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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13
OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1999
or
TRANSITION REPORT PURSUANT TO SECTION
13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM . . . . . . . . TO . . . . . . .
COMMISSION FILE NUMBER 0-23227
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CVC, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 16-1383279
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
525 LEE ROAD
ROCHESTER, NEW YORK 14626
(Address of principal executive offices, zip code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (716) 458-2550
SECURITIES REGISTERED PURSUANT TO SECTION
12(B) OF THE ACT: NONE SECURITIES
REGISTERED PURSUANT TO SECTION 12(G) OF
THE ACT:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file Such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes / / no / X /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [|X|]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant based on the closing price of Common Stock on November 12, 1999
of $10.94 as reported on the Nasdaq National Market was approximately $48.270
million. Shares of Common Stock held by each officer and director and by each
person who owns 5% or more of the outstanding Common Stock have been excluded in
that such person may be deemed to be affiliates. This determination of affiliate
status is not necessarily a conclusive determination for other purposes.
As of November 12, 1999, 11,492,707 shares of Common Stock, $.01 par value
per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
/ None /
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Table of Contents
PART I
Item 1. Business.............................................................1
Item 2. Properties..........................................................14
Item 3. Legal Proceedings...................................................14
Item 4. Submission of Matters to a Vote of Security Holders.................14
PART II
Item 5. Market for the Company's Common Equity and Related
Stockholder Matters.................................................15
Item 6. Selected Financial Data.............................................16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................17
Item 8. Financial Statements and Supplementary Data.........................26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................................29
PART III
Item 10. Directors and Executive Officers of the Registrant..................30
Item 11. Executive Compensation..............................................33
Item 12. Security Ownership of Certain Beneficial Owners and Management......34
Item 13. Certain Relationships and Related Transactions......................36
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K......38
Item 15. Signatures..........................................................41
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PART I
ITEM 1. 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.
RECENT DEVELOPMENTS
Stock split
On August 30, 1999, the CVC declared a two-for-three reverse stock split
which became effective in connection with its initial public offering in
November 1999. This reverse stock split decreased the number of common shares
outstanding by 1,172,688. Accordingly, all share and per share amounts for all
periods presented herein have been retroactively adjusted to give effect to this
stock split.
Public offering
On November 12, 1999, CVC received net proceeds of $27.9 million from a
public equity offering, consisting of 3,000,000 shares of common stock sold by
CVC and 500,000 shares of common stock sold by certain shareholders of CVC at an
initial offering price of $10.00 per share. Total common shares outstanding
after the offering were 11,492,707. CVC used a portion of the net proceeds from
the offering to repay approximately $15.0 million of debt, $10.0 million for the
redemption of the Series D Redeemable Preferred Stock and the balance for
general corporate purposes. CVC did not receive any of the proceeds from the
sale of shares by the selling shareholders.
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:
o the exchange of increasing volumes of data among users across the Internet
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and intranets;
o the rapid accumulation of data resulting from growth of digital content,
including audio, video and data;
o continued improvements in computing price performance ratios, including the
emergence of the sub-$1,000 personal computer; and
o 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.
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.
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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:
o incorporates highly specialized processing and systems knowledge;
o enables the precise, uniform deposition of a wide range of thin film
materials;
o supports a variety of deposition and etching processes on an integrated
platform; and
o 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:
o the deposition and removal of multiple thin film materials in a vacuum
environment;
o advanced physics and material science;
o engineering of microelectronic and atomic components; and
o 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 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.
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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 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 Scientific Corporation,
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.
