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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE FISCAL YEAR
ENDED JUNE 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE
TRANSITION PERIOD FROM ___________ TO ____________.
COMMISSION FILE NUMBER: 0-23840
MICRION CORPORATION
(Name of registrant as specified in its charter)
MASSACHUSETTS 04-2892070
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE CORPORATION WAY 01960-7990
PEABODY, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
(978) 538-6700
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act: COMMON STOCK, NO PAR VALUE
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
-----
The aggregate market value of the registrant's voting stock held by
non-affiliates of the registrant was $22,492,504 as of September 18, 1998.
The number of shares of the registrant's Common Stock outstanding as of
September 18, 1998 was 4,074,397.
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DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Micrion Corporation (the "Company" or "Micrion") is a leader in the
design, development, manufacture and marketing of focused-ion-beam (FIB)
systems. Micrion(R) FIB systems are used in the design, fabrication and testing
of semiconductor integrated circuits (ICs) and other high technology devices.
FIB technology provides a unique combination of capabilities to image, analyze
and perform "microsurgery" on ICs and other high technology devices.
Semiconductor integrated circuit and other high technology manufacturers use
Micrion's FIB systems to reduce the time needed to get new products to market
and/or to achieve and maintain acceptable manufacturing yields more quickly and
cost effectively. The Company introduced the world's first FIB system
specifically designed for use in the manufacturing process of ICs in 1985 and
since then has introduced new products incorporating a variety of technological
advances, including the MicroMill(R)HT, 9500HT and 9500PV FIB systems,
specifically designed for magnetic head manufacturing applications.
TECHNOLOGY AND MARKET TRENDS
Integrated circuits are critical components of a wide variety of
products such as computers, telephones, televisions, automobiles and aircraft.
As applications for ICs continue to expand, the trend in the industry is to put
more functionality on a single chip. To increase functionality, semiconductor
manufacturers are producing larger chips with more layers utilizing smaller
feature sizes. Improvements in lithography technology have allowed the printing
of progressively smaller features on progressively larger wafers. Minimum
feature sizes in advanced ICs are now less than 0.5 microns, or one
one-hundredth the diameter of a human hair. The density of components on the
most advanced ICs has approximately doubled every two years. At the same time,
the market price per functional element on a chip has decreased and product
cycles have shortened. The combination of technology and market forces has put
enormous pressure on semiconductor equipment manufacturers to produce tools with
increased capabilities. Various technologies, including FIB systems such as
those manufactured by Micrion have been developed to meet this need.
Disk drive manufacturers are constantly striving to achieve higher
densities of data on a disk because higher densities generally permit greater
storage capacities at lower costs in smaller packages. One of the primary
factors that determines data density is the size and performance of the magnetic
"read/write" heads. Smaller heads can record and retrieve data from narrower
tracks, thus providing increased data density on a given disk size. Therefore,
disk drive manufacturers desire to produce increasingly smaller read/write
heads. However, the current photolithographic technology used to manufacture
such heads seems to be reaching a barrier beyond which smaller heads cannot be
reliably produced. During the last three fiscal years, the 9500HT, 9500PV and
MicroMill HT FIB systems were introduced to help meet the needs of prototyping,
analyzing and producing smaller, more precise magnetic heads.
INTEGRATED CIRCUIT MANUFACTURING PROCESS AND PROBLEMS
The integrated circuit manufacturing process consists of three major
phases: design, fabrication and test.
The design phase begins with the specification of the desired
functionality and architecture of the IC and ends with a fully operational,
mass-producible IC. Depending on the complexity of the IC, the average design
phase often can last from several months to several years. The design phase
involves many iterations of design, test, analysis and redesign. A key step is
the computer aided design of a circuit layout that defines the physical
locations of the circuit elements. The IC manufacturer analyzes the layout using
design verification software and
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makes necessary modifications. Although design verification software is
effective, the manufacturer must produce working sample chips before beginning
volume production. To accomplish this, a set of master patterns or masks must be
generated and used to fabricate sample chips. Identifying and correcting design
problems exposed in the test of initial sample chips presents one of the most
difficult, costly and potentially time consuming tasks in the IC design phase.
