x) a final non-appealable order of a court
of competent jurisdiction or (y) joint direction of Parent and the
Representative.
(e) NO INTEREST IN ESCROW FUND. The Escrow Agent does not have
any interest in the Escrow Fund, but is serving as escrow holder only and having
only possession thereof.
(f) INFORMATION. The Escrow Agent shall furnish to Parent and
the Representative any information regarding the Escrow Fund or the matters
contemplated by this Agreement which either of them may reasonably request.
6. RESIGNATION OR TERMINATION OF ESCROW AGENT; APPOINTMENT OF A
SUCCESSOR.
(a) The Escrow Agent may resign and be discharged from its
duties and obligations hereunder for any reason. Such resignation shall be made
by written notice of such resignation to Parent and the Representative but shall
not become effective until a successor Escrow Agent shall have been appointed by
mutual agreement of Parent and the Representative and shall have accepted such
appointment in writing. Parent and the Representative shall use reasonable best
efforts to appoint any such successor Escrow Agent as promptly as practicable
following receipt of the notice of resignation as contemplated by the
immediately preceding sentence. Parent and the Representative shall also have
the right, by mutual agreement, to terminate the appointment of Escrow Agent by
giving to it notice of such termination, specifying the date on which such
termination shall take effect and designating a successor Escrow Agent. In any
such event, Parent and the Representative shall, by mutual agreement, reasonably
approve and designate a successor Escrow Agent.
(b) Any successor Escrow Agent shall execute and deliver to
the then serving Escrow Agent a written instrument accepting the appointment and
agreeing to the terms of this Agreement. Upon receipt thereof from such
successor Escrow Agent, all
3
<PAGE>
property in the Escrow Fund, and all related records, shall be turned over and
delivered to such successor Escrow Agent who shall thereupon be bound by all of
the provisions hereof as if an original signatory hereto. No resignation or
removal of the Escrow Agent shall be effective until the acceptance of
appointment by the successor Escrow Agent in the manner provided above.
7. NOTICE. All notices and other communications hereunder shall be in
writing and shall be deemed given upon receipt by Parent and the Representative
at the addresses set forth in the Merger Agreement and the Escrow Agent at
Manufacturers & Traders Trust Company, One M&T Plaza 8th Floor, Buffalo, New
York 14203, Attention: Douglas P. Marmion(or at such other address for a party
as shall be specified by like notice).
8. FEES AND EXPENSES OF ESCROW AGENT. For its services hereunder,
Escrow Agent shall be entitled to a fee for each month it holds any portion of
the Escrow Fund equal to the amount set forth in Exhibit A and reimbursement of
reasonable and documented out-of-pocket expenses incurred by Escrow Agent in
connection with the performance of such services. All amounts due to Escrow
Agent pursuant to this Section 8 shall be paid by Parent.
9. HEADINGS; COUNTERPARTS. The headings herein are inserted for
convenience only and are not intended to be part of or to affect the meaning or
interpretation of this Agreement. This Agreement may be executed in two or more
counterparts, all of which shall be considered one and the same instrument.
10. ENTIRE AGREEMENT; ASSIGNMENT. This Agreement and the Merger
Agreement constitute the entire agreement among the parties hereto with respect
to the subject matter hereof, and supersedes all prior and contemporaneous
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof. The Former Commonwealth Stockholders may
not transfer any interest in any portion of the Escrow Fund or any other right
under this Agreement to any other party, by operation of law or otherwise,
except that (i) in the case of a Former Commonwealth Stockholder that is a
trust, such interests and rights hereunder shall be transferable to the
beneficiaries of such trust by the trustee in accordance with the terms of the
governing trust instrument; provided that (a) such transfer shall not be in
violation of federal and state securities laws and (b) any beneficiary of such
trust shall be bound by the provisions of this Agreement and (ii)upon prior
written notice from the legal representative of the estate of any Former
Commonwealth Stockholder to the Escrow Agent, the rights of such stockholder
under this Agreement may transfer to the estate of the stockholder, and
subsequently to any beneficiary thereof, in the event of the death of such
Former Commonwealth Stockholder; provided, however, that any such beneficiary or
the legal representative of such stockholder's estate shall be bound by the
provisions of this Agreement. This Agreement shall not be assigned by Parent by
operation of law or otherwise, PROVIDED, that Parent may assign its rights and
obligations hereunder to any wholly owned subsidiary of Parent, but no such
assignment shall relieve Parent of its obligations hereunder if such assignee
does not perform such obligations. No amendment,
4
<PAGE>
modification, supplement, or termination of this Agreement shall bind or be
enforceable against any party unless set forth in a written document signed by
all of the parties hereto.
11. BINDING NATURE; NO THIRD PARTY BENEFICIARIES. This Agreement shall
be binding upon and inure solely to the benefit of each party hereto and their
permitted successors and assigns, and nothing in this Agreement, express or
implied, is intended to or shall confer upon any other person or persons any
rights, benefits or remedies of any nature whatsoever under or by reason of this
Agreement.
12. GOVERNING LAW. This Agreement shall be governed and construed in
accordance with the laws of the State of New York, without regard to any
applicable conflicts of law principles.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
CVC, INC.
By:
-------------------------------
Name:
Title:
The Representative:
-------------------------------
M&T Bank
By:
-------------------------------
Name:
Title:
6
<PAGE>
Exhibit 10.41
CONSULTING AGREEMENT
Consulting Agreement, dated as of April 1, 1999, between CVC, Inc.,
(the "Company") a Delaware corporation, and George R. Thompson, Jr., an
individual ("Consultant").
