<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1999
REGISTRATION NO. 333-38057
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 6
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>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1999
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 $11.00 to $13.00 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 expects to deliver these shares on , 1999.
- --------------------------------------------------------------------------------
LEHMAN BROTHERS
PRUDENTIAL SECURITIES
SG COWEN
WARBURG DILLON READ LLC
, 1999
<PAGE>
[DESCRIPTION OF ARTWORK]
[Back of front cover of prospectus] Across the top of the page is a caption:
"CVC makes the CONNEXION-Registered Trademark-." At top of the shaded square
surrounding the globe is a caption that reads "CVC makes products used in the
manufacturing of." In the center of the page is a graphic of a globe with the
CVC logo in the center and images consisting of, clockwise from the top left
corner of the globe: a photograph of a microprocessor with a caption "Integrated
Circuits;" a photograph of a disk drive with a caption: "Disk Drives;" a
caption: "Radio Frequency Communications Devices;" a photograph of several
microchips with a caption: "Digital Signal Processing;" a photograph of a
cluster of fiber optics with a caption: "Fiber Optic Communications;" and a
caption: "Optical Coatings."
[Inside of front cover foldout section, left panel] In the top right corner
is a paragraph: "CVC's CONNEXION-REGISTERED TRADEMARK- Cluster Tools offer thin
film processing technologies for the data storage and semiconductor industries."
In the top left corner is a photograph of silicon wafers with the caption:
"Patterned Silicon Wafers." In the center left side is a photograph of the
Connexion Metal-Organic Chemical Vapor Deposition process module with a caption:
"CONNEXION-REGISTERED TRADEMARK- process module for barrier and copper
deposition layers." In the bottom left is a photograph of an ion beam etch
cluster tool with a caption: "CONNEXION-Registered Trademark- Cluster Tool with
attached modules that etch layers onto wafers." In the bottom right is a
photograph of a Connexion Metal-Organic Chemical Vapor Deposition process module
with a caption: "Open view of CONNEXION-REGISTERED TRADEMARK- process module,
containing copper coated wafer." In the center right is a photograph of a
Connexion module with a caption: "CONNEXION-REGISTERED TRADEMARK- wafer handler
with six process modules attached." In the center of the page is a photograph of
a circuit chip with a caption: "Silicon Integrated Circuit Chip."
[Inside of front cover foldout section, right panel] In the upper left
corner is a paragraph: "CVC's CONNEXION-Registered Trademark- Cluster Tool
Technology is used in manufacturing of magnetic recording heads for disk drives
and magnetic storage devices." In the center right side is a photograph of a
Connexion giant magnetoresistive multistation process module with the caption:
"CONNEXION-Registered Trademark- multi-target process module." In the bottom
right is a photograph of a hard disk drive with the caption: "Hard Disk Drive".
In the bottom center is a photograph enlargement of the hard disk drive with the
caption: "Recording Head that reads and writes data onto a hard disk contained
in a disk drive."
[Inside of back cover] In the upper left corner is a caption: "CVC Provides
Worldwide Service and Support." Under this caption is the paragraph: "CVC
operates advanced product development, systems engineering, applications
engineering, customer service and technical support centers in New York,
California, Virginia, Texas, Minnesota, Europe and Asia." In the upper right
corner is a photograph of a Connexion central wafer handler with a caption:
"CONNEXION-Registered Trademark- Central Wafer Handler showing wafer transport
robot." In the bottom left corner is a screen photograph from the Connexion
software application with a caption: "an example of CVC Open
CONNEXION-Registered Trademark- Plug and Play software application." In the
right corner is a photograph of a technician next to the Connexion Cluster Tool
with the caption: "CONNEXION-Registered Trademark- 800 Cluster Tool System." In
the center is a graphic depicting both hemispheres with icons labeling CVC's
Worldwide Manufacturing and R&D, Sales & Support Services, and
Distributors/Representatives.
<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...................... 18
</TABLE>
<TABLE>
Business............................. 28
<CAPTION>
PAGE
----
<S> <C>
Management........................... 41
Certain Transactions................. 51
Principal and Selling Stockholders... 52
Description of Capital Stock......... 55
Shares Eligible for Future Sale...... 58
Underwriting......................... 60
Legal Matters........................ 62
Experts.............................. 62
Additional Information............... 62
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 the forward-looking statements contained
herein, including those discussed under the section of this prospectus entitled
"Risk Factors."
CONNEXION-Registered Trademark- and OPTILIN-Registered Trademark- are
registered trademarks of CVC. OPEN CONNEXION-TM-, Millenion-TM- and INFINITY-TM-
are trademarks of CVC.
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 IN CONNECTION WITH THE COMPLETION OF THIS
OFFERING.
OUR BUSINESS
CVC is a worldwide supplier of process equipment used in the manufacture of
magnetic recording heads for disk drives and advanced semiconductor devices for
computers and communications systems. Our equipment either deposits or removes
thin film layers as steps in the process of manufacturing magnetic recording
heads and semiconductor devices. Our customers include most of the leading
manufacturers of magnetic recording heads for the data storage industry such as
Alps, Fujitsu, Headway Technologies, Hitachi Metals, IBM, Read-Rite, Samsung,
Seagate Technology, Sony, TDK and Yamaha, as well as manufacturers of
semiconductor devices, such as Anadigics, Analog Devices, Honeywell, Kodak,
M/A-COM, Viking Tech and Xerox.
The manufacture of magnetic recording heads, which read and write
information onto disk drives, and semiconductor devices requires from tens to
hundreds of processing steps. Both magnetic recording heads and semiconductor
devices are formed by depositing or removing extremely thin, uniform layers of
conducting or insulating films onto surfaces called "substrates" or "wafers."
The need to increase the storage density of disk drives has led to the
development of smaller, more advanced magnetic recording heads with multiple
layers of different materials and surface structures. In order to increase the
performance of semiconductor devices, semiconductor manufacturers are shrinking
the geometries and line widths of integrated circuits, while at the same time
adding multiple layers of insulating or conducting materials. The process of
manufacturing magnetic recording heads and semiconductor devices is constantly
evolving to address the demand for smaller devices with higher performance and
requires advanced process equipment.
Our principal product, the CONNEXION Cluster Tool system, is designed for
the highly uniform, repetitive steps required for the manufacturing of devices
involving multiple thin film layers and a wide range of materials. The CONNEXION
Cluster Tool system allows our customers to attach up to six process modules to
a central substrate handling platform. This architecture provides a controlled
vacuum environment in which multiple steps are performed without exposing the
substrate to outside contamination. We believe that the CONNEXION Cluster Tool
system is well suited for next generation applications involving deposition of
advanced materials like copper. Since 1993, we have shipped more than 100
CONNEXION Cluster Tool systems, including more than 400 process modules.
CVC was incorporated in Delaware 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. Our executive offices are located at
525 Lee Road, Rochester, New York, 14606, and our telephone number is (716)
458-2550.
1
<PAGE>
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................................... 11,492,707 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,
$6.3 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 2,234,040 shares
issuable upon exercise of stock options outstanding as of September 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 1999 assume the acquisition of Commonwealth Scientific
Corporation occurred on October 1, 1998 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>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------------------------------
PRO FORMA
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................. $21,358 $48,378 $62,588 $68,173 $82,915 $101,841
Gross margin.............................. 5,728 14,623 21,302 26,154 32,413 33,989
Income from operations.................... 143 3,376 4,095 2,367 3,706 678
Net income................................ 130 3,179 2,045 264 1,571 62
Net income per share:
Basic................................... $ 0.18 $ 4.32 $ 2.67 $ 0.26 $ 1.01 $ 0.01
Diluted................................. 0.02 0.46 0.29 0.04 0.18 0.01
Weighted average shares outstanding:
Basic................................... 735 735 765 1,021 1,561 8,267
Diluted................................. 5,302 6,914 6,992 7,070 8,589 9,361
</TABLE>
Assuming only the conversion of the outstanding shares of Series A
Convertible Preferred Stock and Series B Convertible Preferred Stock into common
stock, as well as the conversion of the Series C Convertible Preferred Stock
into common stock and into Series D Redeemable Preferred Stock, pro forma basic
earnings per share for the year ended September 30, 1999 was $0.21. Diluted
earnings per share is unchanged from the historical diluted earnings per share
amount presented above.
The following table summarizes our balance sheet as of September 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 $12.00 per share, after deducting the
underwriting discount and estimated offering expenses, and the application of
the estimated net proceeds as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 434 $ 434 $ 8,014
Working capital........................................ 22,104 22,104 39,100
Total assets........................................... 75,917 75,917 83,497
Short-term borrowings and current portion of long-term
debt................................................. 13,217 13,217 3,801
Long-term debt, less current portion................... 8,493 8,493 2,909
Preferred stock...................................... 19,895 10,000 --
Common stockholders' equity.......................... 11,698 21,593 54,173
Total stockholders' equity............................. 31,593 31,593 54,173
</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
- modification or cancellation of customer orders
- the publication of opinions by industry analysts about us, our products or
our competitors
These factors may be 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.
YEAR 2000 PROBLEMS OF OUR CUSTOMERS COULD CAUSE THEM TO DELAY PAYMENT FOR
PRODUCTS THAT WE HAVE SHIPPED TO THEM, WHICH COULD CAUSE OUR REVENUES TO
DECREASE.
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 operating results in the first quarter of fiscal 2000, our
first quarter as a public company.
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 is primarily due to customer order patterns and the length of our
production cycle. This concentration increases the risk of shipment delays and,
consequently, the risk that quarterly revenue expectations will not be met. Our
revenues for a particular period could be materially reduced if an anticipated
order for even one system is not received in time to permit shipment during that
period. In addition, a significant portion of our expenses is 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 is 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.
4
<PAGE>
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,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Data Storage........................................ 88% 77% 85%
Semiconductor....................................... 9% 21% 9%
</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 materially
reduced 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 could
be harmed 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 the loss of Seagate
Technology in particular, could result in a material decrease in our revenues.
The following table sets forth the percentage of our total revenues derived
from sales to our five largest customers, as well as Seagate Technology on a
stand-alone basis, for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Five Largest Customers.............................. 79% 71% 79%
Seagate Technology.................................. 47% 31% 34%
</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. Our sales to specific customers tend to vary
significantly from year to year depending upon our 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
harm our business. If any of these large manufacturers discontinues its
relationship with us or suffers economic downturns, our operating results could
suffer.
5
<PAGE>
IF WE DO NOT RESPOND EFFECTIVELY AND ON A TIMELY BASIS TO RAPID TECHNOLOGICAL
CHANGE, OUR ABILITY TO ATTRACT AND MAINTAIN CUSTOMERS COULD BE DIMINISHED.
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
adversely impact 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 new products.
New product development, as well as the introduction of new products, may also
require us to increase our research and development and marketing expenditures.
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
- 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 magnetic recording heads and semiconductor devices. We believe
that continued future growth depends in large part upon
6
<PAGE>
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,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
CONNEXION Cluster Tool system....................... 85% 83% 71%
</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 continually enhance the CONNEXION Cluster Tool system, the
future marketplace acceptance of that product could be diminished. 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 harmed.
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 DIMINISHED.
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.
Currently, we expect that in fiscal 2000, approximately 20% of our research and
development budget will be dedicated to the development of our copper deposition
technology. 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 and 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 commercial success in our pursuit of
copper-based technology for the semiconductor industry, our long-term growth
prospects could be diminished.
SALES TO INTERNATIONAL MARKETS CONSTITUTE A SIGNIFICANT AND GROWING PORTION OF
OUR TOTAL REVENUES. OUR OPERATING RESULTS COULD BE HARMED BY ECONOMIC DOWNTURNS
IN FOREIGN MARKETS AND OUR DEPENDENCE ON INTERNATIONAL SALES REPRESENTATIVES.
An increasing portion of our revenues in recent years has been derived from
sales in international markets. International sales are subject to various
risks.
7
<PAGE>
The following table sets forth for the periods indicated the percentage of
our total revenues derived from sales to customers located outside of the United
States:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Non-U.S. Customers.................................... 31% 38% 53%
</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, these 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 our
sales, damage our reputation and adversely impact our business.
THE LOSS OF ANY OF OUR KEY PERSONNEL COULD ADVERSELY IMPACT OUR ABILITY TO MEET
CUSTOMER AND TECHNOLOGICAL DEMANDS.
Because of our small size and our need for employees with both executive and
advanced technical skills, we depend in significant part upon the continued
contributions of our officers and key personnel. Our key personnel are critical
to our success, and many of them would be difficult to replace. Many of our
employees are not bound by long-term employment or noncompetition agreements,
and competitors in the high technology industry in which we compete may attempt
to recruit them. The loss of our officers or other key personnel could cause our
business to suffer.
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. The market for personnel with these skills 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 harm our business.
8
<PAGE>
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
reduce the revenues of the combined enterprise, or cause the financial condition
and operating results of the combined enterprise to suffer. If we are not able
to successfully integrate Commonwealth and its services and products into our
operations, our business could be harmed.
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. 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 litigation of
this type, 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 negative impact on our business. Adverse determinations in
that litigation could:
- result in our loss of proprietary rights
- subject us to significant liabilities, including treble damages in some
instances
- 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 harm our business.
9
<PAGE>
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 September 30, 1999,
we had obtained 16 U.S. patents and had 29 U.S. patent applications pending. In
addition, we had obtained two foreign patents from the United Kingdom and had 13
foreign patent applications pending on our 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 patents may afford less protection under foreign law
than is available under U.S. 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
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
components included in our systems could adversely impact our sales or our
ability to attract and maintain customers.
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.
We have identified the following risks you should be aware of:
- we cannot be certain that the entities on whom we rely for 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
10
<PAGE>
- although we have made efforts to notify our customers who have purchased
potential non-compliant products, we cannot be sure that customers who
purchased these products will not assert claims against us alleging that
these products should have been Year 2000 compliant at the time of
purchase, which could result in costly litigation and divert management's
attention
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 cause a significant disruption of our business.
OUR STOCK PRICE MAY BE VOLATILE DUE TO THE LACK OF A PRIOR PUBLIC MARKET FOR OUR
STOCK AND THE FACT THAT WE OPERATE IN SEVERAL HIGH-TECHNOLOGY INDUSTRIES.
There has not been a public market for our common stock. We cannot predict
the extent to which investor interest in us 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 us, 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
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 harm 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 61% 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 our
largest stockholder and one of its representatives is a member of our board of
directors. Following completion of this offering, Seagate Technology will own
2,428,313 shares representing approximately 21% of our 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 our
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 matters of the kind described above.
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
11
<PAGE>
factors also could make it more difficult for us to raise funds through future
offerings of common stock.
There will be 11,492,707 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 7,992,707 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 7,218,197 shares of common stock will
also have registration rights allowing them to cause us to register their shares
under the Securities Act.
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 $32.6 million.
This is based on an assumed initial public offering price of $12.00 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 borrowings 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 October 2000 with an interest rate
at 8%; (4) a term loan which matures April 2005 with an interest rate of 8.39%
and (5) 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%. In addition, we
intend to use approximately $10.0 million to redeem the Series D Redeemable
Preferred Stock, approximately $6.3 million for capital expenditures, including
demonstration tools and equipment and expansion and improvement of existing
facilities, and the balance of the net proceeds will be used for general
corporate purposes. Pending such uses, our net proceeds from this offering will
be invested in short-term, interest-bearing, investment grade securities. The
Series D Redeemable Preferred Stock is held by Advent International Corporation.
Advent is one of our major stockholders and a representative of Advent is a
member of our Board of Directors.
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 operating
results, (2) capital requirements and (3) restrictions in loan agreements.