This task has traditionally been done using an iterative design modification
cycle consisting of sample chip fabrication, sample chip test, data analysis,
design change, new design verification, new mask set generation and new sample
chip fabrication. This cycle takes from several weeks to several months and may
have to be repeated numerous times to arrive at a final proven design. The
amount of time spent in the design modification cycle has a significant impact
on when a new product can be introduced to the marketplace.
The fabrication phase can begin once sample chips have been
manufactured and the design is deemed to be functional. The first critical step
in the fabrication phase is to generate a production mask set with as few
defects as possible, as mask defects result in circuit failures and
manufacturing yield loss. Following mask generation, multiple ICs are fabricated
on a wafer by performing in sequence a large number of complex processing steps
including film deposition, mask pattern printing (lithography) and film etch. In
this manner, the circuit is built up layer by layer into a complex
three-dimensional structure. Since wafer fabrication is very costly, it is
critical to know that each process step is being performed correctly. Expensive,
specialized equipment is used to obtain data from the wafers as they progress
through the fabrication sequence. Information is relatively easy to gather for
each individual step by making observations during or immediately after the step
is completed; however, information on how various steps or layers relate to each
other is much more difficult and costly to gather using traditional methods
since previous layers are covered by subsequent layers. Traditionally,
three-dimensional information has been obtained by the costly and wasteful
procedure of cutting or breaking a wafer and analyzing its cross-section with a
high resolution scanning electron microscope (SEM).
During the test phase, completed wafers undergo a rigorous test
procedure and are then cut into individual chips and packaged. Chips that fail
their initial tests or subsequently fail after some period of use often undergo
failure analysis by semiconductor manufacturers to determine and correct the
cause of the failure. Failure analysis is a difficult procedure as faults are
often embedded within the layers of the IC. In order to assess accurately the
cause of failure, the manufacturer must be able to locate, expose and analyze
the faulty area without destroying the surrounding areas or losing the
information at the site of the fault. Shrinking geometries, increased complexity
and more three-dimensional chip structures have created a need for instruments
with higher resolution, more accurate navigation (ability to locate specific
areas and features on a chip or wafer) and increased analytical capability.
Micrion's FIB systems permit semiconductor manufacturers more quickly
and effectively to view, analyze and modify ICs and mask sets during the design,
fabrication and test phases. The Company's FIB systems use a highly focused beam
of ions to create high resolution images of a portion of an IC or workpiece to
locate specific areas where work is necessary. Once located, Micrion's systems
can remove or add material to modify the circuit or analyze the area of the
circuit to determine construction and composition. This combination of
capabilities is unique to FIB systems and allows IC manufacturers to use one
system to perform many analysis and circuit modification tasks with accuracy,
precision and speed that previously were not possible.
MAGNETIC HEAD TRIMMING PROCESS AND PROBLEMS
The magnetic head manufacturing process is driven by the need to design
and produce smaller read/write heads that can record and retrieve data
accurately at a lower effective overall cost. Because the manufacturing process
is so complex, the production of prototype heads to test new design concepts is
expensive and time consuming. In addition, the existing manufacturing process,
which employs photolithographic process technology seems to be approaching size
limit barriers that may make the process less able to produce increasingly
smaller heads. Currently, the heads are manufactured using a stepper process,
similar to that used in integrated circuit manufacturing, to produce row bars
containing thousands of magnetic heads that are then introduced to an ion etch
process to remove excess material and to achieve the proper head size. The
smaller geometries of these
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advanced magnetic heads are challenging the manufacturer's ability to analyze
the structures and possible defects in the heads being manufactured in order to
achieve acceptable yields. Traditional analysis techniques are both labor
intensive and slow.
Micrion's 9500 HT provides the flexibility and speed needed for rapid
prototyping of new designs. Various trim patterns can be created and applied.
Once a design has been proven, the design parameters may be easily transferred
to a MicroMill HT system for production head trimming. Micrion's MicroMill HT
FIB system overcomes certain of the technical limitations of head manufacturing,
using a combination of a highly focused ion beam and sophisticated automation.
Precisely positioning and imaging heads, the MicroMill HT FIB system
automatically defines and performs the necessary micromachining to the
manufacturer's specification. The Micrion 9500PV is specifically designed for
thorough analysis of heads being manufactured. Machine vision capabilities help
to automate the cross-sectioning of selected features, and the built-in SEM
column produces high resolution images and measures specified features. Critical
dimension measurements may be sent to a yield management database for
statistical analysis.