WHEREAS, the Company, CVC Acquisition Corporation, a Virginia
corporation and a wholly owned subsidiary of the Company ("Sub") and
Commonwealth Scientific Corporation, a Virginia corporation ("CSC"), are
entering into an Agreement and Plan of Merger (the "Merger Agreement"), dated as
of the date hereof, providing for the merger of Sub with and into CSC (the
"Merger");
WHEREAS, the Consultant is the Chief Executive Officer and principal
shareholder of CSC; and
WHEREAS, effective as of the closing of the Merger, the Company desires
to enter into a consulting relationship with Consultant upon the terms and
conditions set forth in this Agreement, and Consultant wishes to accept such
consulting relationship upon the terms and conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of and in reliance upon the foregoing
and the covenants, obligations and agreements contained herein, the Company and
Consultant hereby agree as follows:
1. CONSULTING PERIOD.
(a) Subject to early termination as provided in Section 4 of this
Agreement, the term of this Agreement will be the three year period beginning on
the date of the closing of the Merger (the "Commencement Date") and ending on
the third anniversary of such date (unless the term is extended as described in
paragraph (b) below (the "Consulting Period").
(b) In the event that there has not been a Liquidation Event (as
defined in paragraph (c) below) prior the third anniversary of the Commencement
Date, the term of this Agreement shall be extended for a period ending upon the
occurrence of a Liquidation Event, but in no event for a period exceeding two
years.
(c) For purposes hereof, a "Liquidation Event" shall mean the
occurrence of an event in which Consultant would have the ability to, and choose
to, exchange shares of common stock of the Company held by Consultant for
readily marketable securities or cash, having a value of $4.0 million.
2. CONSULTING SERVICES. During the Consulting Period, Consultant agrees to
provide technology, product, design and other advice as required by the Company
(the "Consulting Services"). During the Consulting Period, Consultant shall be
available to
<PAGE>
perform the Consulting Services as reasonably requested by the Company;
PROVIDED, HOWEVER, that (i) during the first year of the Consulting Period,
Consultant is not required to perform services for more than an aggregate of 100
hours per calendar month, (ii) during the second year of the Consulting Period,
Consultant is not required to perform services for more than an aggregate of 75
hours per calendar month, and (iii) during the third year of the Consulting
Period, Consultant is not required to perform services for more than an
aggregate of 50 hours per calendar month. In no event shall Consultant be
required to regularly report or work at locations designated by the Company that
are outside of Northern Virginia or the Greater Washington, D.C. metropolitan
area, without the Consultant's express consent.
3. COMPENSATION.
(a) CONSULTING FEES. The Company shall pay Consultant a base fee at the
rate of (i) $200,000 for the first year of the Consulting Period, (ii) $175,000
for the second year of the Consulting Period (iii) $150,000 for the third year
of the Consulting Period, and (iv) $150,000 per year for any subsequent years
due to the extension of the Consulting Period pursuant to Section 1(b) hereof
(the "Consulting Fee"), payable on a by-weekly basis irrespective of the number
of hours served.
(b) MEDICAL COVERAGE. During the Consulting Period, Consultant and his
dependents will be covered under the medical benefit plans generally in effect
from time to time for senior executives of the Company and their dependents,
including dental and prescription drug coverage, if any, provided that the
Company will bear 100% of the costs of any such coverage.
(c) LIFE INSURANCE. During the Consulting Period, the Company shall
provide the Consultant with life insurance coverage equal to $50,000, provided
that the Company will bear 100% of the costs of any such coverage.
(d) BUSINESS EXPENSES. All reasonable and necessary business expenses
incurred by the Consultant in the performance of his services hereunder shall be
promptly reimbursed by the Company in accordance with the Company's standard
expense reimbursement policies applicable to contractors.
(e) LOAN PAYMENT. The Company shall continue to pay the monthly loan
payments that were paid by Commonwealth Scientific Corporation immediately prior
to the Merger for use of an automobile (the "Pre-Merger Automobile") by the
Consultant until such loan payment is paid in full. Upon the payment in full of
such loan, Company shall provide Consultant with a leased vehicle of a make and
model similar to the Pre-Merger Automobile (the "Leased Automobile") for any
remaining portion of the Consulting Period. In addition, during the Consulting
Period, the Company shall pay the full cost of appropriate and customary
automobile insurance for the use by the Consultant of the Pre-Merger Automobile
and the Leased Automobile in accordance with the foregoing.
2
<PAGE>
(f) DUTIES AS A DIRECTOR. The Consultant's duties as a director of the
Company are independent of his obligations under this Agreement, and any
directors' fees paid to the Consultant shall be excluded from the calculation of
the Consultant's fees under this Agreement. For the period in which the
Consultant is a director of the Company, the Company shall provide directors and
officers liability insurance coverage to the Consultant on the same terms and
only to the extent provided to other directors and officers of the Company.
4. TERMINATION.
4.1 MANNER OF TERMINATION. This Agreement may be terminated prior to
the expiration of the Consulting Period, as follows:
(a) BY THE COMPANY FOR CAUSE. At the option of and by written
notice from the Company, if the Company finds "Cause" for termination. For
purposes of this Agreement, the term "Cause" shall mean (i) any material breach
by Consultant of his obligations under the Stockholder Non-Competition Agreement
dated as of the date hereof between the Consultant and the Company (the
"Stockholder Non-Competition Agreement"); (ii) final conviction by Consultant of
a felony or any offense involving misappropriation of money; or (iii) the
Consultant's willful failure or refusal to perform the Consulting Services
contemplated hereby (which shall be deemed to include, without limitation,
disobeying reasonable directives of the Chief Executive Officer of the Company).