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5
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>
DATA STORAGE
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MATERIALS GROUPS SPECIFIC MATERIALS PRODUCT APPLICATIONS
- ---------------- ------------------ --------------------
<S> <C> <C>
Conductors Aluminum Tantalum
Chromium Titanium
Copper Titanium/Tungsten
Gold Tungsten
Molybdenum
Platinum
Magnetic Aluminum Silicon Iron Iridium Manganese Inductive,
Materials Cobalt Chromium Iron Manganese Magnetoresistive
Platinum Iron Tantalum Nitride and Giant
Cobalt Iron Nickel Iron Magnetoresistive
Cobalt Platinum Nickel Iron Rhodium Recording Heads
Cobalt Zirconium Nickel Manganese for Disk Drives
Tantalum Platinum Chromium
Cobalt Zirconium Manganese
Niobium Platinum Manganese
Insulating Aluminum Nitride Silicon Nitride
Aluminum Oxide Silicon Oxide
Wear-Resistant Diamond-like-carbon, or DLC
Coatings
</TABLE>
<TABLE>
SEMICONDUCTOR DEVICES
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MATERIALS GROUPS SPECIFIC MATERIALS PRODUCT APPLICATIONS
- ---------------- ------------------ --------------------
<S> <C> <C>
Conductors Aluminum (alloys) Titanium
Cobalt Titanium Silicide
Copper Titanium Tungsten Nitride
Gold Tungsten Gallium Arsenide
Nickel and Silicon
Platinum Semiconductors
Barrier/Liner/ Tantalum Titanium Logic and Memory
Glue/ Tantalum Nitride Titanium Nitride Integrated Circuits
Layers
High-k Barium Strontium Tantalum Pentoxide
Dielectrics Titanate Titanium Oxide Analog and Mixed
Signal Integrated
Circuits
Other Blue Phosphor Silicon Chromium Carbon
Specialty Chromium Silicon Nitride Tantalum Nitride
Materials Nickel Chromium Zinc Oxide
Silicon Chromium
</TABLE>
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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.
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.
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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.
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.
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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 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> <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.
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10
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
terminated upon consummation of CVC's initial public offering in November 1999.
See "Business - Recent Developments - Public Offering." As of September 30,
1999, Seagate Technology owned shares representing approximately 29% 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 of $5.58 per share. Assuming full exercise
of this warrant, Seagate Technology would own an aggregate of approximately 35%
of CVC's outstanding common stock as of September 30, 1999.
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.
<PAGE>
11
CVC generally warrants its new systems for 15 months from the date of
shipment. CVC generally warrants to an original purchaser of its new systems
that the products and parts manufactured or assembled by CVC and the application
software supplied will be free from defects in materials and workmanship under
normal use. Installation is included in the price of the system. CVC's field
service engineers provide customers with call-out repair and maintenance
services for a fee. Customers may also enter into repair and maintenance service
contracts covering CVC's systems. For a fee, CVC trains its customers' service
engineers to perform routine services, and, in addition, CVC provides its
customers with 24-hour a day, seven day a week, telephone consultation services.
CVC also has customer support centers located in New York, California, Texas,
Minnesota, Virginia, Northern Ireland and Japan.
RESEARCH 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.
<PAGE>
12
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 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:
o the ability to develop and introduce new products rapidly
o product and technology innovation
o product quality and reliability
o product performance
o breadth of its product line
o price
o technical service and support
o adequacy of manufacturing quality and capacity and sources of raw materials
o efficiency of production
<PAGE>
13
o delivery capabilities
o protection of CVC's products by intellectual property laws
CVC believes it competes favorably in the data storage and semiconductor
manufacturing markets based on its 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.
<PAGE>
14
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.
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.
ITEM 2. PROPERTIES
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.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, CVC may be involved in legal
proceedings from time to time. Currently, there are no material legal
proceedings pending against CVC.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In December 1998, in connection with a private placement (the "Advent
Private Placement") by CVC of preferred stock with entities affiliated with
Advent International Corporation, CVC shareholders consented in writing in lieu
of meeting to the following:
<PAGE>
15
o the sale by CVC of 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;
o an Amended and Restated Registration Rights Agreement with Advent, Seagate
Technology, Nikko Tecno and certain executive officers and stockholders of
CVC which grants demand and piggy-back registration rights to Seagate
Technology and Advent, as well as piggy-back registration rights to certain
executive officers and stockholders of CVC;
o an Amended and Restated Stockholders' Agreement with Advent, Seagate
Technology, Nikko Tecno and certain executive officers and stockholders of
CVC providing for voting and pre-emptive rights with respect to the
acquisition and sale of shares by CVC, as well as matters affecting
corporate governance; and
o the election of Douglas Kinglsey, a Managing Director of Advent, to the CVC
Board of Directors.
