<PAGE>
Rule 424(b)(1)
333-20325
1,670,000 SHARES
[LOGO OF CFM TECHNOLOGIES, INC. APPEARS HERE]
COMMON STOCK
Of the 1,670,000 shares of Common Stock offered hereby, 1,500,000 shares are
being sold by CFM Technologies, Inc. ("CFM" or the "Company") and 170,000
shares are being sold by the Selling Shareholders. The Company will not
receive any of the proceeds from the sale of shares by the Selling
Shareholders. See "Principal and Selling Shareholders." The Company's Common
Stock is traded on The Nasdaq Stock Market under the symbol CFMT. On February
12, 1997, the last reported sale price of the Common Stock on The Nasdaq Stock
Market was $30.50 per share. See "Price Range of Common Stock."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<CAPTION>
Underwriting
Price to Discount and Proceeds to Proceeds to
Public Commissions(1) Company(2) Selling Shareholders
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.......... $30.00 $1.65 $28.35 $28.35
Total(3)........... $50,100,000 $2,755,500 $42,525,000 $4,819,500
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company, estimated at $300,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
250,500 additional shares of Common Stock solely to cover over-allotments,
if any. If the Underwriters exercise this option in full, the Price to
Public will total $57,615,000, the Underwriting Discount and Commissions
will total $3,168,825, the Proceeds to Company will total $49,626,675 and
the Proceeds to Selling Shareholders will total $4,819,500. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right
to reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares of Common Stock will be made against
payment therefor at the office of Montgomery Securities on or about February
19, 1997.
----------------
MONTGOMERY SECURITIES
PAINEWEBBER INCORPORATED
UBS SECURITIES
February 12, 1997
<PAGE>
"THIS FULLY-ENCLOSED, FLOW-OPTIMIZED PROCESSING CHAMBER (SHOWN HERE IN A
CUTAWAY VIEW) PROVIDES, IMPROVED PERFORMANCE IN CRITICAL SEMICONDUCTOR AND FLAT
PANEL DISPLAY MANUFACTURING PROCESSES, AVOIDING MANY OF THE DEFICIENCIES
ASSOCIATED WITH TRADITIONAL WET PROCESSING EQUIPMENT SUCH AS CONTAMINATION
PRODUCING AIR-LIQUID INTERFACES, UNCONTROLLED GROWTH OF SILICON OXIDES,
WATERMARKS AND EXCESSIVE WATER USAGE."
[DIAGRAM APPEARS HERE DEPICTING A CUTAWAY VIEW OF THE COMPANY'S FULL FLOW
PROCESSING VESSEL, PARTIALLY LOADED WITH WAFERS OF SUBSTRATES FOR PROCESSING.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ STOCK MARKET. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS, IF ANY, MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON THE NASDAQ NATIONAL MARKET, IN ACCORDANCE WITH RULE 10B-6A
UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED ("THE EXCHANGE ACT").
SEE "UNDERWRITING."
"THE FULL-FLOW PRODUCT PLATFORM FEATURES THE COMPANY'S PROPRIETARY
DIRECT-DISPLACEMENT(TM) DRYING TECHNOLOGY AND PRINCIPALLY CONSISTS OF THE VESSEL
MODULE, INCLUDING A FULLY-ENCLOSED WATER PROCESSING CHAMBER, AND ASSOCIATED
ROBOTIC, HANDLING EQUIPMENT AS SEEN HERE IN A DUAL-VESSEL INSTALLATION. BECAUSE
THE COMPANY'S FULL-FLOW SYSTEMS MAY BE FLUSH MOUNTED INTO THE CLEANROOM WALL,
USE OF EXPENSIVE CLEANROOM SPACE CAN BE LIMITED TO A SMALL OPERATOR ACCESS
AREA."
[PHOTOGRAPH APPEARS HERE DEPICTING A DUAL VESSEL FULL FLOW SYSTEM FLUSH
MOUNTED IN THE WALL, WITH OPERATOR ACCESS AREA MOUNTED ON THE WALL.]
[PHOTOGRAPH APPEARS HERE DEPICTING TWO OF THE COMPANY'S FULL-FLOW SYSTEMS
INSTALLED IN A SEMICONDUCTOR FABRICATION FACILITY. ALSO APPEARING IN THE
PHOTOGRAPH ARE TWO SYSTEM OPERATORS.]
"MULTIPLE FULL-FLOW INSTALLATION IN A LARGE SEMICONDUCTOR FAB IN EUROPE."
[PHOTOGRAPH APPEARS HERE DEPICTING AN INDIVIDUAL OPERATING A FULL-FLOW SYSTEM
IN THE COMPANY'S APPLICATION LABORATORY.]
"COMPANY PERSONNEL TEST NEW PROCESSES AND EQUIPMENT IN THE COMPANY'S RECENTLY
COMPLETED APPLICATIONS LABORATORY WHICH FEATURES A FULL-FLOW SYSTEM CAPABLE OF
PROCESSING 100 8" WAFERS."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the financial statements and notes
thereto, appearing elsewhere in this Prospectus. Unless otherwise indicated,
(a) all references to fiscal years of the Company in this Prospectus refer to
fiscal years ended on October 31 and (b) the information in this Prospectus
assumes no exercise of the Underwriters' over-allotment option. This Prospectus
contains forward-looking statements that involve risks and uncertainties. See
"Special Note Regarding Forward Looking Statements."
THE COMPANY
CFM Technologies, Inc. ("CFM" or the "Company") designs, manufactures and
markets advanced wet processing equipment for sale to the worldwide
semiconductor and flat panel display ("FPD") industries. The Company's products
are based on its patented Full-Flow enclosed processing and Direct-Displacement
drying technologies and are designed to perform various critical cleaning and
etching and photoresist stripping process steps in the manufacture of
semiconductors and FPDs.
According to VLSI Research Inc. ("VLSI"), total sales of semiconductor
process equipment grew from $2.2 billion in 1980 to $30.9 billion in 1995, with
sales of wet processing equipment totaling approximately $1.4 billion in 1995.
As integrated circuits ("ICs") become increasingly complex and linewidths
continue to decrease, the cost of advanced fabrication equipment escalates.
Therefore, semiconductor manufacturers are increasingly focused on the cost of
owning a particular piece of process equipment compared to competing systems.
Determining such cost of ownership ("COO") involves measuring a variety of
factors, including acquisition and installation costs, yield, throughput and
the use of consumables and facility floor space. Similar trends characterize
the market for the FPD industry. Manufacturers of FPDs are focused on equipment
that can help to achieve higher resolution, lower power consumption, improved
brightness and clearer images.
The Company believes that its patented Full-Flow enclosed processing and
Direct-Displacement drying technologies enable it to provide wet processing
systems that address a variety of limitations inherent in conventional systems,
including wet benches and spray tools, resulting in a significantly lower COO
for the Company's Full-Flow systems. The Company's Full-Flow systems
automatically load wafers or FPD substrates into a fully-enclosed, flow-
optimized processing vessel, which isolates them during processing from the
damaging effects of exposure to cleanroom air and associated contaminants. As a
result, particle contamination is substantially reduced, watermark defects and
native oxide growth are substantially eliminated and process control is
improved. In addition, the fully-enclosed processing vessel substantially
reduces the use of water and process chemicals. Also, the modular design of the
Full-Flow system enables flush mounting in the cleanroom wall, with the
majority of the floor space occupied by the system components located outside
the cleanroom environment, minimizing the use of expensive cleanroom floor
space.
In 1990, the Company sold its first Full-Flow system for use in a
semiconductor production line. To date, the Company has sold over 80 Full-Flow
systems to more than 25 semiconductor and FPD manufacturers. The Company's
customers include: GEC Plessey, LG International (America) and related entities
("LG"), Motorola, National Semiconductor, Samsung, SGS-Thomson
Microelectronics, Siemens, Texas Instruments and Tower Semiconductor. Full-Flow
systems can currently be configured with either one or two vessels that are
capable of processing 50 8-inch wafers each. The Company recently completed
development of an enhanced Full-Flow system that provides a two-fold increase
in capital productivity by offering vessels capable of processing 100 8-inch
wafers. These enhanced systems, which the Company began to ship in April 1996,
address the cost-sensitive photoresist strip market as well as other wet
processing applications. In addition, the Company believes its Full-Flow
technology is well-suited for cleaning and precise etching applications in the
manufacture of FPDs, and provides significant COO advantages over competing FPD
wet processing technologies. The Company has
3
<PAGE>
developed and shipped five FPD processing systems based on its Full-Flow
platform. In addition, the Company recently received a $16.1 million order for
six FPD systems from LG.
The Company's objective is to capitalize on the inherent COO advantages of
its Full-Flow systems to become a leading supplier of advanced wet processing
equipment to the worldwide semiconductor and FPD industries. The Company's
Full-Flow systems are based on a modular design and can be configured using a
variety of process and support modules. By basing new process applications on
its proprietary Full-Flow platform, the Company can focus primarily on the
development and optimization of the applications' process recipes, which the
Company believes significantly reduces the time and cost associated with
entering new wet processing market segments.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company........... 1,500,000 shares
Common Stock offered by the Selling
Shareholders................................. 170,000 shares
---------
Total Offering.............................. 1,670,000 shares
Common Stock to be outstanding after the
Offering..................................... 7,553,340 shares(1)
Use of Proceeds............................... For general corporate purposes,
including working capital.
See "Use of Proceeds."
Nasdaq Stock Market Symbol.................... CFMT
</TABLE>
SUMMARY FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
TEN MONTHS
ENDED FISCAL YEAR ENDED OCTOBER 31,
OCTOBER 31, -------------------------------
1992(2) 1993 1994 1995 1996
----------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales........................ $5,939 $11,840 $15,937 $23,430 $44,013
Operating income................. 793 2,095 1,573 2,278 4,642
Net income....................... 145 883 538 1,402 2,960
Net income per share(3).......... $ 0.35 $ 0.61
Weighted average common and
common equivalent shares(3)..... 3,994 4,831
</TABLE>
<TABLE>
<CAPTION>
OCTOBER 31, 1996
----------------------
ACTUAL AS ADJUSTED(4)
------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...... $12,254 $54,479
Working capital........................................ 27,525 69,750
Total assets........................................... 44,251 86,476
Long-term debt, less current portion................... 2,525 2,525
Shareholders' equity................................... 32,711 74,936
</TABLE>
- --------
(1) Excludes 1,032,107 shares of Common Stock issuable upon the exercise of
outstanding stock options as of the date hereof of which options to
purchase 459,939 shares were then exercisable. See Note 10 of the Notes to
Consolidated Financial Statements.
(2) In 1992, the Company changed its fiscal year end from December 31 to
October 31.
(3) See Note 2 of the Notes to Consolidated Financial Statements for an
explanation of the computation of net income per share.
(4) Adjusted to reflect the sale by the Company of 1,500,000 shares of Common
Stock offered hereby and the application of the estimated net proceeds
therefrom. See "Use of Proceeds."
----------------
"CFM," "Full-Flow," "Direct-Displacement," "Vapor-Flow" and the logo on the
cover of this Prospectus are trademarks of CFM Technologies, Inc. This
Prospectus also contains trademarks of other companies.
5
<PAGE>
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
Statements in this Prospectus including those concerning the Company's
expectations of future sales, gross profits, research, development and
engineering expenses, selling, general and administrative expenses, product
introductions and cash requirements include certain forward-looking
statements. As such, actual results may vary materially from such
expectations. Factors which could cause actual results to differ from
expectations include variations in the level of orders which can be affected
by general economic conditions and growth rates in the semiconductor and FPD
manufacturing industries and in the markets served by the Company's customers,
the international economic and political climates, difficulties or delays in
product functionality or performance, the delivery performance of sole source
vendors, the timing of future product releases, failure to respond adequately
to either changes in technology or customer preferences, changes in pricing by
the Company or its competitors, ability to manage growth, risk of nonpayment
of accounts receivable, changes in budgeted costs or failure to realize a
successful outcome to pending patent litigation, all of which constitute
significant risks. For a description of additional risks, see "Risk Factors"
beginning on this page. There can be no assurance that the Company's results
of operations will not be adversely affected by one or more of these factors.
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby.
FLUCTUATIONS IN OPERATING RESULTS
The Company has derived substantially all of its net sales from the sale of
a limited number of wet processing systems which typically have list prices
ranging from approximately $0.9 million to $3.2 million per system. At the
Company's current revenue level, each sale or failure to make a sale can have
a material effect on the Company. A cancellation, rescheduling or delay in a
shipment of even one system in a particular quarter may cause net sales in
that quarter to fall significantly below the Company's expectations and thus
may materially and adversely affect the Company's operating results for such
quarter. Other factors which may lead to fluctuations in the Company's
quarterly and annual operating results include: market acceptance of the
Company's systems and its customers' products; the number of systems being
manufactured during any particular period; the geographic mix of sales; the
mix of sales by distribution channel; the timing of announcement and
introduction of new systems by the Company and its competitors; a downturn in
the market for personal computers or other products incorporating
semiconductors and FPDs; variations in the type of systems sold; product
discounts and changes in pricing; delays in deliveries from suppliers; delays
in orders due to customers' financial difficulties; and volatility in the
semiconductor and FPD industries and the markets served by the Company's
customers. Also, customers may face competing capital budget considerations,
thus making the timing of customer orders uneven and difficult to predict.
Many of the factors listed above are beyond the control of the Company. In
addition, continued investments in research, development and engineering and
the development of a worldwide sales, marketing and customer satisfaction
organization will result in significantly higher fixed costs. There can be no
assurance that the Company will be able to achieve a rate of growth or level
of sales in any future period commensurate with its level of expenses. The
impact of these and other factors on the Company's operating results in any
future period cannot be forecast with any degree of certainty. Due to the
foregoing factors, it is likely that in some future quarter or quarters the
Company's operating results may be below the expectations of analysts and
investors. In such event, the price of the Company's Common Stock would likely
be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business --
Industry Background."
ACCEPTANCE BY CUSTOMERS OF NEW TECHNOLOGY
The Company's products all rely upon proprietary technology to accomplish
wet chemical processing during semiconductor or FPD manufacturing, which
technology is significantly different from the technological
6
<PAGE>
approaches in current usage for these processes. Most of the Company's
competitors make use of established technology with competitive product
variations. The semiconductor industry is especially resistant to the
introduction of changes in process or approach in a manufacturing cycle which
is quite long (up to twelve weeks), consists of many separate process events
(up to 300 or more) and suffers from limited control measurement points during
the overall fabrication process. Accordingly, managers of semiconductor and
FPD fabrication facilities ("fabs") have exhibited a strong resistance to
changing equipment and have been reluctant to embrace new technology,
including the Company's Full-Flow systems. Because a substantial investment is
required by semiconductor and FPD manufacturers to install and integrate
capital equipment into production lines, these manufacturers will tend to
choose suppliers based on past relationships, product compatibility and proven
operating performance. Once a manufacturer has selected a particular vendor's
capital equipment, the Company believes that the manufacturer generally relies
upon that equipment for a specific production line application and frequently
will attempt to consolidate related capital equipment purchases with the same
vendor, to the degree that such consolidation is possible. Many semiconductor
and FPD manufacturers continue to extract marginal improvements from existing
wet processing technology in order to address issues such as increases in
feature density, reductions in linewidth and planned increases in wafer and
substrate size. Thus, there can be no assurance that the Company's products
will achieve broad market acceptance. See "Business -- Industry Background"
and "Business -- Products."
CUSTOMER CONCENTRATION
Historically, relatively few customers have accounted for a substantial
portion of the Company's net sales. Sales to LG, IBM, SGS-Thomson
Microelectronics and Motorola accounted for approximately 29.1%, 25.3%, 19.0%
and 10.8%, respectively, totalling 84.2% of net sales in fiscal 1996. The
Company expects a significant portion of its future sales to remain
concentrated within a limited number of customers. The Company's arrangements
with its customers are generally on a purchase order basis and not pursuant to
long-term contracts. There can be no assurance that the Company will be able
to retain its major customers or that such customers will not cancel or
reschedule orders or that canceled orders will be replaced by other sales. A
reduction or delay in orders from any of the Company's significant customers,
including reductions or delays due to market, economic or competitive
conditions in the semiconductor or FPD industries, or the loss of any such
customers, could have a material adverse effect upon the Company's results of
operations. See "Business -- Customers."
SOLE OR LIMITED SOURCES OF SUPPLY
The Company relies to a substantial extent on outside vendors to manufacture
and supply many of the components and subassemblies used in the Company's
systems. Certain of these components and subassemblies are obtained from a
sole supplier or a limited group of suppliers, many of which are small,
independent companies. Moreover, the Company believes that certain of these
components and subassemblies can only be obtained from its current suppliers.
The Company's reliance on outside vendors generally and a sole or a limited
group of suppliers in particular, involves several risks, including a
potential inability to obtain an adequate supply of required components and
reduced control over pricing and timely delivery and quality of components.
The Company has experienced and continues to experience some reliability and
quality problems with certain key components and subassemblies provided by
single source suppliers. Because the manufacture of certain of these
components and subassemblies is a complex process and requires long lead
times, there can be no assurance that delays or shortages caused by suppliers
will not occur. The process of obtaining and qualifying replacement suppliers
could be lengthy, and no assurance can be given that any additional sources
would be available to the Company on a timely basis or at all. Any inability
to obtain adequate deliveries of components and subassemblies which conform to
the Company's reliability and quality requirements or any other circumstance
that would require the Company to seek alternate sources of supply or, if
possible, to manufacture such components internally could delay the Company's
ability to ship its systems and could have a material adverse effect on the
Company. See "Business -- Manufacturing."
7
<PAGE>
DEPENDENCE ON LIMITED PRODUCT OFFERINGS
To date, the Company's net sales have consisted primarily of sales to the
semiconductor industry. The Company has recently developed a version of its
Full-Flow system for use in FPD manufacturing. The ability of the Company to
diversify its operations through the introduction and sale of system
enhancements with new applications is dependent upon the success of the
Company's continuing research, development and engineering activities, as well
as its marketing efforts. The Company's continued sales growth will depend
upon achieving market acceptance of its Full-Flow systems and future products.
There can be no assurance that the Company will be able to develop, introduce
or market new systems or system enhancements in a timely or cost-effective
manner or that any such systems or enhancements will achieve market
acceptance. See "Business -- Products."
DEPENDENCE UPON PRODUCT DEVELOPMENT
The markets in which the Company and its customers compete are characterized
by rapidly changing technology, evolving industry standards and continuous
improvements in products and services. In order to remain competitive in the
future, the Company will need to develop and commercialize additional cleaning
and etching processes based on its Full-Flow platform. Further, the Company
will need to develop new products which are capable of supporting customers'
increasingly complex process requirements and which compete effectively on the
basis of overall COO, including process performance and capital productivity.
The market for FPD manufacturing equipment presents an additional challenge as
the technology is at an earlier stage and subject to more rapid evolution. The
success of new system introduction is dependent on a number of factors,
including timely completion of new system designs, system performance and
market acceptance, and may be adversely affected by manufacturing
inefficiencies associated with the start up of such new introductions and the
challenge of producing systems in volume which meet customer requirements.
Because it is generally not possible to predict the time required and costs
involved in reaching certain research, development and engineering objectives,
actual development costs could exceed budgeted amounts and estimated product
development schedules may require extension. Any delays or additional
development costs could have a material adverse effect on the Company's
business and results of operations. There can be no assurance that the Company
will successfully develop and introduce new products or enhancements to its
existing products on a timely basis or in a manner which satisfies or achieves
widespread market acceptance.
Because of the large number of components in, and the complexity of, the
Company's systems, significant delays can occur between the introduction of
systems or system enhancements and the commencement of commercial shipments.
The Company has from time to time experienced delays in the introduction of,
and certain technical and manufacturing difficulties with, certain of its
systems and enhancements, and may experience such delays and technical and
manufacturing difficulties in future introductions or volume production of new
systems or enhancements. The Company's inability to overcome such
difficulties, to meet the technical specifications of any new systems or
enhancements, or to manufacture and ship these systems or enhancements in
volume and in a timely manner, would materially and adversely affect the
Company's business and results of operations, as well as its customer
relationships. In addition, the Company from time to time incurs unanticipated
costs to ensure the functionality and reliability of its products early in
their life cycles, which costs can be substantial. If new products or
enhancements experience reliability or quality problems, the Company could
encounter a number of difficulties, including reduced orders, higher
manufacturing costs, delays in collection of accounts receivable and
additional service and warranty expenses, all of which could materially and
adversely affect the Company's business and results of operations. See
"Business -- Products" and "Business -- Research, Development and
Engineering."
MANAGEMENT OF GROWTH
The Company is currently undergoing a period of rapid growth. To accommodate
this growth, the Company is in the process of implementing a variety of new
and upgraded operating and financial systems, procedures and controls. There
can be no assurance that such efforts can be accomplished successfully, or
that the Company's systems, procedures and controls will be adequate to
support the Company's operations. The Company also faces
8
<PAGE>
the task of identifying, recruiting, training and integrating new employees
quickly enough to keep pace with its rapid growth. Many of the positions which
are critical to supporting the Company's growth require experience with
semiconductor and FPD capital equipment. The recent overall growth of the
semiconductor and FPD capital equipment industries has made the recruitment of
such experienced personnel difficult. The Company's growth may also strain the
Company's management, manufacturing, financial and other resources. Any
failure to expand these areas in an efficient manner could have a material
adverse effect on the Company. The Company has significantly increased its
operations to support increased revenues, including the hiring of additional
personnel, and has made and expects to continue to make substantial
investments in research, development and engineering and in sales and
marketing to support product development. There can be no assurance that the
Company will be able to achieve a rate of growth or level of sales in any
future period commensurate with its level of expenses. The Company has
recently leased an additional facility and anticipates that additional
manufacturing capacity will be required. The need to acquire additional remote
facilities could be disruptive and could have a material adverse effect on the
Company. See "Business -- Employees" and "Business -- Facilities."
DEPENDENCE UPON PERSONNEL
The success of the Company depends to a large extent upon the efforts of key
managerial and technical employees. The loss of services of any of these
persons could have a material adverse effect on the Company. The Company has
not entered into written employment agreements with any of its executive
officers other than its chief financial officer, nor does the Company maintain
key man life insurance on any of its personnel.
In addition, the success of the Company will also depend upon its ability to
attract and retain qualified employees, particularly highly skilled design and
process engineers involved in the manufacture of existing systems, the
development of new applications and systems and the installation, training and
maintenance related to those systems already installed at customer sites.
There can be no assurance that the Company will be successful in recruiting,
training, integrating and retaining the necessary personnel to support its
anticipated growth. The failure to do so could have a material adverse effect
on the Company's results of operations. See "Business -- Employees" and
"Management -- Directors and Executive Officers."