(b) BY CONSULTANT. By the Consultant at any time for any
reason.
(c) DEATH. Upon the death of the Consultant.
4.2 CONSEQUENCES OF TERMINATION. In the event that this Agreement is
terminated prior to the expiration of the Consulting Period by the Company other
than for Cause, the Company will continue to pay the Consultant the Consulting
Fee in the manner set forth in Section 3(a) for the remaining term of the
Consulting Period. In the event that this Agreement is terminated prior to the
expiration of the Consulting Period by the Consultant, or is terminated by the
Company for Cause, all rights and obligations of the parties hereunder will
expire, except that any Consulting Fees and expenses that are owed to the
Consultant for services rendered prior to the date of termination shall be paid
to the Consultant or, if appropriate, his estate.
5. MISCELLANEOUS.
5.1 STATUS. Consultant acknowledges and agrees that his status at all
times shall be that of an independent contractor, and that he may not, at any
time, act as a representative for or on behalf of the Company for any purpose or
transaction, and may not bind or otherwise obligate the Company in any manner
whatsoever without obtaining the prior written approval of the Company therefor.
Except as provided herein,
3
<PAGE>
Consultant hereby waives any rights as an employee or deemed employee of the
Company or any of its affiliates. The parties hereby acknowledge and agree that
all Consulting Fees paid during the Consulting Period shall represent fees for
his Consulting Services as an independent contractor, and shall therefor be paid
without any deductions or withholdings taken therefrom for taxes or any other
purpose. The Consultant further acknowledges that the Company makes no
warranties as to any tax consequences regarding payment of such Consulting Fees,
and specifically agrees that the determination of any tax liability or other
consequences of the payment set forth above is his sole and complete
responsibility and that he will pay all federal, state and local taxes, if any,
assessed on such payments, but will not be responsible for any taxes or
penalties imposed by any taxing authority against the Company for its failure to
properly report the Consultant's earnings under this Agreement.
5.2 WAIVER. Failure of the Company at any time to enforce any provision
of this Agreement or to require performance by Consultant of any provisions
hereof shall in no way affect the validity of this Agreement or any part hereof
or the right of the Company thereafter to enforce its rights hereunder; nor
shall it be taken to constitute a condonation or waiver by the Company of that
default or any other or subsequent default or breach.
5.3 NOTICES. All notices or other communications hereunder shall not be
binding on either party hereto unless in writing, and delivered to the other
party thereto at the following address:
If to the Company: 525 Lee Road
Rochester, New York 14606
Attention: Mr. Emilio O. DiCataldo
If to Consultant: 509 Tobacco Quay Road
Alexandria, Virginia 22314
Attention: Mr. George R. Thompson, Jr.
Notices shall be deemed duly delivered upon hand delivery thereof at
the above addresses, one day after deposit with a nationally recognized
overnight delivery company, or three days after deposit thereof in the United
States mails, postage prepaid, certified or registered mail. Either party may
change its address for notice by delivery of written notice thereof in the
manner provided.
4
<PAGE>
5.4 ASSIGNMENT. Except as set forth herein, no rights of any kind under
this Agreement shall, without the prior consent of the Company, be transferable
to or assignable by Consultant or any other person, or, except as provided by
applicable law, be subject to alienation, encumbrance, garnishment, attachment,
execution or levy of any kind, voluntary or involuntary. This Agreement shall be
binding upon and shall inure to the benefit of the Company and its successors
and assigns.
5.5 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the substantive laws of the Commonwealth of Virginia, without
regard to the conflicts of law principles thereof.
5.6 COUNTERPARTS. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same document.
5.7 HEADINGS. The headings in this Agreement are intended solely for
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
5.8 ENTIRE AGREEMENT. THE PARTIES HERETO ACKNOWLEDGE THAT THEY HAVE
READ THIS AGREEMENT, UNDERSTAND IT, AND AGREE TO BE BOUND BY ITS TERMS. This
Agreement and the Shareholder Non-Competition Agreement entered into among the
parties as of the date hereof constitute the entire understanding and agreement
between the parties hereto concerning the subject matter hereof. All
negotiations by the parties hereto concerning the subject matter hereof are
merged into these Agreements, and there are no representations, warranties,
covenants, understandings or agreements, oral or otherwise, in relation thereto
by the parties hereto other than those incorporated herein. No supplement
modification or amendment of this Agreement shall be binding unless executed in
writing by the parties hereto.
INTENDING TO BE LEGALLY BOUND, the parties or their duly authorized
representatives have signed this Agreement as of the date first above written.
CVC, INC.
By:
--------------------------------
Its:
-------------------------------
CONSULTANT
5
<PAGE>
-----------------------
George R. Thompson, Jr.
6
<PAGE>
Exhibit 10.43
CVC, INC.
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
This Amended and Restated Stockholders' Agreement (this "Agreement") is
entered into as of May 10, 1999 by and among CVC, Inc. a Delaware corporation
(the "Company"), the current stockholders of the Company listed on EXHIBIT A
attached hereto (the "Current Stockholders") and those persons listed on EXHIBIT
C attached hereto (the "Former Commonwealth Stockholders" and together with the
Current Stockholders, the "Stockholders").