FIB SYSTEMS APPLICATIONS
There are four principal applications of FIB systems in the
semiconductor manufacturing process: circuit modification, mask repair, process
monitoring and failure analysis. Each is used in one or more phases of IC
manufacturing. There are three principal applications in the disk drive
production process: magnetic head trimming, laboratory prototyping and analysis,
and in-fab process verification.
Circuit Modification. The wiring of a chip can be modified using
Micrion's FIB systems by removing and adding metal connections without damaging
any of the circuitry in the intervening layers. Wiring can be modified on even
the most advanced ICs containing as many as five metal layers sandwiched between
multiple layers of insulating materials.
Mask Repair. Mask quality has a major impact on IC yield during the
manufacturing process. Defects are usually the result of contamination during
mask fabrication. The Company's FIB systems can be used to make repairs on a
mask by removing unwanted material and replacing missing material. It is
possible to repair defects with a precision that is not attainable by any other
technique, often making the repaired site indistinguishable from non-defective
areas.
Process Monitoring. Semiconductor manufacturers use Micrion's FIB
systems to prepare and view a cross-section of an in-process wafer to provide
vital information about the three-dimensional structure of the circuit. The
systems can reveal layer-to-layer alignment, layer thickness, etch profiles,
step coverage and metal grain structure. In addition, particle contamination can
be analyzed to determine its origin.
Failure Analysis. The combined features of the Company's FIB systems
can permit semiconductor manufacturers to dissect and analyze defective circuits
more precisely than is possible by any other technique. A defective area can be
exposed one segment at a time in increments of a small fraction of a micron.
Each slice can be sequentially imaged and analyzed to obtain a complete
understanding of the defect, helping to determine its cause.
Magnetic Head Laboratory Prototyping and Analysis. Head manufacturers
can speed the time-to-market of new head designs by using the capabilities of
the Micrion 9500HT to quickly produce prototypes of different head designs. A
wide variety of design variables or manufacturing anomalies may be closely
scrutinized and evaluated in a FIB system.
Magnetic Head Trimming. The features of the MicroMill HT FIB system
allow it to position precisely and image magnetic read/write heads and perform
the necessary micromachining to produce smaller heads. This allows for narrower
tracks and greater data storage density on a disk drive.
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Magnetic Head In-fab Process Verification. Smaller, more complex
magnetic heads demand the application of more sophisticated yield management
techniques. Micrion's 9500PV provides automated cross-sectioning and
semi-automatic image acquisition and critical dimension measurements. A
three-dimensional view of head structures aids in verifying manufacturing
processes and in diagnosing defects.
MICRION PRODUCTS
FIB Systems
Micrion FIB systems consist of a number of modular subsystems,
including the ion column and source, the control computer, the control
electronics, the substrate handling mechanism and the vacuum system. The
Company's systems incorporate proprietary software through a graphical user
interface similar to those used on personal computers. Micrion's proprietary
software controls the electronics used throughout the FIB systems, manipulates
the ion beam, moves the workpiece, collects imaging data and performs other
system functions.
To minimize the design cycle and inventory costs of new systems, the
Company utilizes its modular subsystems and components wherever suitable. For
example, the high resolution ion column used in all of Micrion's current FIB
products was originally developed for application to x-ray mask repair and is
now used for other FIB applications such as circuit modification, process
control and failure analysis. Much of the electronics and software used in
Micrion FIB systems are common to all of Micrion's FIB products. The price of
Micrion FIB systems generally ranges from $350,000 to $2,500,000, depending on
the features selected.
The Micrion 9000 Series is used primarily for circuit modification and
cross-sectional imaging and is the largest unit volume product of Micrion's
family of FIB systems. In cross-sectional imaging applications, the important
attributes of substrate handling are accurate x/y navigation and the ability to
tilt large work pieces, such as 8" silicon wafers, to angles up to 60 degrees.
The Micrion 9000 Series incorporates a fully automated computer-controlled 8"
stage that can accommodate the largest silicon wafers used in semiconductor
manufacturing today. A product development program is currently underway to
design and produce FIB systems that will accommodate the next generation of
silicon wafers, which are 12" in diameter. The new platform created for this
program will serve as the foundation for a complete new family of FIB systems
well suited for a variety of applications in both the semiconductor and data
storage industries.