LENGTHY SALES CYCLE
Sales of the Company's systems depend upon the decision of a prospective
customer either to increase manufacturing capacity or change its established
manufacturing process. These decisions typically involve significant capital
commitments or a change in process approach, which may require the approval of
senior management. The amount of time from the initial contact with the
customer to the first order is typically one to two years. The Company's
ability to obtain orders from potential customers has depended in the past and
may continue to depend in the future upon customers purchasing a new system in
order to evaluate Full-Flow and Direct-Displacement drying technologies as an
alternative to existing wet processing technologies. For many potential
customers, decisions to undertake such evaluations occur infrequently. The
Company often experiences delays in finalizing further system sales while the
customer evaluates and receives approvals for the purchase of additional
systems. Such delays may include the time necessary to plan, design or
complete a new or expanded fab. Due to these factors, the Company's systems
typically have a lengthy sales cycle during which the Company may expend
substantial funds and management effort. There can be no assurance that any of
these expenditures or efforts on the part of the Company will result in sales.
See "Business -- Products" and "Business --Competition."
VOLATILITY OF THE SEMICONDUCTOR INDUSTRY
The Company's business depends, in significant part, upon capital
expenditures by manufacturers of semiconductor devices, which in turn depend
upon the current and anticipated market demand for such devices and the
products utilizing such devices. The semiconductor industry has been highly
volatile and historically has experienced periods of oversupply, resulting in
significantly reduced demand for capital equipment, including wet processing
systems. In late 1995 and in 1996, a number of semiconductor manufacturers
experienced a
9
<PAGE>
reduction in order growth and, in a few instances, a reduction in overall
orders. These events caused certain semiconductor manufacturers to postpone or
cancel equipment deliveries to previously planned expansions or new fab
construction projects. In addition, certain market analysts project an overall
reduction in expenditures for semiconductor capital equipment in 1997. There
can be no assurance that further order cancellations or reductions in order
growth or overall orders for semiconductors will not have a material adverse
effect upon the Company's business or results of operations. The Company
believes that the FPD market may be similarly volatile. The need for continued
investment in research, development and engineering, marketing and customer
satisfaction activities may limit the Company's ability to reduce expenses in
response to future downturns in the semiconductor or FPD industries. The
Company's net sales and results of operations could be materially and
adversely affected if downturns or slowdowns in the semiconductor or FPD
markets occur in the future.
INTERNATIONAL SALES
Sales to customers located outside the United States accounted for
approximately 63.1% of the Company's net sales in fiscal 1996. The Company
anticipates that such international sales are subject to numerous risks,
including United States and international regulatory requirements and policy
changes, political and economic instability, increased installation costs,
difficulties in accounts receivable collection, exchange rate fluctuations,
tariffs and other barriers, extended payment terms, difficulty in staffing and
managing international operations, dependence on and difficulties in managing
international distributors or representatives and potentially adverse tax
consequences. Furthermore, although the Company endeavors to meet technical
standards established by foreign regulatory bodies, there can be no assurance
that the Company will be able to comply with such standards in the future. In
addition, the laws of certain other countries may not protect the Company's
intellectual property to the same extent as the laws of the United States. As
part of its efforts to penetrate the East Asia market, the Company entered
into a sales agency agreement with ANAM S&T Co., Ltd. ("ANAM") in Korea in
1991, a distribution agreement with Innotech Corporation ("Innotech") in Japan
in 1992 and an agent agreement with Ampoc Far East Company Limited ("AMPOC")
in Taiwan in 1996. Although management believes that it maintains good
relationships with ANAM, Innotech and AMPOC, there can be no assurance that
these relationships will continue. In the event of a termination of any of the
Company's existing representation, agency or distribution arrangements, the
Company's international sales could be adversely affected. Although the
Company's sales are predominantly denominated in United States dollars, to the
extent that the Company expands its international operations or changes its
pricing practices to denominate prices in international currencies, the
Company will be exposed to increased risks of currency fluctuation.
Additionally, a strengthening in the value of the United States dollar in
relation to international currencies may adversely affect the Company's future
sales to international customers. There can be no assurance that any of these
factors will not have a material adverse effect on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Overview" and "Business--Sales and Marketing."
HIGHLY COMPETITIVE INDUSTRY
The Company faces substantial competition in its market segments from both
established competitors and potential new entrants. The Company believes that
the primary competitive factors in the markets in which the Company competes
are yield, throughput, capital and direct costs, system performance, size of
installed base, breadth of product line and customer satisfaction, as well as
customer commitment to competing technologies. Most of the Company's
competitors have been in business longer than the Company, offer traditional
wet processing technology, and have broader product lines, more experience
with high volume manufacturing, broader name recognition, substantially larger
installed bases and significantly greater financial, technical, marketing,
service and support resources than the Company. In the semiconductor wet
processing market, the Company competes primarily with Dainippon Screen, FSI
International, Santa Clara Plastics, Steag MicroTech, SubMicron Systems, Tokyo
Electron Limited, and Verteq. In the FPD wet processing market, the Company
competes primarily with Dainippon Screen and Semitool. There can be no
assurance that the Company will overcome the established positions of these
competitors or that the Company's competitors will not develop enhancements to
or future generations of competitive products that will offer price and
performance features that
10
<PAGE>
are superior to the Company's systems. The Company believes that in order to
remain competitive, it must invest significant financial resources in
developing new product features and enhancements and in maintaining customer
satisfaction worldwide. In marketing its products, the Company will face
competition from suppliers employing new technologies in order to extend the
capabilities of competitive products beyond their current limits or increase
their productivity. In addition, increased competitive pressure could lead to
intensified price-based competition, resulting in lower prices and margins,
which would materially and adversely affect the Company's business and results
of operations. See "Business -- Competition."
INTELLECTUAL PROPERTY RIGHTS
The Company relies on a combination of patents, copyrights, trademarks and
trade secrets, non-disclosure agreements and other forms of intellectual
property protection to protect its proprietary technology. Although the
Company believes that its patents and trademarks may have value, the Company
believes that its future success will depend primarily on the innovation,
technical expertise and marketing abilities of its personnel. The Company
currently holds 12 patents in the United States and 24 international patents
and has patent applications pending or under evaluation in the United States
and various foreign jurisdictions. The Company is currently asserting its
patent rights in litigation against three defendants, alleging inducement of
infringement and contributory infringement of one of the Company's patents.
The defendants have denied infringement and asserted, among other things, that
the patent at issue is invalid, and one of the defendants has asserted that
the patent is unenforceable. There can be no assurance that any claim in the
subject patent will be adjudged to encompass use of the defendants' products
or that the subject patent will not be found to be unenforceable or invalid
during prosecution of the actions. The Company is also a defendant in a
lawsuit which seeks a declaratory judgement of patent noninfringment and
invalidity of one of the Company's patents. There can be no assurance that the
Company will prevail in either of these actions. A finding of invalidity or
unenforceability could result in the Company's competitors developing products
using the Company's proprietary technology, which in turn could have a
material adverse effect on the Company. The Company believes that these
actions, even if completely successful, will be costly to the Company in terms
of both financial and management resources.
There can be no assurance that additional patents will be issued on the
Company's pending or future applications or that competitors will not be able
legitimately to ascertain proprietary information embedded in the Company's
products which is not covered by patent or copyright. In such cases, the
Company may be precluded from preventing its competitors from making use of
such information. There are no pending lawsuits or claims against the Company
regarding infringement of any existing patents or other intellectual property
rights of others. There can be no assurance, however, that such infringement
clams will not be asserted in the future, nor can there be any assurance, if
such claims are made, that the Company will be able to defend such claims
successfully or, if necessary, obtain licenses on reasonable terms or at all.
Adverse determinations in any litigation naming the Company could subject the
Company to significant liabilities to third parties, require the Company to
seek licenses from third parties and prevent the Company from manufacturing
and selling its systems. Any of these events could have a material adverse
effect on the Company. See "Business -- Intellectual Property" and
"Business -- Legal Proceedings."
ENVIRONMENTAL REGULATION
The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used during its research, development and engineering
activities. Failure to comply with applicable environmental requirements could
result in substantial liability to the Company, suspension or cessation of the
Company's operations, restrictions on the Company's ability to expand its
operations or requirements for the acquisition of additional equipment or
other significant expense, any of which could have a material adverse effect
on the Company. See "Business -- Manufacturing."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation, as amended, and the Pennsylvania
Business Corporation Law contain certain provisions which could delay or
impede the removal of incumbent directors and could make more difficult a
merger, tender offer or proxy contest involving the Company, even if such a
transaction would be
11
<PAGE>
beneficial to the interests of the shareholders, or could discourage a third
party from attempting to acquire control of the Company. The Company has
authorized 1,000,000 shares of Preferred Stock, which the Company could issue
without further shareholder approval and upon such terms and conditions, and
having such rights, privileges and preferences, as the Board of Directors may
determine. The Company has no current plans to issue any Preferred Stock. In
addition, provisions of the Pennsylvania Business Corporation Law prohibit the
Company from engaging in certain business combinations and allow holders of
the Company's voting stock to "put" their stock to an acquiror for fair value
in the event of a control transaction (the acquisition of 20% of the voting
stock of the Company). These provisions could have the effect of delaying,
deferring or preventing a change in control of the Company and may adversely
affect the voting and other rights of holders of Common Stock. Further, the
Company's Articles of Incorporation, as amended, and Amended and Restated By-
Laws include provisions to reduce the personal liability of the Company's
directors for monetary damages resulting from breaches of their fiduciary duty
and to permit the Company to indemnify its directors and officers to the
fullest extent permitted by Pennsylvania law. See "Description of Capital
Stock -- Anti-Takeover Provisions."
CONTINUED EXISTENCE OF A CONTROL GROUP
Upon completion of this offering, Christopher F. McConnell, the Company's
Chairman of the Board, and all of the executive officers and directors of the
Company, collectively, will beneficially own approximately 16.00% and 25.86%,
respectively, of the Common Stock (or 15.48% and 25.06%, respectively, if the
Underwriters' over-allotment option is exercised in full). Existing management
will hold sufficient voting power to enable it to continue to exert
significant influence over the business and affairs of the Company for the
foreseeable future. Such concentration of ownership may also have the effect
of delaying, deferring or preventing a change in control of the Company. See
"Principal and Selling Shareholders."
VOLATILITY OF STOCK PRICE
The Company believes that a variety of factors could cause the price of the
Company's Common Stock to fluctuate, perhaps substantially, including:
announcements of developments related to the Company's business; quarterly
fluctuations in the Company's actual or anticipated operating results and
order levels; general conditions in the semiconductor and FPD industries or
the worldwide economy; announcements of technological innovations; new
products or product enhancements by the Company or its competitors;
developments in patents or other intellectual property rights and litigation;
and developments in the Company's relationships with its customers,
distributors and suppliers. In addition, in recent years the stock market in
general and the market for shares of small capitalization and semiconductor
industry-related companies in particular, have experienced extreme price
fluctuations which have often been unrelated to the operating performance of
affected companies. Any such fluctuations in the future could adversely affect
the market price of the Company's Common Stock. There can be no assurance that
the market price of the Common Stock of the Company will not decline.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of shares of Common Stock in the public market following this offering
by existing shareholders or option holders could adversely affect the market
price of the Common Stock. Following completion of this offering, 7,553,340
shares of Common Stock will be outstanding. Of these shares, 3,981,616 have
been sold pursuant to registration statements filed under the Securities Act.
Substantially all of the balance of such outstanding shares may be sold in the
open market pursuant to the provisions of Rule 144 under the Securities Act.
Under Rule 144 as currently in effect, these shares may be sold subject to
volume limitations and certain other conditions imposed under such rule.
Certain beneficial owners of 2,147,420 shares of Common Stock and options to
purchase shares of Common Stock, owned by the Company's executive officers and
directors and shareholders selling shares in this offering, have agreed not to
sell any of their shares until 90 days after the date of this Prospectus
without the prior written consent of Montgomery Securities. No prediction can
be made as to the effect, if any, that future sales of Common Stock, or the
availability of Common Stock for future sale, will have on the market price of
the Common Stock prevailing from time to time. See "Shares Eligible for Future
Sale."
12
<PAGE>
THE COMPANY
The Company was incorporated in Pennsylvania in November 1994 under the name
"The CFM Technology Corporation" in connection with the reorganization of the
Company's operations into a holding company structure. Pursuant to the
reorganization, the Company issued shares of Common Stock to the shareholders
of CFM Technologies, Inc., a Pennsylvania corporation incorporated in May 1984
("CFM Sub"), in exchange for all of the issued and outstanding capital stock
of CFM Sub, and CFM Sub became the wholly-owned operating subsidiary of the
Company. In December 1995, the Company changed its name to "CFM Technologies,
Inc." and CFM Sub changed its name to "CFM Technologies, Incorporated." The
Company has four other wholly owned subsidiaries: CFMT, Inc., a Delaware
investment holding company incorporated in 1992; CFM International Corp., a
foreign sales corporation incorporated in Guam in 1995; CFM Technologies
Limited, incorporated in Scotland in 1995; and CFM Technologies, S.A.,
incorporated in France in 1996. As used in this Prospectus, references to the
"Company" and "CFM" refer to CFM Technologies, Inc. and its consolidated
subsidiaries. The Company's principal executive offices are located at 1336
Enterprise Drive, West Chester, Pennsylvania 19380. The Company's telephone
number is (610) 696-8300.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
by the Company in this offering are estimated to be approximately $42.2
million ($49.3 million if the Underwriters' over-allotment option is exercised
in full) after deducting underwriting discounts and commissions and estimated
offering expenses. The net proceeds will be used for working capital and
general corporate purposes, including possible acquisitions of or investments
in complementary businesses or products, the right to use complementary
technologies or in joint ventures. The Company is not currently engaged in any
negotiations with respect to any of the foregoing. Pending such uses, the
proceeds from this offering will be invested in deposits with banks and in
short-term, investment grade, interest bearing securities.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded in The Nasdaq Stock Market under the
symbol CFMT. The range of high and low closing prices for the Common Stock as
reported by the National Association of Securities Dealers, Inc. for the
periods indicated below is as follows:
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
FISCAL 1996
3rd Quarter (commencing June 18)............................... $11.00 $8.75
4th Quarter.................................................... 13.25 7.75
FISCAL 1997
1st Quarter.................................................... 37.75 8.25
2nd Quarter (through February 12).............................. 35.63 25.00
</TABLE>
These prices reflect inter-dealer quotations, without retail mark-ups, mark-
downs or other fees or commissions, and may not necessarily represent actual
transactions.
On February 12, 1997, the reported closing price for the Common Stock was
$30.50. As of January 23, 1997, there were approximately 150 holders of record
and the Company believes that it had approximately 2,400 beneficial owners of
the Company's Common Stock.
13
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and does not anticipate paying any cash dividends in the foreseeable future.
The Company currently intends to retain its earnings, if any, for the
development of its business. The declaration of any future dividends by the
Company is within the discretion of the Board of Directors and will be
dependent upon the earnings, financial condition and capital requirements of
the Company, as well as any other factors deemed relevant by the Board of
Directors.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1996 and as adjusted to give effect to the sale of the 1,500,000
shares of Common Stock by the Company in this offering and the application of
the estimated net proceeds therefrom (after deduction of underwriting
discounts and commissions and estimated offering expenses).
<TABLE>
<CAPTION>
OCTOBER 31, 1996
-------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt, less current portion....................... $ 2,525 $ 2,525
------- -------
Shareholders' equity:
Preferred stock, no par value; 1,000,000 shares autho-
rized; no shares issued and outstanding; no shares is-
sued and outstanding, as adjusted....................... -- --
Common stock, no par value: 10,000,000 shares authorized;
6,052,924 issued and outstanding; 7,552,924 shares is-
sued and outstanding, as adjusted(1).................... 29,592 71,817
Retained earnings........................................ 3,119 3,119
------- -------
Total shareholders' equity............................... 32,711 74,936
------- -------
Total capitalization................................... $35,236 $77,461
======= =======
</TABLE>
- --------
(1) Excludes 745,323 shares of Common Stock issuable upon the exercise of
stock options outstanding on October 31, 1996, of which options to
purchase 463,020 shares were then exercisable. See Note 10 of the Notes to
Consolidated Financial Statements.
14
<PAGE>
SELECTED FINANCIAL DATA
The following table contains certain selected consolidated financial data of
the Company and is qualified by the more detailed Consolidated Financial
Statements and Notes thereto included elsewhere in this Prospectus. The
consolidated statement of income data for the fiscal years ended October 31,
1994, 1995 and 1996 and the consolidated balance sheet data as of October 31,
1995 and 1996 have been derived from the Consolidated Financial Statements of
the Company which have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report included elsewhere herein. The
consolidated statement of income data for the year ended October 31, 1993 and
the consolidated balance sheet data as of October 31, 1994 have been derived
from the Consolidated Financial Statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report not included herein. The consolidated statement of income data
for the ten months ended October 31, 1992 and the consolidated balance sheet
data as of October 31, 1992 and 1993 are derived from unaudited financial
statements. The unaudited financial statements include all adjustments,
consisting only of normal adjustments, that the Company considers necessary
for a fair presentation of the results of operations for such periods. This
data should be read in conjunction with the Consolidated Financial Statements
and Notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere herein.
<TABLE>
<CAPTION>
TEN MONTHS
ENDED FISCAL YEAR ENDED OCTOBER 31,
OCTOBER 31, -------------------------------
1992(1) 1993 1994 1995 1996
----------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Net sales......................... $5,939 $11,840 $15,937 $23,430 $44,013
Cost of sales..................... 3,626 6,752 9,114 13,463 23,317
------ ------- ------- ------- -------
Gross profit.................... 2,313 5,088 6,823 9,967 20,696
Operating expenses:
Research, development and
engineering.................... 327 720 2,100 1,717 4,375
Selling, general and administra-
tive........................... 1,193 2,273 3,150 5,972 11,679
------ ------- ------- ------- -------
Total operating expenses...... 1,520 2,993 5,250 7,689 16,054
------ ------- ------- ------- -------
Operating income.................. 793 2,095 1,573 2,278 4,642
Interest expense, net............. 615 755 797 173 157
------ ------- ------- ------- -------
Income before income taxes........ 178 1,340 776 2,105 4,485
Income taxes...................... 33 457 238 703 1,525
------ ------- ------- ------- -------
Net income........................ $ 145 $ 883 $ 538 $ 1,402 $ 2,960
====== ======= ======= ======= =======
Net income per share(2)........... $ 0.35 $ 0.61
======= =======
Weighted average common and common
equivalent shares(2)............. 3,994 4,831
<CAPTION>
OCTOBER 31,
-------------------------------------------
1992 1993 1994 1995 1996
----------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-
term investments................. $ 51 $ 112 $ 1,106 $ 408 $12,254
Working capital................... 2,211 3,118 7,177 8,136 27,525
Total assets...................... 6,062 9,332 16,689 18,454 44,251
Long-term debt, less current por-
tion............................. 5,493 5,610 7,820 3,005 2,525
Shareholders' equity (deficit).... (846) 237 5,109 9,775 32,711
</TABLE>
- --------
(1) In 1992, the Company changed its fiscal year end from December 31 to
October 31.
(2) See Note 2 of the Notes to Consolidated Financial Statements for an
explanation of the computation of net income per share.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
CFM designs, manufactures and markets advanced wet processing equipment for
sale to the worldwide semiconductor and flat panel display manufacturing
industries. The Company was founded in 1984 and began commercial operations in
1990 following a period of technology and product development, during which
time the Company's patented Full-Flow enclosed processing and Direct-
Displacement drying technologies were developed.
The Company has derived substantially all of its revenues from the sale of a
relatively small number of its systems, which typically range in price from
approximately $0.9 million to $3.2 million. As of October 31, 1996, the
Company had shipped over 80 systems to more than 25 semiconductor and FPD
manufacturers worldwide. The Company has been undergoing a period of rapid
growth with net sales during fiscal 1996 increasing by 87.8% over net sales
for fiscal 1995. Net sales for fiscal 1996 included sales of Full-Flow systems
to companies in the FPD manufacturing industry representing approximately 20%
of net sales. The Company expects that FPD sales as a percentage of total
sales will fluctuate as the Company attempts to penetrate new accounts. In
December 1996, the Company received an order for six Full-Flow FPD systems at
a total purchase price of $16.1 million from an existing customer. In late
1995 and in 1996, a number of semiconductor manufacturers experienced a
reduction in order growth and, in a few instances, a reduction in overall
orders. These events caused certain semiconductor manufacturers to postpone or
cancel equipment deliveries to previously planned expansion or new fab
construction projects. In addition, certain market analysts project an overall
reduction in expenditures for semiconductor capital equipment in 1997.
The Company has significantly increased its operations to support increased
revenues, including the hiring of additional personnel, and has made and
expects to continue to make substantial investments in research, development
and engineering and sales and marketing to support product development. There
can be no assurance that the Company will be able to achieve a rate of growth
or level of sales in any future period commensurate with its level of
expenses. Future results will depend upon a variety of factors, including the
timing of significant orders, the ability of the Company to bring new systems
to market, the timing of new product releases by the Company's competitors,
patterns of capital spending by the Company's customers, market acceptance of
new or enhanced versions of the Company's systems, changes in pricing by the
Company or its competitors and the volatility of the semiconductor and FPD
industries and of the markets served by the Company's customers.
The Company's gross margin has been and will continue to be affected by a
variety of factors including the mix and average selling prices of systems,
the mix of sales to domestic and international markets, particularly Korea,
and the customization of systems. The Company sells its systems worldwide and
records a significant portion of its sales to customers outside the United
States. In fiscal 1996, international sales constituted 63.1% of net sales.
The Company anticipates that international sales will continue to account for
a significant portion of net sales, although the percentage of international
sales is expected to fluctuate from period to period. The Company pays
significant selling commissions to agents on sales to East Asia. As a result,
gross margin and selling, general and administrative expenses as a percentage
of net sales has in the past and will continue in the future to fluctuate
based to a large extent on changes in the mix of sales to East Asia.