RECITALS
A. The Company, CVC Acquisition Corporation and Commonwealth Scientific
Corporation ("Commonwealth") have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), dated as of April 1, 1999, pursuant to which the
Company is issuing shares of its common stock, par value $.01 per share to the
Former Commonwealth Stockholders in exchange for all outstanding shares of
Commonwealth.
B. The Company and the Current Stockholders are party to that certain
Amended and Restated Stockholders' Agreement, dated as of December 10, 1998 (the
"Stockholders' Agreement").
C. In order to induce Commonwealth to enter into the Merger Agreement,
and to provide for certain rights as among the parties, all as set forth herein,
the Company and the Current Stockholders have agreed to amend and restate the
Stockholders' Agreement.
D. The execution and delivery of this Agreement is a condition to the
closing of the transactions contemplated by the Merger Agreement.
NOW, THEREFORE, in reliance on the foregoing recitals, and in and for
the mutual covenants and consideration set forth herein, the parties hereto
agree as follows:
SECTION 1
CERTAIN DEFINITIONS
As used in this Agreement the following terms shall have the following
respective meanings:
1.1 "CURRENT STOCKHOLDERS" shall mean the Stockholders of the Company
set forth on EXHIBIT A attached hereto.
1.2 "FORMER COMMONWEALTH STOCKHOLDERS" shall mean the Stockholders of
the Company set forth on Exhibit C hereto.
<PAGE>
1.3 "PRINCIPAL STOCKHOLDERS" shall mean Global Private Equity III
Limited Partners, Advent PGGM Global Limited Partnership, Advent Partners GPE
III Limited Partnership, Advent Partners (NA) GPE III Limited Partnership and
Advent Partners Limited Partnership (collectively, the "Investors"), Seagate
Technology, Inc., a Delaware corporation ("Seagate"); Nikko Tecno Co., Inc., a
Japanese corporation ("Nikko"); Christine B. Whitman and Anne G. Whitman.
1.4 "REGISTRATION RIGHTS AGREEMENT" shall mean the Amended and Restated
Registration Rights Agreement, dated as of the date hereof, among the Company
and the Current Stockholders.
1.5 "SECURITIES" shall mean (i) the Company's equity securities
(including, without limitation, securities convertible into such equity
securities) and (ii) rights, options or warrants to subscribe for, purchase or
otherwise acquire any equity securities of the Company.
1.6 "SHARES" shall mean the shares of Common Stock, Series A Preferred
Stock, Series B Preferred Stock and Series C Preferred Stock.
1.7 "GROUP" shall mean the Stockholders listed on the signature pages
hereto and their permitted transferees pursuant to Section 4.2.
SECTION 2
RIGHT OF FIRST OFFER
2.1 PRINCIPAL STOCKHOLDER RIGHT. Except as provided in Section 4.2
hereof, at any time a Stockholder (the "Seller") proposes to transfer to a third
party (a "Third Party Transferee") any Securities of the Company (the "Offered
Securities"), Seller shall first offer to sell the Offered Securities to each
Principal Stockholder that is not the Seller (the "Non-Selling Stockholders")
and each Non-Selling Stockholder shall have a right to purchase such Non-Selling
Stockholders' Pro Rata Share (as defined in Section 2.4 hereof) of the Offered
Securities on the terms and conditions described herein. No Non-Selling
Stockholder shall have the right to purchase any of the Offered Securities
unless all of the Offered Securities are purchased by the Non-Selling
Stockholders pursuant to either this Section 2.1 or Section 2.2 below.
2.2 OVER-ALLOTMENT OPTION. In the event that any one or more of the
Non-Selling Stockholders chooses not to purchase or to purchase less than all of
such Non-Selling Stockholders' Pro Rata Share of Offered Securities pursuant to
Section 2.1, those Non-Selling Stockholders, if any, that shall have elected to
purchase their full Pro Rata Share of the Offered Securities shall also have a
right to purchase the remaining Offered Securities (the "Over-Allotment
Option"), in addition to such Offered Securities as they shall have already
elected to purchase, if they shall have so elected as provided for in Section
2.3(b) below. If more than one Non-Selling Stockholder elects to exercise its
Over-Allotment Option, and the aggregate number of Offered Securities, such
Non-Selling Stockholders elected to purchase exceeds the aggregate
2
<PAGE>
number of Offered Securities then remaining, then the Offered Securities to be
purchased pursuant to the Over-Allotment Option shall be divided among such
Non-Selling Stockholders to the extent necessary to reflect their respective Pro
Rata Share, or on such other basis as such Non-Selling Stockholders may agree
amongst themselves in writing. In the event that the Non-Selling Stockholders do
not elect to purchase in the aggregate all of the Offered Securities pursuant to
Section 2.1 and this Section 2.2, then no Non-Selling Stockholder shall have the
right to purchase any of the Offered Securities pursuant to Section 2.1 and this
Section 2.2.
2.3 PROCEDURE.
(a) The Seller shall deliver a notice (the "Transfer Notice")
to each Non-Selling Stockholder and to the Company, stating (i) such Seller's
desire to transfer the Offered Securities to a Third Party Transferee, (ii) the
number of Offered Securities to be transferred and (iii) the price, terms and
conditions upon which the proposed transfer of Offered Securities is to be made.
(b) Within twenty (20) days after delivery of the Transfer
Notice to the Company and the Non-Selling Stockholders, the Non-Selling
Stockholder shall indicate in writing (the "Election Notice") to the Company and
the Seller whether such Non-Selling Stockholder elects to purchase any or all of
its Pro Rata Share of the Offered Securities to which the Transfer Notice refers
at the price per share and on the terms and conditions specified in the Transfer
Notice.