62,161 and 835,233 preferred and common shares, respectively, voted in
favor of these transactions and 16 and 222,698 preferred and common shares,
respectively, abstained.
In April 1999, in connection with the acquisition by CVC of Commonwealth
Scientific Corporation, CVC shareholders consented in writing in lieu of meeting
to the following:
o the acquisition by CVC of Commonwealth for consideration of 1,268,799
shares of CVC common stock, the exchange and assumption of Commonwealth
options for options to purchase 286,228 shares of CVC common stock, and
related acquisition costs;
o amendments to the Company's Amended and Restated Certificate of
Incorporation with respect to voting rights of the Company's preferred
stock;
o an Amended and Restated Registration Rights Agreement with Advent, Seagate
Technology, Nikko Tecno and executive officers and stockholders of CVC
which grants demand and piggy-back registration rights to Seagate
Technology and Advent, as well as piggy-back registration rights to certain
executive officers and stockholders of CVC;
o an Amended and Restated Stockholders' Agreement with Advent, Seagate
Technology, Nikko Tecno and certain executive officers and stockholders of
CVC providing for voting and pre-emptive rights with respect to the
acquisition and sale of shares by CVC, as well as matters affecting
corporate governance; and
o the election of George R. Thompson, former President of Commonwealth, to
the CVC Board of Directors.
162,031 and 690,983 preferred and common shares, respectively, voted in
favor of these actions and 146 and 366,948 preferred and common shares,
respectively, abstained.
The Series C Convertible Preferred Stock issued in connection with Advent
Private Placement was automatically converted into 1,016,260 shares of CVC
common stock, as well as 100,000 shares of Series D Redeemable Preferred Stock
upon consummation of CVC's initial public offering in November 1999. In
addition, the Amended and Restated Stockholders' Agreement and the warrants
issued in the Advent Private Placement terminated upon the consummation of CVC's
initial public offering in November 1999. See "Business - Recent Developments -
Public Offering."
<PAGE>
16
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Market for Common Stock and Holders of Record
As of September 30, 1999, there was no public market for shares of CVC's
Common Stock. On such date, there were approximately 66 holders of record of CVC
common stock, assuming the conversion of all outstanding shares of Convertible
Preferred Stock of CVC.
During fiscal year ended September 30, 1999, CVC 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 CVC believes that such transaction were exempt from the
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), by reason of Section 4(2) or Regulation D thereof based on
the private nature of the transactions and the sophistication of the purchasers,
all of whom had access to information concerning CVC and acquired the securities
for investment and not with a view to the distribution thereof.
The following figures give effect to a 2-3 reverse stock split in September
1999.
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 CVC's initial public offering in November
1999, such shares automatically converted into 1,016,260 shares of CVC common
stock and Series D Redeemable Preferred 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. This warrant terminated upon the consummation of
CVC's initial public offering in November 1999. See "Business - Recent
Developments - Public Offering."
In May 1999, CVC 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, CVC 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.
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, CVC 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, CVC assumed 286,228 shares of common stock at exercise
prices ranging from $3.72 to $6.95 as part of its acquisition of Commonwealth.
<PAGE>
17
DIVIDENDS
CVC has never paid or declared cash dividends on its common stock. CVC
currently intends to retain all future earnings for its business and does not
anticipate paying cash dividends in the foreseeable future. CVC is restricted
under the terms of some of its credit agreements from paying any dividends to
stockholders without the prior written consent of the lenders. Future dividends,
if any, will depend on, among other things: (1) CVC's operating results, (2)
capital requirements and (3) restrictions in loan agreements.
USE OF PROCEEDS FROM REGISTERED SECURITIES
Not applicable.