The Micrion 9000EX Series adds a state-of-the-art field emission SEM
column to the basic Micrion 9000 Series platform to provide high resolution SEM
images in addition to the features offered by FIB technologies. The combination
of SEM and FIB technologies permits increased resolution of a cross-sectional
image without breaking the wafer or tilting the workpiece. An available option
for the Micrion 9000EX Series is an x-ray spectrometer that detects x-rays whose
characteristic wavelength can be used to determine the elements comprising the
area being analyzed.
The Micrion 9000IL Series is specifically designed for use in-line in a
semiconductor fabrication facility. Unlike most FIB systems, which are used in
laboratory-like environments, the 9500IL is intended for use in a clean room
production environment. Accordingly, the 9500IL is equipped with a stainless
steel exterior and features an automatic cassette-to-cassette wafer handling
system. An FIB system in-line permits the semiconductor manufacturer to get
answers to process problems more quickly, resulting in increased yields.
The Micrion 9800 is used primarily for circuit modification and is
differentiated from the 9000 Series principally by its substrate handling
capabilities. In automated circuit modification applications, x/y navigation is
required to be more accurate but the workpiece does not need to be tilted. In
fact, navigation on a substrate to an accuracy of better than 0.25 microns is
desired. To achieve this higher accuracy, Micrion equips such systems with x/y
stages in which stage position is monitored by a laser interferometer. This type
of measurement technique is the most accurate available and at the present time
only Micrion FIB systems offer this feature. The
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handling and positioning capability of the Micrion 9800 is valuable since it
permits a large number of complex modifications to be programmed and automated,
eliminating operator error in making the modifications.
The Micrion 9800 FlipChip(TM) system is specifically designed to
facilitate the circuit modification or probing of ICs that are packaged using
the increasingly popular flip-chip packaging technology. In a flip-chip package,
the IC is mounted upside down and bonded directly to the package, burying the
active circuitry under a thick layer of bulk silicon. Micrion's 9800 FlipChip
system incorporates a high current column, laser interferometer stage, in-situ
optical/IR microscope, and a proprietary enhanced gas etching technology to
quickly and precisely access exactly the right location, then perform the
microsurgery necessary for probing or circuit modification.
The Micrion MicroMill HT FIB system is used primarily for magnetic head
trimming by disk drive component manufacturers. It utilizes parts of the Micrion
9800 platform and incorporates sophisticated imaging software to analyze the
read/write heads and to determine which areas to micromachine in a completely
automated process. The system is designed to run automatically for extended
periods of time.
The Micrion 9500HT system combines the flexibility of the basic 9500
system with some of the sophisticated machine vision and software features of
the MicroMill HT system, resulting in a tool that is ideally suited for process
monitoring, failure analysis and pilot production of new magnetic head designs.
All head trimming parameters developed on the 9500HT are readily transferable to
the MicroMill HT for high-volume production.
The Micrion 9500PV system provides head manufacturers with a process
verification tool that can help them control their manufacturing processes and
improve yields. The system incorporates pattern recognition capabilities that
make possible fully automatic cross sectioning of critical structures. The
integrated SEM then produces high- resolution images and critical dimension (CD)
measurements.
The Micrion 8000 is similar in hardware configuration to the Micrion
9800 but is used for the repair of masks, including phase shifting masks and
x-ray masks. The Micrion 8000 comes equipped with a number of specialized
etching and deposition processes customized for mask repair applications.
The Micrion 2000 Series system is designed for use by customers who do
not require the large substrate size handling possible with the Micrion 9000
Series and who are willing to accept a less automated instrument in return for
reduced cost. Many of the features of the Micrion 9000 Series are maintained in
the Micrion 2000 Series. This series includes the Micrion JFIB-2100 Specimen
Preparation System used primarily to prepare samples for viewing in transmission
electron microscopes.
SALES PROSPECTS
The primary current applications for Micrion FIB systems are found
within both the semiconductor industry and the data storage industry. At this
time, the largest application segment of the semiconductor industry application
consists of failure analysis laboratories where FIB systems are used for circuit
modification, failure analysis and process control in support of both
semiconductor design and wafer fabrication groups. The need for FIB systems by
semiconductor design groups will be driven by the growing number of new designs
introduced each year and the increasing complexity of these designs. The need
for FIB systems by wafer fabrication groups will be driven by the increasing
complexity of the semiconductor products being produced and the need for fast,
thorough answers to process problems which may affect manufacturing yields. The
urgency of solving yield-threatening problems in the fabs appears to be creating
new sales prospects within the semiconductor industry for FIB systems to be used
in-line in the fabs, in addition to being used in the failure analysis
laboratories.