12
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 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 $12.00 per share
after deducting the underwriting discount and estimated offering expenses,
the repayment of approximately $15.0 million of debt, of which
approximately $12.3 million relates to debt outstanding as of
September 30, 1999, and the redemption of all outstanding shares of
Series D Redeemable Preferred Stock for $10.0 million.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term borrowings and current portion of long-term
debt...................................................... $13,217 $13,217 $ 3,801
Long-term debt, less current portion........................ 8,493 8,493 2,909
Stockholders' equity:
Preferred stock, $0.01 par value, 502,500 shares
authorized; shares issued and outstanding:
Series C, $0.01 par value; 200,000 shares authorized and
100,000 shares issued 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; 100,000 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; 2,360,767 shares issued and outstanding,
actual; 8,492,707 shares issued and outstanding, pro
forma; 11,492,707 shares issued and outstanding, pro
forma as adjusted....................................... 24 85 115
Additional paid-in capital................................ 9,305 19,139 51,689
Warrant................................................... 14 -- --
Unamortized deferred compensation......................... (135) (135) (135)
Retained earnings......................................... 2,784 2,798 2,798
Minimum pension liability................................. (294) (294) (294)
------- ------- -------
Total stockholders' equity.............................. 31,593 31,593 54,173
------- ------- -------
Total capitalization.................................... $53,303 $53,303 $60,883
======= ======= =======
</TABLE>
Common stock to be outstanding after the offering excludes 2,234,040 shares
issuable upon exercise of stock options outstanding as of September 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.
13
<PAGE>
DILUTION
The pro forma net tangible book value of the common stock as of
September 30, 1999 was $30,445,000, or $3.59 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 6,131,940 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 $12.00 per share, and after deducting the underwriting discount and
estimated expenses of the offering, the adjusted pro forma net tangible book
value at September 30, 1999 would have been $63,025,000, or $5.48 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 September 30, 1999. The offering will result in an increase in
pro forma net tangible book value per share of $1.89 to existing stockholders
and an immediate and substantial dilution of $6.52 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
$12.00 per share. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $ 12.00
Pro forma net tangible book value per share at September
30, 1999................................................ $ 3.59
Increase attributable to sale of common stock in the
offering (1)............................................ 1.89
--------
Pro forma net tangible book value per share after the
offering.................................................. 5.48
--------
Dilution to persons who purchase shares in the offering..... $ 6.52
========
</TABLE>
- ------------------------
(1) After deduction of the underwriting discount and estimated offering expenses
totaling $3,420,000.
The following table summarizes, on a pro forma basis as of September 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 $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
--------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- -------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)................ 8,492,707 73.9% $ 8,557,634 19.2% $ 1.01
New investors............................ 3,000,000 26.1 36,000,000 80.8% 12.00
---------- ----- ----------- ===== ------
Total.................................. 11,492,707 100.0% $44,557,634 100.0%
</TABLE>
- ------------------------
(1) The sale by the selling stockholders in the offering will reduce the number
of shares held by existing stockholders to 7,992,707 shares, or 70% of the
total number of shares of common stock to be outstanding after the offering
and will increase the number of shares held by the new investors to
3,500,000 shares, or 30% 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 September 30, 1999. At September 30, 1999, an aggregate of 2,234,040
shares of common stock were issuable upon the exercise of outstanding options at
a weighted average exercise price of $3.62 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.
14
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data of CVC set forth below as of
September 30, 1998 and 1999 and for each of the years ended September 30, 1997,
1998 and 1999 are derived from CVC's audited consolidated financial statements,
which appear elsewhere in this prospectus. The selected consolidated financial
data as of September 30, 1995, 1996, and 1997 and for each of the years ended
September 30, 1995 and 1996 have been derived from audited consolidated
financial statements of CVC not included in this prospectus. The pro forma
September 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>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues.................................................... $21,358 $48,378 $62,588 $68,173 $82,915
Cost of goods sold.......................................... 15,630 33,755 41,286 42,019 50,502
------- ------- ------- ------- -------
Gross margin................................................ 5,728 14,623 21,302 26,154 32,413
Operating expenses:
Research and development.................................. 1,214 4,346 9,055 12,615 12,630
Sales and marketing....................................... 2,924 4,777 5,613 7,696 10,081
General and administrative................................ 1,447 2,124 2,539 3,476 4,822
In-process R&D write-off.................................. -- -- -- -- 1,174
------- ------- ------- ------- -------
Total..................................................... 5,585 11,247 17,207 23,787 28,707
Income from operations...................................... 143 3,376 4,095 2,367 3,706
Interest and other, net..................................... (559) (197) (593) (1,154) (198)
Write-off of deferred charges............................... -- -- -- (675) --
------- ------- ------- ------- -------
Income (loss) before income taxes........................... (416) 3,179 3,502 538 3,508
Income taxes (benefit)...................................... (546) -- 1,457 274 1,937
------- ------- ------- ------- -------
Net income.................................................. $ 130 $ 3,179 $ 2,045 $ 264 $ 1,571
======= ======= ======= ======= =======
Net income per share:
Basic..................................................... $ 0.18 $ 4.32 $ 2.67 $ 0.26 $ 1.01
Diluted................................................... 0.02 0.46 0.29 0.04 0.18
Weighted average shares outstanding:
Basic..................................................... 735 735 765 1,021 1,561
Diluted................................................... 5,302 6,914 6,992 7,070 8,589
</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, basic pro forma earnings per share for
the year ended September 30, 1999 was $0.21. Diluted earnings per share is
unchanged from the historical diluted earnings per share amount.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
-----------------------------------------------------------------
PRO FORMA
1995 1996 1997 1998 1999 1999
-------- -------- -------- -------- -------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 3,157 $ 730 $ 2,161 $ 106 $ 434 $ 434
Working capital............................................. 5,429 8,816 9,259 10,904 22,104 22,104
Total assets................................................ 23,554 31,837 43,833 42,764 75,917 75,917
Short term borrowings and current portion of long-term
debt...................................................... 188 894 2,295 5,689 13,217 13,217
Long-term debt, less current portion........................ 3,528 5,635 5,309 11,379 8,493 8,493
Preferred stock........................................... 10,040 10,040 10,040 10,040 19,895 10,000
Common stockholders' equity (deficit)..................... (3,857) (721) 1,388 1,940 11,698 21,593
Total stockholders' equity.................................. 6,183 9,319 11,428 11,980 31,593 31,593
</TABLE>
15
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
The following unaudited pro forma statements of operations for the year
ended September 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, 1998. The Commonwealth statements
of operations have been modified to conform to CVC's fiscal year end by
combining the quarterly operating results for the quarters ended December 31,
1998 and March 31, 1999 with the interim results for the period April 1 to
May 9, 1999. 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 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 to in-process research and development, due to its one-time
nature;
- Amortization of goodwill and other intangibles over periods ranging from
five to seven years; and
- Decrease in income taxes related to adjustments.
Amounts are in thousands, except for per share data.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, 1999
----------------------------------------------------
CVC COMMONWEALTH ADJUSTMENTS COMBINED
-------- ------------ ----------- --------
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues...................................... $82,915 $ 18,926 $ -- $101,841
Cost of goods sold............................ 50,502 17,350 -- 67,852
------- -------- --------- --------
Gross margin.................................. 32,413 1,576 -- 33,989
Operating expenses............................ 27,482 6,538 (840) 33,180
In-process R&D write-off...................... 1,174 -- (1,174) --
Goodwill and intangibles amortization......... 51 -- 80 131
------- -------- --------- --------
Total operating expenses.................... 28,707 6,538 (1,934) 33,311
------- -------- --------- --------
Income (loss) from operations................. 3,706 (4,962) 1,934 678
Interest and other, net....................... (198) (305) -- (503)
------- -------- --------- --------
Income (loss) before income taxes............. 3,508 (5,267) 1,934 175
Income taxes (benefit)........................ 1,937 (1,488) (336) 113
------- -------- --------- --------
Net income (loss)............................. $ 1,571 $ (3,779) $ 2,270 $ 62
======= ======== ========= ========
Net income per share:
Basic....................................... $ 1.01 $ 0.03
Diluted..................................... 0.18 0.01
Weighted average shares outstanding:
Basic....................................... 1,561 772 2,333
Diluted..................................... 8,589 772 9,361
</TABLE>
16
<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 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 worldwide supplier of process equipment used in the manufacture of
magnetic recording 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 71% in fiscal 1999, 83% in fiscal 1998 and 85% in
fiscal 1997 of CVC's total revenue. 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, ion
beam 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 fiscal 1999,
fiscal 1998 and fiscal 1997, 85%, 77% and 88% of CVC's revenue was derived from
sales made to manufacturers of magnetic recording heads and 9%, 21%, and 9% 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 fiscal 1999, were Seagate, IBM, TDK and Alps, all of whom
manufacture magnetic recording heads. CVC expects that these customers will
continue to account for a significant portion of CVC's fiscal 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,
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.
International sales accounted for 53%, 38% and 31% of our total revenues in
fiscal 1999, fiscal 1998 and fiscal 1997. CVC expects that international sales
will continue to account for a significant
17
<PAGE>
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, currency changes 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 recording 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 the following items in CVC's consolidated statement of operations
data.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Revenues.................................................... 100.0% 100.0% 100.0%
Cost of goods sold.......................................... 66.0 61.6 60.9
----- ----- -----
Gross margin................................................ 34.0 38.4 39.1
Operating expenses
Research and development.................................. 14.5 18.5 15.2
Sales and marketing....................................... 9.0 11.3 12.2
General and administrative................................ 4.0 5.1 5.8
In-process R&D write-off.................................. -- -- 1.4
----- ----- -----
Total..................................................... 27.5 34.9 34.6
Income from operations...................................... 6.5 3.5 4.5
Interest and other, net..................................... (0.9) (1.7) (0.3)
Write-off of deferred charges............................... -- (1.0) --
----- ----- -----
Income before income taxes.................................. 5.6 0.8 4.2
Income taxes................................................ 2.3 0.4 2.3
----- ----- -----
Net income.................................................. 3.3 0.4 1.9
===== ===== =====
</TABLE>
YEAR ENDED SEPTEMBER 30, 1999 COMPARED TO YEAR ENDED SEPTEMBER 30, 1998
REVENUES. Revenues increased 21.6% to $82.9 million for the year ended
September 30, 1999 from $68.2 million for the year ended September 30, 1998. The
increase is primarily attributable to additional sales resulting from the
Commonwealth acquisition of $13.3 million and increased sales to data storage
customers of $7.0 million, which offset lower sales of CVC's systems to
semiconductor customers of $7.0 million. CVC believes that the decrease in sales
to semiconductor customers reflected residual effects of the semiconductor
market downturn in 1998.
GROSS MARGIN. Gross margin increased to 39.1% of revenues for the year
ended September 30, 1999 from 38.4% for the year ended September 30, 1998. Gross
margin contribution in fiscal 1999 was affected by the lower margins of 30.9% on
sales of the product lines from the Commonwealth
18
<PAGE>
acquisition. Gross margins excluding the impact of the Commonwealth acquisition
product lines would have been 40.7%. The lower gross margins in fiscal 1998
reflect the higher percentage of new system sales to semiconductor customers,
which usually have lower margins.
RESEARCH AND DEVELOPMENT. Research and development expenses were unchanged
at $12.6 million for fiscal 1999 compared to fiscal 1998. As a percentage of
revenues, research and development expenses decreased to 15.2% for fiscal 1999
compared to 18.5% for fiscal 1998. The higher relative expenditure level in
fiscal 1998 is primarily attributable to material expenses of $0.9 million
associated with the completion of a government contract. Expenses in fiscal 1999
reflect additional research and development expenses of $1.3 million from the
acquisition of Commonwealth, higher depreciation expense of $1.1 million due to
additional capitalization of demonstration tools, partially offset by lower
personnel costs of $0.9 million and lower material costs of $0.2 million related
to internal development projects. Although fiscal 1999 expenditure levels were
unchanged compared to fiscal 1998, CVC believes that research and development
expenditures are essential to maintaining its competitive position in the data
storage and semiconductor markets and expects these expenditure levels to
increase in absolute dollars for the foreseeable future.
SALES AND MARKETING. Sales and marketing expenses increased by 31.0% to
$10.1 million for fiscal 1999 from $7.7 million for fiscal 1998. As a percentage
of revenues, sales and marketing expenses increased to 12.2% for fiscal 1999
from 11.3% for fiscal 1998. The increase is attributable to the addition of
personnel and their related expenses of $1.6 million as a result of the
Commonwealth acquisition, additional personnel and related expenses in field
service of $0.6 million to support CVC's expanded product offering and customer
base, and increased expenses of $0.4 million for product demonstrations.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
38.7% to $4.8 million for fiscal 1999 from $3.5 million for fiscal 1998. As a
percentage of revenues, administrative expenses were 5.8% for fiscal 1999, and
5.1% for fiscal 1998. The increase in general and administrative expenses
reflects additional administration expenses of $0.5 million due to the
Commonwealth acquisition, as well as additional accruals for doubtful accounts
of $0.3 million, and other accruals for post-employment and pension benefits of
$0.2 million.
IN-PROCESS R&D WRITE-OFF. During fiscal 1999, as part of the purchase of
Commonwealth, the value assigned to research expenditures on products in the
development stage which have not reached technological feasibility and for which
there is no alternative future use were written off in accordance with
applicable accounting rules. This write-off amounted to approximately
$1.2 million.
The in-process technology acquired from Commonwealth consists of four
technology groupings: ion source products, etch modules, deposition modules, and
dielectric deposition modules, which have assigned values of $0.2 million,
$0.5 million, $0.3 million and $0.2 million. Descriptions of these groupings are
as follows:
- Ion source products, including both ion sources and power supplies, are
being designed for use in applications that include etching, deposition,
surface modification, and ion assist.
- The etch modules are being designed to support the market requirements for
ion beam processing applications.
- The deposition modules are being designed to support very thin metallic
film through ion beam sputter deposition of target materials.
- The dielectric deposition modules are being designed to support very thin
dielectric film through ion beam sputter deposition of target materials.
19
<PAGE>
As of the date of acquisition, $4.5 million had been expended to develop
these R&D projects. The estimated cost to complete these projects is
approximately $2.9 million, to be incurred through fiscal 2000.
There is a risk associated with the completion of the R&D projects, and CVC
cannot assure that any of the projects will have technological and commercial
success without the successful completion of the remaining R&D efforts on the
acquired in-process technologies. Without the successful completion of the
remaining R&D efforts, CVC would not realize the future revenues and profits
attributed to the acquired R&D. CVC believes, however, that the failure of any
particular in-process R&D project would not materially impact CVC's financial
position or operating results.
At September 30, 1999, the estimated development completion dates and costs
of the in-process R&D projects acquired from Commonwealth are consistent with
the estimates made at the acquisition date.
INTEREST AND OTHER, NET. Interest and other, net decreased to $0.2 million
for fiscal 1999 from the $1.2 million for fiscal 1998. The decrease in interest
and other, net primarily reflects reduced interest expense of $0.1 million due
to the reduction of borrowings with the proceeds from the sale of preferred
stock in December 1998, a one-time gain of $0.4 million associated with the sale
of two non-core product lines and a one-time lawsuit settlement of $0.5 million
for infringement by a third party of a CVC patent.
INCOME TAXES. Income tax expense for fiscal 1999 amounted to $1.9 million
compared to $0.3 million for fiscal 1998. The effective tax rate for fiscal 1999
was 55.2% compared to the effective rate of 50.9% for fiscal 1998. The increase
is the result of the non-deductible in-process R&D write-off.