ITEM 6. SELECTED 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 Form 10-K. 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 Form 10-K. 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 Form 10-K.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
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>
<PAGE>
18
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,
1995 1996 1997 1998 1999 PRO FORMA
---- ---- ---- ---- ---- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C> <C>
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>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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.
<PAGE>
19
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 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.
<PAGE>
20
<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 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.
<PAGE>
21
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:
o 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.
o The etch modules are being designed to support the market requirements for
ion beam processing applications.
o The deposition modules are being designed to support very thin metallic
film through ion beam sputter deposition of target materials.
o The dielectric deposition modules are being designed to support very thin
dielectric film through ion beam sputter deposition of target materials.
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.
<PAGE>
22
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.
<PAGE>
23
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.
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.
<PAGE>
24
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 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.
YEAR 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of CVC's computer programs
or hardware or other equipment that have date-sensitive software or embedded
chips may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices or engage in similar normal business
activities.
<PAGE>
25
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 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.
<PAGE>
26
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At September 30, 1999 the Company did not hold any market risk sensitive
instruments.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements of the Company are listed in the Index to the
Consolidated Financial Statements and Financial Statement Schedule filed as part
of this Form 10-K under Item 14.
QUARTERLY RESULTS OF OPERATIONS
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 Form 10-K 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 Form 10-K. CVC's operating results for any
one quarter are not necessarily indicative of results for any future period.
<PAGE>
27
<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)
STATEMENTS OF
OPERATIONS:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 ....... 1,259 634 541 (67) 1,225 1,525 (131) 1,087
operations
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, DEC31, MAR 31, JUNE 30, SEPT 30,
1997 1998 1998 1998 1998 1999 1999 1999
---- ---- ---- ---- ---- ---- ---- ----
PERCENTAGE OF
REVENUE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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 -- 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>
<PAGE>
28
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:
o specific economic conditions in the data storage and semiconductor
industries
o the timing of significant orders
o cyclical patterns of capital spending by customers
o modification or cancellation of customer orders
o continued market acceptance of our systems and our customers' products
o shipment delays
o loss of a significant customer
o increased research and development or marketing costs associated with our
introduction of new products
o introduction of new products by our customers
o our ability to successfully introduce new products on a timely basis
o changes in our pricing policies or those of our competitors
o production and quality problems
o the publication of opinions by industry analysts about us, our products or
our competitors
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.
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 Form 10-K, 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 Form 10-K.
The unaudited pro forma combined statements of operations give effect
to the following pro forma adjustments necessary to reflect the acquisition of
Commonwealth:
o Reduction in operating expenses related to the restructuring activities
undertaken, solely comprised of Commonwealth employees terminated as of or
shortly after the acquisition;
o 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;
o Amortization of goodwill and other intangibles over periods ranging from
five to seven years; and
o Decrease in income taxes related to adjustments.
<PAGE>
29
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)
STATEMENTS OF OPERATIONS:
<S> <C> <C> <C> <C>
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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
<PAGE>
30
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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
<FN>
- -----------
* Upon consummation of CVC's initial public offering in November 1999, Mr.
Thompson retired as a director of CVC.
</FN>
</TABLE>
Ms. Whitman joined CVC Products in 1978 and has served as President, Chief
Executive Officer and Chairman of CVC since its acquisition of CVC Products in
1990. Ms. Whitman received a BA from Syracuse University and is a member and
Secretary of the Board of Directors of SEMI/SEMATECH. She also serves as a
member of the Board of Directors of Frontier Telephone of Rochester and The M&T
Bank. Ms. Whitman serves on the Executive Committee of the Board of Directors of
the Industrial Management Council, the Board of Trustees for the Greater
Rochester Chamber of Commerce, the United Way Board of Directors, the Al Sigl
Center Partners' Foundation Board of Governors and is a member of the Board of
Trustees of Rochester Institute of Technology.
Dr. Nocerino joined CVC in 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 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.