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Another application within the semiconductor industry, mask repair,
includes both semiconductor manufacturers and commercial suppliers of masks to
the semiconductor industry. Larger manufacturers, such as IBM, Motorola, Intel,
Hitachi, Fujitsu and Samsung, generally maintain their own in-house mask making
capability. Smaller semiconductor companies typically buy from commercial mask
suppliers, including DuPont, Dai Nippon Printing, Toppan, Photronics and Hoya.
The Company believes that the market for mask repair applications will increase
due to anticipated re-tooling in the mask industry and therefore, sales of FIB
mask repair tools by the Company are expected to represent an increased portion
of the Company's sales in the foreseeable future.
The sales prospects for Micrion FIB systems within the data storage
industry consist of the manufacturers of magnetic read/write heads used in
computer disk drives. Disk drive manufacturers compete to achieve the highest
data storage capacity at the lowest cost. Data storage capacity depends on many
factors including the size and performance of the magnetic read/write heads.
With current production techniques reaching practical limits, manufacturers are
considering the use of FIB technology to assist in the production of smaller
heads. The need for production FIB systems by magnetic head manufacturers will
be driven by the ability of FIB systems to produce smaller heads, cost
effectively. The need for FIB systems used for prototyping, analysis and process
verification will be driven by the continued move toward smaller head
geometries.
SALES AND MARKETING
Micrion utilizes a network of direct sales engineers, distributors and
representatives to sell the Company's products to customers in the United
States, Europe, Japan and certain of the Pacific Rim countries. In the United
States, the Company has three sales engineers. Micrion's wholly-owned
subsidiary, Micrion GmbH, headquartered in Feldkirchen, Germany, employs two
sales engineers for Europe and Western Asia. The Company's sales engineers are
supported by management personnel.
In Japan, the Company uses Tokyo Electron Limited (TEL) as its
exclusive distributor of semiconductor manufacturing equipment in Japan. TEL
buys equipment at negotiated prices from Micrion and resells the equipment to
end users in Japan. The Company entered into an initial distribution agreement
with TEL in 1986. The distribution agreement is cancelable with 60 days' notice
to either party. At the present time, TEL maintains demonstration equipment
inventory and sufficient spare parts to service the installed base. Typically,
TEL does not purchase equipment from the Company until it has received an order
from a customer. As of June 30, 1998, TEL maintained a full time staff of one
vice-president, one sales manager, six salesmen and seven service engineers
dedicated to Micrion's FIB products.
The Company also uses JEOL, Ltd. ("JEOL") for the exclusive
distribution of the Micrion JFIB-2100 Specimen Preparation System in Japan.
These systems are sold in conjunction with JEOL's sales of their line of
transmission and scanning electron microscopes. The Company entered into this
distribution agreement in May 1995 and began shipments of the Micrion JFIB-2100
systems to JEOL's customers in fiscal 1996. The distribution agreement is
automatically renewable annually unless terminated by either party by 90 days'
written notice prior to the end of any annual term. In fiscal 1996, the Company
consigned a JFIB-2100 system to JEOL for sales demonstrations. JEOL is solely
responsible for sales distribution of this product in Japan, while the Company
maintains installation and service responsibility. Typically, JEOL does not
purchase equipment from the Company until it has received an order from a
customer. As of June 30, 1998, JEOL's sales staff offers Micrion's JFIB-2100
system as part of their product offerings.
Micrion has established a wholly-owned subsidiary in Japan, Micrion
Japan Corporation KK, to provide technical sales and service support to TEL and
JEOL, and to provide information to the Company about the needs of the Japanese
market. Currently, Micrion Japan Corporation KK employs one marketing manager,
one applications engineer, six service engineers and two administrators.
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Micrion established a wholly owned subsidiary in the United Kingdom,
Micrion Corporation Limited, during fiscal 1998. The purpose of the subsidiary
is to provide product demonstration capability, offer FIB services to customers
on a billable basis and to provide support services to service engineers in the
United Kingdom. Currently, Micrion Corporation Limited employs one applications
laboratory manager, one service manager and one service engineer.