(c) If the Company and Seller shall have received one or more
Election Notices within twenty (20) days from the date all the Non-Selling
Stockholders are deemed to have received the Transfer Notice, in which one or
more (but less than all) Non-Selling Stockholders have elected to purchase their
full Pro Rata Share of the Offered Securities, the Company shall immediately
notify the Seller to such effect and the Seller shall immediately give each such
Non-Selling Stockholder and the Company notice (the "Over-Allotment Notice")
indicating the aggregate amount of Offered Securities as to which the
Non-Selling Stockholders shall not have exercised their respective rights of
first offer. Each Non-Selling Stockholder who shall have elected to purchase at
least its full Pro Rata Share of such Offered Securities, pursuant to this
Section 2.3, shall have five (5) days from any delivery date of the
Over-Allotment Notice, to give notice (the "Over-Allotment Election Notice") to
the Company and the Seller whether it elects to exercise its Over-Allotment
Option granted in Section 2.2 hereof (and, if so, the maximum number of
additional shares of Offered Securities it elects to purchase pursuant thereto).
(d) In the event the Non-Selling Stockholders elect in the
aggregate to purchase all of the Offered Securities, then the Seller and the
Non-Selling Stockholders electing to purchase Offered Securities shall
consummate the sale of the Offered Securities pursuant to the terms of the
Transfer Notice within sixty (60) days after delivery of the Transfer Notice.
2.4 PRO RATA SHARE. Each Non-Selling Stockholder's "Pro Rata Share,"
for purposes of this Section 2, is equal to the fraction obtained by dividing
(a) the sum of the total number of shares of any (i) Common Stock, (ii) Common
Stock issuable upon conversion of any of the Company's equity securities, and
(iii) Common Stock issuable upon exercise of any options or warrants (including
warrants to purchase Preferred Stock) then held by such Non-Selling
3
<PAGE>
Stockholder by (b) the sum of the total number of shares of (i) Common Stock,
(ii) Common Stock issuable upon the conversion of the Company's equity
securities and (iii) Common Stock issuable upon any exercise of any options or
warrants (including warrants to purchase Preferred Stock) then outstanding and
held by all of the Non-Selling Stockholders; provided, however, for the purposes
of the second sentence of Section 2.2, clause (b) of this Section 2.4 shall
include only those shares held by the Non-Selling Stockholders electing their
Over-Allotment Option.
2.5 TRANSFER OF OFFERED SECURITIES UPON FAILURE TO EXERCISE RIGHTS OF
FIRST OFFER.
(a) In the event that the Non-Selling Stockholders do not
elect to purchase all of the Offered Securities, the Seller may, not later than
one hundred twenty (120) days following delivery to the Non-Selling Stockholders
of the Transfer Notice conclude a transfer of all of the Offered Securities
covered by the Transfer Notice (i) at or above the price and (ii) on terms and
conditions not more favorable in any material respect to a Third Party
Transferee than those described in the Transfer Notice; provided, that if such
Third Party Transferee is a competitor of the Company, as determined by the
Board of Directors of the Company in good faith, the Board of Directors of the
Company must first consent to such proposed transfer. Any proposed transfer at a
price below or on terms and conditions more favorable in any material respect to
a Third Party Transferee than those described in the Transfer Notice, as well as
any subsequent proposed transfer of any of the Offered Securities by the Seller,
shall again be subject to the right of first offer set forth in this Section 2,
and shall require compliance by the Seller with the procedures described in this
Section 2.
(b) No sale of Securities to a Third Party Transferee pursuant
to this Section 2.5 shall be effective unless the Third Party Transferee shall
have executed such documentation, in form and substance satisfactory to the
Company, evidencing agreement by the Third Party Transferee to be bound by the
provisions of this Agreement and the Third Party Transferee agrees to be bound
by the terms of the Registration Rights Agreement.
SECTION 3
CO-SALE RIGHT
3.1 SALE OF SUBSTANTIAL INTEREST.
(a) If at any time any Stockholder acting independently or in
conjunction with any other Stockholders (a "Stockholders Group") proposes to
transfer (other than in accordance with Section 4.2) in the aggregate 70% or
more of the then outstanding Securities (determined on a fully diluted as
converted basis) to a bona fide purchaser or purchasers in an arm's-length
transaction, for fair value, such Stockholders Group shall provide each other
Stockholder with not less than twenty (20) days' prior written notice of such
proposed sale, which notice shall include the terms and conditions of such
proposed sale. Each Stockholder not belonging to the Stockholders Group shall
have the option, exercisable by written notice to the Stockholders Group within
ten (10) days after the receipt of the Stockholders Groups' notice, to require
the
4
<PAGE>
Stockholders Group to arrange for such bona fide purchaser or purchasers to
purchase the same percentage (the "Percentage") of the Securities then owned by
each such Stockholder as the percentage of the total number of Securities owned
by such offering Stockholders Group which are to be sold pursuant to the bona
fide offer, at the same time as, and upon the same terms and conditions at
which, the offering Stockholders Group sells its Securities. If any such other
Stockholder shall so elect, the offering Stockholders Group agrees that it shall
either (x) arrange for the proposed purchaser or purchasers to purchase the same
Percentage of the Securities then owned by each such other Stockholder at the
same time as and upon the same terms and conditions at which the offering
Stockholder Group sells its Securities, or (y) not effect the proposed sale to
such purchaser or purchasers.