<PAGE>
31
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 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.
<PAGE>
32
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. Upon consummation of CVC's initial public offering in
November 1999, Mr. Thompson retired as a director of CVC.
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.
Mr. Douglas Kingsley and Mr. George R. Thompson did not file Form 3s with
the Securities and Exchange Commission at the time they became directors of CVC
(Mr. Kingsley in December 1998 and Mr. Thompson in May 1999). Both Mr. Thompson
and Mr. Kingsley filed Form 3s on November 10, 1999 in connection with CVC's
initial public offering. Advent International did not file a Form 3 with the
Securities and Exchange Commission at the time it became a 10% shareholder of
CVC pursuant to a private placement of CVC preferred stock December 1998. Upon
completion of CVC's initial public offering in November 1999, Advent
International Corporation was no longer a 10% shareholder of CVC.
<PAGE>
33
ITEM 11. 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:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
NUMBER OF
SECURITIES
UNDERLYING
OPTIONS/SARS
ANNUAL COMPENSATION LONG-TERM
-------------------
ALL
OTHER ANNUAL COMPENSATION OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) AWARDS (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 224,950 -- $ 75,654(3) -- 3,085
1998 183,333 -- 16,535 160,000 --
1997(4) -- -- -- -- --
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 -- 30,000 2,213
1998 146,692 31,800 -- -- 1,900
1997 142,551 34,400 46,930(6) 48,000 1,330
<FN>
- -----------
(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 $2,760.
</FN>
</TABLE>
<PAGE>
34
The following table sets forth information regarding the option grants
made during fiscal 1999 to each of the executive officers. CVC issued no stock
appreciation rights in fiscal 1999.
<TABLE>
<CAPTION>
OPTION GRANTS
INDIVIDUAL GRANTS
-----------------
VALUE AT ASSUMED
PERCENT OF ANNUAL RATES OF
NUMBER OF TOTAL OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE OR APPRECIATION FOR
UNDERLYING EMPLOYEES IN BASE PRICE EXPIRATION OPTION TERM
NAME OPTIONS FISCAL 1999 ($/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.
<TABLE>
<CAPTION>
YEAR END OPTION VALUES
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 $3,263,456 $293,880
Giovanni Nocerino .. 53,333 106,667 227,732 455,468
Mehrdad M. Moslehi . 3,200 21,467 13,664 85,868
Christopher J. Mann 206,000 25,667 1,905,332 113,666
Emilio O. DiCataldo 142,800 49,200 1,081,812 241,152
<FN>
- -----------
(1) The value of the unexercised, in-the-money options on September 30,
1999 is based on the difference between the initial public offering
price of the common stock and the per share option exercise price,
multiplied by the number of shares of common stock underlying the
options.
</FN>
</TABLE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
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 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 OWNED
PRIOR TO THE OFFERING(1)(2)
---------------------------
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- ------ -------
<S> <C> <C>
Seagate Technology(3) .......................... 3,219,073 34.7%
920 Disc Drive
Scotts Valley, CA 95066-4544
Nikko Tecno(4) ................................. 1,412,316 16.6
P.O. Box 139
Central Tokyo, Japan
Advent International Group(5) .................. 1,017,593 12.0
75 State Street
Boston, MA 02109
Anne G. Whitman(6) ............................. 1,108,800 13.1
370 Canfield Drive
Pittsford, NY 14534
Christine B. Whitman(7) ........................ 726,400 8.2
Giovanni Nocerino .............................. 106,667 1.2
Emilio O. DiCataldo ............................ 146,000 1.7
Mehrdad M. Moslehi ............................. 307,200 3.6
Christopher J. Mann(8) ......................... 283,676 3.2
Richard J. Chicotka ............................ 85,600 1.0
Richard A. Kellogg ............................. 8,267 *
Judd C. Prozeller .............................. 28,133 *
Robert C. Fink ................................. 4,888 *
Douglas A. Kingsley(7)(9) ...................... 1,017,593 12.0
Seiya Miyanishi(7)(10) ......................... 1,412,316 16.6
George R. Thompson, Jr.(7)(11) ................. 862,449 10.2
Donald L. Waite(7)(12) ......................... 3,219,073 34.7
Thomas C. McDermott ............................ -- --
Maurice F. Holmes .............................. -- --
All directors and executive
officers as a group
(15 persons)(13) ........................... 8,208,262 80.2%
<FN>
- -----------
* 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.