In South Korea, the Company uses ETEC Systems Korea Corporation (ETEC)
as its sales and service representative. ETEC is compensated on a commission
basis and is paid after the product is delivered. ETEC also provides warranty
service after the installation and customer acceptance of FIB systems in South
Korea. It receives an additional commission after the inception of the warranty
period, which generally extends for one year. As of June 30, 1998, ETEC
maintained a staff of one salesman and five service engineers in support of
Micrion's FIB products.
In each of the two other Pacific Rim countries where the Company's FIB
products are marketed, Taiwan and Singapore, the Company uses a local
representative compensated on a straight sales commission basis and paid only
when a product is delivered.
Micrion has entered into an arrangement with ZMC Technologies, Ltd.
(ZMC), to provide technical contract labor to the Company to support the
installation of the Company's MicroMill HT FIB systems at a customer site in
Thailand. As of June 30, 1998, ZMC maintained a staff of three service engineers
to support the Micrion installed systems.
CUSTOMER SUPPORT AND SERVICE
The Company maintains separate customer support and field service
organizations that work closely together to promote customer satisfaction. The
Company's customer support and field service personnel do not perform sales and
marketing functions. The customer support organization is a group of engineers,
resident at the Company's factory, dedicated to technical and logistical support
of the field engineers on a worldwide basis. The customer support group, as of
June 30, 1998, consisted of 26 employees, and has ready access to in-house
engineering, manufacturing and final test personnel to provide rapid and
knowledgeable support for the engineers maintaining customer equipment in the
field.
As of June 30, 1998, the field service group consisted of 38 field
engineers stationed around the world near the Company's installed systems. Each
engineer is assigned to specific customer sites. Service is provided at the
customer's discretion either under full service contracts where Micrion receives
monthly revenue and provides all the labor and spare parts necessary to maintain
system performance, or as on-call service where the customer is billed on a time
and materials basis for service work performed at the customer's site. A small
number of customers contract with the Company for telephone support of the
customers' system operation staff.
Since 1998, the Company has provided a customer support "call center"
to help customers with the answers, technical assistance and support they need.
In addition, the "help desk" operation of the call center provides greater
support and direction for the Company's field service representatives.
RESEARCH AND DEVELOPMENT
As of June 30, 1998, the Company's research and development effort
employed 54 scientists and engineers, 17 of whom have advanced technical
degrees. Both short- and long-term programs are underway to enhance existing
products and develop new products and technology. Current short-term research
and development programs include work to improve source lifetime, develop
improved columns that can produce smaller spots, expand the applicability of
ion-assisted chemical processes and enhance the materials analysis capabilities
of systems. Long-term research programs are underway to explore areas such as
advanced ion sources, beam focusing techniques and system architectures that
could lead to significant improvements in the capabilities
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of future FIB systems. In fiscal 1998, 1997 and 1996, the Company spent $6.3
million, $5.8 million and $4.2 million, respectively, on research and
development.
Research and development activities are enhanced by funded contracts
and strategic alliances with government agencies, major semiconductor
manufacturers and universities. Funded programs help provide support and
leverage for the Company's research and development efforts, allowing a larger
and more complete overall program than would be possible with internal funding
alone. Contracts are chosen in areas that are closely related to Micrion's main
business activities. The Company is currently involved in the final stages of a
funded program with ARPA. Under this program, the Company is developing gas
field ion source (GFIS) technology. This technology has the potential to produce
significant performance improvements in future FIB systems. Although the United
States government retains a license to use the technology developed under funded
contracts for its own internal purposes, the Company retains the exclusive right
for commercial development of the technology. In some cases, the funding of
research by ARPA is based upon needs identified by the semiconductor industry.
In fiscal 1998, 1997 and 1996, the Company received research and development
revenues of $2.1 million, $1.2 million and $1.2 million, respectively. Due to
pressures on US government budgets, funds available for research and development
programs have been reduced, and no new contracts were issued to the Company in
fiscal 1998, 1997 or 1996. The Company expects external research and development
funding to decrease in the future.
Technology licensing agreements are in effect with the Max Planck
Institut in Germany and certain large industrial companies. Cooperative
development programs are underway with the Department of Energy and a large
domestic semiconductor manufacturer. The Company believes that these
arrangements accelerate technology development and guide the directions the
Company takes in research and development toward those that are responsive to
current and future customer requirements. They also provide valuable insight
into the feasibility and market potential of long-range technology developments.