16
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth the components of the Company's statements of
income for the fiscal years ended October 31, 1994, 1995 and 1996, expressed
as a percentage of sales.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED OCTOBER 31,
-------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales...................................... 100.0% 100.0% 100.0%
Cost of sales.................................. 57.2 57.5 53.0
--------- --------- ---------
Gross profit................................. 42.8 42.5 47.0
--------- --------- ---------
Operating expenses:
Research, development and engineering........ 13.2 7.3 10.0
Selling, general and administrative.......... 19.7 25.5 26.5
--------- --------- ---------
Total operating expenses................... 32.9 32.8 36.5
--------- --------- ---------
Operating income............................... 9.9 9.7 10.5
Interest expense, net.......................... 5.0 0.7 0.3
--------- --------- ---------
Income before income taxes..................... 4.9 9.0 10.2
Income taxes................................... 1.5 3.0 3.5
--------- --------- ---------
Net income..................................... 3.4% 6.0% 6.7%
========= ========= =========
</TABLE>
Net Sales. Net sales increased 47.0% from $15.9 million in fiscal 1994 to
$23.4 million in fiscal 1995 and 87.8% to $44.0 million in fiscal 1996. In
fiscal 1995 and fiscal 1996, these increases resulted primarily from increased
demand for the Company's Full-Flow systems by companies in the semiconductor
industry as the Company's customers equipped new facilities or expanded
facilities, resulting in multiple systems purchases by some of the Company's
major customers, and initial sales to new customers. Net sales for fiscal 1996
included sales of Full-Flow systems to companies in the FPD manufacturing
industry representing approximately 20% of net sales. The Company expects that
FPD sales as a percentage of total sales will fluctuate as the Company
attempts to penetrate new accounts. In December 1996, the Company received an
order for six Full-Flow FPD systems at a total purchase price of $16.1 million
from an existing customer. International sales represented 51.7%, 51.7% and
63.1% of total net sales in fiscal 1994, 1995 and 1996, respectively. The
number of international customers receiving shipments of the Company's systems
increased in both fiscal 1995 and 1996. The Company expects international
sales to continue to represent a significant portion of its net sales as a
result of the Company's continuing expansion of its international marketing
efforts.
Gross Profit. Gross profit as a percentage of net sales remained
substantially constant in fiscal 1994 and 1995, at 42.8% and 42.5%,
respectively, but increased to 47.0% in fiscal 1996. Efficiencies gained
through increased production volume during fiscal 1994 and 1995 were more than
offset by increased recruiting and training costs as the Company significantly
increased the number of production, installation and service personnel in
support of the increased level of shipments. The increase in gross profit in
fiscal 1996 was attributable to increases in sales prices, changes in product
mix, reductions in the cost of component parts due to volume, and
manufacturing efficiencies resulting from the expansion of the Company's
manufacturing facilities.
Research, Development and Engineering. Research, development and engineering
expenses decreased from $2.1 million or 13.2% of net sales in fiscal 1994 to
$1.7 million or 7.3% of net sales in fiscal 1995, and increased to $4.4
million or 10.0% of net sales in fiscal 1996. The decline in research,
development and engineering expenses in fiscal 1995 was primarily attributable
to the completion of two major development projects, a contract awarded by
SEMATECH, a consortium of semiconductor manufacturers, to develop and produce
an advanced semiconductor wet processing system, and a project to develop an
improved wet processing system for flat panel display manufacturing, early in
fiscal 1995. The substantial increase in research,
17
<PAGE>
development and engineering spending in fiscal 1996 is attributable to the
Company's completion in March 1996 of development of a Full-Flow system
configured to process 100 wafers per vessel and the release of this system's
design to the Company's manufacturing division. The first production unit of
this 100-wafer system was shipped in April 1996. In addition, the Company
incurred substantial research, development and engineering expenses in support
of the development of its first Full-Flow system for use in manufacturing flat
panel displays. The first Full-Flow FPD system was shipped in April 1996. The
Company is developing a version of the Full-Flow platform to process 300 mm
semiconductor wafers. The Company believes that a substantial investment in
research, development and engineering is critical to maintaining a strong
technological position and that such expenses in fiscal 1997 will increase
over the 1996 level.
Selling, General and Administrative. Selling, general and administrative
expenses increased from $3.2 million or 19.7% of net sales in fiscal 1994 to
$6.0 million or 25.5% of net sales in fiscal 1995, and to $11.7 million or
26.5% of net sales in fiscal 1996. The increases in fiscal 1995 and 1996
resulted primarily from (i) increases in sales and marketing costs related to
increased customer support and increased international sales, (ii)
administrative costs related to increases in staff in the accounting and
finance functions in preparation for and following the Company's initial
public offering and (iii) legal expenses related to litigation undertaken by
the Company to protect one of the Company's patents. The Company believes that
selling, general and administrative expenses, including legal expenses related
to the patent litigation, will increase in fiscal 1997 and beyond, as
increased personnel and sales and support expenses are expected in connection
with the Company's efforts to increase its net sales.
Interest Expense. Interest expense, net of interest income, of $0.8 million,
or 5.0% of net sales, in fiscal 1994 decreased to $0.2 million in fiscal 1995
and 1996, or 0.7% and 0.3% of net sales, respectively. In fiscal 1994,
interest expense was primarily attributable to interest of $0.7 million on the
Company's obligation to two related-party limited partnerships which provided
the Company with research and development funding in 1984 and 1985. The
decrease in net interest expense in fiscal 1995 was primarily attributable to
the elimination on November 1, 1994 of the Company's obligation to these
limited partnerships. See Note 8 of the Notes to Consolidated Financial
Statements. The Company incurred interest expenses due to intra-period
borrowings on its revolving line of credit during fiscal 1995 and 1996 as
borrowings on the Company's line of credit increased to support increased
working capital requirements. In fiscal 1996, the Company earned interest
income of $0.3 million on funds not immediately required for its operations
following its initial public offering in June 1996.
Income Taxes. The Company's effective tax rate increased from 30.6% in
fiscal 1994 to 33.4% in fiscal 1995, and increased to 34.0% in fiscal 1996.
The rate for fiscal 1994 was affected by recognition of a research and
development tax credit. The rate for fiscal 1995 reflects a reduction in the
research and development tax credit because of lower research, development and
engineering expenses. The rate for fiscal 1996 reflects the unavailability of
the research and development tax credit during the majority of the year.
18
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited consolidated quarterly
financial information for each quarter in the fiscal years ended October 31,
1995 and 1996. In the opinion of the Company's management, this information
has been prepared on the same basis as the Consolidated Financial Statements
appearing elsewhere in the Prospectus and includes all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the
financial results set forth herein. Results of operations for any previous
quarter are not necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
FISCAL 1995 FISCAL 1996
--------------------------------------- ----------------------------------------
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
ENDED ENDED ENDED ENDED ENDED ENDED ENDED ENDED
JANUARY 31 APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 APRIL 30 JULY 31 OCTOBER 31
---------- -------- ------- ---------- ---------- -------- ------- ----------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF INCOME
DATA:
Net sales............... $4,171 $5,160 $6,601 $7,498 $9,611 $10,086 $11,096 $13,220
Cost of sales........... 2,506 3,088 3,848 4,021 5,555 5,082 5,841 6,839
------ ------ ------ ------ ------ ------- ------- -------
Gross profit........... 1,665 2,072 2,753 3,477 4,056 5,004 5,255 6,381
------ ------ ------ ------ ------ ------- ------- -------
Operating expenses:
Research, development
and engineering....... 255 556 426 480 1,046 1,046 881 1,402
Selling, general and
administrative........ 1,304 1,168 1,531 1,969 1,821 2,854 3,366 3,638
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses............ 1,559 1,724 1,957 2,449 2,867 3,900 4,247 5,040
------ ------ ------ ------ ------ ------- ------- -------
Operating income........ 106 348 796 1,028 1,189 1,104 1,008 1,341
Interest expense, net... 31 43 46 53 72 143 34 (92)
------ ------ ------ ------ ------ ------- ------- -------
Income before income
taxes................. 75 305 750 975 1,117 961 974 1,433
Income taxes............ 25 102 251 325 391 336 341 457
------ ------ ------ ------ ------ ------- ------- -------
Net income.............. $ 50 $ 203 $ 499 $ 650 $ 726 $ 625 $ 633 $ 976
====== ====== ====== ====== ====== ======= ======= =======
AS A PERCENTAGE OF NET
SALES:
Net sales............... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales........... 60.1 59.8 58.3 53.6 57.8 50.4 52.6 51.7
------ ------ ------ ------ ------ ------- ------- -------
Gross profit........... 39.9 40.2 41.7 46.4 42.2 49.6 47.4 48.3
------ ------ ------ ------ ------ ------- ------- -------
Operating expenses:
Research, development
and engineering....... 6.1 10.8 6.4 6.4 10.9 10.4 7.9 10.6
Selling, general and
administrative........ 31.3 22.7 23.2 26.3 18.9 28.3 30.4 27.5
------ ------ ------ ------ ------ ------- ------- -------
Total operating
expenses............ 37.4 33.5 29.6 32.7 29.8 38.7 38.3 38.1
------ ------ ------ ------ ------ ------- ------- -------
Operating income........ 2.5 6.7 12.1 13.7 12.4 10.9 9.1 10.2
Interest expense, net... 0.7 0.8 0.7 0.7 0.8 1.4 0.3 (0.7)
------ ------ ------ ------ ------ ------- ------- -------
Income before income
taxes................. 1.8 5.9 11.4 13.0 11.6 9.5 8.8 10.9
Income taxes............ 0.6 2.0 3.8 4.3 4.1 3.3 3.1 3.5
------ ------ ------ ------ ------ ------- ------- -------
Net income.............. 1.2% 3.9% 7.6% 8.7% 7.5% 6.2% 5.7% 7.4%
====== ====== ====== ====== ====== ======= ======= =======
</TABLE>
Net Sales. The Company's net sales have increased sequentially from the
first quarter of fiscal 1995 to the fourth quarter of fiscal 1996 from $4.2
million to $13.2 million. Sales have increased primarily due to penetration of
the Company's Full-Flow products at semiconductor manufacturers worldwide and,
to a lesser extent, due to initial shipments of Full-Flow systems to
manufacturers of FPDs beginning in April 1996. The Company's net sales may
vary significantly from quarter to quarter as a result of the relatively high
average selling price of the Company's systems in relation to the amount of
the Company's overall sales in any quarter, lengthy sales cycles, customer
concentration and the pattern and timing of orders received from the Company's
customers.
19
<PAGE>
Gross Profit. The Company's gross profit has also increased sequentially
from the first quarter of fiscal 1995 to the fourth quarter of fiscal 1996
from $1.7 million to $6.4 million. Gross profit as a percentage of sales has
fluctuated during these quarters due to a variety of factors including
economies of scale, pricing fluctuations, the mix of products sold and the
geographic mix of sales.
Research, Development and Engineering. Research, development and engineering
expenses have fluctuated during the quarters of fiscal 1995 and fiscal 1996
primarily as a result of the timing of expenses related to product
development. Research, development and engineering expenses during fiscal 1995
were predominantly in support of the development of a single vessel system
capable of processing up to 100 8-inch waters simultaneously. During fiscal
1996, work on the 100 wafer system accelerated along with the expenses of
developing a Full-Flow system capable of processing FPD substrates, which
project resulted in the shipment of five FPD systems during fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses have increased due to major increases in sales and marketing and
finance and administration staffs and their respective activities. Certain of
these activities are not necessarily recurring and therefore contribute to
variability from quarter-to-quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has funded its capital requirements through
funding from two research and development limited partnerships, the sale of
private equity securities, the Company's initial public offering of Common
Stock completed in June 1996, and, to a lesser extent, bank borrowings and
equipment leases. As of October 31, 1996, the Company had $12.3 million in
cash, cash equivalents and short-term investments and $27.5 million in working
capital.
Net cash used in operating activities was $2.8 million, $0.4 million and
$3.6 million for fiscal 1994, 1995 and 1996, respectively. Increases in
accounts receivable and inventories were $2.9 million and $0.4 million,
respectively, in fiscal 1995 and $6.2 million and $4.3 million, respectively,
in fiscal 1996. Purchases of property, plant and equipment were $1.3 million
and $2.9 million for fiscal 1995 and 1996, respectively. These expenditures
were primarily related to facility improvements and the establishment of the
Company's applications laboratory in fiscal 1995 and fit-up of the Company's
new leased office facility and acquisition of an advanced three dimensional
computer aided design system for use in the Company's research, development
and engineering activities in fiscal 1996.
During fiscal 1996, the Company leased a 38,400 square foot office facility
in the same industrial park as its owned manufacturing facility and incurred
approximately $0.9 million in expenses to outfit and furnish this facility,
which houses the Company's engineering, customer satisfaction, sales and
marketing and administration functions. The Company has also incurred
approximately $0.4 million in capital expenditures related to the expansion of
its manufacturing facilities, $0.9 million on its applications laboratory and
approximately $1.2 million in capital expenditures related to the improvement
of the Company's information processing infrastructure, including the adoption
of a three dimensional computer aided design database for use in product
development.
The Company has a relationship with a commercial bank which includes a
mortgage on the Company's manufacturing facility in the amount of $0.9 million
and a $7.5 million revolving demand line of credit. The mortgage bears
interest at an annual rate of 8.9%. The line of credit is secured by a first
lien on substantially all of the Company's assets with advances of up to 80%
of qualified accounts receivable and 25% of qualified purchase orders up to a
sub-limit of $2.5 million at an interest rate equal to such bank's prime rate.
No borrowings are outstanding under the Company's line of credit.
The Company also has mortgage notes payable to the Pennsylvania Industrial
Development Authority in the amount of $0.6 million bearing interest at 2.0%
and to the Chester County Development Council in the
20
<PAGE>
amount of $0.1 million bearing interest at 5.0%. In addition, the Company has
outstanding capital lease obligations in the amount of $1.2 million bearing
interest at rates ranging from 7% to 12% per annum.
The Company had outstanding accounts receivable of approximately $8.9
million and $15.1 million as of October 31, 1995 and 1996, respectively. No
allowance for doubtful accounts receivable has been recorded because the
Company believes that all such accounts receivable are fully realizable.
The Company believes that existing cash balances, its available line of
credit and the net proceeds from this offering will be sufficient to meet the
Company's cash requirements through the next 12 months. However, depending
upon its rate of growth and profitability, the Company may require additional
equity or debt financing to meet its working capital requirements or capital
expenditure needs. There can be no assurance that additional financing, if
needed, will be available when required, or, if available, will be on terms
satisfactory to the Company.
21
<PAGE>
BUSINESS
The Company designs, manufacturers and markets advanced wet processing
equipment for sale to the worldwide semiconductor and FPD industries. The
Company believes that its patented Full-Flow enclosed processing and Direct-
Displacement drying technologies enable it to provide wet processing systems
that address a variety of limitations inherent in conventional systems,
including wet benches and spray tools, resulting in a signficantly lower COO
for the Company's Full-Flow systems. The Company's customers include GEC
Plessey, LG, Motorola, National Semiconductor, Samsung, SGS-Thomson, Siemens,
Texas Instruments and Tower Semiconductor.
INDUSTRY BACKGROUND
Market Overview
Over the past two decades, increasing demand for ICs has resulted primarily
from the growth of the personal computer and data communication markets, as
well as the emergence of new markets such as wireless communications, mobile
computing and multimedia and the addition of microprocessor control to many
common consumer products such as automobiles, kitchen appliances and
audio/video equipment. In large part, this demand has been driven by the
semiconductor industry's ability to provide increasingly more complex, higher
performance ICs while steadily reducing the cost per function with lower power
consumption. These improvements in the ratio of price to performance have been
driven by advancements in semiconductor process technology, which have enabled
the cost-effective production of high density ICs with linewidths below 0.5
micron.
As demand for ICs has grown, semiconductor manufacturers have increased
capacity by expanding and updating existing fabs and constructing new fabs.
This expansion has historically exhibited strong cyclical characteristics, and
continues to do so. For example, in late 1995 and in 1996, many semiconductor
manufacturers experienced a reduction in order growth and, in a few instances,
a reduction in overall orders. These events caused certain semiconductor
manufacturers to postpone or cancel equipment deliveries to previously planned
expansion or new fab construction projects, providing evidence of the
continuing cyclical nature of the industry. However, according to VLSI, the
semiconductor capital equipment market has grown through these periodic cycles
from an estimated $2.2 billion in 1980 to $30.9 billion in 1995.
The increasing complexity of ICs has resulted in an increase in both the
number and cost of process tools (such as steppers, etchers, furnaces and wet
processors) required to manufacture semiconductors. In a typical fab in the
1980s, the cost of equipment represented approximately 50-55% of the total
facility costs. Today, the total cost of an advanced fab can substantially
exceed $1 billion, of which equipment costs can account for 65-75%.
Semiconductor manufacturers place great pressure on process equipment
manufacturers to decrease the COO of their products. The principal elements of
COO are yield, throughput, capital costs and direct costs. Yield is primarily
determined by contamination levels and process uniformity. Throughput is
primarily a function of the time required to complete a process cycle and the
handling time between process steps. Capital costs include the cost of
acquisition and installation of the process equipment. Direct costs primarily
include consumables used in the manufacturing process and costs of cleanroom
space occupied by the equipment. Semiconductor device manufacturers must also
address environmental costs such as water usage and costs related to the
control and disposal of chemical waste and emissions associated with operating
a fab. Maintaining an acceptable level of COO becomes increasingly challenging
as manufacturing processes become more complex and process tolerances narrow.
The market for FPDs has grown significantly in recent years as the result of
the increasing popularity of portable computers and other electronic devices
which utilize screens and other types of displays to provide information in
digital format and graphical displays to the end user. As consumers demand
increasingly smaller and lighter electronic devices with improved
functionality, the demand for FPDs continues to increase due to inherent
advantages over cathode ray tubes ("CRTs") with respect to size, weight and
power consumption. As
22
<PAGE>
the cost of FPDs declines, the uses of FPDs will increase beyond computer
applications, which accounted for over half of the total market in 1995.
According to Dataquest, the overall market for FPDs is projected to increase
from $4.7 billion in 1995 to $15.6 billion in 1998. Users of displays require
high resolution which translates to increased device density on the back of
the thin glass screen. In order to support the required device density and
still allow substantial light transmission through the screen (brightness),
significant reductions in feature size will be required. The Company believes
that the superior etch uniformity and cleaning performance possible using a
Full-Flow system may enable manufacturers to meet this combined goal of device
density and brightness.
Wet Processing in Semiconductor and FPD Manufacturing
The manufacture of semiconductors requires a large number of complex process
steps during which layers of electrically insulating or conducting materials
are created or deposited on the surface of a silicon wafer. Before and after
many of these steps, it is necessary to clean, etch, strip or otherwise
condition the surface of the wafer in order to remove unwanted material or
surface contamination in preparation for a subsequent process step. SEMATECH
has estimated that up to 300 fabrication steps are required to manufacture
advanced logic ICs, and that approximately 50 of these steps are accomplished
by wet processing.
The following table identifies the typical wet processing steps in
semiconductor manufacturing.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Critical Cleaning Applications Critical Etching Applications Photoresist Strip Applications
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Initial wafer clean Silicon oxide etch Aqueous chemistry
Pre-diffusion clean Polysilicon etch resist
Pre-oxidation clean Silicon nitride etch strip/post-ash clean
Pre-thin films deposition clean Solvent chemistry resist strip/
Post-CMP clean post-ash clean
Solvent chemistry clean
- -------------------------------------------------------------------------------------------------------
</TABLE>
The above wet processing steps have traditionally been accomplished using
wet benches and spray tools. Advanced wet benches utilize a succession of open
chemical baths and extensive robotic automation to move wafers from one
chemical or rinse bath to the next. Spray tools subject wafers to sequential
spray applications of chemicals as the wafers are spun inside an enclosed
chamber.
Like semiconductors, FPDs are manufactured using numerous process steps,
including photolithography, deposition, etching and cleaning. However, unlike
semiconductor wafers, each of which may contain several hundred individual
ICs, a single FPD substrate may contain as few as two laptop computer
displays. Therefore, defects in the manufacturing process tend to have a much
greater impact on FPD yields than on semiconductor yields.
The Company believes that conventional wet processing methods are subject to
a number of inherent limitations, including:
Particle Contamination. Submicron ICs and FPD substrates are extremely
sensitive to small amounts of particle contamination which can result in poor
device performance or even failure. As device geometries become smaller, the
reduction of particle contamination has become an increasingly critical factor
in maximizing yield. Open-bath wet benches are exposed to the cleanroom
environment and therefore are susceptible to external contamination. Since
particles tend to reside on the surfaces of liquids due to surface tension,
the movement of wafers and substrates in and out of liquids can result in the
transfer of particles to the surfaces through a "skimming" effect. The
tendency to add particles from air-liquid transitions is inherent in wet
benches due to multiple immersions and withdrawals and in spray processing
where each spray droplet striking the wafer or substrate surface can act as a
separate miniature immersion and withdrawal.
23
<PAGE>
Watermark Defects and Native Oxide Growth. Both wet benches and spray tools
subject the surface of wafers and substrates to repeated wetting and
evaporative drying, creating watermark defects on the surface that can
significantly impact device or FPD performance and interfere with subsequent
process steps.
Process Control Limitations. Process liquids in wet benches and spray tools
are subject to evaporation and absorption of atmospheric gases. As a result,
it is difficult to achieve precise repeatability of process results.
Additionally, wafers and substrates in a wet bench must be robotically
transferred from bath to bath through the cleanroom atmosphere. This gap in
processing during transport adds variability due to the effects of water
exposure to the cleanroom atmosphere.
Large Physical Size. The cost of cleanroom space is a significant component
in the overall COO calculation for a specific piece of equipment. Wet benches
configured for the multiple-step wet processes, required by many
manufacturers, can be up to 30 feet in length. Increases in process complexity
or in a wafer or substrate size will likely require even larger wet benches.
Environmental Impact. Due to the large volume of the open baths which
comprise a wet bench and the need for multiple wet processing steps to
manufacture increasingly complex ICs and FPDs, wet benches typically consume
large quantities of water during processing. A recent study has estimated that
water costs can comprise up to one-third of the total cost of cleaning.
Additionally, in many wet bench processes, large amounts of chemicals are
utilized. The open nature of the baths in a typical wet bench necessitates
expensive ventilation and filtration systems in order to remediate chemical
fume emissions. As a result, municipalities and environmental authorities are
increasingly concerned by water consumption and chemical fume emissions by
fabs.
Due to the continuing reduction of device geometries and the escalating cost
of leading edge fabs, the Company believes that semiconductor and FPD
manufacturers are becoming increasingly sensitive to the foregoing limitations
inherent in conventional wet processing methods.
THE CFM SOLUTION
The Company's systems are based on its proprietary Full-Flow wet processing
technology and are used to perform various cleaning and etching process steps
in the manufacture of semiconductors and FPDs. In the Company's Full-Flow wet
processing system, up to 100 wafers or 50 substrates automatically load into a
fully-enclosed, flow-optimized vessel that has a lower fluid inlet and an
upper fluid outlet. The Full-Flow platform requires different vessels
depending upon whether wafers or substrates are processed. Once a selected
process is begun, the vessel is completely filled with fluid at all times,
with fluids flowing through the vessel one directly after another without
exposing the wafers to air.