<PAGE>
35
(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 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. Upon consummation of CVC's initial
public offering in November 1999, Mr. Thompson retired as a director of
CVC.
(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.
<PAGE>
36
(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.
</FN>
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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 was 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 CVC's intitial public offering in November 1999. In
addition, the Series D Redeemable Preferred Stock was redeemed by CVC upon the
consummation of such offering for a redemption price of $10.0 million and the
warrant to purchase common stock was terminated. See "Business - Recent
Developments - Public Offering."
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. 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. This agreement and
the rights contained therein terminated upon the consummation of CVC's initial
public offering in November 1999. See "Business - Recent Developments - Public
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:
o 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
o upon Mr. Thompson's death.
<PAGE>
37
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
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.
<PAGE>
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(1) The Registrant's financial statements together with a separate table of
contents are annexed hereto.
(2) There were no financial statement schedules required to be filed because
they are not applicable or the required information is shown in the
Consolidated Financial Statements or notes thereto.
(3) Exhibits:
<TABLE>
<S> <C>
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 CVC's initial public offering.**
3.1. Restated Certificate of Incorporation to be effective at the closing of
CVC's intial public 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.**
<PAGE>
39
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% Shareholders.**
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.**
<PAGE>
40
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
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.*
<FN>
* Filed herewith.
** Previously filed as an Exhibit to the Registrant's Registration Statement
on Form S-1 (Registration No. 333-38057) and incorporated herein by
reference.
</FN>
</TABLE>
<PAGE>
41
ITEM 15. SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
CVC, INC.
By: /s/ Christine B. Whitman
-----------------------------
Christine B. Whitman
Chairman of the Board,
President and Chief Executive
Officer
Dated: December 28, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities indicated and
on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C> <C>
Chairman of the Board, Chief Executive Officer December 28, 1999
/s/ Christine B. Whitman and President (principal executive officer)
- ----------------------------------
Christine B. Whitman
Senior Vice President and Chief Financial December 28, 1999
Officer (principal accounting and financial
/s/ Emilio O. DiCataldo officer)
- ----------------------------------
Emilio O. DiCataldo
/s/ Robert C. Fink Director December 28, 1999
- ----------------------------------
Robert C. Fink
/s/ Maurice F. Holmes Director December 28, 1999
- ----------------------------------
Maurice F. Holmes
/s/ Douglas A. Kingsley Director December 28, 1999
- ----------------------------------
Douglas A. Kingsley
/s/ Thomas C. McDermott Director December 28, 1999
- ----------------------------------
Thomas C. McDermott
/s/ Seiya Miyanishi Director December 28, 1999
- ----------------------------------
Seiya Miyanishi
/s/ Donald L. Waite Director December 28, 1999
- ----------------------------------
Donald L. Waite
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CVC, INC.
<S> <C>
Report of Independent Accountants ........................................ F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Operations .................................... F-4
Consolidated Statements of Stockholders' Equity .......................... F-5
Consolidated Statements of Cash Flows .................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
</TABLE>
<TABLE>
<CAPTION>
ACQUIRED COMPANY (COMMONWEALTH SCIENTIFIC CORPORATION)
<S> <C>
Report of Independent Public Accountants ................................. F-23
Balance Sheets ........................................................... F-24
Statements of Operations ................................................. F-26
Statements of Stockholders' Equity ....................................... F-27
Statements of Cash Flows ................................................. F-28
Notes to Financial Statements ............................................ F-29
</TABLE>
<PAGE>
F-2
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
<PAGE>
F-3
<TABLE>
<CAPTION>
CVC, Inc.