MANUFACTURING
Manufacturing of all Micrion products is done at the Company's facility
in Peabody, Massachusetts. FIB system manufacturing entails fabrication,
assembly, integration and test of components and subassemblies made by the
Company or purchased from suppliers. Key components such as ion sources and ion
focusing columns are designed and assembled in-house using parts fabricated both
internally and by outside suppliers. Other components and subassemblies are
either fabricated in-house or purchased if readily available. Most purchased
parts and assemblies are standard products. Although certain components and
subassemblies used in the Company's products are made to the Company's
specifications, some components and subassembly items, such as high voltage
power supplies, are obtained or are available from a limited number of
suppliers. Although the Company believes that it could develop alternative
sources of supply for all of the parts included in its systems, the Company
could experience significant delays in the shipment of its products if key
suppliers were unable to deliver product to the Company in a timely way.
The typical manufacturing cycle takes between four and six months
depending on the type and complexity of the system. The manufacturing operation
utilizes up-to-date techniques such as computerized materials release and
just-in-time delivery.
COMPETITION
Competition for the sale of Micrion's products is intense. FIB machines
compete against other methods and technologies, and there are a growing number
of FIB technology suppliers worldwide, all of which have greater financial and
technological resources or have greater strengths in certain technical or other
areas compared with Micrion. There can be no assurance that Micrion can maintain
competitiveness. Current principal competitors include firms that supply FIB
machinery, such as Seiko, FEI Company, Hitachi, JEOL and Schlumberger, and other
suppliers of semiconductor capital equipment, such as KLA/Tencor and Applied
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Materials. Individual competitors have strength in different areas, including
system features, geographic market presence, customer service and support, FIB
breadth of applications and price. While the Company competes effectively in the
sale of high-end, sophisticated systems, some competitors offer alternatives to
FIB machines, and others of its competitors compete on the basis of lower price
for less complex and less flexible systems. In addition, at any point in time, a
particular manufacturer may achieve technological advances that provide a
competitive advantage over others in the industry.
INTELLECTUAL PROPERTY
The Company believes that the success of its business depends more on
its technical innovation, marketing abilities and responsiveness to customer
requirements, than on patents, trademarks, copyrights and other intellectual
property rights. Nevertheless, the Company has a policy of seeking to protect
its intellectual property through patents, license agreements, confidential
disclosure agreements and trade secrets. The Company currently holds twelve U.S.
patents and a number of patents in foreign countries covering aspects of its
technology. The earliest any of these patents expires is 2004. Confidential
disclosure agreements are in place with the customers and other parties who have
a need or desire to exchange proprietary information with the Company. In
addition, the Company generally enters into confidentiality agreements with its
employees and limits access to its proprietary information. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's FIB systems or to obtain information that the Company regards
as proprietary. The laws of some foreign countries in which the Company sells or
may sell its products do not protect the Company's proprietary rights in the
products to the same extent as do the laws of the United States.
Licensing agreements are in effect with the Max Planck Institut
(Germany) and certain large commercial enterprises which give the Company rights
to use aspects of the technology of those organizations. Certain of these
arrangements are non-exclusive and terminable, and there can be no assurance
that the Company will be able to maintain these relationships or to initiate
similar relationships. The Company is not dependent on any licensed technology
for its present FIB systems and has developed alternative technological
solutions to those offered by the licensed technologies.
Various competitors of Micrion hold patents in FIB and related
technologies. From time to time, the Company has notified others that their
products may be infringing the patents of the Company.
EMPLOYEES
As of June 30, 1998, the company had a total of 250 full-time
employees, consisting of 55 in research, development and engineering, 130 in
manufacturing, customer support and quality assurance, 48 in sales and marketing
and 17 in general management, administration and finance. None of the Company's
employees is represented by a labor union and the Company has never experienced
a work stoppage, slowdown or strike. Management considers its relationship with
its employees to be excellent and employee turnover to be low.
The success of the Company's future operations depends in large part on
the Company's ability to attract and retain highly skilled technical, marketing
and management personnel. Certain of such personnel are in limited supply and
are difficult to attract and retain.
ITEM 2. PROPERTIES.