24
<PAGE>
CFM FULL-FLOW VESSEL MODULE AND AUTOMATION
[CFM FULL-FLOW VESSEL MODULE AND AUTOMATION PICTURE APPEARS HERE]
The Company believes that its patented Full-Flow enclosed processing and
Direct-Displacement drying technologies result in superior process performance
and lower COO by offering the following advantages over conventional wet
processing systems:
Reduced Particle Contamination. Full-Flow processing takes place in a fully-
enclosed processing vessel which isolates the wafers or substrates from the
external cleanroom environment and associated contaminants. Additionally,
particle contamination through particle skimming is substantially reduced.
Since the Full-Flow system is capable of directly displacing one chemical or
rinse step with the next without draining the vessel, it can eliminate the
air-liquid interfaces (where particles tend to reside) that normally occur in
wet benches and spray tools. The wafers or substrates are kept completely
immersed in fluid until they are ready to be dried during the Company's
patented in situ Direct-Displacement drying technology.
Substantial Elimination of Watermark Defects and Native Oxide Growth. The
formation of watermarks is substantially eliminated through the prevention of
water evaporation from the wafer or substrate surface. Once the chemical
treatment of the wafers or substrates is completed, drying is accomplished
using CFM's patented Direct-Displacement drying technology. With this
technique, the final rinse water is directly displaced with highly purified
isopropyl alcohol ("IPA") vapor and substantially all water is forced off the
surface before it is exposed to an air environment. Additionally, native oxide
growth is suppressed by degassifying the water immediately before it enters
the vessel. Since the vessel itself is totally enclosed, the ultra pure water
in the vessel is not able to absorb oxygen and carbon dioxide from the
cleanroom environment. As a result, the gas content of the water at the
surface is much lower than that typically found in a wet bench or spray tool.
25
<PAGE>
Tight Process Control. Process precision and repeatability result in large
part from the ability to control accurately the physical and chemical
properties of the processing liquids as well as the transition between process
steps. Full-Flow processing is performed in a completely enclosed vessel,
thereby substantially reducing variability of the processing liquids such as
water and chemical evaporation and absorption of atmospheric gases.
Additionally, because one process liquid directly displaces the previous one,
there is no gap in time and no exposure to the cleanroom atmosphere between
process steps.
Cleanroom Space Savings. The Full-Flow system has been designed to consume a
minimum amount of cleanroom space. System support modules can be located
outside the cleanroom and away from the main system. In many fabs, this means
that these support modules can be located in the basement, further reducing the
amount of square footage that is required on the main floor of the fab where
space is at a premium. A dual vessel Full-Flow system capable of processing 100
8-inch wafers in each of two vessels requires only 13 linear feet of cleanroom
wall space and no direct usage of cleanroom floor space when flush-mounted.
This is significantly less than the space requirements of a wet bench with
similar processing capabilities, which the Company believes can require up to
350 square feet of total floor space and approximately 35 linear feet of
cleanroom wall space.
COMPARISON OF FULL-FLOW DUAL VESSEL SYSTEM WITH TRADITIONAL WET BENCH SYSTEM
[PICTURE OF COMPARISON OF FULL-FLOW DUAL VESSEL SYSTEM WITH TRADITIONAL WET
BENCH SYSTEM APPEARS HERE]
Environmental Advantages. The Company believes that the Full-Flow system
utilizes less than one-half of the water required by traditional wet bench
systems performing similar processing steps because most of the water in wet
bench systems flows around the wafer or substrate carrier rather than across
the surface. In the Company's flow-optimized Full-Flow systems, substantially
less water is lost as bypass flow. The fully-enclosed Full-Flow system also
reduces the amount of process chemicals consumed and the equipment and related
costs of remediation of chemical fume emissions associated with traditional wet
processing.
STRATEGY
The Company's objective is to become a leading supplier of advanced wet
processing equipment to the worldwide semiconductor and FPD industries. The
Company intends to achieve this objective by focusing on the following key
elements of its strategy.
26
<PAGE>
Increase Current Market Share. The Company seeks to continue to expand its
share of the semiconductor critical cleaning and etching wet processing market
through significant expansion of its sales and marketing and customer
satisfaction efforts. The Company also intends to continually improve its
existing Full-Flow platform in order to offer enhanced technical capabilities
and lower COO benefits for currently served critical wet processing
applications. For example, in April 1996, the Company shipped a new version of
its Full-Flow system that doubles the throughput and capital productivity of
its predecessor system by enabling the processing of up to 100 8-inch wafers
in a single vessel. Subsequently, in July 1996, the Company shipped the first
fully-automated Full Flow system capable of processing 370mm x 470mm FPD
substrates to a customer in East Asia. In December 1996, the Company received
a $16.1 million follow on order for six Full-Flow FPD systems.
Broaden Semiconductor Market Penetration. The Company intends to leverage
its Full-Flow platform to address additional wet processing applications in
the semiconductor manufacturing process where it believes its proprietary
Full-Flow technology can provide important benefits over competing wet
processing technologies. By basing new process applications on this platform,
the Company is able to focus primarily on the development and optimization of
the applications' process recipes, which the Company believes significantly
reduces the time and cost associated with entering new wet processing market
segments. Additional semiconductor wet processing applications identified by
the Company include solvent-based cleaning and photoresist stripping, in which
CFM's fully-enclosed Full-Flow processing vessel would provide the important
benefit of controlling chemical fume emissions.
Further Penetrate FPD Market. The Company intends to continue to develop wet
processing equipment for use in the fabrication of FPDs. The Company believes
that its Full-Flow platform is particularly well-suited for cleaning and
precise etching applications in the manufacture of FPDs due to its advanced
process capabilities, its significantly lower use of water and chemicals
relative to comparable wet bench processes, its ability to successfully
process very large substrates and its substantially smaller footprint which
saves increasingly valuable cleanroom floor space. The Company believes that
the FPD market represents a significant opportunity for increasing sales of
its systems, as evidenced by its recent shipments of Full-Flow systems to
Xerox, Motorola and LG. The Company believes that further validation of the
applicability of the Company's Full-Flow technology to the FPD manufacturing
process was provided in February 1996, when the Company was selected by the
United States Display Consortium (the "USDC") to develop an advanced wet
processing system for use in the manufacture of future generation FPDs.
Focus on Customer Satisfaction. The Company believes that its commitment to
customer satisfaction has been a critical factor in its success to date. To
ensure a high level of customer satisfaction, the Company provides
comprehensive customer service and support, through customer training and
ongoing process consultation. The Company has already developed a
comprehensive customer service and support organization, and has invested in
this area by locating direct sales and service staff in Europe in 1996 with
plans to extend this expansion into East Asia in 1997. The Company also
intends to increase the utilization of its applications laboratory to design
and test new processes and equipment features and to provide a Full-Flow
system completely dedicated to training the Company's customers and employees
early in 1997.
Continue Commitment to Worldwide Markets. The Company believes that its
long-term success is substantially dependent on its ability to compete on a
worldwide basis. As such, the Company intends to continue to focus on
expanding its sales activities in each of the primary worldwide markets for
semiconductor and FPD capital equipment. To date, the Company has achieved
considerable success in selling to customers outside the United States. While
such customers accounted for approximately one-half of its net sales in each
of the prior two fiscal years, approximately 63.1% of its net sales in year
ended October 31, 1996 were international. The Company has achieved this
result by hiring direct sales personnel covering Europe and East Asia in 1996
and the Company intends to build upon this success in 1997 by continuing to
add staff in these markets.
27
<PAGE>
PRODUCTS
The Company's systems are based on its proprietary Full-Flow wet processing
technology and are used to perform various cleaning and etching process steps
in the manufacture of semiconductors and FPDs.
The Full-Flow Product Platform
The Company's proprietary Direct-Displacement drying technology is embodied
in its Full-Flow platform, which principally consists of a fully-enclosed
processing vessel incorporating megasonic technology and associated systems
software, hardware and control electronics. Megasonic technology utilizes high
frequency sonic energy to enhance particle removal from the surface of
semiconductor wafers and FPD substrates during wet processing, enabling a
quicker process cycle and a significant reduction in the quantity of process
chemicals used. The Company believes that its Full-Flow platform offers
significant improvements in process performance and a lower COO relative to
competing technologies. Conventional wet bench processes used for many wet
processing applications rely on a succession of open chemical baths and
extensive robotic automation to move semiconductor wafers or FPD substrates
from one chemical bath to the next, which exposes them to contamination.
In the Company's Full-Flow system, wafers or FPD substrates are loaded
automatically into a fully-enclosed flow-optimized processing vessel that has
a lower fluid inlet and an upper fluid outlet. They are completely isolated
from cleanroom air and accompanying contaminants as a succession of process
fluids are introduced into the processing vessel one directly after another,
flowing over the wafers or substrates to complete the desired process
application. Once processing is completed, wafers or substrates are dried in
situ using the Company's patented Direct-Displacement drying process. With
this technique, the final rinse water is directly displaced with highly
purified IPA vapor and substantially all water is forced off the surface of
the wafers or substrates before they are exposed to an air environment. This
process substantially eliminates evaporative drying defects such as
watermarks, inhibits native oxide growth and significantly reduces particle
contamination compared to competing technologies, where the wafers or
substrates are exposed to intermediate evaporative drying within the cleanroom
atmosphere prior to the completion of the final drying process. The optimized
flow characteristics of the Full-Flow processing vessel and the advanced
process control and monitoring capabilities of the Full-Flow platform provide
process uniformity and repeatability. Also, the Company's Full-Flow systems
can be flush-mounted in the cleanroom wall, with the majority of the floor
space needed by the system components located outside the cleanroom
environment. Due to this flush-mounting and the Full-Flow system's
comparatively smaller size, it requires significantly less expensive cleanroom
floor space than competing wet bench systems. The Company's Full-Flow systems
are based on a modular design and can be configured to accomplish a broad
range of wet processing applications using a variety of process and support
modules offered by the Company. By basing new process applications on its
proprietary Full-Flow platform, the Company can focus primarily on the
development and optimization of the applications' process recipes, which the
Company believes significantly reduces the time and cost associated with
developing new products to address additional market opportunities.
The following tables list the Company's product offerings.
CFM FULL-FLOW PLATFORM CONFIGURATIONS
<TABLE>
<CAPTION>
FULL-FLOW AVERAGE SELLING
MARKETS CONFIGURATION CAPACITY PRICE RANGE
<S> <C> <C> <C>
Semiconductor Single vessel 50 wafers $0.9 - 1.3 million
Single vessel 100 wafers $1.1 - 1.5 million
Dual vessel 100 wafers $1.2 - 1.6 million
Dual vessel 200 wafers $1.5 - 2.8 million
- --------------------------------------------------------------------------------
Flat panel display Single vessel 50 substrates $1.5 - 2.1 million
Dual vessel 100 substrates $1.7 - 3.2 million
</TABLE>
- -------------------------------------------------------------------------------
28
<PAGE>
CFM FULL-FLOW SYSTEM MODULES AND FEATURES
- --------------------------------------------------------------------------------
STANDARD MODULES AND FEATURES
- --------------------------------------------------------------------------------
Vessel Module Includes a single, fully-enclosed process
vessel for all chemical, rinse and drying
processes
Control Module Generates, receives and interlocks all
control signals required to operate the
system hardware
Injection Module Measures and dispenses the appropriate amount
of each chemical concentrate into the
deionized water
IPA Recovery Module Generates and subsequently reclaims and
repurifies processed IPA vapor for Direct-
Displacement IPA drying
Deionized Water Mixing Module Blends combinations of hot and cold deionized
water together to meet process recipe
requirements
Transfer Automation Loads and unloads wafers and FPD substrates
to and from the Full-Flow process vessel
Touch Screen Graphical Interface Provides operator control of the system
through a user-friendly graphics touch
screen
- --------------------------------------------------------------------------------
OPTIONAL MODULES AND FEATURES
- --------------------------------------------------------------------------------
Pumping Module Circulates, heats, filters, dispenses and
recovers a mixture of sulfuric acid and
ozone used to remove organic contamination
and to perform photoresist stripping and
post-ash cleans
Ozone Module Generates ozone for use in the Pumping Module
Selective Etch Module Circulates, heats, filters, dispenses and
recovers chemicals for selective etching
processes
Tri-Dispense Module Supplies a user-selectable mixture of
concentrated chemicals to the Selective Etch
Module
Degassifier Module Removes entrained bubbles and dissolved
oxygen from the deionized water supply for
improved process control
Mini-environment Encloses the wafers and automation in a Class
1 environment
Megasonic Carrier Provides high-power, high-frequency sonic
energy for enhanced cleaning capability
Sonic Flow Meters Measures deionized water flow using a non-
contact sonic energy method
Deionized Water Heater Generates a continuous supply of hot
deionized water for use by the Full-Flow
system
Deionized Water Reclaim System Incorporates drain valving and software to
divert deionized water to a reclaim system
Uninterruptable Power Supply Supplies up to 30 minutes of back-up power to
the Full-Flow system in the event of a
facility power failure
Dilute Chemistries Allows the user to switch solution
concentration operating ranges without
affecting standard chemistries
Core Maintenance Provides touch screens and keyboards used
primarily for maintenance functions in
remote locations
SMIF Automation Interface Integrates Standard Mechanical Interface
robotics and wafer handling equipment with
the Full-Flow system
GEM 3.0 Compliance Software Allows the fab's host computer control system
to interface with the Full-Flow system for
transfer of critical process information
Emulation Package Software Simulates the actual operation and command
signals of the Full-Flow system
Data Logging Software Records significant system events including
alarms, interlocks, process states and
operator actions
- --------------------------------------------------------------------------------
29
<PAGE>
Semiconductor Manufacturing Applications
The Company first introduced its Full-Flow systems for use in semiconductor
manufacturing research and development facilities in 1988, and shipped its
first system for use in semiconductor production lines in 1990. To date, the
Company has sold over 80 Full-Flow systems to more than 25 semiconductor and
FPD manufacturers. Full-Flow systems can currently be configured with either
one or two vessels, each of which can be designed to accommodate 4-inch, 5-
inch, 6-inch or 8-inch wafers. During 1996, the Company completed development
of an enhanced Full-Flow system that doubles capital productivity by enabling
customers to process up to 100 8-inch wafers per vessel, or up to 200 8-inch
wafers simultaneously, assuming a dual vessel configuration. This enhanced
system began shipping in April 1996.
A flush-mounted Full-Flow system configured with dual processing vessels
requires approximately 170 square feet of total floor space and approximately
13 linear feet of cleanroom wall space. Assuming similar throughput
capabilities and the same wet process, the Company believes that a competing
wet bench system can require up to 350 square feet of total floor space and
approximately 35 linear feet of cleanroom wall space. Additionally, the
Company believes that its Full-Flow systems can typically achieve a greater
than 50% reduction in the usage of water and chemicals compared to wet benches
performing similar applications. List prices for the Company's Full-Flow
systems range from approximately $0.9 million to $3.2 million depending on
automation options and system configuration.
SEMATECH has estimated that up to 300 fabrication steps are required to
manufacture advanced logic ICs and that approximately 50 of these steps are
accomplished by wet processing. The following table identifies the typical wet
processing steps in semiconductor manufacturing and indicates those performed
by the Company's Full-Flow systems (in bold).
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
Critical Cleaning Applications Critical Etching Applications Photoresist Strip Applications
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
INITIAL WAFER CLEAN SILICON OXIDE ETCH AQUEOUS CHEMISTRY RESIST
PRE-DIFFUSION CLEAN POLYSILICON ETCH STRIP/POST-ASH CLEAN (FRONT END)
PRE-OXIDATION CLEAN Silicon nitride etch Solvent chemistry resist strip/
PRE-THIN FILMS DEPOSITION CLEAN post-ash clean (back end)
Post-CMP clean
Solvent chemistry clean (back end)
- -------------------------------------------------------------------------------------------------------
</TABLE>
For classification purposes, the process to fabricate a semiconductor die
(without testing or packaging) is divided into two major phases referred to as
"front end" and "back end." Front-end steps are those that are performed to
fabricate individual components within an IC such as transistors. Back-end
steps are those that involve the creation of metal patterns on the wafers in
order to connect these individual components to create the IC. For a high-
performance logic IC, approximately 60% of the wet processing steps are front-
end and the balance are back-end.
Critical Cleaning Applications. Critical cleans are those wet processing
steps that are performed in the front end to remove surface contamination
prior to performing highly sensitive fabrication steps such as gate oxidation
or diffusion. The Company believes that approximately 40% of the wet
processing operations in the front end fall into this category. To date, most
of the Company's Full-Flow systems have been purchased by semiconductor
manufacturers for use in these applications.
Critical Etching Applications. Wet processing is also commonly used in the
front end to etch the surface of the wafer to remove silicon dioxide or other
surface material. It is generally important to tightly control the exact
amount of material removed and the uniformity of the etch. The Company
believes that approximately 20% of the wet processing steps in the front end
involve etching. These etching steps are often performed as part of a wet
clean rather than as stand-alone operations, and as such, most of the Full-
Flow systems sold by the Company to date are also performing critical etching
applications.
30
<PAGE>
Photoresist Strip Applications. Photoresist stripping operations involve the
removal of either virgin or ashed photoresist from the surface of wafers after
a patterning step has been completed. Resist stripping is performed in both
the front end and the back end, and the Company believes that this process
represents approximately 40% of the wet processing operations in each area.
Front-end cleans and resist strips are generally performed with aqueous
chemistries. However, back-end cleans and resist strips must be accomplished
with different chemistries that utilize solvents, since front-end water-based
chemistries are incompatible with the metal present on wafers in the back end.
In both cases, resist stripping operations are driven as much by cost as by
process performance. Production shipments of the Company's enhanced throughput
Full-Flow system, the Full-Flow 8100, capable of processing up to 100 8-inch
wafers per vessel, began in April 1996. For a nominally higher system sales
price, this new system provides all the advantages of Full-Flow technology
with double the throughput of its predecessor. Since the Full-Flow system
already utilizes the chemistries required for front-end stripping, the Company
believes that the throughput and other COO advantages provided by this
enhanced system make it attractive for use in front-end resist strip
applications. In 1996, the Company delivered several such systems for use in
front-end applications including resist stripping. Other development projects
are currently underway to further increase the throughput and capital
productivity of future versions of the Full-Flow system.
Future Applications. Approximately 40% of semiconductor wet processing
operations are performed in the back end and are comprised primarily of
solvent-based cleans and solvent-based resist strips. The Company believes
that its Full-Flow systems offer a range of attractive benefits for these
applications as process requirements become more demanding and regulatory
restrictions on the release of chemical fumes become more stringent.
Furthermore, the Company believes that its proprietary Direct-Displacement
drying method is well suited for drying wafers with complex topographies that
often exist in the back end.
FPD Manufacturing Applications
The Company believes that its Full-Flow platform is particularly well-suited
for cleaning and etching applications in the manufacture of FPDs due to its
advanced process capabilities, its significantly lower use of water and
chemicals relative to competing wet bench systems and its substantially
smaller footprint. The Company initially addressed the FPD market with its
Vapor-Flow system, a modified version of its Full-Flow system in which the
process fluids enter the process vessel via an inlet located on the bottom,
like the Full-Flow system, but exit the vessel on the side, unlike the Full-
Flow system in which process fluids exit at the top. The Company introduced
its first Vapor-Flow system in 1990, and has sold 13 systems to seven
customers, including systems to two manufacturers of FPDs. To address the
rapidly increasing demand for FPDs, the Company has developed a high-
throughput FPD processing system based on its Full-Flow platform. This Full-
Flow FPD system, which was first shipped in April 1996, has been designed to
process up to 50 FPD substrates per vessel. The system is available in a dual
vessel configuration capable of processing up to 100 substrates
simultaneously.
In February 1996, the USDC awarded the Company a development contract to
produce a wet processing system to support both cleaning and etching
requirements during the manufacture of advanced technology FPDs. The Company
will own all of the technology which is developed as a result of this
contract.
CUSTOMERS
The Company sells its systems to leading semiconductor manufacturers located
in the United States, Europe and East Asia. Sales to LG, IBM, SGS-Thomson
Microelectronics and Motorola accounted for 29.1%, 25.3%, 19.0% and 10.8%,
respectively, totalling 84.2% of net sales in fiscal 1996. See Note 14 of the
Notes to Consolidated Financial Statements for information with respect to
export sales.
The Company expects a significant portion of its future sales to remain
concentrated within a limited number of customers. The Company's results of
operations could be materially and adversely affected by any loss of business
from, the cancellation of orders by, or decreases in prices of systems sold
to, any of its major customers.
31
<PAGE>
The Company's arrangements with its customers are generally on a purchase
order basis and not pursuant to long term contracts. A reduction or delay in
orders from any of the Company's significant customers, including reductions
or delays due to market, economic or competitive conditions in the
semiconductor or FPD industries, or the loss of any such customers, could have
a material adverse effect upon the Company's results of operations. While the
Company actively pursues new customers, there can be no assurance that the
Company will be successful in its efforts, and any significant weakening in
customer demand would have a material adverse effect on the Company.
SALES AND MARKETING
The Company sells its systems through a combination of a direct sales force,
manufacturers' sales representatives, a Korean sales agent, a Japanese
distributor and a Taiwanese sales agent. The Company's field service personnel
support its sales force. In North America, the Company utilizes a combination
of a direct sales force and manufacturers' representatives. In addition to the
direct sales force at the Company's headquarters in West Chester,
Pennsylvania, the Company has direct sales personnel located in Marietta,
Georgia, Austin, Texas and Phoenix, Arizona. The Company has recently hired a
direct salesperson in Paris, France and continues to support the European
market through its North American direct sales force. The Company hired a
director of sales and marketing for East Asia during fiscal 1996, and intends
to substantially increase its expenditures during fiscal 1997 for sales and
sales support in order to continue to expand the adoption of its products in
East Asia. The Company signed agreements with ANAM, which markets in Korea,
Innotech, the Company's distributor in Japan and AMPOC, a sales agent in
Taiwan, in 1991, 1992 and 1996, respectively. See "Certain Relationships and
Related Transactions."
Although the Company believes that it has good relationships with its
manufacturers' sales representatives, sales agents and its distributor, there
can be no assurance that these relationships will continue to be satisfactory
or continue at all. In the event of a termination of any of the Company's
existing representation, agency or distribution arrangements, the Company's
strategy of worldwide expansion could be adversely affected.
CUSTOMER SATISFACTION
The Company believes that high quality customer support, customer training
and process consultation are key elements in the creation of customer
satisfaction. The Company also believes that product reliability, as it is
perceived by the individual customer technician, manager and executive, is
strongly correlated with customer satisfaction and the resulting decisions to
select the Company's technology and its products for broad application within
that individual customer's area of personal authority. The Company has made
substantial investments in its customer support, customer training, customer
communication and reliability engineering and testing programs and intends to
continue to make such investments in the future.