Consolidated Balance Sheets
(In Thousands, Except Share Data)
At September 30,
----------------
1999 Pro Forma
1998 1999 (Note 1)
---- ---- --------
<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
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
======= ======= =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
F-4
<TABLE>
<CAPTION>
CVC, Inc.
Consolidated Statements of Operations
(In Thousands, Except Per Share Data)
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
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
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
===== ===== =====
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
F-5
<TABLE>
<CAPTION>
CVC, Inc.
Consolidated Statements of Stockholders' Equity
(In Thousands, Except Share Data)
Series C Series B Series A
Preferred Preferred Preferred
Stock Stock Stock Common Stock Unamort-
----- ----- ----- ------------ ized
Number Number Number Number Paid- Deferred Minimum
of of of of Par in Compen- Retained Pension
Shares Amount Shares Amount Shares Amount Share Value Capital Warrant Sation Earnings Liability Total
------ ------ ------ ------ ------ ------ ----- ----- ------- ------- ------ -------- --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1,
1996............ 60,492 $8,355 1,685 $1,685 735,160 $7 $454 $(1,096) $(86) $9,319
Net income .......... 2,045 2,045
Minimum pension
liability........ (2) (2)
Tax impact on pension
liability........ 1 1
-
Comprehensive
earnings........ 2,044
Deferred compensation 261 $(261) --
Amortization of
deferred
compensation..... 7 7
Issuance of common
stock............ 114,100 2 56 58
------- - -- --
Balance at September
30, 1997......... -- -- 60,492 8,355 1,685 1,685 849,260 9 771 (254) 949 (87) 11,428
Net income .......... 264 264
Minimum pension
liability........ (74) (74)
Tax impact on pension
liability........ 30 30
--
Comprehensive
earnings........ 220
Deferred compensation 109 (109) --
Amortization of
deferred
compensation... 111 111
Issuance of common
stock........... 208,669 2 219 221
Balance at September
30, 1998........ -- -- 60,492 8,355 1,685 1,685 1,057,929 11 1,099 -- (252) 1,213 (131) 11,980
Net income .......... 1,571 1,571
Minimum pension
liability (271) (271)
Tax impact on pension
liability...... 108 108
---
Comprehensive
earnings....... 1,408
Deferred compensation (12) 12 --
Amortization of
deferred
compensation... 105 105
Issuance of preferred
stock and
warrant........ 100,000 $9,855 $14 9,869
Issuance of common
stock.......... 1,302,838 $13 8,218 8,231
--------- --- ----- -----
Balance at September
30, 1999....... 100,000 $9,855 60,492 $8,355 1,685 $1,685 2,360,767 $24 $9,305 $14 $(135) $2,784 $(294) $31,593
======= ====== ====== ====== ===== ====== ========= === ====== === ===== ====== ===== =======
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
F-6
<TABLE>
<CAPTION>
CVC, Inc.
Consolidated Statements of Cash Flows
(In Thousands)
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) (6,409)
----- ------ ------
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
The accompanying notes are an integral part of these financial statements.
</TABLE>
<PAGE>
F-7
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.
<PAGE>
F-8
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
<PAGE>
F-9
CVC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
assets, a write-down would be 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.
<PAGE>
F-10
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>
<CAPTION>
<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
<PAGE>
F-11
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.
<PAGE>
F-12
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.
<PAGE>
F-13
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.
<PAGE>
F-14
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.
<PAGE>
F-15
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>
<PAGE>
F-16
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.
<PAGE>
F-17
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>
<PAGE>
F-18
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
<PAGE>
F-19
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
<PAGE>
F-20
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>
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 Exerise 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.
<PAGE>
F-21
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>
<PAGE>
F-22
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>
Nothern
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.
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.