(b) All rights to sell any Securities in accordance with this
Section 3 shall be subject to the provisions of Section 2 hereof.
SECTION 4
ADDITIONAL PROVISIONS
4.1 INVALID TRANSFERS. Any sale, assignment or other transfer of
Securities by a Stockholder contrary to the provisions of Section 2 and Section
3 hereof shall be null and void, and the transferee shall not be recognized by
the Company as the holder or owner of the Securities sold, assigned, or
transferred for any purpose (including, without limitation, voting or dividend
rights), unless and until a Stockholder has satisfied the requirements of
Section 2 and Section 3 hereof with respect to such sale. A Selling Stockholder
shall provide the Company and the other Stockholders with written evidence that
such requirements have been met or waived prior to consummating any sale,
assignment or other transfer of securities, and no Securities shall be
transferred on the books of the Company until such written evidence has been
received by the Company and the Stockholders.
4.2 PERMITTED TRANSFERS.
(a) Any Stockholder may transfer any Securities to the
following (each a "Permitted Transferee") without complying with the provisions
of Section 2 or Section 3 hereof: (i) to a member of such Stockholder's
immediate family, (ii) to a trust established by such Stockholder for the
benefit of the Stockholder or such Stockholder's immediate family, (iii)
pursuant to a testamentary will or applicable laws of descent and distribution,
or (iv) any majority-owned subsidiary or controlled affiliate of such
Stockholder (but only if and for so long as such subsiding or affiliate remains
a majority-owned subsidiary or controlled affiliate of the Stockholder).
(b) No sale, assignment or transfer of Securities pursuant to
Section 4.2(a) shall be effective unless and until the Permitted Transferee
shall have executed such documentation, in form and substance satisfactory to
the Company, evidencing the agreement by the Permitted
5
<PAGE>
Transferee to be bound by the provisions of this Agreement and the Registration
Rights Agreement.
4.3 LEGENDS. Each certificate evidencing any of the Shares now owned or
hereafter acquired by the Stockholders shall bear a legend substantially as
follows:
The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended ("the Act"), and have been
acquired for investment and not with a view to, or in connection with,
the sale or distribution thereof. Such shares may not be sold, offered
for sale, pledged or hypothecated in the absence of such registration
unless (a) the Corporation receives an opinion of counsel reasonably
satisfactory to it stating that such sale or transfer is exempt from
the registration and prospectus delivery requirements of the act, (b)
it is established to the satisfaction of the Corporation that such sale
or transfer is in a transaction which is exempt under, or otherwise in
compliance with, such laws or (c) the Corporation receives a "no
action" letter or similar declaration from the securities and exchange
commission to the effect that such sale or transfer without
registration will not result in a recommendation by said commission
that action be taken with respect thereto. Copies of the agreements
covering the purchase of these shares and restricting the sale,
assignment, transfer, or other disposition of, or the voting of, the
shares represented by this certificate may be obtained at no cost by
written request made by the holder of record of this certificate to the
Secretary of the Corporation at the principal executive offices of the
Corporation.
The Corporation is authorized to issue more than one class of stock.
Shareholders may obtain, upon written request and without charge, a
statement of the rights, preferences, privileges, and restrictions
granted to or imposed upon each class or series of shares authorized to
be issued and upon the holders thereof from the principal office of the
Corporation.
4.4 LEGEND REMOVAL. The last sentence of the first paragraph of the
legend referred to in Section 4.3 shall be removed upon termination of this
Agreement in accordance with the provisions of 6.1.
SECTION 5
5.1 ELECTION OF DIRECTORS. At each annual meeting of the Stockholders
and at each special meeting of the Stockholders called for the purpose of
electing directors of the Company, and at any time at which stockholders of the
Company shall have the right to, or shall, vote for directors of the Company,
then, and in each event, the Stockholders hereby agree to attend each meeting in
person or by proxy and hereby agree to vote stock of the Company and Shares of
the Company now owned or hereafter acquired by him, her or it (whether at a
meeting or by written consent in lieu thereof), to fix the number of members of
the Board of Directors of the Company (the "Board") at ten (10) and to elect and
thereafter to continue in office as a Director of the
6
<PAGE>
Company the following: (i) one (1) director shall be a person nominated by Nikko
(who shall initially be Mr. Seiya Miyanishi) (the "Nikko Representative"); (ii)
two (2) directors shall be persons nominated by Seagate (who shall initially be
G. Patrick Bonnie and Donald L. Waite) (the "Seagate Representatives"); (iii)
the Chief Executive Officer of the Company (as long as such person shall serve
in such capacity); (iv) four (4) Directors shall be persons nominated by
Christine B. Whitman ("Whitman") (who shall initially be Robert C. Fink, Andrew
C. Peskoe, James Geater and Victor Mann) (the "Whitman Representatives"); (v)
one (1) director shall be nominated by Global Private Equity III Limited
Partnership (who shall initially be Douglas A. Kingsley) (the "Advent
Representative") and (vi) one (1) director shall be a person nominated by the
Former Commonwealth Stockholders (the "Commonwealth Representative"). Each
holder of Series A Preferred and Common Stock hereby (other than the shares of
Common Stock issued upon conversion of the Series B Preferred or Series C
Preferred and the shares of Common Stock held by the Former Commonwealth
Stockholders) grants his, her or its irrevocable proxy coupled with an interest
to each of Christine Whitman and Nikko, Inc. to vote his, her or its shares of
Series A Preferred and/or Common Stock (other than the shares of Common Stock
issued upon conversion of the Series B Preferred, Series C Preferred or Series D
Preferred and shares of Common Stock held by the Former Commonwealth
Stockholders) on each of the foregoing matters (including the removal of
directors and the filling of vacancies) with respect to which, and for so long
as, Christine Whitman and/or Nikko, Inc. have the right to direct such votes. A
vacancy in any of the directorships to be occupied by a Whitman Representative
shall be filled only by vote or written consent of Whitman; a vacancy in the
directorship to be occupied by the Nikko Representative shall be filled only by
vote or written consent of Nikko; a vacancy in either of the directorships to be
occupied by a Seagate Representative shall be filled only by vote or written
consent of Seagate; a vacancy in the directorship to be occupied by the Advent
Representative shall be filled only by vote or written consent of Advent and a
vacancy in the directorship to be occupied by the Commonwealth Representative
shall be filled only by vote or written consent of the Former Commonwealth
Stockholders. A member of the Board of Directors may not at any time also be a
director of a "Competitor" of the Company shall mean a person who or which is
engaged in a line of business in which the Company is then engaged in or in
which the Company is then actively considering engaging.