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 primarily attributable
to increased systems sales of $7.4 million and spare sales of $0.9 million to
new semiconductor customers. The majority of this increased volume was to new
customers placing their initial system order. Partially offsetting these
increases was decreased system sales to data storage customers by $5.0 million
as demand decreased due to a general downturn in the industry.
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 at 57% and enhancements at
64%.
RESEARCH AND DEVELOPMENT. Research and development expenses increased 39.3%
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 of $0.3 million, increased
personnel costs due to the hiring of engineers in the fourth quarter 1997 to
support the expanded demonstration program and new development projects of $1.5
million, increased depreciation of $0.6 million as well as expenses related to
government contracts of $0.5 million.
SALES AND MARKETING. Sales and marketing expenses increased 37.1% 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 of $0.5 million, the addition of
field service personnel of $0.8 million, increased trade show and advertising
expense of $0.3 million, and higher commissions resulting from increased system
sales of $0.1 million.
20
<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
36.9% 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 of $0.4 million, an increase of $0.2 million in consulting services
directly related to the implementation of a new computer system and an increase
of $0.1 million in depreciation for computer systems installed in fiscal 1998
and fiscal 1997.
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, CVC determined to suspend efforts to complete the public offering
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. 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.
21
<PAGE>
QUARTERLY OPERATING RESULTS
The following tables set forth CVC's operating results for each of the eight
quarters ended September 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>
DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS:
Revenues.................................. $19,346 $20,529 $14,400 $13,898 $14,655 $17,788 $23,352 $27,120
Cost of goods sold........................ 12,307 13,108 8,265 8,339 8,249 10,983 14,934 16,336
------- ------- ------- ------- ------- ------- ------- -------
Gross margin.............................. 7,039 7,421 6,135 5,559 6,406 6,805 8,418 10,784
Operating expenses
Research and development................ 2,867 4,009 2,968 2,771 2,439 2,546 3,504 4,141
Sales and marketing..................... 1,885 1,913 1,620 2,278 1,930 1,832 2,633 3,686
General and administrative.............. 1,028 865 1,006 577 812 902 1,238 1,870
In-process R&D write-off................ -- -- -- -- -- -- 1,174 --
------- ------- ------- ------- ------- ------- ------- -------
Total................................... 5,780 6,787 5,594 5,626 5,181 5,280 8,549 9,697
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations............. 1,259 634 541 (67) 1,225 1,525 (131) 1,087
Interest and other, net................... (211) (305) (414) (224) (326) 190 (220) 158
Write-off of deferred charges............. -- -- -- (675) -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes......... 1,048 329 127 (966) 899 1,715 (351) 1,245
Income taxes (benefit).................... 436 137 53 (352) 419 757 348 413
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)......................... $ 612 $ 192 $ 74 $ (614) $ 480 $ 958 $ (699) $ 832
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
DEC 31, MAR 31, JUNE 30, SEPT 30, DEC 31, MAR 31, JUNE 30, SEPT 30,
1997 1998 1998 1998 1998 1999 1999 1999
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PERCENTAGE OF REVENUE:
Revenues.................................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross margin.............................. 36.4 36.1 42.6 40.0 43.7 38.3 36.0 39.8
Operating expenses
Research and development................ 14.8 19.5 20.6 19.9 16.6 14.3 15.0 15.3
Sales and marketing..................... 9.8 9.3 11.2 16.4 13.2 10.3 11.3 13.6
General and administrative.............. 5.3 4.2 7.0 4.2 5.5 5.1 5.3 6.9
In-process R&D write-off................ -- -- -- -- -- -- 5.0 --
------ ------ ------ ------ ------ ------ ------ ------
Total................................... 29.9 33.0 38.8 40.5 35.3 29.7 36.6 35.8
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from operations............. 6.5 3.1 3.8 (0.5) 8.4 8.6 (0.6) 4.0
Interest and other, net................... (1.1) (1.5) (2.9) (1.6) (2.2) 1.1 (0.9) 0.6
Write-off of deferred charges............. -- -- -- (4.9) -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss)......................... 3.2% 0.9% 0.5% (4.4%) 3.3% 5.4% (3.0%) 3.1%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
CVC's quarterly and annual operating results are affected by a wide variety
of factors that could materially and adversely affect revenues 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
- introduction of new products by our customers
22
<PAGE>
- 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 third and
fourth quarters 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 fourth
quarter of fiscal 1998 due to an increase in advertising, customer
demonstrations and exhibits expense. Sales and marketing as a percentage of
sales increased during the fourth quarter of fiscal 1999 due to an increase in
distribution commisions, employee relocation and customer service expenses
associated with the integration of Commonwealth. General and administrative
expenses as a percentage of sales increased during the fourth quarter of fiscal
1999 due to an increase in allowances for bad debt, accounting fees and business
system implementation all associated with the integration of Commonwealth.
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
September 30, 1999, CVC had working capital of $22.1 million, including cash and
cash equivalents of $0.4 million, compared to working capital of $10.9 million
and $9.3 million at September 30, 1998 and 1997. Operating activities in fiscal
1999 used cash flow of $4.8 million, as compared with fiscal 1998 in which
operating activities used cash of $6.9 million and fiscal 1997 in which
operating activities provided cash of $3.1 million. In fiscal 1999, increased
accounts receivable and reduced customer advances used cash of $12.0 million and
$2.4 million, respectively, and were partially offset by increased depreciation
of $4.2 million, increased net income of $1.6 million reduced inventories of
$1.4 million, in process R&D write-off of $1.2 million, increased accounts
payable of $0.7 million, and decreased other assets of $0.5 million. The
significant increase in the use of cash for accounts receivables from 1998 to
1999 is due to the increased fourth quarter revenue year over year from
$13.9 million to $27.1 million. The use of cash in operating activities in
fiscal 1998 was a direct result of a $7.5 million decrease in advances from
customers generally attributable to lower order rates from customers, and a
$2.8 million 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
23
<PAGE>
overall inventory level reductions. Of the cash provided from operating
activities in 1997, net income provided $2.0 million, depreciation and
amortization another $1.3 million, and increases in accounts payable, advances
from customers, and other liabilities provided $4.6 million, $3.0 million and
$1.3 million, respectively. Increases in accounts receivable and inventories
used $3.4 million and $5.8 million of operating cash flow in 1997.
In fiscal 1999, 1998 and 1997, CVC invested $4.0 million, $6.6 million and
$2.8 million, respectively, in capital expenditures. The capital expenditures
were primarily for facilities, machinery and equipment, computers and related
equipment, and demonstration system tools. CVC 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.
As of September 30, 1999, CVC's principal source of liquidity consisted of a
$15.0 million line of credit under a demand line and term loan agreement, under
which there were $10.7 million in borrowings. As of the end of the third quarter
in fiscal 1999, CVC was not in compliance with one financial test relating to
minimum backlog levels to be met under the agreement and thus, CVC was in
technical default of the agreement. The lender has waived in writing its rights
regarding prior lack of compliance and, as of September 30, 1999, CVC was in
compliance with all covenants in this agreement. Borrowings associated with term
loans from a commercial bank as of September 30, 1999 amounted to $8.0 million.
One of these loans 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 available an equipment line of credit at
September 30, 1999 which allows for maximum borrowings of $3.0 million.
Borrowings under the agreement are at an interest rate of prime. There are no
amounts outstanding under the equipment line of credit at September 30, 1999.
CVC 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 fixed or variable interest rate
alternatives.
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 $6.3 million for capital
expenditures relating to facility expansion and manufacturing and demonstration
equipment, $15.0 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 this offering, together with borrowings and cash flow from
operations. To the extent that these 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
24
<PAGE>
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.
In order to upgrade its overall business systems' hardware and software and
to enable those systems to properly use dates beyond December 31, 1999, CVC
installed a new business system in May 1999 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 believes it has identified those systems and
laptops which require upgrade or replacement. CVC currently expects that these
remediation efforts will be complete in November 1999. CVC believes that with
these and other modifications or replacements of its business systems' existing
software and, in some cases, hardware, its computer programs should be able to
continue to operate effectively after December 31, 1999. However, if these
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. With respect to its facilities and technical support systems such as
security, voice mail and phone systems, CVC has contacted its suppliers of those
systems and suppliers have informed CVC that the non-information technology
systems they provide to CVC are Year 2000 compliant.
CVC also relies directly and indirectly on the 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 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 in 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 has warranted that all of its products shipped after June 1999 are Year
2000 ready. The Company believes that, based on internal testing, these products
are Year 2000 ready and therefore any remediation expense with respect to these
products will be minimal. Some of CVC's products shipped before June 1999 may
require upgrades to be Year 2000 ready. Although these products were not
warranted by CVC to be Year 2000 ready, CVC has offered to provide the necessary
upgrades to customers who use these products. A substantial majority of these
customers have accepted or requested the upgrades. Although in general CVC
charges a fee for upgrading products that it shipped prior to June 1999, it has
not charged all customers for these upgrades. The Company does not believe that
the costs it may incur in providing all upgrades requested by its customers will
be material. 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 these kinds of malfunctions, which could have a material adverse effect on
CVC's business, results of operations or financial condition. CVC has worked
with its customers to plan for any impact the Year 2000 has on its customers'
businesses as it relates to CVC products used by its customers. In general,
however, CVC has not taken efforts to determine whether its customers'
businesses as a whole are Year 2000 ready. If
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our customers' businesses are negatively impacted by their failure to be Year
2000 ready as a whole, our business may be harmed.
CVC has formulated a Year 2000 contingency plan. CVC's reasonably likely
worst case scenario with respect to the Year 2000 issue would be disruption of
its internal operating systems, particularly its accounting and billing systems.
A disruption of this type may adversely impact CVC's business by creating a
delay in payment by our customers and a corresponding increase in CVC's accounts
receivable. We may also be required to purchase alternative hardware and
software systems, incurring additional costs and suffering additional delays
associated with implementing new systems. While we are confident we would be
able to remediate these problems, the delays associated with remediation would
harm our business. CVC cannot be certain, however, 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
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", which
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption had no impact on the Company's net income
or stockholders' equity. SFAS No. 130 requires changes to the minimum pension
liability, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS No.
130.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (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 CVC's fiscal year 2000 financial statements and CVC does not
expect its adoption to have a material effect on its financial condition or
results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The new standard
establishes accounting and reporting standards for derivative instruments,
including types of derivative instruments embedded in other contracts, and for
hedging activities. SFAS No. 133 is effective for all quarters of fiscal years
beginning after June 15, 2000. CVC does not expect SFAS No. 133 to have a
material effect on its financial condition or results of operations.
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<PAGE>
BUSINESS
INTRODUCTION
CVC is a worldwide supplier of process equipment used in the manufacture of
magnetic recording heads for disk drives and advanced semiconductor devices for
computers and communications equipment. Our equipment either deposits or removes
thin film layers as steps in the process of manufacturing magnetic recording
heads and semiconductor devices. Since 1993, we have shipped more than 100
CONNEXION Cluster Tool systems, including more than 400 process modules. Our
customers include many of the leading manufacturers of magnetic recording heads
for the data storage industry such as Alps, Fujitsu, IBM, Read-Rite, Seagate
Technology, TDK and Yamaha, as well as manufacturers of semiconductor devices
such as 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 growth in areal density, or storage capacity, has been facilitated by
the evolution of recording head manufacturing technology from IR, or inductive
recording heads, to MR, or magnetoresistive heads, to the more recent
introduction of giant magnetoresistive heads, or GMR heads.
According to TrendFocus, giant magnetoresistive head shipments are expected
to increase from 0.4 billion units in 1999 to 1.2 billion units in 2002, while
the shipment of magnetoresistive heads are expected to decrease from
0.5 billion units in 1999 to limited shipments by 2002. The disk drive
industry's expected growth and transition to technologically advanced recording
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.
Magnetic recording heads are manufactured using various thin film deposition
and etch processes, which provide magnetic, conductive and insulating
properties. More advanced 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 more advanced
technologies 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. Semiconductor devices that utilize exotic substrates, such as Gallium
Arsenide, or GaAs, are more difficult to produce due to 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, 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.
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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 $200 million in 1999 to $700 million in 2003.
SUBSTRATE PROCESSING
The manufacture of magnetic recording 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 application of
materials to a wafer, known as deposition, involves the building up of extremely
thin films of electrically insulating or 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 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 recording 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 worldwide supplier of process equipment for the data storage and
semiconductor industries. CVC provides thin film deposition and etching
equipment based on a central substrate-handling platform to which a series of
interchangeable process modules can be connected. CVC's process equipment
incorporate its expertise in:
- the deposition and removal of multiple thin film materials in a vacuum
environment;
- advanced physics and material science;
- engineering of microelectronic and atomic components; and
- proprietary software that controls the deposition and etching processes.
CVC's products are designed 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 CONNEXION Cluster Tool system is a modular system with stations for
connecting up to six modules around a central substrate-handling platform. Each
module performs a different manufacturing process on the substrate. CVC's
CONNEXION Cluster Tool system enables the
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integration of modules supplied by either CVC or third-parties. CVC currently
offers a wide range of advanced process modules for deposition and etching of
thin film layers. The CONNEXION Cluster Tool, combined with a wide range of
process modules, helps to create highly uniform devices through the integration
of various processes in a vacuum controlled environment. CVC's integrated,
modular-based systems provide functional flexibility that enables data storage
and semiconductor manufacturers to quickly transition to new process
technologies, improve time-to-market of higher performance products and improve
manufacturing yields.
STRATEGY
CVC's objective is to enhance its position as a worldwide developer of thin
film processing technologies for the data storage and semiconductor industries.
Key elements of CVC's strategy include:
MAINTAIN TECHNOLOGICAL EXPERTISE IN THE DATA STORAGE INDUSTRY. Since 1990,
CVC has focused on the development of integrated thin film process technologies
that are part of the manufacturing process 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 400 process modules. CVC intends to continue
to combine its expertise in the processing of thin films with the 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 EXPERTISE 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, advanced storage devices and optical
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 a module that enables deposition of both
barrier and copper layers in an integrated system. CVC has delivered a
developmental integrated copper and barrier deposition system to one of its
strategic customers and intends to continue to develop solutions to meet the
requirements of emerging advanced interconnect technologies.
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 53 full-time employees and a research development group consisting of 103
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 CVC'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
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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 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, CVC 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 provides some of the processes required to manufacture
magnetic recording heads and semiconductor devices. 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 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 400 process modules. The diagrams
below illustrate overhead views of 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.
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 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.
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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>
<S> <C> <C> <C>
DATA STORAGE
MATERIALS GROUPS SPECIFIC MATERIALS PRODUCT APPLICATIONS
Conductors Aluminum Tantalum
Chromium Titanium
Copper Titanium/Tungsten
Gold Tungsten
Molybdenum
Platinum
Magnetic Materials Aluminum Silicon Iron Iridium Manganese Inductive,
Cobalt Chromium Iron Manganese Magnetoresistive and
Platinum Iron Tantalum Nitride Giant
Cobalt Iron Nickel Iron Magnetoresistive
Cobalt Platinum Nickel Iron Rhodium Recording Heads
Cobalt Zirconium Nickel Manganese for Disk Drives
Tantalum Platinum Chromium Manganese
Cobalt Zirconium Platinum Manganese
Niobium
Insulating Materials Aluminum Nitride Silicon Nitride
Aluminum Oxide Silicon Oxide
Wear-Resistant Diamond-like-carbon, or DLC
Coatings
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
SEMICONDUCTOR DEVICES
MATERIALS GROUPS SPECIFIC MATERIALS PRODUCT APPLICATIONS
Conductors Aluminum (alloys) Titanium Gallium Arsenide
Cobalt Titanium Silicide and Silicon
Copper Titanium Tungsten Nitride Semiconductors
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>
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
production system. Furthermore, the modular design allows customers to
reconfigure systems that are in production to address the evolving manufacturing
processes required by magnetic recording head and semiconductor manufacturers.