<PAGE>
F-23
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
<PAGE>
F-24
<TABLE>
<CAPTION>
COMMONWEALTH SCIENTIFIC CORPORATION
BALANCE SHEETS
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 5,556,183 3,160,366
March 31, 1998 and 1999, respectively
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
=========== ===========
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>
F-25
<TABLE>
<CAPTION>
COMMONWEALTH SCIENTIFIC CORPORATION
BALANCE SHEETS
MARCH 31,
---------
1998 1999
---- ----
Liabilities and Stockholders' Equity
<S> <C> <C>
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
=========== ===========
The accompanying notes are an integral part of these balance sheets.
</TABLE>
<PAGE>
F-26
<TABLE>
<CAPTION>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF OPERATIONS
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)
============ ============ ============
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
F-27
<TABLE>
<CAPTION>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
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
======== ======== ========== ======== ==========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
F-28
<TABLE>
<CAPTION>
COMMONWEALTH SCIENTIFIC CORPORATION
STATEMENTS OF CASH FLOWS
Years Emded 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
========== ======== ========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
F-29
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>
<CAPTION>
<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.
<PAGE>
F-30
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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 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.
<PAGE>
F-31
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.
<PAGE>
F-32
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>
<PAGE>
F-33
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 Price
Shares Exercise 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.
<PAGE>
F-34
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>
Year As Reported Pro Forma
Ended Net (Loss) Income Net (Loss) 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>
<PAGE>
F-35
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 MARCH 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.
<PAGE>
F-36
COMMONWEALTH SCIENTIFIC CORPORATION
NOTES TO FINANCIAL STATEMENTS AS OF MARCH 31, 1999 (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Company has the option to purchase the equipment at termination of the lease
for$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>
<CAPTION>
<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.
<PAGE>
F-37
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.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Annual Report on Form 10-K of CVC, Inc. of
our report dated October 18, 1999 relating to the financial statements of CVC,
Inc. which appears in this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Rochester, New York
December 28, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion of
our report dated May 17, 1999 on the Financial Statements of Commonwealth
Scientific Corporation in this Form 10-K. It should be noted that we have not
audited any financial statements of Commonwealth Scientific Corporation
subsequent to March 31, 1999 or performed any audit procedures subsequent to
the date of our report.
ARTHUR ANDERSEN LLP
Vienna, Virginia
December 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1998 WHICH ARE CONTAINED
IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 7,371
<ALLOWANCES> 345
<INVENTORY> 18,811
<CURRENT-ASSETS> 28,429
<PP&E> 18,622
<DEPRECIATION> 4,721
<TOTAL-ASSETS> 42,764
<CURRENT-LIABILITIES> 17,525
<BONDS> 0
0
10,040
<COMMON> 11
<OTHER-SE> 1,929
<TOTAL-LIABILITY-AND-EQUITY> 42,764
<SALES> 68,173
<TOTAL-REVENUES> 68,173
<CGS> 42,019
<TOTAL-COSTS> 23,442
<OTHER-EXPENSES> 675
<LOSS-PROVISION> 345
<INTEREST-EXPENSE> 1,325
<INCOME-PRETAX> 538
<INCOME-TAX> 274
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-BASIC> 0.26
<EPS-DILUTED> 0.04
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30, 1999 WHICH ARE CONTAINED
IN FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 434
<SECURITIES> 0
<RECEIVABLES> 22,446
<ALLOWANCES> 887
<INVENTORY> 29,187
<CURRENT-ASSETS> 55,395
<PP&E> 31,821
<DEPRECIATION> 12,447
<TOTAL-ASSETS> 75,917
<CURRENT-LIABILITIES> 33,291
<BONDS> 0
0
19,895
<COMMON> 24
<OTHER-SE> 11,674
<TOTAL-LIABILITY-AND-EQUITY> 75,917
<SALES> 82,915
<TOTAL-REVENUES> 82,915
<CGS> 50,502
<TOTAL-COSTS> 27,820
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 887
<INTEREST-EXPENSE> 1,235
<INCOME-PRETAX> 3,508
<INCOME-TAX> 1,937
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,571
<EPS-BASIC> 1.01
<EPS-DILUTED> 0.18
</TABLE>