The Company's customer satisfaction organization is headquartered in West
Chester, Pennsylvania, with additional employees and consultants located in
Arizona, California, Colorado, Idaho, New York, New Mexico, Oregon, Texas,
Vermont, France, Germany and the United Kingdom. The Company uses local
support personnel where there are multiple installed systems. Innotech, ANAM
and AMPOC provide service to customers located in Japan, Korea and Taiwan,
respectively. The Company's support personnel generally have prior technical
backgrounds in the mechanical, electronic or chemical processing industries
and prior experience or training in semiconductor manufacturing processes.
These field personnel are supported by the Company's manufacturing and
engineering personnel during system installation and initial process
validation. Field support personnel also perform warranty and after-warranty
service and sales support.
The Company's products are typically sold with a 12 month warranty covering
all parts and labor, which commences upon completion of installation and final
acceptance. Longer and more comprehensive warranties, as well as service
contracts, are also available to be purchased by customers.
32
<PAGE>
BACKLOG
The Company manages its production forecast using both backlog and projected
system orders. The Company includes in backlog only those customer purchase
orders which have been accepted by the Company and for which shipments dates
have been assigned within the following 12 months. Orders are generally
subject to delay without penalty, but may contain cancellation penalties. As
of October 31, 1996, the Company's backlog was approximately $18.5 million.
The entire backlog is for semiconductor equipment, approximately 50% of which
is for international orders. It has been the experience of the Company that
neither the backlog nor the pattern of receipt of orders are necessarily
indicative of future orders or revenues.
RESEARCH, DEVELOPMENT AND ENGINEERING
CFM maintains an applications laboratory in West Chester, Pennsylvania to
test new equipment and processes, design new features and train customer and
Company personnel. By basing new applications on its proprietary Full-Flow
platform, the Company can reduce substantially the time and cost required to
develop new process applications by focusing primarily on the optimization of
the applications' process recipes. The Company is currently focusing its
research, development and engineering efforts on equipment to support
additional wet process applications such as photoresist strip processes. The
Company recently completed the development of a high-throughput version of its
8100 system, the Full-Flow 8100HT, which the Company began shipping early in
fiscal 1997. In addition to the doubling in system throughput and capital
productivity offered by the base Full-Flow 8100, the 8100HT offers
asynchronous wafer handling, maximizing processing productivity. The Company
is currently designing new vessels capable of processing 300mm semiconductor
wafers and a new vessel capable of processing 590mm x 670mm FPDs which are
larger than those processed presently. The Company has accepted orders for
these new products to ship during 1997. See "Risk Factors -- Dependence Upon
Product Development."
The markets in which the Company and its customers compete are characterized
by rapidly changing technology, evolving industry standards and continuous
improvements in products and services. Because of continual changes in these
markets, the Company believes that its future success will depend, in part,
upon its ability to continue to improve its systems and its process
technologies and to develop new system applications which compete effectively
on the basis of COO, including yield, throughput, capital and direct costs and
system performance. In addition, the Company must adapt its systems and
processes to technological changes to support the standards required by
emerging target markets. The success of new system introductions is dependent
on a number of factors, including timely completion of new system designs,
ultimate system performance achieved by those designs and market acceptance.
There can be no assurance that the Company will be able to improve its
existing systems and process technologies or develop new system applications.
The Company's research, development and engineering expenses for the 1994,
1995 and 1996 fiscal years were $2.1 million, $1.7 million and $4.4 million,
respectively, representing 13.2%, 7.3% and 10.0% of net sales, respectively.
Research, development and engineering expenses were net of reimbursements of
$1,835,000, $232,000 and $1,592,000, respectively, for the 1994, 1995 and 1996
fiscal years.
COMPETITION
The Company faces substantial competition in its market segments from both
established competitors and potential new entrants. The Company believes that
the primary competitive factors in the markets in which the Company competes
are yield, throughput, capital and direct costs, system performance, size of
installed base, breadth of product line and customer satisfaction. The Company
believes that it competes favorably with respect to each of these factors. The
Company also faces the challenge posed by semiconductor and FPD manufacturers'
commitment to competing technologies. Most of the Company's competitors have
been in business longer than the Company, offer traditional wet processing
technology, have broader product lines, more experience with high volume
manufacturing, broader name recognition, substantially larger installed bases
and significantly greater financial, technical, marketing, service and
suppport resources than the Company. In the semiconductor wet processing
market, the Company competes primarily with Dainippon Screen, FSI
International, Santa Clara
33
<PAGE>
Plastics, Steag MicroTech, SubMicron Systems, Tokyo Electron Limited and
Verteq. In the FPD wet processing market, the Company competes primarily with
Dainippon Screen and Semitool. There can be no assurance that these
competitors will not also develop enhancements to or future generations of
competitive products that will offer price or performance features that are
superior to the Company's systems or that the Company's products will gain
market acceptance. See "Risk Factors -- Acceptance by Customers of New
Technology."
The Company believes that in order to remain competitive, it must invest
significant financial resources in developing new product features and
enhancements and in maintaining customer satisfaction worldwide. In marketing
its products, the Company will face competition from suppliers employing new
technologies in order to extend the capabilities of competitive products
beyond their current limits or increase their productivity. Once a
manufacturer has selected a particular vendor's capital equipment, the Company
believes that the manufacturer generally relies upon that equipment for a
specific production line application and frequently will attempt to
consolidate related capital equipment requirements with the same vendor, to
the degree that such consolidation is possible. In addition, increased
competitive pressure could lead to intensified price-based competition,
resulting in lower prices and margins, which would materially and adversely
affect the Company's business and results of operations.
MANUFACTURING
The Company's manufacturing operations are based in West Chester,
Pennsylvania and consist of procurement, assembly and test engineering. Early
in fiscal 1996, the Company completed an expansion of its manufacturing
operations, which resulted in a 150% increase in production capacity. Early in
fiscal 1997, the Company completed an additional expansion of its
manufacturing operator which resulted in an additional 50% increase in
production capacity. The Company's Full-Flow systems are based upon a common
set of modules, enabling the Company to reduce manufacturing costs by using a
large number of common subassemblies and components. Many of the major
subassemblies are purchased complete from outside sources. The Company focuses
its manufacturing efforts on carefully documented assembly and integration
activities which the Company has determined to be critical to the successful
operation of its products. In 1994, as a result of adoption of SEMATECH
measurement and improvement methodologies, the Company began a concerted
effort to meet the requirements of ISO 9001, the international standard for
quality systems. In December 1996, the Company was recommended for ISO 9001
certification.
Certain of the Company's components and subassemblies are obtained from sole
suppliers or limited groups of suppliers, which are often small, independent
companies. Moreover, the Company believes that certain of these components and
subassemblies can only be obtained from its current suppliers. The Company
generally acquires such components on a purchase order basis and not under
long-term supply contracts. The Company's reliance on outside vendors
generally, and on sole suppliers in particular, involves several risks,
including a potential inability to obtain an adequate supply of required
components and reduced control over pricing, timely delivery and quality of
components. The Company has experienced and continues to experience some
reliability and quality problems with certain key components and subassemblies
provided by single source suppliers. Because the manufacture of certain of
these components and subassemblies is a complex process and can require long
lead times, there can be no assurance that delays or shortages caused by
suppliers will not occur. Historically the Company has not experienced any
significant delays in manufacturing due to an inability to obtain components
and is not currently aware of any specific problems regarding the availability
of components which might significantly delay the manufacturing of its systems
in the future. However, any inability to obtain adequate deliveries or any
other circumstance that would require the Company to seek alternative sources
of supply or to manufacture such components internally could delay the
Company's ability to ship its systems and could have a material adverse effect
on the Company. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Risk Factors -- Sole or Limited
Sources of Supply."
The Company is subject to a variety of federal, state and local laws, rules
and regulations relating to the use, storage, discharge and disposal of
hazardous chemicals used in its research, development and engineering
activities. The Company believes that it is currently in compliance in all
material respects with such laws, rules
34
<PAGE>
and regulations. However, failure to so comply could result in substantial
liability to the Company, suspension or cessation of the Company's operations,
restrictions on the Company's ability to expand at its present location or
requirements for the acquisition of additional equipment or other significant
expense. To date, compliance with environmental rules and regulations has not
had a material effect on the Company's operations.
INTELLECTUAL PROPERTY
The Company relies on a combination of patent, copyright, trademark and
trade secret laws, non-disclosure agreements and other forms of intellectual
property protection to protect its proprietary technology. The Company
currently holds 12 patents in the United States, four patents in Japan, three
patents in Korea and 17 patents in various European countries. The Company
also has multiple patent applications pending or under evaluation in the
United States and various foreign jurisdictions. Certain of these patents
cover the Company's Full-Flow process and Direct-Displacement drying
technologies on which the Company's current product offerings are based. While
the Company believes that these patents have significant value, the Company
also believes that the innovative skills, technical expertise and know-how of
its personnel in applying the art reflected in these patents would be
difficult, costly and time consuming to reproduce. The Company has asserted
its patent rights against three defendants, Steag MicroTech, Inc., Steag
MicroTech GmbH Donaueschingen and YieldUP International Corp., in actions
commenced in July and September 1995, respectively, in the United States
District Court for the District of Delaware. The Company's complaints in these
actions allege inducement of infringement and contributory infringement of one
of the Company's patents and seek damage awards and to permanently enjoin
further infringement. The defendants have denied infringement and have
asserted, among other things, that the subject patent is invalid. In addition,
one of the defendants has asserted that the patent is unenforceable. On
January 24, 1997, the Company received a letter dated January 22, 1997 from
Dainippon Screen Manufacturing ("Dainippon"), a competitor of the Company,
informing the Company that Dainippon had filed a lawsuit against the Company.
The lawsuit seeks a declaratory judgment of patent non-infringement and
invalidity of one of the Company's patents. The suit was filed in the United
States District Court for the Northern District of California, San Jose
Division, on December 19, 1996 by Dainippon and DNS Electronics, LLC, an
indirect wholly-owned subsidiary of Dainippon (collectively the "Plaintiffs"),
against the Company. The Complaint alleges that certain, if not all, of the
claims of the patent are invalid for failure to satisfy the conditions and
requirements for patentability, and also seeks to enjoin the Company from
wrongly accusing Plaintiffs of infringing the patent. There can be no
assurance that any of the claims of the patent cited in these actions will be
found to encompass use of the competitors' products or that the subject patent
will not be found to be unenforceable or invalid during prosecution of the
actions. A finding of invalidity or unenforceability could result in the
Company's competitors being able to develop products using the Company's
proprietary technology, which in turn could have a material adverse effect on
the Company. Further, there can be no assurance that any rights granted under
any of the Company's patents will provide adequate protection to the Company,
or that the Company will have sufficient resources to continue to prosecute
its rights in the current actions or others.
Although there are no other pending lawsuits against the Company regarding
infringement of any existing patents or other intellectual property rights or
any claims that the Company is infringing intellectual property rights of
others, there can be no assurance that such infringement claims will not be
asserted by third parties in the future. There also can be no assurance in the
event of such claims of infringement that the Company will be able to obtain
licenses on reasonable terms. The Company's involvement in any patent dispute
or other intellectual property dispute or action to protect trade secrets and
know-how, including the actions brought by and against the Company presently
pending, could result in a material adverse effect on the Company's business.
Adverse determinations in the current litigation or any other litigation in
which the Company may become involved could subject the Company to significant
liabilities to third parties, require the Company to grant licenses to or seek
licenses from third parties and prevent the Company from manufacturing and
selling its products. Any of these situations could have a material adverse
effect on the Company.
EMPLOYEES
As of December 31, 1996, the Company had 276 employees, of which 211 were
full-time and the balance temporary or contract employees. There were 117
employees in manufacturing operations, 73 in research,
35
<PAGE>
development and engineering, 15 in sales and marketing, 42 in customer
satisfaction and field support and 29 in general administrative and finance
positions. The Company plans to hire additional personnel in each of the above
areas during the next 12 months.
While the Company has generally been able to find qualified candidates to
fill new positions, substantial growth throughout the semiconductor capital
equipment industry has made it more difficult to recruit qualified candidates
for certain positions in design, field support, testing and process
engineering. Once recruited, the Company then faces the task of training and
integrating new employees quickly enough to keep pace with its rapid growth.
There can be no assurance that the Company will be successful in recruiting,
retaining, training and integrating the necessary key personnel to support its
anticipated growth, and any failure to expand these areas in an efficient
manner could have a material effect on the Company's results of operations.
See "Risk Factors -- Management of Growth" and "-- Dependence upon Personnel."
None of the Company's employees is represented by a labor union and the
Company has never experienced a work stoppage, slowdown or strike. The Company
considers its relationships with its employees to be good.
FACILITIES
The Company conducts its manufacturing in a 26,000 square foot facility
which it owns in West Chester, Pennsylvania. In January 1996 the Company
commenced occupancy of a 38,400 square foot leased office building located in
the same industrial park to serve as the new location for its engineering,
sales and marketing, customer satisfaction and administration activities.
These functions were previously located in the facility owned by the Company,
which is now devoted entirely to manufacturing. The lease expires in December
2000 and includes an option for early cancellation in December 1998 with the
payment of a cancellation penalty. In January 1997, the Company commenced
occupancy of an additional 14,000 square foot leased manufacturing facility in
the same industrial park. The lease expires in January 2002 and includes a
mutual option to cancel in January 1998 upon six months notice with no
penalty. The Company plans to occupy additional facilities and believes that
suitable additional space, if ultimately needed, will be available on terms
acceptable to the Company.
LEGAL PROCEEDINGS
The Company is a party to two lawsuits related to its patent rights. See "--
Intellectual Property." The Company is not a party to any other litigation.
36
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information concerning the Company's
directors, executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Christopher F. McConnell.. 43 Chairman of the Board of Directors
Roger A. Carolin.......... 41 President, Chief Executive Officer and Director
Alan E. Walter............ 43 Senior Vice President, Business Development
Joseph E. Berger.......... 38 Vice President -- Worldwide Sales and Marketing
David L. deLesdenier...... 47 Vice President -- Engineering
Garry M. Mayers........... 43 Vice President -- Customer Service
John L. Posta............. 55 Vice President -- Manufacturing
Lorin J. Randall.......... 53 Vice President -- Finance, Chief Financial
Officer, Secretary and Treasurer
Steven T. Bay............. 40 Chief Technical Officer
Heinrich S. Erhardt....... 52 Vice President -- Product Development
Steven Verhaverbeke....... 31 Director of Process Technology
James J. Kim.............. 61 Director
Brad S. Mattson........... 42 Director(1)
Burton E. McGillivray..... 40 Director(1)(2)
Milton S. Stearns, Jr..... 73 Director(2)
</TABLE>
- --------
(1) Member of Executive Compensation and Stock Option Committee. Mr. Kim
served as a member of this committee until October 18, 1996, at which time
he was succeeded by Mr. Mattson.
(2) Member of Audit Committee.
CHRISTOPHER F. MCCONNELL founded the Company in May 1984 and served as
President and Chief Executive Officer until October 1990 when he was named
Chairman of the Board of Directors. Prior to forming the Company, Mr.
McConnell held various technical and marketing positions with Dow Chemical.
Mr. McConnell received his BS and MS degrees in Chemical Engineering from
Dartmouth College and Purdue University, respectively, and his MBA from
Harvard Business School. Mr. McConnell is a named inventor on all of the
Company's patents. See "Certain Relationships and Related Transactions."
ROGER A. CAROLIN has served the Company as a director since its inception in
1984 and as President and Chief Executive Officer since April 1991. From
October 1990 to April 1991, he served as a marketing and sales consultant to
the Company. From June 1984 to October 1990, Mr. Carolin was Senior Vice
President of The Mills Group, Inc., a real estate development firm.
Previously, Mr. Carolin was with The General Electric Company and Honeywell,
Inc. in a variety of technical positions. Mr. Carolin received his BS in
Electrical Engineering from Duke University and his MBA from Harvard Business
School.
ALAN E. WALTER co-founded the Company in 1984 and currently serves as Senior
Vice President, Business Development, with primary responsibility for the
Company's marketing efforts in the FPD industry. Prior to joining the Company,
he was with the Cochrane Division of Crane Company, a producer of ultra-high
purity water systems, Mr. Walter received his BS in Chemical Engineering from
the University of Delaware. He is a named inventor on ten of the Company's
patents.
JOSEPH E. BERGER joined the Company in June 1993 and has served as Vice
President -- Worldwide Sales and Marketing since December 1995. Mr. Berger
served as the Company's Director of Sales and Marketing from June 1995 to
December 1995, and as Program Director from June 1993 to June 1995. Mr. Berger
served as Director of Sales for A.E. Staley Manufacturing Co., a manufacturer
of corn sweetener and starches, from 1990 until May 1993. Mr. Berger received
his BS in Chemical Engineering from the University of Virginia and his MBA
from Harvard Business School.
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<PAGE>
DAVID L. DELESDENIER joined the Company in September 1996 and currently
serves as Vice President -- Engineering. From August 1995 to August 1996, Mr.
deLesdenier was Corporate Vice President -- Commercial and International for
Science Applications International Corporation, a defense contractor. From
1977 until June 1995, Mr. deLesdenier was Vice President -- Technology for
IPEC/Clean, a manufacturer of sulfuric acid reprocessing systems for the
semiconductor industry. Mr. deLesdenier received his BS and MS from the
Georgia Institute of Technology and his MBA from San Diego State University.
GARRY M. MAYERS joined the Company in October 1996 and currently serves as
Vice President -- Customer Service. From April 1991 until October 1996, Mr.
Mayers served as Director of World Wide Customer Service at ADE Corporation, a
manufacturer of chemical vapor deposition and ion implant equipment for
semiconductor devices. Mr. Mayers attended Northeastern University, majoring
in electrical engineering.
JOHN L. POSTA joined the Company in October 1993 as Vice President --
Manufacturing. Mr. Posta served as a consulting engineer to the Company from
August 1993 to October 1993 and as a manufacturing consultant from August 1989
to October 1993. Mr. Posta served as Vice President of Operations for Hercules
Aerospace Display Systems from May 1988 to August 1989, and as Director of
Manufacturing and Director of Materials for Commodore Business Machines, Inc.
from September 1984 to May 1988. Mr. Posta received his BS in Industrial
Management from Fairleigh Dickinson University.
LORIN J. RANDALL joined the Company in January 1995 as Vice President --
Finance, Chief Financial Officer, Secretary and Treasurer. From May 1994 to
June 1995, Mr. Randall served as the President and Chief Executive Officer of
Greenwich Pharmaceuticals Incorporated, a drug development company where from
September 1991 to May 1994, he served as Vice President -- Finance and Chief
Financial Officer. From April 1990 to March 1991, Mr. Randall served as
President and Chief Executive Officer of Surgilase, Inc., a supplier of
surgical laser equipment. Mr. Randall received his BS in Accounting from The
Pennsylvania State University and his MBA from Northeastern University. Mr.
Randall is a director of Quad Systems Corporation.
STEVEN T. BAY joined the Company in April 1992 as Director of Technology and
Marketing/Far East, and has served as Chief Technical Officer since September
1994. From 1990 until April 1992, Mr. Bay was employed by Bridgetek, Inc. of
San Jose, California, which was the manufacturer's representative for the
Company in California and the Pacific Northwest. Mr. Bay received his BA in
Chemistry from St. Louis University.
HEINRICH S. ERHARDT joined the Company in January 1992 and currently serves
as Vice President -- Product Development. From January 1992 until September
1996, Mr. Erhardt served as Vice President --Engineering. Prior to joining the
Company, Mr. Erhardt served as Vice President of Operations for Image
Storage/Retrieval Systems, a supplier of high-density data storage systems,
from January to December 1991, and as President of HEA, Inc., a computer
maintenance service and consulting company, from October 1989 to December
1990. Mr. Erhardt received his BS in Mechanical Engineering from City
University of New York and his MS in Engineering Science from The Pennsylvania
State University.
STEVEN VERHAVERBEKE joined the Company in February 1995 and has served as
Director of Process Technology since that time. Dr. Verhaverbeke was employed
by IMEC of Leuven, Belgium, a microelectronics research institute, as a senior
researcher from August 1994 to January 1995 and as a doctoral researcher from
September 1988 to July 1993. Dr. Verhaverbeke also served as a researcher at
Tohoku University in Sendai, Japan from August 1993 to August 1994. Dr.
Verhaverbeke received his PhD in Chemical Engineering from K.U. Leuven,
Belgium.
JAMES J. KIM has been a director of the Company since 1991. Mr. Kim is the
founder, Chairman and Chief Executive Officer of AMKOR Electronics, a leading
semiconductor assembly company. He also founded and serves as Chairman and
Chief Executive Officer of The Electronics Boutique, an electronics products
retailer, and as Chairman of ANAM Group, the parent of ANAM, the Company's
Korean agent. See "Certain Relationships and Related Transactions."
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<PAGE>
BRAD S. MATTSON has been a director of the Company since December 1995. Mr.
Mattson founded Mattson Technology, Inc., a manufacturer of semiconductor
fabrication equipment, and has served as its Chief Executive Officer,
President and a Director since its inception in November 1988. Mr. Mattson was
the founder of Novellus, a semiconductor equipment company, and formerly
served as its President, Chief Executive Officer and Chairman. He has also
held executive positions at Applied Materials and LFE Corporation, both
semiconductor equipment companies.
BURTON E. MCGILLIVRAY has been a director of the Company since 1990. Since
January 1994, Mr. McGillivray has served as Managing Director of First Chicago
Equity Capital, a venture capital firm. From January to December 1993, Mr.
McGillivray was a Chicago-based private investor, and from September 1984 to
December 1992, Mr. McGillivray was employed by Continental Illinois Venture
Corporation and Continental Equity Capital Corporation, serving as Managing
Director of both from 1989 to 1992. Mr. McGillivray received his AB from
Harvard University and his MBA from Harvard Business School. Mr. McGillivray
is a member of the board of directors of Three-Five Systems, Inc.
MILTON S. STEARNS, JR. has been a director of the Company since December
1994. Since 1972, Mr. Stearns has been President of Charter Financial Company,
a corporate financial consulting company. Mr. Stearns has been a director of
five public and a number of private companies. In addition, from 1976 to 1987,
he was Chairman and Chief Executive Officer of Judson Infrared Inc., a
manufacturer of infrared detectors for military and telecommunications
companies. Mr. Stearns received his BS from Harvard University and his MBA
from Harvard Business School.
All directors hold office until the next annual meeting of shareholders or
until their successors have been elected and qualified. Officers are appointed
by the Board of Directors and serve at the discretion of the Board.
COMPENSATION OF DIRECTORS
The Company reimburses directors for expenses incurred in connection with
attendance at meetings of the Board of Directors and committees. In March
1991, the Company and Mr. McGillivray entered into a Stock Option Agreement
(the "McGillivray Agreement") pursuant to which the Company granted to Mr.