The flexibility to exchange modules enables customers to quickly develop new
fabrication processes, improving time-to-market of higher performance products,
with a lower capital investment.
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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 different methods of depositing thin films on
a wafer, or substrate, such as physical vapor deposition, mainly a physical
technique, and chemical vapor deposition, mainly a chemical technique. CVC also
offers modules for different methods of removing, or etching, portions of thin
films from a wafer or a substrate. CVC obtained its ion beam deposition, etching
and its diamond like carbon processing modules through its acquisition of
Commonwealth Scientific Corporation in May 1999.
Below is a brief description of CVC's process modules:
PHYSICAL VAPOR DEPOSITION--PLASMA SPUTTERING MODULE
Physical vapor deposition, or PVD, by plasma 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 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. In addition, in some
processes, a second ion beam is directed toward the substrate to control the
microstructure of the thin film while depositing the desired material.
METAL-ORGANIC CHEMICAL VAPOR DEPOSITION MODULE
Metal-organic chemical vapor deposition, or 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.
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ION BEAM ETCH MODULE
Etching by ion beam is used to transfer a desired device pattern to the
substrates. An ion beam directed toward the substrate can also 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.
DIAMOND-LIKE-CARBON MODULE
Ion beam deposition 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 ion beam diamond-like-carbon module employs a
carbon-containing gas flow through an ion source mounted onto a vacuum process
chamber to deposit thin layers of diamond-like-carbon on wafers or other
substrates. CVC's ion beam diamond-like-carbon 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 giant
magnetoresistive heads will require dense and defect-free diamond-like-carbon
films below 50 Angstroms. To address this requirement, CVC has developed a
filtered cathodic arc diamond-like-carbon deposition cluster module which
enables controlled deposition of high-quality ultrathin diamond-like-carbon
layers. This cluster module will enable CVC to effectively serve the
diamond-like-carbon 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 license
from Texas Instruments covering the design features of the ICP system expires in
2014. 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 rapid thermal processing, or RTP, module with multi-zone temperature
control optimizes temperature and process uniformity and repeatability control.
CVC's RTP and rapid thermal chemical vapor deposition, or RTCVD, module is
designed for various thermal processing applications including anneal, oxidation
and CVD processes.
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 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
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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 as components 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
magnetic recording heads for the data storage industry, as well as manufacturers
of semiconductor devices. During fiscal year 1999, approximately 85% of CVC's
revenues were derived from sales made to thin film magnetic recording head
manufacturers and approximately 9% of CVC's revenues were from sales to
semiconductor device manufacturers. Customers of CVC who have purchased at least
one Connexion Cluster Tool system from it during fiscal 1998 and 1999 are:
<TABLE>
<CAPTION>
DATA STORAGE SEMICONDUCTOR
- ------------ -------------
<S> <C>
Alps Electronics Anadigics
Applied Magnetics Analog Devices
Fujitsu Honeywell
Headway Technologies Inc. Kodak
Hitachi Metals M/A-COM
IBM Viking Tech
Read-Rite Xerox
Samsung Electronics
Seagate Technology
Sony
TDK
Yamaha
</TABLE>
Of these customers, Seagate, IBM and TDK each accounted for 10% or more of
CVC's revenues in fiscal 1999 and Seagate, Headway and Alps each accounted for
10% or more of CVC's revenues in fiscal 1998.
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 47% of CVC's total revenue in fiscal 1997, 31% of CVC's total
revenue in fiscal 1998 and 34% of CVC's total revenue in fiscal 1999. The
decline in fiscal 1998 in the percentage of CVC's total revenues attributable to
sales to Seagate Technology is due primarily to a decline in the absolute dollar
amount of CVC's sales to Seagate Technology in fiscal 1998. CVC believes that
decline, in turn, reflects competitive market conditions and weakness in demand
for disk drive products. The increase in fiscal 1998 in the percentage of CVC's
total revenues attributable to sales to Seagate Technology reflects an increase
in the absolute dollar amount of CVC's sales to Seagate Technology, partially
offset by increased sales to CVC's other customers due to expansion of its
customer base.
In 1995, Seagate Technology made an equity investment of approximately
$9.0 million in CVC. In connection with this 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. 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
it in 1995, Seagate Technology has the right to acquire an additional 790,760
shares of common stock at an exercise price
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of $5.58 per share. Assuming full exercise of this 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 orders are 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 29-person marketing and sales organization.
In Japan and Europe, CVC uses 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 31% of
CVC's total revenues for fiscal 1997, 38% for fiscal 1998 and 53% for fiscal
1999. CVC's sales and marketing organization uses 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 offering 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, 1999, CVC had 53 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.
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
35
<PAGE>
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 AND DEVELOPMENT
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 and development 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 and introduced
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. 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 metal-organic chemical vapor
deposition 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, 1999, CVC had 103 full-time employees dedicated to its
research and development programs. In fiscal 1997, 1998 and 1999, CVC expended
$9.1 million, $12.6 million and $12.6 million on these programs, constituting
15%, 19% and 15% 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 and development 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 these organizations has
helped to ensure that CVC's new products conform to industry standards and
emerging requirements.
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, 1999,
CVC had 168 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
36
<PAGE>
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 that are not ISO 9001 certified
and, in some cases, is a condition of doing business with 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. Some 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
- 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
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<PAGE>
CVC believes it competes favorably in the data storage and semiconductor
manufacturing markets based on its multiple processing capabilities, 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. Although 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
similar rights.
As of September 30, 1999, CVC had obtained 16 issued U.S. patents and had 29
U.S. patent applications pending. CVC has also obtained two foreign patents from
the United Kingdom and had 13 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 several
jointly-owned patents but there can be no assurance that such licensed and
assigned rights are sufficiently broad for current or contemplated uses.
CVC holds patents which it believes to be material to its business covering
the components used for physical vapor deposition for the data storage
marketplace and rapid thermal processing. As of September 30, 1999, these
patents have durations of not less than 11 years. Through its acquisition of
Commonwealth, CVC also holds patents covering ion beam processing with durations
of not less than 11 years, as of September 30, 1999. In addition, as of
September 30, 1999, CVC holds exclusive licenses to ion source technology
obtained in the acquisition of Commonwealth, which extend to the term of the
underlying patents, varying in length from five to 11 years. In addition, CVC
has licensed the design features in its inductively-coupled-plasma technology.
This license will expire in 2014.
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 it, 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, that 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 this type of litigation,
CVC might be required to discontinue the use of 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
could be harmed.
CVC cannot give any assurance that its 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 negative impact on CVC's business. CVC cannot give any assurance that others
will not independently develop similar products, duplicate its products or, if
patents are issued to CVC, design around these patents. CVC also relies upon
trade secret protection and employee and third-party nondisclosure agreements to
protect its confidential and proprietary information. Despite these efforts, CVC
cannot give any assurance that others will not independently develop
substantially equivalent proprietary information and techniques or otherwise
gain access to its trade secrets or disclose its technology or that CVC can
meaningfully protect its trade secrets.
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<PAGE>
EMPLOYEES
As of September 30, 1999, CVC had a total of 394 full-time employees at all
of its locations, consisting of 168 in manufacturing, 103 in research and
development, 29 in marketing and sales, 53 in customer service and support, 35
in administration and 6 in facilities maintenance.
As of September 30, 1999, 47 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 the Local
342 members, 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 in 1974 under which this agency's bond proceeds
were used to purchase the land and construct the Rochester facility for lease to
CVC. On September 29, 1997, CVC entered into an amended lease agreement with the
County of Monroe Industrial Development Agency that extended the term of the
original lease from the year 2000 to December 31, 2007. Upon the expiration of
this amended lease, CVC is obligated to purchase the Rochester facility from
this 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 22,000 square feet. The manufacturing and
engineering functions are located in a separate leased facility of approximately
32,000 square feet. This facility is leased under two separate leases for
approximately 28,000 square feet and 4,250 square feet of contiguous space. The
leases on this facility are scheduled to expire on January 31, 2000 and
September 14, 2001.
In addition, CVC leases 14,400 square feet in Fremont, California, for
research and process development, product engineering and as a base for regional
sales and field service for the West Coast of the United States and 3,400 square
feet in Dallas, Texas, for engineering, equipment design, process development,
sales and customer support. 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.
SECURITIES LAW ISSUES
In 1997, CVC initiated the process of registering its common stock under the
Federal securities laws in preparation for its initial public offering. The
process included filing with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act of 1933 and a
registration statement on Form 8-A under the Securities Exchange Act of 1934.
When market conditions deteriorated in late 1997, CVC suspended its efforts to
complete its initial public offering until market conditions improved, but it
did not withdraw those registration statements from the filing process. The
registration statement on Form 8-A subsequently became effective automatically
by operation of law, as a consequence of which CVC became subject to the
reporting and disclosure obligations of the Securities Exchange Act, even though
it had not "gone public" and no trading in its securities had occurred. Because
CVC was not aware it had become subject to those requirements, it did not
attempt to satisfy them. Furthermore, CVC completed several unregistered sales
of its capital stock and issued several written communications during the period
when the initial public offering process had been suspended but the registration
statement on Form S-1 was still pending, potentially raising questions regarding
the availability of the exemptions from the registration requirements of the
Securities Act upon which it was relying.
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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 Technology 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
Robert C. Fink......................... 64 Director
Maurice F. Holmes...................... 56 Director
Douglas A. Kingsley.................... 37 Director
Thomas C. McDermott.................... 63 Director
Seiya Miyanishi........................ 53 Director
George R. Thompson, Jr.*............... 69 Director
Donald L. Waite........................ 66 Director
</TABLE>
- ------------------------
* Mr. Thompson has advised CVC that upon consummation of this offering he will
retire as a director.
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 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.
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 Technology
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
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cleaning. Dr. Moslehi is named as an inventor on over 80 U.S. patents and in
1993 he earned the American Electronics Association's Technologist/Inventor of
the Year. Dr. Moslehi received a BS in Electrical Engineering at Arya-Mehr
University of Technology and a MS and Ph.D. in Electrical Engineering from
Stanford University. Dr. Moslehi also serves on the consulting faculty of
Stanford University.
Mr. Christopher Mann joined CVC Products in 1979 and now serves as Senior
Vice President, Marketing after having served as Senior Vice President, Data
Storage from 1997 to June 1999. Mr. Mann has previously held the positions of
Field Service Manager, Engineering Services Manager and Vice President, Data
Storage at CVC. Prior to joining CVC in 1979, Mr. Mann worked for Sperry in the
United Kingdom.
Dr. Chicotka joined CVC in 1995 as Vice President, Operations, and since
1998 has served 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 1999 and currently serves as Vice President,
Manufacturing. From 1998 to 1999, 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 Corporation, a manufacturer of
semiconductor processing equipment. 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. Fink has been a director of CVC since 1997. In 1993, Mr. Fink joined Lam
Research Corporation, a manufacturer of semiconductor processing equipment, and
formerly served as the 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. Holmes has been a director of CVC since October 1999. Since
January 1999, Mr. Holmes has been a Professor of the Practice of Management and
Engineering Systems at the Massachusetts Institute of Technology, as well as
holding a dual professorship with both its Sloan School of Management and School
of Engineering. Prior to this, Mr. Holmes served as Corporate Vice President and
the Chief Engineer for Xerox Corporation beginning in 1994. Mr. Holmes received
a BS degree from the University of Pittsburgh and a MS in Mechanical and
Aerospace Science from the University
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<PAGE>
of Rochester. He currently is a director of Frontier Telephone Company of
Rochester, Optical Dynamics Corporation and Storage Technology Corporaton. In
addition, Mr. Holmes serves on the Board of Trustees of Rochester Institute of
Technology and the Ford Design Institute.
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. McDermott has been a director of CVC since October 1999. From 1994 to
1997, Mr. McDermott was Chairman of the Board, Chief Executive Officer and
President of Goulds Pumps, Inc. From 1986 to 1993, Mr. McDermott was the
President and Chief Operating Officer of Bausch & Lomb. Prior to this,
Mr. McDermott served in a variety of management positions at Bausch & Lomb, and
also was a member of its Board of Directors from 1983 until 1993. Mr. McDermott
received a BS degree and an Honorary Doctoral Degree from Providence College. He
currently is a director of Canandaigua Brands, Inc. and Thomas & Betts
Corporation. In addition, Mr. McDermott serves on the Board of Governors of
Strong Memorial Hospital and as a Trustee of Rochester Institute of Technology.
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 involved 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. 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, CEO
and Chairman of the Board 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 is Chairman of
the Board of Marshall National Bank and Trust Co. in Marshall, Virginia.
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 Senior
Administrative Officer, Senior 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.
Mr. Thompson has advised CVC that upon 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, McDermott, Thompson and Waite. The Audit Committee:
- reviews with CVC's independent accountants the scope and timing of their
audit services;
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- 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, Holmes and Kingsley. 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 a director. In addition, chairmen 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.
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EXECUTIVE COMPENSATION
The following table sets forth the total compensation for fiscal 1997, 1998
and 1999, respectively, of the chief executive officer and each of the other
four most highly compensated executive officers of CVC whose total salary and
bonus for fiscal 1999 exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES
UNDERLYING
ANNUAL 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... 1999 $178,652 $28,000 -- 33,333 $2,936
1998 173,040 47,600 -- -- 2,647
1997 167,250 46,600 -- 51,000 2,325
Giovanni Nocerino
Executive Vice President,
Sales & Service........ 1999(4) 224,950 -- $75,654(3) -- 3,085
1998 183,333 -- 16,535 160,000 --
1997 -- -- -- -- --
Mehrdad M. Moslehi
Senior Vice President and
Chief Technical Officer.. 1999 158,489 10,000 -- 16,667 2,700
1998 147,054 31,100 -- -- 2,576
1997 140,078 29,100 -- 12,000 1,905
Christopher J. Mann
Senior Vice President,
Marketing.............. 1999 158,487 -- 41,127(5) 16,667 3,810
1998 147,290 27,100 77,731(5) -- 4,153
1997 122,406 28,500 31,962(5) 22,500 2,506
Emilio O. DiCataldo
Senior Vice President and
Chief Financial Officer.. 1999 152,148 25,000 --(6) 30,000 2,213
1998 146,692 31,800 -- -- 1,900
1997 142,551 34,400 46,930 48,000 1,330
</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 executive officer for each fiscal
year.
(2) Represents matching contributions made by CVC on behalf of the executive
officer to its 401(k) Plan.
(3) Represents automobile allowance of $1,901 and sales commissions of $73,754.
(4) No information for fiscal 1997 is presented as Mr. Nocerino joined CVC in
fiscal 1998. Mr. Nocerino became one of our executive officers in the fall
of 1997.
(5) Represents automobile allowance of $10,488 and sales commissions of $30,639
in 1999, automobile allowance of $10,488 and sales commissions of $67,243 in
1998 and automobile allowance of $10,488 and sales commissions of $21,474 in
1997.
(6) Represents relocation expense of $17,500, relocation allowance of $26,670
and dues of $2,760.
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<PAGE>
The following table sets forth information regarding the option grants made
during fiscal 1999 to each of the executive officers. CVC issued no stock
appreciation rights in fiscal 1999.