5.2 COMPENSATION COMMITTEE. There shall be maintained at all times
during the term of this Agreement, a Compensation Committee of the Board of
Directors (the "Compensation Committee") which shall be comprised of at least
three (3) directors. The Compensation Committee will determine the compensation
of all senior employees and consultants of the Company (including salary, bonus,
equity participation and benefits). The compensation of senior employees and
consultants shall be reviewed by the Compensation Committee on an annual basis,
and the decision by a majority of the members of the Compensation Committee will
control the Committee's actions.
5.3 AUDIT COMMITTEE. There shall be maintained at all times thereafter
during the term of this Agreement, an Audit Committee of the Board of Directors
(the "Audit Committee") which shall be comprised of three (3) directors: one (1)
of whom shall be the Advent Representative. The Audit Committee will determine
the Company's audit policies, review audit reports and recommendations made by
the Company's internal audit staff and its independent
7
<PAGE>
auditors, meet with the Company's independent auditors, oversee the independent
auditors, and recommend the Company's engagement of independent auditors.
5.4 BOARD MEETINGS. The Board of Directors of the Company shall meet at
least four (4) times a year. The Company shall reimburse each of the Directors
for all travel and out-of-pocket expenses incurred by such director in attending
such meetings. In addition to the four (4) meetings of the Board of Directors to
be held annually as described herein, the Company covenants and agrees that it
shall cause each of the Chief Executive Officer and the Chief Financial Officer
of the Company to be available to meet with the Advent Representative either in
person or by telephone upon the reasonable request of the Advent Representative
while the Advent Representative is a member of the Board of Directors.
SECTION 6
MISCELLANEOUS
6.1 TERMINATION. This Agreement shall terminate upon (i) the closing of
the initial firm commitment underwritten public offering of the Common Stock, or
(ii) the occurrence of the merger or consolidation of the Company into, or the
sale of all or substantially all of the Company's assets to another corporation,
unless the stockholders of the Company immediately prior to such merger,
consolidation or sale shall own at least a majority of the voting stock of such
other corporation immediately after such merger, consolidation or sale. With
respect to Section 2 hereof, (i) the rights of any Principal Stockholder (other
than Investor) shall terminate on the date such Principal Stockholder owns
shares constituting less than 5% of the Company's Common Stock on a fully
diluted as converted basis and (ii) with respect to the Investors, their rights
hereunder shall terminate on the date Investors no longer hold shares of Series
D Redeemable Preferred Stock or owns shares constituting less than 5% of the
Company Common Stock on a fully diluted as converted basis.
6.2 ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the full
and entire understanding and agreement between the parties with regard to the
subjects hereof. This Agreement may only be amended or waived by a writing
signed by holders of at least 75% of the shares held by Stockholders on an as
converted basis. Any amendment or waiver effected in accordance with this
Section 6.2 shall be binding upon each Stockholder at the time outstanding
(including securities into which such securities are convertible), each future
holder of all such securities, and the Company. Notwithstanding the foregoing,
any amendment to or waiver of the provisions of Sections 2, 3, 5, 6.1 and 6.2 as
they relate in any respect to the Investors effected in accordance with this
Section 6.2 may not be effected without the prior written consent of the Advent
Representative.
6.3 NOTICE. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, by overnight courier, or otherwise delivered by hand or
by messenger or sent by facsimile and confirmed by mail, addressed (a) if to a
Current Stockholder, at the Current Stockholder's address set forth on EXHIBIT A
attached hereto, or at such other address as the Stockholder shall have
8
<PAGE>
furnished to the Company and the other Current Stockholders in writing, (b) if
to the Company, 525 Lee Road, Rochester, New York 14603, telephone (716)
458-2550, facsimile (716) 458-0424, and addressed to the attention of the
President, with a copy to Dewey Ballantine LLP, 1301 Avenue of the Americas, New
York, New York 10019 (Attention: Frederick W. Kanner, Esq.), telephone: (212)
259-7300, facsimile: (212) 259-7202, (c) to the Investors at the address set
forth on EXHIBIT B attached hereto, with a copy to Hutchins, Wheeler & Dittmar,
A Professional Corporation, 101 Federal Street, Boston, Massachusetts 02110,
Attention: Anthony J. Medaglia, Jr., P.C. and (d) to the Former Commonwealth
Stockholders at the address set forth on EXHIBIT C attached hereto, with a copy
to Hunton & Williams, Riverfront Plaza, East Tower, 951 East Byrd Street,
Richmond, Virginia 23219, Attention: David Wright, Esq. Each of such notice or
other communication shall for all purposes of this Agreement be treated as
effective or having been given when delivered if delivered personally, or, if
sent by mail, at the earlier of its receipt or 72 hours after the same has been
deposited in a regularly maintained receptacle for deposit of the United States
mail as aforesaid, or if sent by FedEx or other reputable overnight carrier, two
days after delivery of such courier.