McGillivray four-year options to purchase up to 832 shares of Common Stock, at
an exercise price of $2.41 per share, for each meeting of the Board of
Directors attended by Mr. McGillivray during a two year period beginning in
December 1990. This agreement was amended in June 1993 to provide for
additional grants of options to purchase 832 shares of Common Stock for each
meeting of the Board of Directors attended by Mr. McGillivray during the
period from March 1993 to December 1997. The amendment also extended the term
of the options previously granted to ten years. The McGillivray Agreement was
also amended in September 1994 to provide an exercise price of $7.52 per share
with respect to all stock options granted under the McGillivray Agreement
after January 6, 1994. In December 1994, the Company and Mr. Stearns entered
into a Stock Option Agreement (the "Stearns Agreement") pursuant to which the
Company granted to Mr. Stearns ten-year options to purchase up to 832 shares
of Common Stock, at an exercise price of $7.52 per share for each meeting of
the Board of Directors attended by Mr. Stearns during a one year period
beginning in December 1994. This agreement was amended in November 1995 to
provide for additional grants of options to purchase 832 shares of Common
Stock at an exercise price of $7.52 per share for each meeting of the Board of
Directors attended by Mr. Stearns during the period from November 1995 to
October 1997. Messrs. McGillivray and Stearns will continue to be compensated
for their service on and attendance at meetings of the Board of Directors
through stock option grants to be made pursuant to the terms of the
McGillivray Agreement and the Stearns Agreement, respectively. Upon the
respective terminations of the McGillivray Agreement and the Stearns
Agreement, Messrs. McGillivray and Stearns will be compensated for their
service on the Board of Directors pursuant to the Non-Employee Directors'
Stock Option Plan described below.
In March 1996, the Board of Directors granted options to purchase up to
3,000 shares of Common Stock to each of John N. McConnell, Sr. (father of
Christopher F. McConnell) and Vincent L. Verdiani in connection with the
appointment of these individuals as Honorary Lifetime Directors of the
Company. The exercise price of
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these ten-year options is $7.52 per share and such options were fully
exercisable on the date of grant. Honorary Lifetime Directors are not elected
by the Company's shareholders, do not receive any compensation for their
service as such and are not voting members of the Board of Directors.
Also in March 1996, the Board of Directors granted to Mr. Mattson ten-year
options to purchase up to 2,000 shares of Common Stock at an exercise price of
$7.52 per share, which will be exercisable in full commencing on March 3,
1997. These options were granted as compensation for Mr. Mattson's service as
a consultant to the Company during the term of the options. In March 1996, Mr.
Mattson also received a grant of options to purchase up to 10,000 shares of
Common Stock at an exercise price of $7.52 per share pursuant to the Company's
Non-Employee Directors' Stock Option Plan. One-third of these options will
vest on each of the first three anniversaries of the date of grant, and the
options will expire upon the earlier of the tenth anniversary of their grant
or twelve months after Mr. Mattson ceases to be a director of the Company.
In the future, the Company may compensate directors for their service as
directors through cash compensation, stock options or stock grants. See "--
Non-Employee Directors' Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth information concerning the annual and long-
term compensation for services in all capacities to the Company for the fiscal
years ended October 31, 1994, 1995 and 1996 of those persons who during such
fiscal years (i) served as the Company's chief executive officer or (ii) were
the five most highly-compensated executive officers (other than the chief
executive officer) (collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
FISCAL --------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)(1)
- --------------------------- ------ ---------- --------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Roger A. Carolin......... 1996 $ 150,000 $ 60,000 -- $6,653
President and Chief Ex-
ecutive Officer 1995 103,550 30,000 -- 6,531
1994 94,800 25,000 -- 1,813
Christopher F.
McConnell............... 1996 140,000 50,000 -- 8,066
Chairman of the Board of
Directors 1995 103,550 30,000 -- 9,386
1994 94,800 25,000 -- 3,497
Lorin J. Randall(2)...... 1996 125,000 30,000 -- 5,426
Vice President -- 1995 101,563 15,000 39,916 72
Finance, Secretary and 1994 -- -- -- --
Treasurer
Alan E. Walter........... 1996 90,000 45,000 -- 7,202
Senior Vice President,
Business Development 1995 79,800 22,500 -- 6,744
1994 79,800 2,500 -- 1,745
Huw K. Thomas(3)......... 1996 116,846 -- -- 4,458
Executive Vice President 1995 88,550 25,000 -- 5,233
1994 82,300 25,000 16,632 1,970
Joseph E. Berger......... 1996 90,000 25,000 -- 3,691
Vice President -- 1995 82,000 16,500 -- 2,236
Worldwide Sales and 1994 82,000 16,400 -- 600
Marketing
</TABLE>
- --------
(1) Compensation reported represents (a) the dollar value of premiums paid by
the Company on two life insurance policies, one regularly furnished to all
employees, and the other an executive policy for Messrs. Carolin,
McConnell and Randall; (b) the Company's matching contribution to the
401(k) Plan paid in fiscal 1995 for the 1994 fiscal year, paid in fiscal
1996 for the 1995 fiscal year and paid in fiscal 1997 for the 1996 fiscal
year; (c) amounts from the Company's annual profit sharing plan; and (d)
annual fees for club membership.
(2) Mr. Randall joined the Company in January 1995. His annual salary is
$125,000.
(3) Mr. Thomas resigned as Executive Vice President in fiscal year 1996.
40
<PAGE>
No stock options were granted to any of the Named Executive Officers during
the fiscal year ended October 31, 1996.
The following table sets forth the number of shares covered by exercisable
and unexercisable options held by the Named Executive Officers on October 31,
1996 and the aggregate gains that would have been realized had these options
been exercised on October 31, 1996, even though these options were not
exercised, and the unexercisable options could not have been exercised on
October 31, 1996. No stock options were exercised by the Named Executive
Officers during the fiscal year ended October 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
--------------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Roger A. Carolin...................... 192,928 -- $1,151,780 --
Christopher F. McConnell.............. -- -- -- --
Lorin J. Randall...................... 17,465 22,451 15,002 $19,285
Alan E. Walter........................ -- -- -- --
Huw K. Thomas......................... 33,264 -- 278,586 --
Joseph E. Berger...................... 32,432 7,484 193,619 44,679
</TABLE>
- --------
(1) Options are in-the-money if the market value of the shares covered thereby
is greater than the option exercise price. Calculated based on the fair
market value at fiscal year end of $8.375 per share, less the exercise
price.
1992 STOCK OPTION PLAN
The Company's 1992 Stock Option Plan (the "Option Plan") was adopted by the
Company in 1992 and was amended and restated and was approved by the Company's
shareholders in May 1995. The purposes of the Option Plan are to attract and
retain qualified personnel, to provide additional incentives to employees and
officers of and consultants to the Company and to promote the success of the
Company's business. As of December 31, 1996, options to purchase an aggregate
of 408,331 shares of the Company's Common Stock have been granted under the
Option Plan, and no additional options will be granted thereunder. The Option
Plan is administered by the Executive Compensation and Stock Option Committee
of the Board of Directors (the "Committee"), which Committee has complete
discretion to determine which eligible individuals are to receive option
grants, the number of shares subject to each such grant, the vesting schedule
to be in effect for the option grant and the maximum term for which any
granted option is to remain outstanding.
Each option granted under the Option Plan has a maximum term of ten years
(or five years with respect to holders of more than 10% of the voting power of
the Company's outstanding stock), subject to earlier termination following the
optionee's cessation of service with the Company. Options granted under the
Option Plan may be exercised only for fully vested shares. The exercise price
of options granted under the Option Plan must be at least 100% of the fair
market value of the stock subject to the Option on the date of grant (or 110%
with respect to holders of more than 10% of the voting power of the Company's
outstanding stock). The Executive Compensation and Stock Option Committee
determines the fair market value of the Common Stock from time to time. The
option exercise price is payable in cash upon the exercise of the option.
The Committee may amend or modify the Option Plan at any time, provided that
no such amendment or modification may adversely affect the rights and
obligations of the participants with respect to their outstanding options
invested shares without their consent. In addition, no amendment of the Option
Plan may, without the approval of the Company's shareholders, (i) modify the
class of individuals eligible for participation, (ii) increase the number of
shares available for issuance, except in the event of certain changes to the
Company's capital structure or (iii) extend the term of the Option Plan.
41
<PAGE>
OTHER OPTIONS
Options to purchase 202,255 shares of Common Stock were granted from 1990 to
1996 not pursuant to a stock option plan.
ANNUAL PROFIT SHARING PLAN
The Company has an Annual Profit Sharing Plan (the "Profit Sharing Plan")
pursuant to which certain eligible employees of the Company may receive annual
distributions in cash based upon the Company's operating profit for the most
recent fiscal year. For the 1995 and 1996 fiscal years, $65,000 and $150,000,
respectively, was paid to eligible employees under the Profit Sharing Plan.
1995 INCENTIVE PLAN
In December 1995, the Company's Board of Directors adopted, and in January
1996, the Company's shareholders approved, the 1995 Incentive Plan (the
"Incentive Plan"). Under the Incentive Plan, the Company is authorized to
award up to 400,000 shares of Common Stock to employees of the Company and its
subsidiaries. As of December 31, 1996, options for an aggregate of 400,000
shares were outstanding under the Incentive Plan, and options for an
additional 39,937 shares were granted, subject to shareholder approval of an
increase in the number of shares authorized for issuance under the Incentive
Plan. An increase in the number of shares issuable pursuant to the Incentive
Plan was approved by the Board of Directors on December 18, 1996, subject to
shareholder approval. If approved by the shareholders, an additional 600,000
shares would be reserved and available for future option grants, which would
include the 39,937 shares underlying options already granted subject to
shareholder approval. The Committee administers the Incentive Plan. Under the
terms of the Incentive Plan, the Committee is required to be composed of two
or more directors, each of whom shall be a "disinterested person" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended.
The Committee has the authority to interpret the Incentive Plan and to
determine and designate the persons to whom awards shall be made and the
terms, conditions and restrictions applicable to each award (including, but
not limited to, the price, any restriction or limitation, any vesting schedule
or acceleration thereof and any forfeiture restrictions).
The Incentive Plan contains provisions for granting various stock-based
awards, including incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), nonqualified stock
options and Restricted Stock (as further described below). The term of the
Incentive Plan is ten years, subject to earlier termination or amendment.
Stock Options. The Incentive Plan provides for the grant of "incentive stock
options," as defined in Section 422 of the Code, to employees of the Company.
The Incentive Plan also provides for the grants of stock options that do not
qualify as incentive stock options under the Code ("non-qualified stock
options") to employees of the Company, including directors who are employees
of the Company. The exercise price of any incentive stock option granted under
the Incentive Plan may not be less than 100% of the fair market value of the
Company's Common Stock on the date of grant. Options granted under the
Incentive Plan may be exercised for cash, by reduction of the number of shares
of Common Stock issuable upon such exercise or, to the extent determined by
the Committee, in exchange for shares of Common Stock owned by the option
holder having a fair market value on the date of exercise equal to the option
exercise price. The aggregate fair market value, determined on the date of
grant, of the shares with respect to which incentive stock options are
exercisable for the first time by an employee during any calendar year may not
exceed $100,000.
Under the Incentive Plan, each option is exercisable for the full amount or
for any part thereof at such intervals or in such installments as the
Incentive Committee shall determine at the time it grants an option. However,
no award shall be exercisable with respect to any shares of Common Stock later
than ten years after the date of the grant of such option. All options are
non-transferable by the optionee except upon death. The shares subject to
expired options or terminated options which remain unexercised become
available for future grants.
42
<PAGE>
If an optionee ceases to be employed by the Company for any reason other
than death, disability or retirement, any option exercisable on the date of
such termination generally may be exercised for a period of 90 days from the
date of such termination or until the expiration of the stated term of the
option, whichever period is shorter. In the event of termination of employment
by reason of death or retirement, any option exercisable at the date of such
termination generally may be exercised for a period of one year from the date
of termination or until the expiration of the stated term of the option,
whichever period is shorter. In the event of a change of control of the
Company, the Incentive Plan provides that all outstanding options will become
immediately exercisable.
Restricted Stock. "Restricted Stock" consists of shares of the Company's
Common Stock granted to an employee for no consideration, which will be
forfeited to the Company if the grantee ceases to be an employee of the
Company during a restriction period specified by the Committee at the time it
grants the Restricted Stock. In the event of death or disability, the
restrictions will lapse with respect to that percentage of Restricted Stock
held by the grantee that is equal to the percentage of the restriction period
that had elapsed as of the date of death or commencement of disability. In the
event of a change of control of the Company, all restrictions on shares of
Restricted Stock will lapse. Shares of Restricted Stock that are forfeited
become available for future grants.
NON-EMPLOYEE DIRECTORS' STOCK OPTION PLAN
In December 1995, the Company's Board of Directors adopted, and in January
1996, the Company's shareholders approved, the Non-Employee Directors' Stock
Option Plan (the "Directors' Plan"), under which options to purchase up to
150,000 shares of Common Stock may be granted to non-employee directors. The
purposes of the Directors' Plan are to attract and retain independent
directors and to strengthen the mutuality of interests between such directors
and the Company's shareholders. As of December 31, 1996, options to purchase
an aggregate of 10,000 shares of Common Stock have been granted under the
Directors' Plan.
The Directors' Plan is administered by the Company's Board of Directors.
Under the terms of the Directors' Plan, the option exercise price shall be
100% of the fair market value of the shares on the date of grant and each
option generally expires upon the earlier of twelve months after the optionee
ceases to be a director of the Company or ten years.
Each independent director elected at an annual meeting of shareholders will
automatically be granted an option on the date of such meeting of shareholders
to purchase 3,000 shares of Common Stock, which option will vest on the date
of the next succeeding annual meeting of shareholders. Each independent
director elected to fill a vacancy on the Board of Directors will
automatically be granted an option on the date of election to purchase 10,000
shares of Common Stock, one-third of which shall vest on each of the first
three anniversaries of the date of grant. An amendment to the Directors' Plan
to provide for the annual grant of options to purchase 200 shares of Common
Stock with respect to each committee of the Board of Directors on which a
director serves was approved by the Board of Directors and the Committee on
December 18, 1996, subject to shareholder approval.
Under the Directors' Plan, no award shall be exercisable with respect to any
shares of Common Stock later than ten years after the date of the grant of
such option. All options are non-transferable by the optionee except upon
death. The shares subject to expired options or terminated options which
remain unexercised become available for future grants.
If an optionee ceases to be a member of the Board of Directors for any
reason other than death, disability or retirement, any option exercisable on
the date of such termination generally may be exercised for a period of 90
days from the date of such termination or until the expiration of the stated
term of the option, whichever period is shorter. In the event of termination
of Board membership by reason of death or retirement, any option exercisable
at the date of such termination generally may be exercised for a period of one
year from the date of termination or until the expiration of the stated term
of the option, whichever period is shorter. In the event of
43
<PAGE>
termination of Board membership by reason of disability, all options
outstanding at the date of such termination will become immediately
exercisable and generally may be exercised for a period of one year from the
date of termination or until the expiration of the stated term of the option,
whichever period is shorter.
The Board of Directors of the Company may make any amendments to the
Directors' Plan which it deems necessary or advisable.
EMPLOYEE STOCK PURCHASE PLAN
In December 1995, the Company's Board of Directors adopted, and in January
1996, the Company's shareholders approved, an Employee Stock Purchase Plan
(the "Purchase Plan"), which allows all full-time employees of the Company,
subject to certain limitations, to purchase shares of the Company's Common
Stock at a discount from the prevailing market price at the time of purchase.
Such shares may be purchased on the open market or may be newly issued shares
of Common Stock. Any employee owning five percent or more of the voting power
or value of the Company is not eligible to participate in the Purchase Plan. A
maximum of 300,000 shares of the Company's Common Stock may be purchased under
the Purchase Plan. As of December 31, 1996, no shares have been granted under
the Purchase Plan.
An eligible employee will be able to specify an amount to be withheld from
his or her paycheck and credited to an account established for him or her (the
"Participation Account"). Amounts in the Participation Account will be applied
to the purchase of shares of the Company's Common Stock on the termination
date of each offering made under the Purchase Plan. The price for such shares
will be equal to 85% of the market price of the Common Stock, as determined
pursuant to the Purchase Plan. Only whole shares of Common Stock may be
purchased. Amounts withheld from an employee's paycheck and not applied to the
purchase of whole shares of Common Stock will, at the election of the
employee, either remain credited to the employee's Participation Account or be
returned to the employee.
Upon termination of an employee's employment for any reason other than death
or an approved leave of absence, all amounts credited to such employee's
Participation Account shall be resumed to him or her. Upon termination of an
employee's employment because of death, his or her successor-in-interest shall
have the right to elect before the earlier of the offering termination date or
the 60th day following the employee's date of death either to withdraw the
amount credited to his or her Participation Account or to apply such amounts
to the purchase of Common Stock.
The Purchase Plan is administered by the Board of Directors which may
delegate responsibility for such administration to a committee of the Board of
Directors. The Board of Directors may amend or terminate the Purchase Plan at
any time. The Purchase Plan is intended to comply with the requirements of
Section 423 of the Code.
401(K) PLAN
In November 1993, the Company adopted a deferred 401(k) salary savings plan
(the "401(k) Plan") for the benefit of its employees and their beneficiaries,
which was amended in April 1995. Generally, any employee who has completed six
months of service and is over 21 years of age is eligible to participate in
the 401(k) Plan. Each eligible employee may elect to contribute to the 401(k)
Plan through payroll deductions up to 15% of his or her eligible compensation.
Participants are 100% vested in their contributions immediately. The Company
matches contributions up to certain levels.
EMPLOYMENT CONTRACTS
The Company has entered into a written employment agreement with Lorin J.
Randall, its Vice President--Finance and Chief Financial Officer. The
agreement continues until terminated pursuant to its terms. The agreement
provides for a base salary of $125,000 and for such employee benefits as are
made available to other employees of the Company. In addition, pursuant to the
agreement, Mr. Randall received a non-qualified option
44
<PAGE>
to purchase 39,916 shares of Common Stock of the Company for $7.52 per share
under the Company's 1992 Stock Option Plan. In the event the Company
terminates the agreement without "cause" (as defined in the agreement), Mr.
Randall will be entitled to continue to receive his then-current base salary
for six months following such termination, or until the date he commences
permanent, full-time employment elsewhere, whichever first occurs.
Except as set forth above, the Company does not have employment agreements
with any of its executive officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Executive Compensation and Stock Option Committee of the Company's Board
of Directors was formed in November 1991 and the members of this committee are
Messrs. Mattson and McGillivray. Neither of these individuals was at any time
during the fiscal year ended October 31, 1996 or at any other time an officer
or employee of the Company. No executive officer of the Company serves as a
member of the board of directors or compensation committee of any entity which
has one or more executive officers serving as a member of the Company's Board
of Directors or Executive Compensation and Stock Option Committee.
Until October 18, 1996, James J. Kim, a director and shareholder of the
Company, served on the Executive Compensation and Stock Option Committee of
the Board of Directors. Mr. Kim is, directly and indirectly, the largest
shareholder of ANAM. ANAM, which is also a shareholder of the Company, acts as
the Company's sales agent in Korea. See "Certain Relationships and Related
Transactions."
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
The Company's Articles of Incorporation, as amended, and Amended and
Restated By-Laws include provisions (i) to reduce the personal liability of
the Company's directors for monetary damages resulting from breaches of the
fiduciary duty and (ii) to permit the Company to indemnify its directors and
officers to the fullest extent permitted by Pennsylvania law.
At present there is no pending litigation or proceeding involving any
director, officer, employee or agent of the Company where indemnification will
be required or permitted. The Company is not aware of any threatened
litigation or proceeding that might result in a claim for such
indemnification.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In 1984 and 1985, CFM Technologies, Incorporated, which is now the Company's
wholly-owned operating subsidiary ("CFM Sub"), entered into research and
development agreements with two related party limited partnerships (together,
the "Partnerships"), in which CFM Sub was the general partner. A significant
number of the limited partners were also significant shareholders of CFM Sub.
In April 1987 and September 1988, CFM Sub exercised its options under the
research and development agreements between CFM Sub and the Partnerships to
purchase the Partnerships' technologies. This exercise resulted in a liability
of CFM Sub to the Partnerships in the aggregate amount of $2,184.000. This
amount was calculated based on the total cost to the Partnerships of
developing the technology, including parts and materials, rent, salaries and
other administrative costs incurred in developing and testing prototype units,
with such cost being multiplied by a factor which depended upon the time at
which the option was exercised. At the time of the exercise of the first
option in April 1987, the development cost was approximately $383,000 and the
factor in effect at that time was 3.00, resulting in a liability of
$1,149,000. Similarly, at the time of the exercise of the second option in
September 1988, the development cost was approximately $345,000 and the factor
in effect at that time was also 3.00, resulting in a liability of $1,035,000.
Through the end of the 1994 fiscal year, CFM Sub had made aggregate payments
of $1,612,000 to the Partnerships. During 1994, in response to inquiries and
requests by a number of the limited partners of the Partnerships, CFM Sub
began to investigate the possibility of exchanging the limited partners'
45
<PAGE>
interests in the Partnerships for common stock or other securities of CFM Sub.
In October 1994, CFM Sub sent a letter to each limited partner of each of the
Partnerships outlining a proposal to exchange the limited partnership
interests of the limited partners for common stock of a new entity, The CFM
Technology Corporation, on a tax free basis. As of October 31, 1994, the
obligation due from CFM Sub to the Partnerships, net of tax, was approximately
$3,200,000. Also in October 1994, the shareholders of CFM Sub and the general
partner of the Partnerships approved a reorganization for the purpose of
dissolving the Partnerships and incorporating the limited partners thereof as
equity holders of CFM Sub. Pursuant to the reorganization, effective November
1, 1994, the Company was incorporated as "The CFM Technology Corporation" and
acquired all of the outstanding shares of common stock of CFM Sub in exchange
for an equal number of shares of Common Stock. The Company also acquired all
of the assets of the Partnerships, which consisted primarily of CFM Sub's
obligations to the Partnerships, in exchange for an aggregate of 408,339
shares of Common Stock, the value of which approximated the obligation then
due from CFM Sub to the Partnerships, net of tax. The price per share of
Common Stock utilized in connection with the exchange of such Common Stock for
the assets of the Partnerships was determined by reference to the offering
price of the Common Stock in connection with a limited offering of Common
Stock which commenced on January 1994 and concluded in October 1994. The
Common Stock issued to the Partnerships was then distributed to the limited
partners of the Partnerships in accordance with their respective percentage
interests in the Partnerships. Of that Common Stock, 22,188 shares were issued
to John N. McConnell and 7,128 shares were issued to Vincent Verdiani, both of
whom were directors of the Company at the time. See Note 8 of the Notes to
Consolidated Financial Statements. John N. McConnell is the father of
Christopher F. McConnell, the Chairman of the Company's Board of Directors. In
December 1995, the Company changed its name to "CFM Technologies, Inc." The
Partnerships' Certificates of Limited Partnership were cancelled in May 1995.