OPTION GRANTS
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
TOTAL STOCK PRICE
NUMBER OF OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERM
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME OPTIONS FISCAL 1999 ($/SHARE) DATE 5% 10%
- ---- ---------- ------------ ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Christine B. Whitman.............. 33,333 10.70% $6.00 5/14/09 $ 255,254 $ 322,099
Giovanni Nocerino................. -- -- -- -- -- --
Mehrdad M. Moslehi................ 16,667 5.35 6.00 5/14/09 127,631 161,054
Christopher J. Mann............... 16,667 5.35 6.00 5/14/09 127,631 161,054
Emilio O. DiCataldo............... 30,000 9.63 6.00 5/14/09 229,731 289,892
</TABLE>
The following table sets forth information regarding exercise of options and
the number and value of options held at September 30, 1999, by each of the
officers listed below.
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.......................... 353,600 53,733 $4,243,200 $ 644,796
Giovanni Nocerino............................. 53,333 106,667 639,996 1,280,004
Mehrdad M. Moslehi............................ 3,200 21,467 38,400 257,604
Christopher J. Mann........................... 206,000 25,667 2,472,000 308,004
Emilio O. DiCataldo........................... 142,800 49,200 1,713,600 590,400
</TABLE>
- ------------------------
(1) The value of the unexercised, in-the-money options on September 30, 1999 is
based on the difference between the assumed initial public offering price of
the common stock ($12.00 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 selected CVC 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.
45
<PAGE>
Options granted under this informal plan 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. Under this
program, options to purchase 1,473,840 shares of common stock have been granted,
of which options to purchase 321,333 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 and incentive stock options to purchase shares of common stock.
The primary purpose of this plan was to provide long-term incentives to selected
CVC 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 September 30, 1999, options to purchase 582,134 shares of common stock
had been granted under this plan, of which options to purchase 16,600 shares of
common stock have been exercised and options to purchase 184,833 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 incentive stock options under Section 422 of the
Internal Revenue Code and nonqualified stock options which do not so qualify.
CVC has initially authorized and reserved 1,833,333 shares of 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 3,333,333. As of
September 30, 1999, 736,002 options had been granted. Options to purchase
185,734 shares have been cancelled and 133 shares have been exercised as of
September 30, 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;
46
<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 a merger,
acquisition or similar transaction;
- 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 333,333. 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. However, in the event of a change of control upon a transaction such
as a merger, consolidation, sale of all or substantially all of the assets of
CVC or a change in the composition of a majority of CVC's Board, then each
option that was not then vested prior to these types of events will become fully
vested and immediately exercisable unless assumed or substituted by the
successor corporation.
All options granted under this plan are nontransferable by the optionee,
except for transfers approved by the Compensation Committee to 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 the case of any other termination of
employment, outstanding options that have previously become vested will remain
exercisable for a period of 90 days. However, all unexercised options will be
immediately forfeited by any employee who is terminated as a result of any of
the following:
- embezzlement or misappropriation of corporate funds;
- conviction for a felony;
- misconduct resulting in material injury to us;
- significant activities harmful to our reputation or the reputation of any
of our subsidiaries;
- a significant violation of our corporate policies;
- willful refusal to perform, or substantial disregard of, the duties
properly assigned to the option holder; or
- a significant violation of any contractual, statutory or common law duty
of loyalty to us or any of our subsidiaries.
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,
47
<PAGE>
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 and our stockholders have approved 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 COMMONWEALTH 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 of September 30, 1999,
options to purchase an aggregate of 270,697 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 prior retirement plans of CVC. This
plan was frozen effective September 30, 1991 and no further benefits will be
accrued under it. 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, Holmes
and Kingsley. None of these directors was at any time during the fiscal year
ended September 30, 1999, 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 Ms. Whitman, Messrs.
DiCataldo, Mann, Kellogg, Prozeller and Drs. Moslehi, Chicotka and Nocerino.
These agreements provide that these employees will serve CVC in their offices
for a term of three years, with automatic one-year renewals, subject to earlier
termination as provided for in the these agreements. These agreements set forth
the following minimum base salary during the term of the particular agreement
for the following employees: (1) Ms. Whitman - $168,000;
(2) Dr. Chicotka - $127,688; (3) Mr. DiCataldo - $140,369;
(4) Mr. Kellogg - $142,000; (5) Mr. Mann - $124,162;
(6) Dr. Moslehi - $142,771; (7) Dr. Nocerino - $220,000; and
(8) Mr. Prozeller - $110,000. These amounts are 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.
48
<PAGE>
In addition, these agreements provide that the employee is entitled to a
lump-sum cash severance payment in the following circumstances:
- upon a termination by CVC of the employee without cause; and
- upon a termination by the employee of his employment with CVC, within six
months immediately following an acquisition, merger, reorganization of CVC
or other similar transaction or event.
This lump-sum severance payment is equal to the employee's base salary as in
effect immediately prior to termination multiplied by a number of months
(24 months for Ms. Whitman, 18 months for Mr. DiCataldo, 12 months for Drs.
Moslehi, Chicotka, Nocerino and Messrs. Mann, Kellogg, Prozeller and Sowers) and
then discounted to present value from the dates payments would otherwise have
been made.
Upon an acquisition, merger, reorganization or other similar transaction or
event, all options to purchase shares of common stock held by the employees that
were not then vested will become fully and immediately vested and exercisable,
unless provision has been made for (1) continuation of any CVC option plan
and/or the assumption of options by a successor corporation or (2) the
substitution for the options of new options covering the stock of a successor
corporation, with appropriate adjustments. An employee terminated after any of
these types of transactions or events will retain the right to exercise any
options to purchase shares of common stock for 12 months following the date of
his or her termination or, if earlier, the expiration of the original term of
the option.
These agreements include 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.
Seagate Technology is a principal stockholder of CVC, as well as a major
customer. Mr. Waite, a director of CVC, is an officer of Seagate Technology.
Total revenues attributed to sales of CVC products to Seagate Technology were
$29.2 million in fiscal 1997, $21.3 million in fiscal 1998 and $28.4 million in
fiscal 1999.
In December 1998, CVC sold an aggregate of 100,000 shares of Series C
Convertible Preferred Stock for a price of $100.00 per share and a warrant to
purchase an aggregate of 200,000 shares of common stock to entities affiliated
with Advent International Corporation 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. As a consequence of redemption of the
Series D Redeemable Preferred Stock, Advent will have received the return of its
entire $10.0 million investment made in December 1998 and will continue to own
1,016,260 shares of CVC common stock. 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 executive officers and stockholders of CVC who are parties to this
agreement. This agreement grants 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 piggy-back registration
rights to the executive officers and stockholders of CVC who are parties to this
agreement. 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 the executive officers and stockholders of
CVC who are parties to this agreement providing for voting and pre-emptive
rights with respect to the acquisition and sale of shares by CVC, as well as
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 benefits, such as an automobile allowance and health
insurance coverage. This consulting agreement may be terminated by Mr. Thompson
for any reason at any time and by the Company in the following circumstances:
- if Mr. Thompson (1) materially breaches his obligations under a
non-competition agreement; (2) is convicted of a felony or any offense
involving misappropriation of money; or (3) willfully fails or refuses to
perform his duties under this agreement or
- upon Mr. Thompson's death.
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 1990 and $1.0 million in December 1991 under two
unsecured notes that required quarterly interest payments calculated at an
50
<PAGE>
annual rate of 9%. The principal of the $1.0 million note was paid in October
1997. The principal of the $1.5 million note was paid in January 1999. See Notes
to Consolidated Financial Statements.
Christine Whitman, CVC's Chairman, President and Chief Executive Officer,
currently serves as a director of M&T Bank, with whom CVC has outstanding credit
agreements. Net proceeds borrowed from M&T Bank were $1.7 million in fiscal
1997, $9.5 million in fiscal 1998 and $3.9 million in fiscal 1999.
With respect to all of the transactions listed above, CVC believes that the
terms of these transactions were, at the time entered into, no less favorable
than CVC could have obtained with
non-affiliated parties. It is CVC's policy that when a transaction or matter
comes before its Board of Directors in which a director may have a conflict, the
nature and extent of the potential conflict is disclosed and/or reviewed with
the CVC Board of Directors, after which the conflicted director is prohibited
from participating in any discussions and subsequent Board voting relating to
the transaction or matter in which he or she may have a conflicting interest. In
addition, any transaction of this type must be approved by a majority of those
CVC directors who do not have a conflicting interest in any transaction or
matter of this type.
51
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of CVC's common stock as of October 15, 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 the 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 AFTER THE
OFFERING(1)(2) SHARES TO 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 16.6 -- 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
370 Canfield Drive
Pittsford, NY 14534
Christine B. Whitman(7)...................... 726,400 8.2 -- 726,400 6.1
Giovanni Nocerino............................ 106,667 1.2 -- 106,667 *
Emilio O. DiCataldo.......................... 146,000 1.7 -- 146,000 1.3
Mehrdad M. Moslehi........................... 307,200 3.6 -- 307,200 2.7
Christopher J. Mann(8)....................... 283,676 3.2 -- 283,676 2.4
Richard J. Chicotka.......................... 85,600 1.0 -- 85,600 *
Richard A. Kellogg........................... 8,267 * -- 8,267 *
Judd C. Prozeller............................ 28,133 * -- 28,133 *
Robert C. Fink............................... 4,888 * -- 4,888 *
Douglas A. Kingsley(7)(9).................... 1,017,593 12.0 -- 1,017,593 8.9
Seiya Miyanishi(7)(10)....................... 1,412,316 16.6 -- 1,412,316 12.3
George R. Thompson, Jr.(7)(11)............... 862,449 10.2 200,000 662,449 5.8
Donald L. Waite(7)(12)....................... 3,219,073 34.7 -- 3,219,073 26.2
Thomas C. McDermott.......................... -- -- -- -- --
Maurice F. Holmes............................ -- -- -- -- --
All directors and executive officers as a
group
(15 persons)(13)........................... 8,208,262 80.2% -- 8,008,262 60.5%
</TABLE>
- ------------------------
* Less than one percent.
(1) The number of shares of common stock shown in the table above as
beneficially owned includes shares issuable pursuant to options and warrants
that may be exercised within 60 days after September 30, 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--358,400 shares; Giovanni Nocerino--106,667
shares; Emilio O. DiCataldo--146,000
52
<PAGE>
shares; Mehrdad M. Moslehi--3,200 shares; Christopher J. Mann--207,400
shares; Richard J. Chicotka--85,600 shares; Richard A. Kellogg--8,267
shares; Judd C. Prozeller--28,133 shares; and Robert C. Fink--2,222 shares.
(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: (1) 853,658 shares of common stock issuable to
Global Private Equity III Limited Partnership upon conversion of outstanding
shares of Series C Convertible Preferred Stock, (2) 130,793 shares of common
stock issuable to Advent PGGM Global Limited Partnership upon conversion of
outstanding shares of Series C Convertible Preferred Stock, (3) 12,907
shares of common stock issuable to Advent Partners GPE III Limited
Partnership upon conversion of outstanding shares of Series C Convertible
Preferred Stock, (4) 3,861 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 (5) 15,041 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 and has at no time
held any position, office or other material relationship with CVC or any of
its predecessors or affiliates, except as a shareholder of CVC.
(7) The stockholders' address is: c/o CVC, Inc., 525 Lee Road, Rochester, New
York, 14606.
(8) Includes 20,316 shares of common stock held in an irrevocable trust for
Mr. Mann's children. Mr. Mann disclaims beneficial ownership of these
shares.
(9) Represents 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) Represents 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 50,869 shares of common stock held by Mr. Thompson's daughter,
Eleanor Thompson, and 50,869 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.
(12) Represents 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.
53
<PAGE>
(13) Includes (1) 1,412,316 shares held of record by Nikko Tecno, the ownership
of which is attributed to Mr. Miyanishi, (2) 1,017,593 shares held of record
by Advent, the ownership of which is attributed to Mr. Kingsley,
(3) 3,219,073 shares held of record by Seagate Technology, the ownership of
which is attributed to Mr. Waite, (4) 50,869 shares of common stock held by
Mr. Thompson's daughter, Eleanor Thompson, and 50,869 shares of common stock
held by his son, G. Richard Thompson and (5) 20,316 shares held in an
irrevocable trust for Mr. Mann's children, the ownership of which is
attributed to Mr. Mann.
Anne G. Whitman and George R. Thompson, Jr. have granted to the underwriters
an option to purchase up to an aggregate of 525,000 shares of common stock to
cover over-allotments, if any. This option may be exercised at any time within
30 days from the date of this prospectus, in whole or in part. If the
underwriters option is exercised in full, Ms. Whitman would beneficially own
483,800 shares representing 4.2% of shares outstanding and Mr. Thompson would
beneficially own 462,449, shares representing 4.0% of shares outstanding. The
percentage beneficial ownership of the other stockholders listed above would not
change as a result of the exercise of the underwriter's over-allotment option.
54
<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 September 30, 1999 there were 8,492,707 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 any
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 September 30, 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 a 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 Restated Certificate of
Incorporation, CVC's board of directors is authorized, subject to any
limitations prescribed by law, without further stockholder approval, to issue
those shares of preferred stock in one or more series. Each such series of
preferred stock shall have those 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.
55
<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 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 of 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. All expenses incurred in
connection with registrations of this type 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 its stockholders unless otherwise
required, including this provision in CVC's Amended and Restated
56
<PAGE>
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.
PROVISIONS IN CVC'S CHARTER THAT MAY HAVE ANTI-TAKEOVER EFFECTS
CVC's certificate of incorporation contains provisions that could have the
effect of delaying, deferring or preventing an unsolicited change in control of
CVC. These provisions provide that all stockholder action must be taken at an
annual or special meeting of stockholders and that only the Board of Directors
may call special meetings of the stockholders. In addition, CVC's certificate of
incorporation authorizes the Board of Directors to issue up to 5,000,000 shares
of preferred stock without stockholder approval and on any terms as the Board of
Directors may determine. Although no shares of preferred stock will be
outstanding upon completion of this offering and the application of offering
proceeds, and CVC has no plans to issue any shares of preferred stock, holders
of CVC's common stock will be subject to, and may be adversely affected by, the
rights of any preferred stock that may be issued in the future. Each of these
provisions in CVC's certificate of incorporation may have the effect of
preventing changes in the management of CVC, which may adversely affect the
market price of CVC's common stock or the ability of stockholders to participate
in a transaction in which they might otherwise receive a premium for their
shares over the then current market price.
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.
57
<PAGE>
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.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock will be BankBoston,
N.A.
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, CVC will have 11,492,707 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 common 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;
1,167,409 of these shares are subject to the 180-day lock-up agreements
described below, but would otherwise 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; all 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 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, 1,901,379 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;
1,758,730 of these shares underlying these options are subject to the 180-day
lock-up agreements. An additional 1,283,065 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
59
<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 these 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.
60
<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 Incorporated..........................
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
and the selling stockholders 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 $900,000. There are conditions in the
underwriting agreement that 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 and the selling stockholders 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 brokers and dealers. After the initial
offering of the shares the underwriters may change the public offering price and
other selling terms.
The following table shows the per share and total public offering price,
underwriting discount to be paid by CVC and the selling stockholders to the
underwriters and the proceeds before expenses to CVC and the selling
stockholders. This information is presented assuming either no exercise or full
exercise by the underwriters of their over-allotment option.
<TABLE>
<CAPTION>
PER
SHARE WITHOUT OPTION WITH OPTION
-------- -------------- -----------
<S> <C> <C> <C>
Public offering price....................................... $ $ $
Underwriting discount....................................... $ $ $
Proceeds, before expenses, to CVC........................... $ $ $
Proceeds to selling stockholders............................ $ $ $
</TABLE>
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 the
selling stockholders will be obligated to sell the shares to the underwriters.
The underwriters may exercise this option only to cover over-allotments.