6.4 SUCCESSORS AND ASSIGNS. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
6.5 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, all of which together shall constitute one instrument, and each of
which may be executed by less than all of the parties to this Agreement.
6.6 SEVERABILITY. In the event that any provision of this Agreement
becomes or declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
6.7 GOVERNING LAW. The Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without giving effect to the
conflicts of laws provisions thereof.
* * * * *
9
<PAGE>
IN WITNESS WHEREOF, this agreement has been duly executed by the
parties hereto as of the date first above written.
THE COMPANY: CVC, INC.
By:
------------------------------------
Name: Christine B. Whitman
Title: President & CEO
CURRENT STOCKHOLDERS:
GLOBAL PRIVATE EQUITY III LIMITED PARTNERS
By: Advent International Limited Partnership, G.P.
By: Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
By: Advent International Limited Partnership, G.P.
By: Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
By: Advent International Limited Partnership, G.P.
By: Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PARTNERS (NA) GTE III LIMITED PARTNERSHIP
By: Advent International Limited Partnership, G.P.
By: Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
ADVENT PARTNERS LIMITED PARTNERSHIP
By: Advent International Limited Partnership, G.P.
B-1
<PAGE>
By: Advent International Corporation, G.P.
By:
------------------------------------
Douglas A. Kingsley, Senior V.P.
By: Advent International
Corporation,
General Partner
By:
Douglas A. Kingsely,
Senior Vice President
------------------------------------
Anne Whitman
------------------------------------
Catherine Whitman
------------------------------------
Bradley Whitman
------------------------------------
Sara Whitman
LIVA & Co.
By:
----------------------------------
Name:
Title:
NIKKO TECNO CO., INC.
By:
----------------------------------
Name:
Title:
------------------------------------
David Pefley
------------------------------------
Diana Pefley
------------------------------------
Christopher Mann
B-2
<PAGE>
------------------------------------
Andrew Peskoe
------------------------------------
Patrick Borelli
------------------------------------
Phillip Chapados, Jt.
------------------------------------
Cecil Davis
------------------------------------
Jeff Dobbs
------------------------------------
Robert Fink
------------------------------------
James Geater
Seagate Technology
By:
----------------------------------
Name:
Title:
------------------------------------
George Heltz
------------------------------------
Jalil Kamali
------------------------------------
Yong Jin Lee
------------------------------------
Victor Mann
B-3
<PAGE>
------------------------------------
Mehrdad Moslehi
------------------------------------
Thomas Omstead
------------------------------------
Julie Peskoe
------------------------------------
Carla Reif
------------------------------------
Peter Schwartz
------------------------------------
Lino Velo
------------------------------------
Christine B. Whitman
------------------------------------
Rhen Zhou
B-4
<PAGE>
THE FORMER COMMONWEALTH STOCKHOLDERS:
B-5
<PAGE>
EXHIBIT A
CURRENT STOCKHOLDERS
Anne Whitman
Catherine Whitman
Bradley Whitman
Sara Whitman
Liva & Co.
NIKKO TECNO CO., INC.
David Pefley
Diana Pefley
Christopher Mann
Andrew Peskoe
Patrick Borelli
Philip Chapados, Jr.
Cecil Davis
Jeff Dobbs
Robert Fink
James Geater
George Heltz
Jalil Kamali
Yong Jin Lee
Victor Mann
Mehrdad Moslehi
Thomas Omstead
Julie Peskoe
Carla Reif
Peter Schwartz
SEAGATE TECHNOLOGY
Lino Velo
Christine B. Whitman
Rhen Zhou
GLOBAL PRIVATE EQUITY III LIMITED PARTNERSHIP
ADVENT PGGM GLOBAL LIMITED PARTNERSHIP
ADVENT PARTNERS GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS (NA) GPE III LIMITED PARTNERSHIP
ADVENT PARTNERS LIMLITED PARTNERSHIP
B-6
<PAGE>
EXHIBIT B
---------
INVESTORS
---------
GLOBAL PRIVATE EQUITY III
LIMITED PARTNERSHIP
ADVENT PGGM
GLOBAL LIMITED PARTNERSHIP
ADVENT PARTNERS GPE III
LIMITED PARTNERSHIP
ADVENT PARTNERS (NA) GPE III
LIMITED PARTNERSHIP
ADVENT PARTNERS
LIMITED PARTNERSHIP
c/o Advent International Corporation
75 State Street
Boston, MA 02109
Attention: Douglas A. Kingsley
B-7
<PAGE>
EXHIBIT C
---------
FORMER COMMONWEALTH STOCKHOLDERS
--------------------------------
B-8
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-1 of our
report dated November 12, 1998, relating to the financial statements of CVC,
Inc. which appear in such Registration Statement. We also consent to the
references to us under the heading "Experts" in such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
September 10, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Vienna, Virginia
September 9, 1999