In November 1995, counsel to two shareholders who acquired 31,614 shares of
Common Stock in connection with the November 1, 1994 exchange sent letters to
the Securities and Exchange Commission and the Pennsylvania Securities
Commission referencing such shareholders' objection to that transaction and
its valuation and allegations that the Company breached certain duties and
violated unspecified state and federal laws in connection therewith.
Specifically, counsel to these shareholders alleged that the Company had no
right to cause the exchange and that the exchange rate utilized in the
transaction was too low. The Company believes that such shareholders'
objections and allegations are without merit and that any resolution of such
matter will not have a material adverse effect on the Company.
In October 1994, the Company sold 332,633 shares of Common Stock of the
Company to ANAM, a company controlled by Mr. James Kim, a director and
shareholder of the Company, for $6.02 per share. ANAM acts as the Company's
sales agent in Korea. The Company believes that the terms of the sale of these
shares of Common Stock to ANAM were no less favorable than could have been
obtained from other large investors. During fiscal 1994, 1995 and 1996, sales
commissions accrued by the Company pursuant to the ANAM sales agency agreement
aggregated $430,000, $282,000 and $2,444,000, respectively. The terms of the
commissions to ANAM were no less favorable than would have been obtained from
unrelated third parties.
46
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth, as of February 11, 1997 and as adjusted to
reflect the sale of 1,670,000 shares offered by this Prospectus, information
with respect to the beneficial ownership of the Common Stock of the Company by
(i) each person known to the Company to own 5% or more of the outstanding
shares of Common Stock, (ii) each of the Company's directors, (iii) each of
the Named Executive Officers, (iv) all of the directors and executive officers
as a group and (v) the Selling Shareholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER THE
OFFERING(1)(2) OFFERING(1)(2)
------------------- SHARES TO -------------------
NAME AND ADDRESS* NUMBER PERCENT BE SOLD NUMBER PERCENT
----------------- ---------- ------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Christopher F. McConnell(3)..................... 1,208,297 19.96% -- 1,208,297 16.00%
Alan E. Walter.................................. 352,896 5.83 10,500 342,396 4.53
ANAM S&T Co., Ltd. .............................
493-3 Sung Sung-Dong
Cheon-An. Choong-Nam
Korea, 330-300(4) 222,758 3.68 112,000 110,758 1.47
James J. Kim(5)................................. 256,038 4.23 112,000 144,038 1.91
Roger A. Carolin(6)............................. 192,928 3.09 28,000 164,928 2.14
Helena Carolin.................................. 83,159 1.37 12,000 71,159 **
Burton E. McGillivray(7)........................ 39,917 ** -- 39,917 **
Milton S. Stearns, Jr.(8)....................... 44,843 ** -- 44,843 **
Lorin J. Randall(9)............................. 22,455 ** -- 22,455 **
Joseph E. Berger(9)............................. 37,422 ** -- 37,422 **
Huw K. Thomas(10)............................... 172,949 2.84 -- 172,949 2.28
Brad S. Mattson................................. 5,333 ** -- 5,333 **
Pamela A. McCardell............................. 33,368 ** 3,750 29,618 **
Barbara J. Wagner............................... 24,948 ** 3,750 21,198 **
All directors and executive officers as a group
(13 persons)(5)(11)........................... 2,175,945 34.21 150,500 2,025,445 25.86
</TABLE>
- --------
* Unless otherwise indicated, the business address of each shareholder named
in this table is CFM Technologies, Inc., 1336 Enterprise Drive, West
Chester, PA 19380.
** Less than 1%.
(1) Unless otherwise indicated in the footnotes to this table, the persons
named in the table have sole voting and investment power with respect to
all shares beneficially owned.
(2) Based on 6,053,340 shares outstanding prior to this offering and 7,553,340
shares to be outstanding after this offering, except that shares
underlying options exercisable within 60 days are deemed to be outstanding
for purposes of calculating the percentage owned by the holder of such
options.
(3) Includes 38,919 shares owned by Mr. McConnell's wife and 26,624 shares
held in trust for Mr. McConnell's children.
(4) The shares owned by ANAM are included in Mr. Kim's beneficial ownership.
(5) Includes 222,758 shares owned by ANAM, of which Mr. James Kim is, directly
and indirectly, the largest shareholder. The 112,000 shares being sold are
owned of record by ANAM.
(6) Consists of exercisable options to purchase 192,928 shares. Mr. Carolin
disclaims beneficial ownership of 83,159 shares owned by his wife.
(7) Includes 16,632 shares owned jointly with Mr. McGillivray's wife and
exercisable options to purchase 23,285 shares.
(8) Includes 3,527 shares held in a trust of which Mr. Stearns is trustee and
exercisable options to purchase 9,979 shares and 31,337 owned shares.
(9) Consists of exercisable options.
(10) Includes exercisable options to purchase 33,264 shares.
(11) Includes exercisable options to purchase 307,218 shares prior to this
offering and 279,218 shares after this offering. Includes 112,000 shares
of Common Stock being sold by ANAM.
47
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 10,000,000 shares of
Common Stock, no par value per share, and 1,000,000 shares of Preferred Stock,
no par value per share. As of January 23, 1997, 6,053,340 shares of Common
Stock and no shares of Preferred Stock were outstanding. The rights of the
Company's capital stock are defined by the Company's Articles of
Incorporation, as amended (the "Articles"), as described below, as well as by
the Company's Amended and Restated By-Laws (the "By-Laws") and the
Pennsylvania Business Corporation Law, as amended. The following summary of
certain provisions of the capital stock of the Company does not purport to be
complete and is subject to, and qualified in its entirety by, the provisions
of the Articles and By-Laws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part, and by
provisions of applicable law. The Company intends to seek shareholder approval
in March 1997 of an amendment to the Articles increasing its authorized Common
Stock to 30,000,000 shares.
COMMON STOCK
The holders of the Common Stock are entitled to one vote per share for each
share held of record on all matters submitted to a vote of shareholders.
Subject to preferential rights with respect to any series of Preferred Stock
that may be issued, holders of the Common Stock are entitled to receive
ratably such dividends as may be declared by the Board of Directors on the
Common Stock out of funds legally available therefor and, in the event of a
liquidation, dissolution or winding-up of the affairs of the Company, are
entitled to share equally and ratably in all remaining assets and funds of the
Company. The holders of the Common Stock have no preemptive rights or rights
to convert shares of the Common Stock into any other securities and are not
subject to future calls or assessments by the Company. All outstanding shares
of the Common Stock are fully paid and nonassessable by the Company.
PREFERRED STOCK
The Company, by resolution of the Board of Directors and without any further
vote or action by the shareholders, has the authority to issue up to 1,000,000
shares of Preferred Stock in one or more series and to fix from time to time
the number of shares to be included in each such series and the designations,
preferences, qualifications, limitations, restrictions and special or relative
rights of the shares of each such series. The ability of the Company to issue
Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could adversely affect the voting
power of the holders of the Common Stock and could have the effect of making
it more difficult for a person to acquire, or of discouraging a person from
acquiring, control of the Company. The Company has no present plans to issue
any of the Preferred Stock.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Articles and By-Laws may discourage certain
transactions involving a change in control of the Company. For example, the
Articles contain a provision which permits the Board to issue "blank check"
Preferred Stock without shareholder approval. Further, provisions of the
Pennsylvania Business Corporation Law prohibit the Company from engaging in
certain business combinations with a holder of 20% or more of the Company's
voting securities without super-majority board or shareholder approval and
allow holders of voting stock of the Company to "put" their stock to an
acquiror for fair value in the event of a control transaction (the acquisition
of 20% of the voting stock of the Company). Fair value is defined as not less
than the highest price paid by the acquiror during a certain 90-day period.
These provisions could have the effect of delaying, deferring or preventing a
change in control of the Company and may adversely affect the voting and other
rights of holders of Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
48
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Following completion of this offering, 7,553,340 shares of Common Stock will
be outstanding. Of these shares, 3,981,616 have been sold pursuant to
registration statements filed under the Securities Act. Substantially all of
the balance of such outstanding shares may be sold in the open market pursuant
to the provisions of Rule 144 under the Securities Act. Under Rule 144 as
currently in effect, these restricted securities are eligible for public sale
subject to the volume limitations and other conditions imposed by Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned his or her shares for at least two years, including persons
who may be deemed "affiliates" of the Company as that term is defined in the
Securities Act, would be entitled to sell within any three month period a
number of shares which does not exceed the greater of 1% of the then
outstanding shares of the Company's Common Stock or the average weekly trading
volume in such shares in The Nasdaq Stock Market during the four calendar
weeks preceding the date on which notice of sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale limitations,
notice requirements and the availability of current public information about
the Company. Rule 144 also permits, under ordinary circumstances, the sale of
Common Stock without regard to the foregoing limitations by a person (or
persons whose shares are aggregated) who is not an affiliate of the Company
and who has satisfied a three year holding period requirement.
The Company's directors, executive officers and certain shareholders, who
collectively beneficially own an aggregate of 2,147,420 shares of Common
Stock, have agreed pursuant to certain agreements that they will not sell any
Common Stock owned by them without the prior written consent of Montgomery
Securities for a period of 90 days from the date of this Prospectus.
An aggregate of 992,170 shares of Common Stock (excluding options to
purchase 39,937 shares of Common Stock which are subject to shareholder
approval) is reserved for issuance under outstanding stock options and 300,000
shares of Common Stock are reserved for issuance under the Purchase Plan. No
shares have been issued under the Purchase Plan. Additionally, 140,000 shares
of Common Stock are reserved for issuance with respect to options which may be
granted in the future under the Directors' Plan. The Company intends to seek
the approval of its shareholders to increase the shares of Common Stock
reserved for issuance under the Incentive Plan by an additional 600,000
shares. See "Management--1995 Incentive Plan," "Management -- 1992 Stock
Option Plan", "Management -- 1995 Incentive Plan" and "Management -- Non-
Employee Directors' Stock Option Plan." The Company has filed registration
statements on Form S-8 under the Securities Act covering the shares of Common
Stock subject to outstanding options and reserved for issuance under the
option plans. Accordingly, such registered shares, unless subject to the
agreements not to sell described above, will generally be freely transferable
by persons other than affiliates of the Company. Sales of substantial amounts
of Common Stock in the public market, or the possibility of sales thereof,
could adversely affect prevailing market prices.
49
<PAGE>
UNDERWRITING
Montgomery Securities, PaineWebber Incorporated and UBS Securities LLC (the
"Underwriters"), have severally agreed, subject to the terms and conditions in
the Underwriting Agreement (the "Underwriting Agreement"), by and among the
Company, the Selling Shareholders and the Underwriters, to purchase from the
Company and the Selling Shareholders the number of shares of Common Stock
indicated below opposite their respective names, at the public offering price
less the underwriting discount set forth on the cover page of this Prospectus.
The Underwriting Agreement provides that the obligations of the Underwriters
are subject to certain conditions precedent and that the Underwriters are
committed to purchase all of the shares of Common Stock, if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities.................................................... 751,500
PaineWebber Incorporated................................................. 501,000
UBS Securities LLC....................................................... 417,500
---------
Total.................................................................. 1,670,000
=========
</TABLE>
The Underwriters have advised the Company and the Selling Shareholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow selected dealers a concession of not more than $.94 per share; and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $.10 per share to certain other dealers. After the offering, the public
offering price and other selling terms may be changed by the Underwriters. The
Common Stock is offered subject to receipt and acceptance by the Underwriters,
and to certain other conditions, including the right to reject orders in whole
or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 250,500 additional shares of Common Stock, respectively, to cover
over-allotments, if any, at the same price per share as the initial shares to
be purchased by the Underwriters. To the extent that the Underwriters exercise
such over-allotment option, the Underwriters will be committed, subject to
certain conditions, to purchase such additional shares in approximately the
same proportion as set forth in the above table. The Underwriters may purchase
such shares only to cover over-allotments made in connection with the
Offering.
The Underwriting Agreement provides that the Company and the Selling
Shareholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
The Company, the Selling Shareholders and the Company's executive officers
and directors who are also shareholders of the Company and who, immediately
following the Offering (assuming no exercise of the Underwriters' over-
allotment option), collectively will beneficially own an aggregate of
2,025,445 shares of Common Stock, have agreed that for a period of 90 days
after the effective date of the Offering they will not, without the prior
written consent of Montgomery Securities, directly or indirectly offer for
sale, sell, solicit an offer to sell, contact or grant an option to sell,
pledge, transfer, establish an open put equivalent position or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares
of Common Stock. The Company has also agreed not to issue, offer, sell, grant
options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable with its
Common Stock for a period of 90 days after the effective date of the offering
without the prior written consent of Montgomery Securities, subject to limited
exceptions including any shares of Common Stock issued to selling parties in
connection with acquisitions and grants and exercises of stock options. In
evaluating any request for a waiver of the 90 day lock-up period, the
Underwriters would consider, in accordance with their customary practice, all
relevant facts and circumstances at the time of the request, including,
without limitation, the recent trading market for the Common Stock, the size
of the request and, with respect to a request by the Company to issue
additional equity securities, the purpose of such an issuance. See "Shares
Eligible for Future Sale."
50
<PAGE>
The Underwriters have informed the Company and the Selling Shareholders that
the Underwriters do not intend to confirm sales of Common Stock offered by
this Prospectus to accounts over which they exercise discretionary authority
in excess of 5% of the number of shares of Common Stock offered hereby.
In connection with the offering, certain Underwriters and selling group
members may engage in passive market making transactions in the Common Stock
immediately prior to the commencement of sales in the offering, in accordance
with Rule 10b-6A under the Securities Exchange Act of 1934, as amended.
Passive market making consists of, among other things, displaying bids on The
Nasdaq Stock Market limited by the bid prices of independent market makers and
purchases limited by such prices and effected in response to order flow. Net
purchases by a passive market maker on each day are limited to a specified
percentage of the passive market maker's average daily trading volume in the
Common Stock during a specified prior period and all possible market-making
activity must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Stock at a level above
that which might otherwise prevail and, if commenced, may be discontinued at
any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Ballard Spahr Andrews & Ingersoll, Philadelphia,
Pennsylvania. Certain legal matters relating to this offering will be passed
upon for the Underwriters by Pepper, Hamilton & Scheetz LLP, Philadelphia,
Pennsylvania.
EXPERTS
The consolidated balance sheets as of October 31, 1995 and 1996 and the
consolidated statements of income, shareholders' equity and cash flows for
each of the three fiscal years in the period ended October 31, 1996, included
in this Prospectus have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
giving said reports.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). This Prospectus, which
constitutes a part of a registration statement on Form S-1 (the "Registration
Statement") filed by the Company with the Commission under the Securities Act
of 1933, as amended (the "Securities Act"), omits certain of the information
set forth in the Registration Statement. Reference is hereby made to the
Registration Statement and to the exhibits thereto for further information
with respect to the Company. Statements contained herein concerning the
provisions of such documents are necessarily summaries of such documents, and
each statement is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. The Registration Statement,
including exhibits and schedules filed therewith, and the reports, proxy
statements and other information filed by the Company with the Commission may
be inspected without charge at the public reference facilities maintained by
the Commission at its principal office at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at regional offices of the
Commission located at Northwestern Atrium Center, Suite 1400, 500 West Madison
Street, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such materials may be obtained from the Public
Reference Section of the Commission, Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and its public reference facilities in
Chicago, Illinois and New York, New York, at prescribed rates. In addition,
registration statements and certain other filings made with the Commission
through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system
are publicly available through the Commission's site on the Internet's World
Wide Web, located at http://www.sec.gov. The Registration Statement, including
all exhibits thereto and amendments thereof, has been filed with the
Commission through EDGAR. The Company's Common Stock is traded on The Nasdaq
Stock Market, as reported by the National Association of Securities Dealers,
Inc., 1735 K Street, Washington, D.C. 20006, and copies of the reports, proxy
statements and other information filed by the Company can be inspected at such
location.
51
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of October 31, 1996 and 1995............... F-3
Consolidated Statements of Income for the years ended October 31, 1996,
1995 and 1994............................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended Octo-
ber 31, 1996, 1995 and 1994.............................................. F-5
Consolidated Statements of Cash Flows for the years ended October 31,
1996, 1995 and 1994...................................................... F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CFM Technologies, Inc.:
We have audited the accompanying consolidated balance sheets of CFM
Technologies, Inc. (a Pennsylvania corporation) and subsidiaries as of October
31, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three years in the period
ended October 31, 1996. 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 CFM Technologies, Inc. and
subsidiaries as of October 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period
ended October 31, 1996, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Philadelphia, Pa.,
December 19, 1996
F-2
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31, OCTOBER 31,
1996 1995
---------------- ----------------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............ $ 9,308 $ 408
Short-term investments............... 2,946 --
Accounts receivable.................. 15,090 8,886
Inventories.......................... 8,047 3,700
Prepaid expenses and other........... 362 184
Deferred income taxes................ 641 529
---------------- ----------------
Total current assets............... 36,394 13,707
---------------- ----------------
PROPERTY, PLANT AND EQUIPMENT:
Land................................. 540 540
Building and improvements............ 3,180 2,205
Machinery and equipment.............. 4,075 1,640
Furniture and fixtures............... 934 412
---------------- ----------------
8,729 4,797
Less -- Accumulated depreciation and
amortization........................ (1,268) (406)
---------------- ----------------
Net property, plant and equipment.. 7,461 4,391
---------------- ----------------
OTHER ASSETS:
Patents, net of accumulated
amortization of $76 and $57......... 266 251
Other................................ 130 105
---------------- ----------------
Total other assets................. 396 356
---------------- ----------------
$ 44,251 $ 18,454
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt.... $ 489 $ 574
Accounts payable..................... 4,211 2,537
Accrued expenses..................... 4,147 2,373
Customer deposits.................... 22 87
---------------- ----------------
Total current liabilities.......... 8,869 5,571
---------------- ----------------
LONG-TERM DEBT......................... 2,525 3,005
---------------- ----------------
DEFERRED INCOME TAXES.................. 146 103
---------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 16)
SHAREHOLDERS' EQUITY:
Preferred stock, no par value;
1,000,000 authorized shares; no
shares issued or outstanding........ -- --
Common stock, no par value;
10,000,000 authorized shares;
6,052,924 and 3,803,263 shares
issued and outstanding.............. 29,592 9,616
Retained earnings.................... 3,119 159
---------------- ----------------
Total shareholders'equity.......... 32,711 9,775
---------------- ----------------
$ 44,251 $ 18,454
================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
NET SALES............................................. $44,013 $23,430 $15,937
COST OF SALES......................................... 23,317 13,463 9,114
------- ------- -------
Gross profit...................................... 20,696 9,967 6,823
------- ------- -------
OPERATING EXPENSES:
Research, development and engineering............... 4,375 1,717 2,100
Selling, general and administrative................. 11,679 5,972 3,150
------- ------- -------
Total operating expenses.......................... 16,054 7,689 5,250
------- ------- -------
Operating income.................................. 4,642 2,278 1,573
INTEREST EXPENSE, Net of interest income of $271, $72
and $31 ............................................. 157 173 797
------- ------- -------
Income before income taxes........................ 4,485 2,105 776
INCOME TAXES.......................................... 1,525 703 238
------- ------- -------
NET INCOME............................................ $ 2,960 $ 1,402 $ 538
======= ======= =======
NET INCOME PER SHARE.................................. $ 0.61 $ 0.35
======= =======
WEIGHTED AVERAGE COMMON AND COMMON EQUIVALENT SHARES.. 4,831 3,994
======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
------------------ EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
--------- ------- --------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C> <C>
BALANCE, OCTOBER 31, 1993............... 2,757,600 $ 2,018 $(1,781) $ 237
Proceeds from sale of common stock.... 670,254 4,533 -- 4,533
Exercise of stock options............. 6,653 2 -- 2
Purchase of common stock.............. (41,579) (201) -- (201)
Net income............................ -- -- 538 538
--------- ------- ------- -------
BALANCE, OCTOBER 31, 1994............... 3,392,928 6,352 (1,243) 5,109
Common stock issued for services...... 1,996 15 -- 15
Exchange of common stock for
Partnership interests................ 408,339 3,249 -- 3,249
Net income............................ -- -- 1,402 1,402
--------- ------- ------- -------
BALANCE, OCTOBER 31, 1995............... 3,803,263 9,616 159 9,775
Proceeds from sale of common stock,
net.................................. 2,249,661 19,976 -- 19,976
Net income............................ -- -- 2,960 2,960
--------- ------- ------- -------
BALANCE, OCTOBER 31, 1996............... 6,052,924 $29,592 $ 3,119 $32,711
========= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income........................................ $ 2,960 $ 1,402 $ 538
Adjustments to reconcile net income to net cash
used in operating activities--
Depreciation and amortization................... 881 224 134
Deferred income tax benefit..................... (41) (251) (261)
(Increase) decrease in--
Accounts receivable........................... (6,204) (2,887) (2,326)
Inventories................................... (4,347) (358) (809)
Prepaid expenses and other current assets..... (178) (12) (46)
Other assets.................................. (59) (94) 10
Increase (decrease) in--
Accounts payable.............................. 1,674 1,044 80
Accrued expenses.............................. 1,746 1,311 (276)
Customer deposits............................. (65) (744) 201
------- ------- -------
Net cash used in operating activities....... (3,633) (365) (2,755)
------- ------- -------
INVESTING ACTIVITIES:
Purchases of short-term investments............... (4,366) -- --
Proceeds from short-term investments.............. 1,420 -- --
Purchases of property, plant and equipment........ (2,891) (1,311) (2,623)
------- ------- -------
Net cash used in investing activities....... (5,837) (1,311) (2,623)
------- ------- -------
FINANCING ACTIVITIES:
Payments on long-term debt........................ (1,606) (388) (250)
Proceeds from long-term debt...................... -- 1,241 2,212
Proceeds from sale of common stock, net........... 19,976 125 4,410
------- ------- -------
Net cash provided by financing activities... 18,370 978 6,372
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 8,900 (698) 994
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........ 408 1,106 112
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR.............. $ 9,308 $ 408 $ 1,106
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest expense.................... $ 444 $ 197 $ 745
Cash received for interest income................. 251 72 31
Cash paid for income taxes........................ 1,949 730 528
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND
FINANCING ACTITIVIES:
Machinery acquired under capital leases........... $ 1,041 $ 398 $ 316
Common stock issued for stock subscriptions
receivable....................................... -- -- 125
Common stock issued for Partnership interests..... -- 3,249 --
Common stock issued for services.................. -- 15 --
Note payable issued for common stock purchases.... -- -- 201
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
CFM Technologies, Inc. (the Company) designs, manufactures and markets
advanced wet processing equipment for sale to the worldwide semiconductor and
flat panel display industries.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
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. Actual amounts could differ from those estimates.