Each of the officers and directors of CVC, and a substantial majority of the
stockholders of CVC, including the selling stockholders, have agreed not to
offer, sell, pledge or otherwise dispose of any
61
<PAGE>
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 these 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
representatives of the underwriters, CVC and representatives of the selling
stockholders. 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 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 200,000 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 these individuals purchase the 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 and the selling stockholders have agreed to indemnify the underwriters
against 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
selling group members to bid for and 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. Stabilizing
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 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 these types of purchases.
The imposition of a penalty bid might have an effect on the price of a security
to the extent that it was 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
62
<PAGE>
underwriters will engage in transactions of this type or that transactions of
this type, 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 a
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.
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, 1999 and
1998 and for the three years in the period ended September 30, 1999 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 1998, 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
CVC has filed with the Securities and Exchange Commission, 450
Fifth Street, 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 this
registration statement and the exhibits and schedules thereto. For further
information with respect to CVC 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 the 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 SEC 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 SEC,
Washington, D.C. 20549 upon the payment of the fees prescribed by the SEC. The
SEC maintains a web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants, such as CVC,
that file electronically with the SEC. The SEC's free investor information
service can be reached at 1-800-SEC-0330.
63
<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-24
Balance Sheets.............................................. F-25
Statements of Operations.................................... F-27
Statements of Stockholders' Equity.......................... F-28
Statements of Cash Flows.................................... F-29
Notes to Financial Statements............................... F-30
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To Board of Directors and
Stockholders of CVC, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
CVC, Inc. (the "Company") and its subsidiaries at September 30, 1999 and
1998, and the results of their operations and their cash flows for each of
the three years in the period ended September 30, 1999 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
October 18, 1999
F-2
<PAGE>
CVC, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
----------------------------------------
1999 PRO FORMA
1998 1999 (NOTE 1)
-------- ----------- ---------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 106 $ 434 $ 434
Accounts receivable--trade (includes related party
receivables of $1,397 and $4,105 at September 30, 1998
and 1999, respectively), less allowance for doubtful
accounts of $345 and $887 at September 30, 1998 and
1999, respectively...................................... 7,026 21,559 21,559
Inventories............................................... 18,811 29,187 29,187
Deferred income taxes..................................... 1,431 2,819 2,819
Other current assets...................................... 1,055 1,396 1,396
------- ------- -------
28,429 55,395 55,395
Property, plant and equipment, net.......................... 13,901 19,374 19,374
Goodwill and other intangible assets, net................... 434 1,148 1,148
------- ------- -------
Total assets........................................ $42,764 $75,917 $75,917
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion of long-term
debt.................................................... $ 5,689 $13,217 $13,217
Accounts payable.......................................... 7,221 11,279 11,279
Advances from customers (includes related party amounts of
$463 at September 30, 1998)............................. 1,167 1,483 1,483
Other current liabilities................................. 3,448 7,312 7,312
------- ------- -------
17,525 33,291 33,291
Long-term debt (includes related party note of $1,500 at
September 30, 1998)....................................... 11,379 8,493 8,493
Deferred income taxes....................................... 1,393 1,554 1,554
Other liabilities........................................... 487 986 986
------- ------- -------
Total liabilities................................... 30,784 44,324 44,324
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 at September 30, 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, 1998 and 1999
(liquidation preference of $9,000,000).................. 8,355 8,355 --
Series A--1,685 shares at September 30, 1998 and 1999
(liquidation preference of $1,685,000).................. 1,685 1,685 --
Common Stock, $.01 par value per share; 50,000,000 shares
authorized; 1,057,929 shares issued and outstanding
at September 30, 1998, and 2,360,767 shares issued and
outstanding at September 30, 1999......................... 11 24 85
Additional paid-in capital.................................. 1,099 9,305 19,139
Warrant..................................................... -- 14 --
Unamortized deferred compensation........................... (252) (135) (135)
Retained earnings........................................... 1,213 2,784 2,798
Minimum pension liability................................... (131) (294) (294)
------- ------- -------
Total stockholders' equity.................................. 11,980 31,593 31,593
------- ------- -------
Total liabilities and stockholders' equity.................. $42,764 $75,917 $75,917
======= ======= =======
</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>
FOR THE YEAR ENDED SEPTEMBER 30,
---------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues (includes sales to related party of $29,244,
$21,322, and $28,408, for the years ended September 30,
1997, 1998 and 1999, respectively)........................ $62,588 $68,173 $82,915
Cost of goods sold (includes cost of goods sold to related
party of $17,352, $11,115, and $15,167 for the years ended
September 30, 1997, 1998 and 1999, respectively).......... 41,286 42,019 50,502
------- ------- -------
Gross margin................................................ 21,302 26,154 32,413
Operating expenses
Research and development.................................. 9,055 12,615 12,630
In-process R&D write-off.................................. -- -- 1,174
Sales and marketing....................................... 5,613 7,696 10,081
General and administrative................................ 2,539 3,476 4,822
------- ------- -------
17,207 23,787 28,707
------- ------- -------
Income from operations...................................... 4,095 2,367 3,706
Other income/(expense)
Write-off of deferred charges............................. -- (675) --
Interest and other income................................. 11 171 1,037
Interest expense.......................................... (604) (1,325) (1,235)
------- ------- -------
(593) (1,829) (198)
------- ------- -------
Income before income taxes.................................. 3,502 538 3,508
Income taxes................................................ 1,457 274 1,937
------- ------- -------
Net income.................................................. $ 2,045 $ 264 $ 1,571
======= ======= =======
Net income per share:
Basic..................................................... $ 2.67 $ 0.26 $ 1.01
======= ======= =======
Diluted................................................... $ 0.29 $ 0.04 $ 0.18
======= ======= =======
</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 C SERIES B SERIES A
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
-------------------- -------------------- --------------------
NUMBER NUMBER NUMBER
OF SHARES AMOUNT OF SHARES AMOUNT OF SHARES AMOUNT
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996.................... 60,492 $8,355 1,685 $1,685
Net income....................................
Minimum pension liability.....................
Tax impact on pension liability...............
Comprehensive earnings......................
Deferred compensation.........................
Amortization of deferred compensation.........
Issuance of common stock......................
------- ------ ------ ------ ------- ------
Balance at September 30, 1997................. 60,492 8,355 1,685 1,685
Net income....................................
Minimum pension liability.....................
Tax impact on pension liability...............
Comprehensive earnings......................
Deferred compensation.........................
Amortization of deferred compensation.........
Issuance of common stock......................
------- ------ ------ ------ ------- ------
Balance at September 30, 1998................. -- -- 60,492 8,355 1,685 1,685
Net income....................................
Minimum pension liability.....................
Tax impact on pension liability...............
Comprehensive earnings......................
Deferred compensation.........................
Amortization of deferred compensation.........
Issuance of preferred stock and warrant....... 100,000 $9,855
Issuance of common stock......................
------- ------ ------ ------ ------- ------
Balance at September 30, 1999................. 100,000 $9,855 60,492 $8,355 1,685 $1,685
======= ====== ====== ====== ======= ======
<CAPTION>
COMMON STOCK
------------------------------- UNAMORTIZED MINIMUM
NUMBER PAR PAID-IN DEFERRED RETAINED PENSION
OF SHARES VALUE CAPITAL WARRANT COMPENSATION EARNINGS LIABILITY
--------- -------- -------- -------- ------------ -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1996.................... 735,160 $ 7 $ 454 $(1,096) $ (86)
Net income.................................... 2,045
Minimum pension liability..................... (2)
Tax impact on pension liability............... 1
Comprehensive earnings......................
Deferred compensation......................... 261 $(261)
Amortization of deferred compensation......... 7
Issuance of common stock...................... 114,100 2 56
--------- --- ------ ---- ----- ------- -----
Balance at September 30, 1997................. 849,260 9 771 (254) 949 (87)
Net income.................................... 264
Minimum pension liability..................... (74)
Tax impact on pension liability............... 30
Comprehensive earnings......................
Deferred compensation......................... 109 (109)
Amortization of deferred compensation......... 111
Issuance of common stock...................... 208,669 2 219
--------- --- ------ ---- ----- ------- -----
Balance at September 30, 1998................. 1,057,929 11 1,099 -- (252) 1,213 (131)
Net income.................................... 1,571
Minimum pension liability..................... (271)
Tax impact on pension liability............... 108
Comprehensive earnings......................
Deferred compensation......................... (12) 12
Amortization of deferred compensation......... 105
Issuance of preferred stock and warrant....... $ 14
Issuance of common stock...................... 1,302,838 $13 8,218
--------- --- ------ ---- ----- ------- -----
Balance at September 30, 1999................. 2,360,767 $24 $9,305 $ 14 $(135) $ 2,784 $(294)
========= === ====== ==== ===== ======= =====
<CAPTION>
TOTAL
--------
<S> <C>
Balance at October 1, 1996.................... $ 9,319
Net income.................................... 2,045
Minimum pension liability..................... (2)
Tax impact on pension liability............... 1
-------
Comprehensive earnings...................... 2,044
Deferred compensation......................... --
Amortization of deferred compensation......... 7
Issuance of common stock...................... 58
-------
Balance at September 30, 1997................. 11,428
Net income.................................... 264
Minimum pension liability..................... (74)
Tax impact on pension liability............... 30
-------
Comprehensive earnings...................... 220
Deferred compensation......................... --
Amortization of deferred compensation......... 111
Issuance of common stock...................... 221
-------
Balance at September 30, 1998................. 11,980
Net income.................................... 1,571
Minimum pension liability..................... (271)
Tax impact on pension liability............... 108
-------
Comprehensive earnings...................... 1,408
Deferred compensation......................... --
Amortization of deferred compensation......... 105
Issuance of preferred stock and warrant....... 9,869
Issuance of common stock...................... 8,231
-------
Balance at September 30, 1999................. $31,593
=======
</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>
FOR THE YEAR ENDED
SEPTEMBER 30,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................ $ 2,045 $ 264 $ 1,571
Adjustments to reconcile net income to net cash provided
(used) by operating activities:
In-process R&D write-off.................................. -- -- 1,174
Depreciation and amortization............................. 1,285 2,167 4,180
Provision for deferred taxes.............................. 461 (259) (166)
Changes in operating assets and liabilities --
Accounts receivable (including related party)........... (3,406) 1,262 (12,046)
Inventories............................................. (5,767) 1,721 1,449
Other assets............................................ (405) (931) 456
Accounts payable........................................ 4,556 (2,772) 746
Advances from customers (including related party)....... 3,035 (7,485) (2,402)
Other liabilities....................................... 1,299 (890) 200
------- ------- -------
Total adjustments..................................... 1,058 (7,187) (11,597)
------- ------- -------
Net cash provided (used) by operating activities...... 3,103 (6,923) (4,838)
------- ------- -------
Cash flows from investing activities:
Capital expenditures...................................... (2,805) (4,817) (1,755)
------- ------- -------
Net cash used by investing activities................. (2,805) (4,817) (1,755)
------- ------- -------
Cash flows from financing activities:
Net proceeds from line of credit.......................... 527 3,612 6,540
Payments on notes payable (including related party)....... -- (1,127) (1,500)
Proceeds from long-term debt.............................. 2,000 8,000 --
Payments on long-term debt and capital lease
obligations............................................. (1,452) (1,021) (8,111)
Net proceeds from issuance of preferred stock and
warrant................................................. -- -- 9,869
Net proceeds from issuance of common stock................ 58 221 123
------- ------- -------
Net cash provided by financing activities............. 1,133 9,685 6,921
------- ------- -------
Net increase (decrease) in cash and cash equivalents........ 1,431 (2,055) 328
Cash and cash equivalents, beginning of period.............. 730 2,161 106
------- ------- -------
Cash and cash equivalents, end of period.................... $ 2,161 $ 106 $ 434
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Non-cash investing transaction:
Equipment capitalized from inventory...................... $ -- $ 1,828 $ 2,258
Equipment transferred to inventory........................ -- $ -- $ 198
Net tangible assets acquired by issuing common stock
(Note 2)................................................ $ 6,298
Cash paid during the year for:
Interest.................................................. $ 542 $ 1,287 $ 1,237
Income taxes.............................................. $ 782 $ 1,430 $ 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
PRINCIPLES OF CONSOLIDATION AND NATURE OF OPERATION
The consolidated financial statements of CVC, Inc. and subsidiaries (CVC or
the Company) include the consolidated accounts of CVC, Inc., CVC Products Inc.,
Commonwealth Scientific Corporation, since acquisition on May 10, 1999, and CVC
Process Solutions, Inc. CVC is a worldwide supplier of fabrication equipment
providing thin film process solutions for the manufacture of magnetic recording
heads and advanced semiconductor devices for computers and communications
systems. The Company maintains offices in Rochester, New York; Alexandria,
Virginia; Fremont, California; Garland, Texas; Minneapolis, Minnesota; Japan and
Northern Ireland.
All significant intercompany balances and transactions have been eliminated
in consolidation.
UNAUDITED PRO FORMA BALANCE SHEET
The Company's Series A and Series B Convertible Preferred Stock
automatically convert 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 for pro forma purposes is
assumed to occur as of September 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 and
disclosure of contingent 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, accounts receivable (including related party receivables--Note 12)
and accrued expenses. 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
expenses, approximates their fair value at September 30, 1998 and 1999, 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.
F-7
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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.
Amounts received from customers prior to product shipment are classified as
advances from customers.
CASH AND CASH EQUIVALENTS
Cash and 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 any gains or losses from sale recorded in the statement of
operations.
CAPITALIZED SOFTWARE COSTS
The Company capitalizes the costs associated with purchased software for
resale 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.
ASSET IMPAIRMENT
The Company regularly assesses all of its long-lived assets for impairment
when events or circumstances indicate, in accordance with 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." The assessment
is accomplished by comparing the estimated undiscounted future cash flows of the
asset grouping with the respective carrying amount as of the date of assessment.
Should aggregate future cash flows be less than the carrying value of the
assets, a write-down would be
F-8
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
required, measured by the difference between the carrying value of the assets
and the discounted future cash flows.
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.
The asset and liability 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.
NEW ACCOUNTING STANDARDS
Effective October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130 (SFAS 130), "Reporting Comprehensive Income", which
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption had no impact on the Company's net income
or stockholders' equity. SFAS 130 requires changes to the minimum pension
liability, to be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of SFAS 130.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (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 the Company's fiscal year 2000 financial statements and the
Company does not expect its adoption to have a material effect on the Company's
financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS 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 quarters of fiscal years
beginning after June 15, 2000. The Company does not expect SFAS No. 133 to have
a material effect on the Company's financial condition or results of operations.
F-9
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK SPLITS
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 to
become effective in connection with the completion of an initial public
offering. This reverse stock split decreased the number of common shares
outstanding by 1,172,688. 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.
NOTE 2--ACQUISITION
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 1,268,799 shares of the Company's common stock, exchanged and
assumed options in Commonwealth for options to purchase 286,228 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 of Commonwealth's property to
fair market value by $600,000 and the recognition of a restructuring liability
approximating $550,000. Approximately $140,000 of the restructuring liability
relates to severance costs associated with the reduction of Commonwealth's
workforce by approximately 20%, or 29 employees. The reduction of the workforce
and the payment of termination benefits was completed by September 30, 1999.
Approximately $410,000 of the restructuring liability relates to existing lease
obligations or cancellation penalties associated with facilities which will be
exited. Lease payments will be made through fiscal 2000. At September 30, 1999,
approximately $200,000 has been charged against the restructuring liability. The
F-10
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--ACQUISITION (CONTINUED)
Company believes that the amounts remaining under the restructuring liability
are adequate to cover the remaining lease obligations.
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 Company used independent professional appraisal consultants to assess
and allocate value to the acquired in-process R&D. The allocated value was
determined using the income approach, which involves estimating the discounted
after-tax cash flows attributable to projects based on the projects' stage of
completion.
A discount rate of 35% was applied to the projects' cash flows and there
were no material changes from historical pricing, margins, and expense levels.
Management believes that the assumptions used in the forecasts were reasonable
at the time of the business combination. No assurance can be given, however,
that the underlying assumptions used to estimate expected project sales,
development costs, or profitability will be realized as estimated. For these
reasons, actual results may vary from the projected results.
Estimated net cash inflows from the acquired in-process technology are
projected to commence in fiscal 2001.
The amortization periods of intangible assets related to workforce in place,
current technology and goodwill are seven years, five years and seven years,
respectively.
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 (in
thousands):
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------
FOR THE YEAR ENDED FOR THE YEAR ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1999
------------------ ------------------
<S> <C> <C>
Net sales........................................... $112,060 $101,841
Operating income.................................... 4,782 678
Net income.......................................... 1,524 62
Net income per share:
--Basic........................................... $ 0.67 $ 0.03
--Diluted......................................... $ 0.18 $ 0.01
</TABLE>
The pro forma results include amortization of the intangibles presented
above and cost reductions related to the restructuring charges, and excludes 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.
F-11
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3--INVENTORIES
Inventories consisted of the following at September 30, 1998 and 1999 (in
thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Component parts........................................... $ 8,976 $15,421
Work-in-process........................................... 5,615 11,674
Finished goods............................................ 4,917 4,117
------- -------
19,508 31,212
Less--reserve for obsolescence........................ (697) (2,025)
------- -------
$18,811 $29,187
======= =======
</TABLE>
NOTE 4--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following at September 30,
1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- ---------
<S> <C> <C>
Land.................................................... $ 625 $ 2,225
Buildings and improvements.............................. 5,954 7,548
Machinery and equipment................................. 10,358 22,048
------- ---------
16,937 31,821
Less--Accumulated depreciation........................ (4,721) (12,447)
------- ---------
12,216 19,374
Construction-in-process................................. 1,685 --
------- ---------
$13,901 $ 19,374
======= =========
</TABLE>
Construction-in-process was mainly comprised of machinery and equipment
which was placed in service subsequent to September 30, 1998.
Included in property, plant and equipment is $2,220,000 and $2,494,000 for a
building and certain equipment held under capital lease agreements at
September 30, 1998 and 1999, respectively. Related accumulated amortization at
September 30, 1998 and 1999 was $403,000 and $558,000, respectively.
Total depreciation and amortization expense on plant and equipment was
$1,215,000, $1,874,000 and $3,697,000 in 1997, 1998 and 1999, respectively.
Total depreciation expense on assets under capital leases was $56,000 in 1997
and 1998 and $102,000 in 1999.
F-12
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--OTHER CURRENT LIABILITIES
Other current liabilities consisted of the following at September 30, 1998
and 1999 (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accrued payroll and benefits................................ $ 874 $1,981
Other current liabilities................................... 2,574 5,331
------ ------
$3,448 $7,312
====== ======
</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 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 $2,386,000 at September 30, 1999.
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 were
evidenced by notes, which were unsecured and required 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, $138,000 and $34,000 in 1997, 1998 and 1999,
respectively.
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 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.
In connection with the acquisition of Commonwealth, the Company assumed a
$1,214,000 unsecured note payable to a third party. The 18-month note requires
payments of principal and interest at 8% until October 2000.
F-13
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6--NOTES PAYABLE AND LONG-TERM DEBT (CONTINUED)
The Company also has a $15,000,000 bank line of credit at September 30, 1999
which allows for maximum borrowings based on certain financial criteria.
Allowable borrowings based on this criteria at September 30, 1999 were
$13,819,000. Borrowings under the agreements are at an interest rate of prime.
There was approximately $10,679,000 outstanding under the line of credit at
September 30, 1999.
The Company also has available an equipment line of credit at September 30,
1999 which allows for maximum borrowings of $3,000,000 based on certain
financial criteria. Borrowings under the agreement are at an interest rate of
prime. There were no amounts outstanding under the line of credit at
September 30, 1999.
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 was in
compliance with all covenants at September 30, 1998 and 1999.
A summary of the notes payable and long-term debt outstanding at
September 30, 1998 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Term loan, 5 year........................................ $ 1,850 $ 1,250
Term loan, 7 year........................................ 7,624 6,723
Notes payable due related party.......................... 1,500 --
Mortgage credit facility................................. 1,955 1,906
Note payable to third party.............................. -- 891
Future minimum payments under capital leases payable
through January 2002................................... -- 261
Borrowings on line of credit............................. 4,139 10,679
------- --------
17,068 21,710
Less--Current portion................................ (5,689) (13,217)
------- --------
$11,379 $ 8,493
======= ========
</TABLE>
The aggregate maturities for debt over the next five years and thereafter
are as follows (in thousands): 2000--$13,217, 2001--$1,900, 2002--$1,296,
2003--$1,313, and 2004--$1,433.
F-14
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES
The components of income taxes (benefit) for the years ended September 30,
1997, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal.......................................... $ 604 $ 417 $1,806
State............................................ 392 116 297
------ ------- ------
996 533 2,103
Deferred:
Federal.......................................... 475 (211) (143)
State............................................ (14) (48) (23)
------ ------- ------
461 (259) (166)
------ ------- ------
$1,457 $ 274 $1,937
====== ======= ======
</TABLE>
The significant components of deferred tax assets and liabilities at
September 30, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards........................ $ 175 $ 344
Inventories............................................. 455 1,076
State and federal tax credits........................... 122 209
Allowance for doubtful accounts......................... 138 373
Accrued compensation and benefits....................... 240 398
Other accruals.......................................... 577 1,053
------- -------
1,707 3,453
------- -------
Deferred tax liabilities:
Unamortized inventory accounting change................. (605) (424)
Property, plant and equipment........................... (962) (1,343)
------- -------
(1,567) (1,767)
------- -------
Deferred tax asset valuation allowance.................... (102) (421)
------- -------
Net deferred tax asset.................................... $ 38 $ 1,265
======= =======
</TABLE>
F-15
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--INCOME TAXES (CONTINUED)
The differences between income taxes (benefit) at the U.S. statutory rate
and the effective rate for the years ended September 30, 1997, 1998 and 1999 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Provision at federal statutory rate.................. $1,191 $183 $ 1,193
State taxes, net of federal benefit.................. 213 45 226
Permanent items...................................... 53 101 546
Release of valuation allowance....................... -- (53) (130)
Other................................................ -- (2) 102
------ ---- -------
Income tax expense................................... $1,457 $274 $ 1,937
====== ==== =======
</TABLE>
During 1998 and 1999, the valuation allowance, which relates to net
operating loss carryforwards and state investment credits, was reduced by
$53,000 and $130,000, respectively, due to the increased likelihood the benefits
will be recognized. As a result of the acquisition of Commonwealth, in 1999, a
number of permanent items were recorded by the Company and the valuation
allowance increased by the assumed amount of $449,000.
The net operating tax loss carryforwards of approximately $820,000 expire at
various times through 2019.
F-16
<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 $92,000, $222,000 and $278,000 in fiscal years 1997, 1998 and
1999, 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 and $381,000 is included in other
liabilities at September 30, 1998 and 1999, respectively, 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. As permitted under SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions," 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,
1997, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Service cost............................................ $ 68 $ 90 $150
Interest cost on benefit obligation..................... 82 78 90
Amortization............................................ 56 56 60
---- ---- ----
Retiree health care cost................................ $206 $224 $300
==== ==== ====
</TABLE>
An analysis of amounts shown in the consolidated balance sheet at
September 30, 1998 and 1999 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees................................................. $ 810 $ 607
Active participants...................................... 465 787
------- ------
1,275 1,394
Unrecognized prior service cost............................ (39) (65)
Unrecognized net gain...................................... 73 163
Unrecognized transition obligation......................... (944) (889)
------- ------
Retirement benefit liability............................... $ 365 $ 603
======= ======
</TABLE>
F-17
<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
9.5% in 1999 and grades down uniformly to 4.5% in 2010 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, 1999 accumulated postretirement benefit obligation by $190,000,
and the 1999 service cost plus interest by $55,000. Decreasing the health care
inflation rate by 1% would decrease the September 30, 1999 accumulated
postretirement benefit obligation by $155,000, and the 1999 service cost plus
interest by $42,000. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.50%.
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.
In December 1998, the Company issued 100,000 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
F-18
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
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.
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 generally 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.
In 1999, the Board of Directors amended the plan, which increased the amount of
shares authorized under the plan by 1,000,000 shares. Additionally, the Board of
Directors has authorized the Company to increase the number of shares available
for issuance under the plan by an amount equal to five percent of the total
number of shares of common stock issued by the Company during the preceding
fiscal year. As of September 30, 1998 and 1999, the Company has authorized and
reserved 833,333 and 1,833,333 shares, respectively, of common stock for
issuance under the Plan; and, options available for grant under the Plan were
523,333 and 1,283,065 shares, respectively.
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 is being amortized over the vesting
period and unamortized compensation expense has been recorded as a reduction in
stockholders' equity. During fiscal 1997, 1998 and 1999, compensation expense
recognized in the statements of operations approximated $7,000, $111,000 and
$105,000, 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 1997, 1998 and 1999
F-19
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
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>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C> <C>
Net income (loss) As reported................................ $2,045 $ 264 $1,571
Pro forma.................................. $1,954 $ (12) $1,276
Basic earnings per share As reported................................ $ 2.67 $ 0.26 $ 1.01
Pro forma.................................. $ 2.55 $(0.01) $ 0.82
Diluted earnings per share As reported................................ $ 0.29 $ 0.04 $ 0.18
Pro forma.................................. $ 0.28 $ 0.00 $ 0.15
</TABLE>
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 4.24% to 5.65% and expected lives of 3 to 5
years.
A summary of the status of the Company's stock option plan for the three
years ended September 30, 1999 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Outstanding at October 1, 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......................... 286,228 $6.00
Granted........................................ 311,669 $7.12
Cancelled...................................... (116,257) $6.28
Exercised...................................... (23,374) $3.15
--------- -----
Outstanding at September 30, 1999.................. 2,234,040 $3.62
</TABLE>
The weighted average fair value of options granted during fiscal 1997 and
1998 was $1.94. The weighted-average fair value of options granted during fiscal
1999 was $1.58.
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.
During 1999, 57,333 options were issued at a weighted average exercise price
of $6.00 which was higher than fair market value at the date of grant.
F-20
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10--STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the options outstanding and exercisable as of September 30,
1999 is as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- --------------------------------------------------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF REMAINING EXERCISE NUMBER OF EXERCISE
RANGE OF EXERCISE OPTIONS CONTRACTUAL PRICE PER OPTIONS PRICE PER
PRICES PER SHARE OUTSTANDING LIFE IN YEARS SHARE OUTSTANDING SHARE
- --------------------- ----------- ------------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
0$.63-$ 1.25......... 840,507 2.3 $0.66 840,507 $0.66
3$.00-$ 4.17......... 488,624 5.8 $3.59 387,291 $3.57
4$.85-$12.00......... 904,909 7.5 $6.39 255,671 $6.05
--------- --- ----- --------- -----
0$.63- 12.00......... 2,234,040 5.2 $3.62 1,483,469 $2.35
</TABLE>
NOTE 11--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, 1997, 1998 and 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net income available to common shareholders................. $2,045 $ 264 $1,571
Weighted average number of common shares.................... 765 1,021 1,561
------ ------ ------
Basic earnings per share.................................... $ 2.67 $ 0.26 $ 1.01
====== ====== ======
DILUTED EARNINGS PER SHARE
Net income available to common shareholders................. $2,045 $ 264 $1,571
====== ====== ======
Weighted average number of common shares.................... 765 1,021 1,561
Common equivalent shares related to stock options and
convertible preferred stock............................... 6,227 6,049 7,028
------ ------ ------
Weighted average common and common equivalent shares........ 6,992 7,070 8,589
====== ====== ======
Diluted earnings per share.................................. $ 0.29 $ 0.04 $ 0.18
====== ====== ======
</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, 1997, 1998 and 1999 and their
associated exercise prices are summarized below. The options and warrants expire
at various times between 2002 and 2008.
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------- -------------------
<S> <C> <C> <C>
Number of options and warrants...... 815,333 836,000 396,070
Exercise price...................... $ 5.58-$5.73 $ 5.58-$12.00 $ 6.45-$18.00
</TABLE>
F-21
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12--TRANSACTIONS WITH RELATED PARTIES
At September 30, 1998, the Company had borrowings of $1,500,000 from a
company whose president is a director and shareholder of the Company (Note 6).
Seagate Technology (Seagate), which provides products for storage,
retrieval, and management of data on computer and data communications systems,
is the Company's largest customer and a 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.
During 1999, the Company's President and Chief Executive Officer, who is
also a shareholder, was elected to the Board of Directors of the Company's
principal lender, M&T Bank.
NOTE 13--SEGMENT DATA, SIGNIFICANT CUSTOMERS AND GEOGRAPHIC INFORMATION
The Company adopted the provisions of SFAS No. 131, "Disclosures About
Segments and Related Information," effective October 1, 1998. In connection with
the adoption of SFAS 131, the Company determined that it operates in one
business segment.
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. For the year ended September 30,
1999, sales to the Company's three largest customers comprised 34%, 18% and 14%
of revenues, respectively.
Export sales to customers (including related party sales) outside the United
States represents 31%, 38% and 53% of the Company's revenues for the fiscal
years ended September 30, 1997, 1998 and 1999, respectively. Total sales were
made to the following geographic regions:
<TABLE>
<CAPTION>
NORTHERN
USA IRELAND JAPAN OTHER TOTAL
----------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1997................. $43,126,000 5,409,000 9,767,000 4,286,000 $62,588,000
1998................. 42,284,000 13,194,000 9,075,000 3,620,000 $68,173,000
1999................. 39,130,000 11,672,000 20,505,000 11,608,000 $82,915,000
</TABLE>
NOTE 14--COMMITMENTS
The Company leases various equipment and facilities under operating lease
agreements. Rental expense under operating lease agreements was approximately
$289,000, $774,000 and $1,318,000 in fiscal years 1997, 1998 and 1999,
respectively. The future minimum lease payments under non-cancelable lease
agreements are $1,430,000 in 2000, $1,028,000 in 2001, $201,000 in 2002 and
$25,000 in 2003 and $4,000 in 2004.
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 determined to suspend efforts to complete the public offering
and, accordingly, these costs were charged against current period earnings.
F-22
<PAGE>
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16--SUBSEQUENT EVENT
In October 1999, the Company's Series C Preferred Stock, Series B Preferred
Stock, Series A Preferred Stock, and Common Stock shareholders approved an
amendment to the Amended and Restated Certificate of Incorporation which
provides for a 2-for-3 reverse stock split (Note 1) as well as the elimination
of the $12.50 price per share requirement for the automatic conversion of
Series C Preferred Stock, Series B Preferred Stock, and Series A Preferred Stock
into common stock upon the closing of an initial public offering.
F-23
<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 LLP
Vienna, Virginia
May 17, 1999
F-24
<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-25
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
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-26
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
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 TAX (PROVISION) 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-27
<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-28
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
-------------------------------------
1997 1998 1999
---------- ---------- -----------
<S> <C> <C> <C>
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-29
<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>
Building and improvements................................... 5 to 31.5 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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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 statements of operations is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1997 1998 1999
---------- -------- -----------
<S> <C> <C> <C>
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-36
<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.