Cash, Cash Equivalents and Investments
The Company considers all highly liquid debt instruments purchased with an
original maturity of three months or less to be cash equivalents. Investments
at October 31, 1996 are carried at amortized cost which equals market value,
and are classified as short-term. The investments have various maturity dates
which do not exceed one year. At October 31, 1996, all of the Company's short-
term investments are classified as available for sale pursuant to Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," (SFAS 115). Therefore, any unrealized holding
gains or losses would be presented as a separate component of stockholders'
equity. At October 31, 1996, there were no unrealized holding gains or losses.
The gross proceeds from sales and maturities of investments were $1,420,000
for the year ended October 31, 1996. Gross realized gains and losses for the
year ended October 31, 1996 were not material. For the purpose of determining
gross realized gains and losses, the cost of securities sold is based upon
specific identification.
Cash and cash equivalents and short-term investments consisted of the
following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1996 1995
---------- --------
<S> <C> <C>
Cash and cash equivalents:
Money market funds and demand accounts................ $ 423,000 $408,000
Repurchase agreements................................. 4,556,000 --
Commercial paper...................................... 495,000 --
---------- --------
$5,474,000 $408,000
========== ========
Short-term investments:
Commercial paper...................................... $1,472,000 $ --
Mortgage-backed Government securities................. 987,000 --
U.S. government securities............................ 487,000 --
---------- --------
$2,946,000 $ --
========== ========
</TABLE>
Inventories
Inventories are valued at the lower of first-in, first-out cost or market.
F-7
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Significant improvements
are capitalized and expenditures for maintenance and repairs are charged to
expense as incurred. Upon the sale or retirement of these assets, the cost and
related accumulated depreciation are removed from the accounts and any gain or
loss is included in income.
Depreciation and amortization are provided using straight-line and
accelerated methods based on the estimated useful lives of the assets as
follows:
<TABLE>
<S> <C>
Building and improvements......................................... 40 years
Machinery and equipment........................................... 3-10 years
Furniture and fixtures............................................ 5-10 years
</TABLE>
Depreciation expense was $862,000, $207,000 and $121,000 in fiscal 1996,
1995 and 1994, respectively.
Patents
The cost of patents acquired are being amortized on a straight-line method
over 17 years. Amortization expense was $19,000, $17,000 and $13,000 in fiscal
1996, 1995 and 1994, respectively.
Revenue Recognition
Net sales are generally recognized upon shipment of the system and, if
recognized prior to shipment, upon completion of customer inspection or
acceptance where risk of loss is transferred to the customer. The estimated
costs of system installation and warranty are accrued when the related sale is
recognized.
Research, Development and Engineering Expenses
Research, development and engineering expenses are charged to expense as
incurred. Research, development and engineering expenses were net of
reimbursement of $1,592,000, $232,000 and $1,835,000 in fiscal 1996, 1995 and
1994, respectively.
Engineering expenses consist of personnel and material costs related to the
development of new products and the integration of existing products into
application-specific systems.
Income Taxes
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 requires the liability method of accounting for deferred income taxes.
Deferred tax assets and liabilities are determined based on the difference
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities at the end of each period are determined
using the tax rate expected to be in effect when taxes are actually paid or
recovered.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk are accounts receivable. The Company's customer base
principally comprises companies within the semiconductor industry, which
historically has been volatile. The Company does not require collateral from
its customers.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable,
accrued expenses and debt instruments. The book values of cash and cash
equivalents, short-term investments, accounts receivable, accounts payable and
accrued expenses
F-8
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
are considered to be representative of their respective fair values. None of
the Company's debt instruments that are outstanding as of October 31, 1996
have readily ascertainable market values; however, the carrying values are
considered to approximate their respective fair values. See Note 7 for the
terms and carrying values of the Company's various debt instruments.
Net Income Per Share
Net income per common share was calculated by dividing net income by the
weighted average number of common shares outstanding for the respective period
adjusted for the dilutive effect of common stock equivalents, which consist of
stock options using the treasury stock method. Pursuant to the requirements of
the Securities and Exchange Commission, common stock issued by the Company
during the twelve months immediately preceding the initial public offering,
plus the number of common equivalent shares which became issuable during the
same period pursuant to the grant of common stock options, have been included
in the calculation of the shares used in computing net income per share as if
they were outstanding for all periods prior to the initial public offering
(using the treasury stock method and the initial public offering price of
$10.00 per share). Pursuant to the requirements of the Securities and Exchange
Commission, the calculation of shares used in computing net income per share
also includes the redeemable common stock for which the redemption provisions
were terminated immediately prior to the effective date of the initial public
offering. Historical net income per share for fiscal 1994 is not presented as
such data is not meaningful due to the accretion recorded for the redeemable
common stock (see Note 9).
New Accounting Pronouncement
The Financial Accounting Standard Board has issued SFAS No. 123, "Accounting
for Stock-Based Compensation." The Company is required to adopt this standard
for the fiscal year ending October 31, 1997. The Company has elected to adopt
the disclosure requirement of this pronouncement. The adoption of this
pronouncement will have no impact on the Company's financial position or
results of operations.
The Financial Accounting Standard Board has issued SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of," which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and
undiscounted cash flows estimated to be generated by those assets are less
than the assets carrying amount. SFAS No. 121 also addresses the accounting
for long-lived assets where disposal is expected. The Company will adopt SFAS
No. 121 in the first quarter of the year ending October 31, 1997 and does not
expect the adoption to have any impact on the Company's financial position or
results of operations.
3. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1996 1995
----------- ----------
<S> <C> <C>
Billed................................................ $10,558,000 $7,162,000
Unbilled.............................................. 4,532,000 1,724,000
----------- ----------
$15,090,000 $8,886,000
=========== ==========
</TABLE>
Unbilled receivables represent final retainage amounts to be billed upon
completion of the installation process.
No allowance for doubtful accounts receivable has been recorded because the
Company believes that all such accounts receivable are fully realizable.
F-9
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. INVENTORIES:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Raw material........................................... $4,267,000 $1,979,000
Work in progress....................................... 3,780,000 1,721,000
---------- ----------
$8,047,000 $3,700,000
========== ==========
</TABLE>
5. LINE OF CREDIT:
The Company has a $7,500,000 demand line of credit with a bank. The line of
credit agreement does not have a stated maturity or expiration date, however,
outstanding borrowings are due upon demand by the bank. The borrowing base
related to the line of credit is based upon a certain percentage of eligible
accounts receivable and customer signed purchase orders, as defined. Interest
is charged at the bank's prime rate and was 8.75% at October 31, 1996 and
1995. The line also provides for the issuance of letters of credit. As of
October 31, 1996 and 1995, the Company had no borrowings on the line.
Borrowings under the line are collateralized by substantially all of the
Company's assets. The line of credit requires the Company to maintain certain
financial and other covenants, including a minimum tangible net worth and
minimum cash flow to debt service coverage ratio.
6. ACCRUED EXPENSES:
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------
1996 1995
---------- ----------
<S> <C> <C>
Warranty and installation costs....................... $1,069,000 $ 991,000
Payroll and payroll related........................... 1,010,000 732,000
Accrued commissions................................... 1,004,000 250,000
Other................................................. 1,064,000 400,000
---------- ----------
$4,147,000 $2,373,000
========== ==========
</TABLE>
7. LONG-TERM DEBT:
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Mortgage note payable to bank, payable in monthly
installments of $6,250 plus interest at 8.9%
through February 2009, collateralized by land and
building.......................................... $ 925,000 $1,000,000
Mortgage note payable to Pennsylvania Industrial
Development Authority (PIDA), payable in monthly
installments of $4,363 including interest at 2%
through August 2009, collateralized by land and
building.......................................... 592,000 632,000
Term note payable to bank, repaid in June 1996..... -- 1,200,000
Mortgage note payable to Chester County Development
Council, payable in monthly installments of $1,067
including interest at 5% through August 2004,
collateralized by land and building............... 82,000 91,000
Term notes payable to bank, payable in monthly
installments of $5,834 plus interest at the bank's
prime rate plus 1% through August 1999,
collateralized by certain assets.................. 194,000 275,000
Capitalized lease obligations, lease periods
expiring at various dates through 2001, interest
rates range from 7% to 12%, collateralized by the
leased assets..................................... 1,221,000 381,000
---------- ----------
3,014,000 3,579,000
Less -- Current portion............................ (489,000) (574,000)
---------- ----------
$2,525,000 $3,005,000
========== ==========
</TABLE>
F-10
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Maturities of long-term debt as of October 31, 1996 are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997.............................................................. $ 489,000
1998.............................................................. 482,000
1999.............................................................. 453,000
2000.............................................................. 356,000
2001.............................................................. 246,000
2002 and thereafter............................................... 988,000
----------
$3,014,000
==========
</TABLE>
In February 1994, the Company purchased land and a building to be used as
its manufacturing and office facilities. The cost of the land and building was
$2,558,000, including transaction costs and additional costs to renovate the
building to meet the Company's occupancy requirements. The property and
improvements are subject to the three mortgage notes. The mortgage note due to
PIDA contains certain financial covenants, the most restrictive of which
requires minimum levels of shareholders' equity. In addition, this note bears
interest at 2%, assuming the Company can create a specified number of jobs
over a three-year period. If the Company fails to meet the employment
commitment, the interest rate will increase to a market rate of up to 12.5%,
as defined.
In fiscal 1995, the Company issued a new term note to a bank in order to
finance an expansion and improvements to the Company's facilities. This term
note was repaid using a portion of the proceeds from the initial public
offering in June 1996. In addition, in fiscal 1994, the Company issued several
new term notes to a bank in order to finance additional improvements and
machinery and equipment necessary for the Company's new facility.
The Company leases machinery and equipment and furniture and fixtures under
capital leases expiring in various years through 2001. The assets and
liabilities under these leases are recorded at the lower of the present value
of the minimum lease payments or the fair value of the asset. The assets are
depreciated over their estimated useful lives since ownership will transfer
upon lease expiration. The net book value of equipment under capitalized lease
obligations as of October 31, 1996 is $1,147,000. The minimum lease payments,
including interest, under the capital lease obligations as of October 31, 1996
are $392,000, $357,000, $316,000, $249,000 and $144,000 for fiscal 1997, 1998,
1999, 2000 and 2001, respectively.
8. RESEARCH AND DEVELOPMENT LIMITED PARTNERSHIPS:
In 1984 and 1985, the Company entered into research and development
agreements with two related party limited partnerships (the Partnerships), in
which the Company was the general partner. A significant number of the
individuals who were limited partners were also significant shareholders of
the Company. Due to this related party relationship, the cash that was paid by
the Partnerships to the Company was recorded as an obligation due to the
Partnerships and interest was accrued thereon. In April 1987 and September
1988, the Company exercised its purchase options to acquire the Partnerships'
technologies, which resulted in an aggregate liability of $2,184,000. The
obligation due to the Partnerships increased by scheduled amounts which
aggregated $5,030,000 through October 31, 1994 and were recorded as interest
expense. In fiscal 1994, $728,000 of interest expense was recorded. The
Company made payments to the Partnerships of $1,612,000 on a cumulative basis
through October 31, 1994. As of October 31, 1994, deferred taxes of $2,353,000
were recorded for differences in financial statement and income tax reporting
with respect to this obligation. On November 1, 1994, the Company exchanged
408,339 shares of its common stock for the assets of the Partnerships, which
consisted primarily of the Company's obligation to the Partnerships. The fair
value of these common shares, approximated the obligation due to the
Partnerships, net of tax. Accordingly, no gain or loss was recognized as a
result of this transaction.
F-11
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. SHAREHOLDERS' EQUITY:
On June 21, 1996, the Company consummated an initial public offering of its
Common Stock. The Company sold 2,249,661 (including the underwriters over-
allotment) shares of its Common Stock, no par value, at an initial public
offering price of $10.00 per share. After deducting the underwriters' discount
and other offering expenses, the net proceeds to the Company were $19,976,000.
On December 19, 1995, the Company's Board of Directors adopted, and on
January 3, 1996, the Company's shareholders approved, an increase in the
number of authorized common shares from 2,000,000 to 10,000,000 and
authorization of 1,000,000 shares of no par value preferred stock. In
addition, on June 16, 1996, the Company effected a 3.326-for-1 split of its
common stock. All share and stock option data have been restated to reflect
the stock split.
Certain common shareholders had the right to require the Company to redeem
their stock during certain periods and at specified prices. Immediately prior
to the consummation of the initial public offering, these redemption rights
terminated and therefore, the related redemption amounts are included in
common stock and shareholders' equity for all periods presented. The Company
recorded the accretion to the redemption value of $200,000 and zero in fiscal
1994 and 1995, respectively. The accretion was charged to common stock as the
Company had an accumulated deficit at that time. These amounts are not
presented separately in the statements of shareholders' equity due to the
termination of the redemption rights and are included in common stock for all
periods presented.
On December 19,1995, the Company's Board of Directors adopted, and on
January 3, 1996, the Company's shareholders approved the Employee Stock
Purchase Plan (Purchase Plan). The Purchase Plan allows eligible employees to
purchase up to 300,000 shares of common stock at the lower of 85% of the fair
market value of the stock on the first or last day of the applicable six month
purchase period. Eligible employees were able to participate in the Purchase
Plan beginning on October 1, 1996 through payroll withholding of up to $500
per pay period. As of October 31, 1996, employee withholdings included in
accrued expenses were $10,000. No shares have been issued under the Purchase
Plan as of October 31, 1996.
10. STOCK OPTIONS:
The Company has a stock option plan (the 1992 Plan) whereby 409,163 options
to purchase common stock were issued to key management personnel, directors
and consultants at exercise prices not less than fair market value. The
options have vesting terms set by the executive compensation and stock option
committee of the Board of Directors and expire 10 years after the date of
grant.
On December 19, 1995, the Company's Board of Directors adopted, and on
January 3, 1996, the Company's shareholders approved, the 1995 Incentive Plan
(Incentive Plan) and the Non-Employee Directors' Stock Option Plan (Directors'
Plan). The Incentive Plan and the Directors' Plan authorized the granting of
up to 400,000 shares of common stock or options to Company employees and up to
150,000 options to purchase common stock to non-employee directors,
respectively. The Company will not grant any additional options under the 1992
Plan.
F-12
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes stock option activity:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Options outstanding at October 31, 1993............. 389,184 $0.24-$7.52
Granted........................................... 16,632 7.52
Exercised......................................... (6,653) 0.24
-------
Options outstanding at October 31, 1994............. 399,163 0.24-7.52
Granted........................................... 207,087 7.52
-------
Options outstanding at October 31, 1995............. 606,250 0.24-7.52
Granted........................................... 139,905 7.52-10.75
Canceled.......................................... (832) 7.52
-------
Options outstanding at October 31, 1996............. 745,323 $0.24-$10.75
=======
</TABLE>
As of October 31, 1996, there were 463,020 options vested and exercisable
and 415,263 stock options were available for grant under the Company's stock
option plans.
11. EMPLOYEE BENEFIT PLANS:
The Company has a defined contribution retirement plan for the benefit of
eligible employees. Management believes that the plan qualifies under Section
401(k) of the Internal Revenue Code. The plan provides for matching
contributions by the Company at a discretionary percentage of eligible pretax
contributions by the employee. Matching contributions by the Company were
$107,000, $68,000 and $27,000 for the years ended October 31, 1996, 1995 and
1994, respectively.
In fiscal 1995, the Company established a profit-sharing plan for the
benefit of eligible employees. The plan provides for a target contribution of
approximately 2% of total planned salaries and wages, with actual payments
based upon certain annual performance results. The Company recorded profit
sharing expense of $150,000 and $65,000 for the years ended October 31, 1996
and 1995, respectively.
12. OTHER RELATED PARTY TRANSACTIONS:
The Company recorded commission expense in fiscal 1996, 1995 and 1994 of
$2,444,000, $282,000 and $430,000, respectively, which related to commissions
payable to a distributor who is also a stockholder of the Company. Commissions
payable to this distributor included in accrued expenses as of October 31,
1996 and 1995 were $959,000 and $28,000, respectively. The distributor is
controlled by an individual who is a director of the Company. See Note 8 for
other related party transactions.
F-13
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. INCOME TAXES:
The components of the income tax provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
--------------------------------
1996 1995 1994
---------- --------- ---------
<S> <C> <C> <C>
Current:
Federal.................................. $1,493,000 $ 937,000 $ 471,000
State.................................... 73,000 17,000 28,000
---------- --------- ---------
1,566,000 954,000 499,000
---------- --------- ---------
Deferred:
Federal.................................. (12,000) (244,000) (235,000)
State.................................... (29,000) (7,000) (26,000)
---------- --------- ---------
(41,000) (251,000) (261,000)
---------- --------- ---------
$1,525,000 $ 703,000 $ 238,000
========== ========= =========
</TABLE>
Income tax expense differs from the amount currently payable because certain
expenses, primarily depreciation and accruals, are reported in different
periods for financial reporting and income tax purposes.
The federal statutory income tax rate is reconciled to the effective income
tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Federal statuary rate............................. 34.0% 34.0% 34.0%
State income taxes, net of federal benefit........ 0.6 0.5 0.2
Research and development credit................... (0.2) (2.4) (3.6)
Other............................................. (0.4) 1.3 --
------- ------- -------
34.0% 33.4% 30.6%
======= ======= =======
</TABLE>
The components of the net current and long-term deferred tax assets and
liabilities, measured under SFAS No. 109, are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets--
Inventories.......................................... $ 103,000 $ 85,000
Warranty and installation accrual.................... 342,000 347,000
Other................................................ 196,000 97,000
--------- ---------
641,000 529,000
Deferred tax liability--
Depreciation......................................... (146,000) (103,000)
--------- ---------
Net deferred tax asset............................. $ 495,000 $ 426,000
========= =========
</TABLE>
14. CUSTOMER AND GEOGRAPHIC INFORMATION:
The Company's operations are conducted in one business segment. Export net
sales were $27,789,000, $12,102,000 and $8,242,000 in fiscal 1996, 1995 and
1994, respectively. Export net sales to Europe and East
F-14
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Asia were $13,140,000 and $14,649,000 in fiscal 1996, $10,099,000 and
$2,003,000 in fiscal 1995 and $4,625,000 and $3,617,000 in fiscal 1994,
respectively.
The following table summarizes significant customers with net sales in
excess of 10% of net sales:
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
---------------------------------
CUSTOMER 1996 1995 1994
-------- ----------- ---------- ----------
<S> <C> <C> <C>
A........................................ $12,828,000 $ * $ *
B........................................ 11,149,000 5,287,000 6,876,000
C........................................ 8,361,000 * 2,583,000
D........................................ 4,762,000 * *
E........................................ * 3,075,000 *
F........................................ * 4,041,000 *
G........................................ * 2,490,000 *
</TABLE>
- --------
* Net sales less than 10% of net sales
15. SUPPLIER CONCENTRATION:
The Company relies to a substantial extent on outside vendors to manufacture
and supply many of the components and subassemblies used in the Company's
systems. Certain of these are obtained from a sole supplier or a limited group
of suppliers, many of which are small, independent companies. Moreover, the
Company believes that certain of these components and subassemblies can only
be obtained from its current suppliers. The Company's reliance on outside
vendors generally, and on sole suppliers in particular, involves several
risks, including a potential inability to obtain an adequate supply of
required components and reduced control over pricing, timely delivery and
quality of components.
16. COMMITMENTS AND CONTINGENCIES:
In fiscal 1995, the Company entered into a non-cancelable lease effective as
of December 1, 1995 for office facilities. Future minimum rental payments,
including operating expense allocations, as of October 31, 1996 on this lease
are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
-----------
<S> <C>
1997................................................................ $548,000
1998................................................................ 548,000
1999................................................................ 548,000
2000................................................................ 548,000
2001................................................................ 46,000
</TABLE>
The Company has asserted certain of its patent rights against three
defendants. One of the defendants has counterclaimed against the Company,
seeking a declaratory judgment that the subject patent is invalid. Although
management believes that the ultimate resolution of these matters will not
have a material impact on the Company's financial position or results of
operations, there can be no assurance in that regard.
On December 19, 1996, a lawsuit was filed by one of the Company's
competitors which seeks a declaratory judgement of patent non-infringement and
invalidity of one of the Company's patents. Although management believes that
the ultimate resolution of this matter will not have a material impact on the
Company's financial position or results of operations, there can be no
assurance in that regard.
F-15
<PAGE>
CFM TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1995, counsel to two shareholders who acquired 31,614 shares of
Common Stock in connection with the November 1, 1994 transaction with the
Partnerships (see Note 8) sent letters to the Securities and Exchange
Commission and the Pennsylvania Securities Commission referencing such
shareholders' objection to that transaction and its valuation and allegations
that the Company breached certain duties and violated unspecified state and
federal laws in connection therewith. Specifically, counsel to these
shareholders alleged that the Company had no right to cause the exchange with
the Partnerships and that the exchange rate utilized in the transaction was
too low. The Company believes that such shareholders' objections and
allegations are without merit and that any resolution of such matter will not
have a material adverse effect on the Company.
F-16
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations in connection with this of-
fering other than those contained in this Prospectus and, if given or made,
such information or representations must not be relied upon as having been au-
thorized by the Company, the Selling Shareholders or any of the Underwriters.
This Prospectus does not constitute an offer to sell or a solicitation of any
offer to buy any securities other than the shares of Common Stock to which it
relates or an offer to, or a solicitation of, any person in any jurisdiction
where such an offer or solicitation would be unlawful. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create an implication that there has been no change in the affairs of the Com-
pany or that information contained herein is correct as of any time subsequent
to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Special Note Regarding Forward Looking Statements........................ 6
Risk Factors............................................................. 6
The Company.............................................................. 13
Use of Proceeds.......................................................... 13
Price Range of Common Stock.............................................. 13
Dividend Policy.......................................................... 14
Capitalization........................................................... 14
Selected Financial Data.................................................. 15
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 16
Business................................................................. 22
Management............................................................... 37
Certain Relationships and Related Transactions........................... 45
Principal and Selling Shareholders....................................... 47
Description of Capital Stock............................................. 48
Shares Eligible for Future Sale.......................................... 49
Underwriting............................................................. 50
Legal Matters............................................................ 51
Experts.................................................................. 51
Available Information.................................................... 51
Index to Consolidated Financial Statements............................... F-1
</TABLE>
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1,670,000 SHARES
[LOGO OF CFM TECHNOLOGIES, INC APPEARS HERE]
COMMON STOCK
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PROSPECTUS
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MONTGOMERY SECURITIES
PAINEWEBBER INCORPORATED
UBS SECURITIES
February 12, 1997
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