F-37
<PAGE>
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
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, 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-38
<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.............................. 265,000
Legal fees and expenses..................................... 300,000
Printing and engraving expenses............................. 150,000
Transfer agent and registrar fees........................... 18,000
Miscellaneous............................................... 87,973
----------
Total................................................... $ 900,000
==========
</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 pursuant
to the exercise of such individual's stock options.
On March 18, 1997, Patrick Borrelli purchased 200 shares of common stock for
$808 pursuant to the exercise of such individual's stock options.
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 pursuant to the
exercise of such individual's stock options.
On August 11, 1997, Yong Jin Lee purchased 20,000 shares of common stock for
$12,500 pursuant to the exercise of such individual's stock options.
On September 15, 1997, Cecil Davis purchased 20,000 shares of common stock
for $25,000 pursuant to the exercise of such individual's stock options.
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.
II-2
<PAGE>
On October 21, 1997, Rhen Zhou purchased 1,334 shares of common stock for
$5,389 pursuant to the exercise of such individual's stock options.
On October 31, 1997, Carla Reif purchased 668 shares of common stock for
$2,699 pursuant to the exercise of such individual's stock options.
On November 5, 1997, Cecil Davis purchased 33,333 shares of common stock for
$41,666 pursuant to the exercise of such individual's stock options.
On November 18, 1997, Mehrdad Moslehi purchased 48,000 shares of common
stock for $30,240 pursuant to the exercise of such individual's stock options.
On December 2, 1997, Mehrdad Moslehi purchased 112,000 shares of common
stock for $70,360 pursuant to the exercise of such individual's stock options.
On December 8, 1997, Jeff Dobbs purchased 1,334 shares of common stock for
$5,383 pursuant to the exercise of such individual's stock options.
On December 8, 1997, George Heltz purchased 668 shares of common stock for
$2,699 pursuant to the exercise of such individual's stock options.
On March 24, 1998, Peter Schwartz purchased 667 shares of common stock for
$2,695 pursuant to the exercise of such individual's stock options.
On April 1, 1998, the Company issued 9,331 shares of common stock to various
non-employee directors as payment of their annual retainer.
On September 1, 1998, Jalil Kamali purchased 1,334 shares of common stock
for $5,389 pursuant to the exercise of such individual's stock options.
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.
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
$100.00 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 1,268,799 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 10,665 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 pursuant to the exercise of such individual's stock options.
On September 14, 1999, Kitaek Kang purchased 2,133 shares of common stock
for $9,670 pursuant to the exercise of such individual's stock options.
On September 23, 1999, David Kolczynski purchased 7,200 shares of common
stock for $29,052 pursuant to the exercise of such individual's stock options.
On September 30, 1999, Zeming Liu purchased 1,200 shares of common stock for
$6,870 pursuant to the exercise of such individual's stock options.
II-3
<PAGE>
On September 30, 1999, David Day purchased 4,841 shares of common stock for
$18,007 pursuant to the exercise of such individual's stock options.
During the fiscal year ended September 30, 1999, the Company granted options
to acquire an aggregate of 311,669 shares of common stock at exercise prices
ranging from $6.00 to $11.70 to various directors, officers, employees and/or
consultants. In addition, the company assumed 286,228 shares of common stock at
exercise prices ranging from $3.72 to $6.95 as part of its acquisition of
Commonwealth.
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.**
3.1.1 Amendment to the Restated Certificate of Incorporation to be
effective on or about the time of pricing of this
offering.**
3.1.2 Restated Certificate of Incorporation to be effective at the
closing of this offering.**
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 Amended and Restated 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 Tecno Co., Inc.**
10.10 U.S. $500,000 Subordinated Promissory Note, dated November
14, 1990, between the Registrant and Nikko Tecno Co., Inc.**
10.11 Letter extending repayment of U.S. $1,000,000 and U.S.
$500,000 Subordinated Promissory Notes, dated August 18,
1997, by Nikko Tecno Co., Inc.**
10.12 Mortgage Note, dated September 29, 1997, between Registrant
and M&T Real Estate, Inc.**
10.13 Mortgage, dated September 29, 1997, between Registrant and
M&T Real Estate, Inc.**
10.14 Continuing Guaranty, dated September 29, 1997, between
Registrant and M&T Real Estate, Inc.**
10.15 General Assignment of Rights, dated September 29, 1997,
between Registrant and M&T Real Estate, Inc.**
10.16 Amendment No. 1 to General Security Agreement, dated
September 29, 1997, by and among the Registrant, M&T Trust
Company and the County of Monroe Industrial Development
Agency.**
</TABLE>
II-4
<PAGE>
<TABLE>
<C> <S>
10.17 Amended and Restated Lease Agreement, dated September 29,
1997, between Registrant and the County of Monroe Industrial
Development Agency.**
10.18 Bill of Sale, dated September 29, 1997, executed by
Registrant.**
10.19 Lease Agreement, dated November 7, 1995, between Registrant
and SCI Limited Partnership.**
10.20 $3,000,000 Term Loan Agreement, dated September 30, 1996, by
Registrant and M&T Trust Company.**
10.21 Letter of Credit Reimbursement Agreement, dated November 21,
1995 between CVC Holdings Inc. and M&T Trust Company.**
10.22 Continuing Guaranty of CVC Holdings, dated February 2, 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 February
2, 1996, by Registrant.**
10.25 General Security Agreement of CVC Holdings, dated February
2, 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 Christine B. Whitman.**
10.28 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 April 1, 1999, between the
Registrant and George R. Thompson, Jr.**
</TABLE>
II-5
<PAGE>
<TABLE>
<C> <S>
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.**
10.44 Loan Agreement, dated March 31, 1998, between CVC Products,
Inc. and M&T Trust Company.**
10.45 Letter Amendment, dated September 30, 1998 to Loan Agreement
dated March 31, 1998, between CVC Products, Inc. and M&T
Trust Company.**
10.46 Letter Amendment, dated February 19, 1999 to Loan Agreement
dated March 31, 1998, between CVC Products, Inc. and M&T
Trust Company.**
10.47 Amendment, dated September 22, 1999 to Loan Agreement, dated
March 31, 1998 between CVC Products, Inc. and M&T Trust
Company.**
10.48 Patent Collateral Assignment and Security Agreement, dated
September 22, 1999, between Commonwealth Scientific
Corporation and M&T Trust Company.**
10.49 Amended and Restated Patent Collateral Assignment and
Security Agreement, dated September 22, 1999, among, CVC
Products, Inc. and M&T Trust Company.**
10.50 Trademark Collateral Assignment and Security Agreement,
dated September 22, 1999, between Commonwealth Scientific
Corporation and M&T Trust Company.**
10.51 Acknowledgement and Agreement, dated September 22, 1999
among Registrant, CVC Products, Inc. and M&T Trust
Company.**
10.52 General Security Agreement, dated September 22, 1999 between
CVC Process Solutions, Inc. and M&T Trust Company.**
10.53 General Security Agreement, dated September 3, 1999 between
Commonwealth Scientific Corporation and M&T Trust Company.**
10.54 Continuing Guaranty, dated September 22, 1999 among
Registrant, Commonwealth Scientific Corporation and M&T
Trust Company.**
10.55 Continuing Guaranty, dated September 22, 1999 among
Registrant, CVC Process Solutions, Inc. and M&T Trust
Company.**
10.56 Master Equipment Lease No. 1, dated April 7, 1998 between
CVC Products, Inc. and M&T Financial Corporation.**
10.57 Lease Agreement, dated February 1, 1995, between North Point
Associates Limited Partnership and Commonwealth Scientific
Corporation.**
10.58 Lease Agreement, dated August 14, 1996 between North Point
Associates Limited Partnership and Commonwealth Scientific
Corporation.**
11.0 Computation of Earnings Per Share.**
21.1 List of Subsidiaries.**
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>
- ------------------------
** Previously filed
+ Filed herewith
II-6
<PAGE>
(b) Consolidated Financial Statement Schedules
All schedules have been omitted because they are not required or because the
required information is given in the Consolidated Financial Statements or Notes
thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the underwriters,
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at the
time shall be deemed to be the initial bona fide offering thereof.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Rochester,
State of New York, on November 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 November 3, 1999 in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board, Chief
/s/ CHRISTINE B. WHITMAN Executive Officer and
--------------------------------------- President (principal November 10, 1999
Christine B. Whitman executive officer)
Senior Vice President and
/s/ EMILIO O. DICATALDO Chief Financial Officer
--------------------------------------- (principal accounting and November 10, 1999
Emilio O. DiCataldo financial officer)
/s/ ROBERT C. FINK* Director
--------------------------------------- November 10, 1999
Robert C. Fink
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ MAURICE F. HOLMES* Director
--------------------------------------- November 10, 1999
Maurice F. Holmes
/s/ DOUGLAS A. KINGSLEY* Director
--------------------------------------- November 10, 1999
Douglas A. Kingsley
/s/ THOMAS C. MCDERMOTT* Director
--------------------------------------- November 10, 1999
Thomas C. McDermott
/s/ SEIYA MIYANISHI* Director
--------------------------------------- November 10, 1999
Seiya Miyanishi
/s/ GEORGE R. THOMPSON, JR.* Director
--------------------------------------- November 10, 1999
George R. Thompson, Jr.
/s/ DONALD L. WAITE* Director
--------------------------------------- November 10, 1999
Donald L. Waite
</TABLE>
<TABLE>
<S> <C>
*By: /s/ EMILIO O. DICATALDO
-------------------------------------------
Emilio O. DiCataldo
(ATTORNEY IN FACT)
</TABLE>
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<C> <S>
1.1 Underwriting Agreement.**
3.1 Amended and Restated Certificate of Incorporation of the
Registrant.**
3.1.1 Amendment to the Restated Certificate of Incorporation to be
effective on or about the time of pricing of this
offering.**
3.1.2 Restated Certificate of Incorporation to be effective at the
closing of this offering.**
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 Amended and Restated 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 Tecno Co., Inc.**
10.10 U.S. $500,000 Subordinated Promissory Note, dated November
14, 1990, between the Registrant and Nikko Tecno Co., Inc.**
10.11 Letter extending repayment of U.S. $1,000,000 and U.S.
$500,000 Subordinated Promissory Notes, dated August 18,
1997, by Nikko Tecno Co., Inc.**
10.12 Mortgage Note, dated September 29, 1997, between Registrant
and M&T Real Estate, Inc.**
10.13 Mortgage, dated September 29, 1997, between Registrant and
M&T Real Estate, Inc.**
10.14 Continuing Guaranty, dated September 29, 1997, between
Registrant and M&T Real Estate, Inc.**
10.15 General Assignment of Rights, dated September 29, 1997,
between Registrant and M&T Real Estate, Inc.**
10.16 Amendment No. 1 to General Security Agreement, dated
September 29, 1997, by and among the Registrant, M&T Trust
Company and the County of Monroe Industrial Development
Agency.**
10.17 Amended and Restated Lease Agreement, dated September 29,
1997, between Registrant and the County of Monroe Industrial
Development Agency.**
10.18 Bill of Sale, dated September 29, 1997, executed by
Registrant.**
10.19 Lease Agreement, dated November 7, 1995, between Registrant
and SCI Limited Partnership.**
10.20 $3,000,000 Term Loan Agreement, dated September 30, 1996, by
Registrant and M&T Trust Company.**
10.21 Letter of Credit Reimbursement Agreement, dated November 21,
1995 between CVC Holdings Inc. and M&T Trust Company.**
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.22 Continuing Guaranty of CVC Holdings, dated February 2, 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 February
2, 1996, by Registrant.**
10.25 General Security Agreement of CVC Holdings, dated February
2, 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 Christine B. Whitman.**
10.28 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 April 1, 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.**
10.44 Loan Agreement, dated March 31, 1998, between CVC Products,
Inc. and M&T Trust Company.**
10.45 Letter Amendment, dated September 30, 1998 to Loan Agreement
dated March 31, 1998, between CVC Products, Inc. and M&T
Trust Company.**
10.46 Letter Amendment, dated February 19, 1999 to Loan Agreement
dated March 31, 1998, between CVC Products, Inc. and M&T
Trust Company.**
</TABLE>
<PAGE>
<TABLE>
<C> <S>
10.47 Amendment, dated September 22, 1999 to Loan Agreement, dated
March 31, 1998 between CVC Products, Inc. and M&T Trust
Company.**
10.48 Patent Collateral Assignment and Security Agreement, dated
September 22, 1999, between Commonwealth Scientific
Corporation and M&T Trust Company.**
10.49 Amended and Restated Patent Collateral Assignment and
Security Agreement, dated September 22, 1999, among, CVC
Products, Inc. and M&T Trust Company.**
10.50 Trademark Collateral Assignment and Security Agreement,
dated September 22, 1999, between Commonwealth Scientific
Corporation and M&T Trust Company.**
10.51 Acknowledgement and Agreement, dated September 22, 1999
among Registrant, CVC Products, Inc. and M&T Trust
Company.**
10.52 General Security Agreement, dated September 22, 1999 between
CVC Process Solutions, Inc. and M&T Trust Company.**
10.53 General Security Agreement, dated September 3, 1999 between
Commonwealth Scientific Corporation and M&T Trust Company.**
10.54 Continuing Guaranty, dated September 22, 1999 among
Registrant, Commonwealth Scientific Corporation and M&T
Trust Company.**
10.55 Continuing Guaranty, dated September 22, 1999 among
Registrant, CVC Process Solutions, Inc. and M&T Trust
Company.**
10.56 Master Equipment Lease No. 1, dated April 7, 1998 between
CVC Products, Inc. and M&T Financial Corporation.**
10.57 Lease Agreement, dated February 1, 1995, between North Point
Associates Limited Partnership and Commonwealth Scientific
Corporation.**
10.58 Lease Agreement, dated August 14, 1996 between North Point
Associates Limited Partnership and Commonwealth Scientific
Corporation.**
11.0 Computation of Earnings Per Share.**
21.1 List of Subsidiaries.**
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>
- ------------------------
** Previously filed
+ Filed herewith
<PAGE>
Exhibit 5.1
[LETTERHEAD OF DEWEY BALLANTINE LLP]
November 10, 1999
CVC, Inc.
525 Lee Road
Rochester, New York 14606
Re: CVC, Inc. - Registration Statement
on Form S-1 (the "Registration Statement")
Dear Ladies and Gentlemen:
We are acting as counsel for CVC, Inc., a Delaware corporation
(the "Company"), in connection with the proposed issuance and sale pursuant
to the Registration Statement (File No. 333-38057) of shares of common stock,
par value $0.01 per share, of the Company (the "Shares").
We have examined such corporate records, certificates and
other documents as we have considered necessary for the purposes hereof. In
such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals, the conformity to
the original documents of all documents submitted to us as copies and the
authenticity of the originals of such latter documents. As to any facts
material to our opinion, we have, when relevant facts were not independently
established, relied upon the aforesaid records, certificates and documents.
Based on the foregoing, we are of the opinion that, upon
issuance and delivery in accordance with the Underwriting Agreement filed as
Exhibit 1.1 to the Registration Statement, the Shares will be duly
authorized, validly issued, fully paid and nonassessable.
Our opinion set forth herein is limited in all cases to
matters arising under the laws of the State of Delaware and judicial
interpretations thereof. We consent to the use of this opinion as an Exhibit
to the Registration Statement and to the reference to our firm under the
caption "Legal Matters" in the prospectus that is a part of the Registration
Statement. In giving such consent, we do not thereby concede that we are
within the category of persons whose consent is required under Section 7 of
the Securities Act of 1933, as amended, or the rules and regulations of the
Commission thereunder.
Very truly yours,
/s/ Dewey Ballantine LLP
Dewey Ballantine LLP
<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 October 18, 1999 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
November 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
November 9, 1999