The Company's corporate headquarters and manufacturing and research and
development facility are located at One Corporation Way, Centennial Park,
Peabody, Massachusetts, where the Company occupies approximately 53,000 square
feet under a lease that expires in February 2005. The Company leases an
additional 38,000 square feet at Ten Technology Drive, Peabody, Massachusetts,
under a lease that expires in July 2001; the space is used as a warehouse for
inventory and spare parts in support of the Company's manufacturing and field
10
<PAGE> 11
service operations, to support an expanded customer service organization, and to
provide future expansion for manufacturing production. The Company also leases
field service and/or sales offices in Austin, Texas; San Jose, California;
Colorado Springs, Colorado; Feldkirchen, Germany; Tachikawa, Japan; and Bristol,
United Kingdom.
The Company believes that its existing facilities are adequate to meet
its requirements for at least the next twelve months.
ITEM 3. LEGAL PROCEEDINGS.
On August 2, 1996, an action was filed in the U.S. District court for
the District of Massachusetts against the Company, Nicholas P. Economou, a
director and officer of the Company, and David M. Hunter and Robert K.
McMenamin, officers of the Company. On September 9, 1996, another action was
filed in the same court against the Company, Dr. Economou, Messrs. Hunter and
McMenamin and Billy W. Ward, an officer of the Company. On December 6, 1996, the
plaintiffs in both actions filed an amended consolidated complaint. The
consolidated complaint does not contain a claim against Billy W. Ward. The
consolidated complaint purports to be brought on behalf of a class of purchasers
of the Company's common stock from April 26, 1996 through June 21, 1996. It
asserts claims for violations under the federal securities laws, alleging that
the Company made false and misleading statements to the public concerning the
nature of its sales agreement with a customer. The Company filed a motion to
dismiss the consolidated complaint for failure to state a claim. This motion was
denied on April 30, 1997. Thereafter, factual discovery was completed. The
Company has filed a motion for summary judgment to dismiss the case, which is
pending before the court. The Company believes the consolidated complaint to be
without merit and intends vigorously to continue to defend itself against the
claims. There can be no assurance, however, that the Company will be successful
in defending this lawsuit or that money damages, if awarded, would not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended June 30, 1998.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is traded on the Nasdaq National Market
System under the symbol "MICN." As of September 18, 1998, there were
approximately 120 holders of record and approximately 3,000 holders in street
name of the Company's Common Stock. The following table sets forth, for the
periods indicated, the high and low bid prices of the Common Stock, as reported
by Nasdaq. The bid prices quotations reflect interdealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
HIGH LOW
---- ---
1998
- ----
First Quarter.............................................. $25 1/4 $15 5/8
Second Quarter............................................. 27 1/2 14 3/8
Third Quarter.............................................. 16 9/16 10 7/8
Fourth Quarter............................................. 12 1/8 7 1/8
1997
- ----
First Quarter.............................................. $14 1/2 $ 8 3/4
Second Quarter............................................. 22 3/4 10 3/8
Third Quarter.............................................. 28 1/4 12 1/4
Fourth Quarter............................................. 19 11 1/2
DIVIDEND POLICY
The Company has not declared or paid cash dividends on its Common
Stock, presently intends to retain earnings for use in its business and does not
anticipate paying cash dividends in the foreseeable future. The Company's
current bank line of credit prohibits the payment of dividends, in cash or in
kind, without the bank's consent.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
For the years ended June 30,
---------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(Amounts in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Total revenue $54,657 $55,979 $39,536 $28,768 $20,011
(Loss) income from operations (3,336)(1) 5,009 3,611 2,666 1,966
Net (loss) income (2,840) 3,049 2,004(2) 3,217 1,717
Net (loss) income per share (.70) .72 .49 .91 .85
At year end:
Working Capital $29,899 $27,872 $26,577 $22,800 $8,726
Total assets 51,847 54,384 41,571 30,486 14,144
Long-term capital lease obligations 688 1,355 779 26 68
Total stockholders' equity 29,926 32,448 29,257 24,637 10,269
</TABLE>
- --------------------------
(1)Includes a one-time charge of $4,000, recorded during the fourth quarter, to
cover costs associated with asset valuation and inventory reserve adjustments.
(2)Includes a one-time litigation settlement charge of $2,685 during the fourth
quarter of fiscal 1996. See note 13 in Notes to Consolidated Financial
Statements.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table summarizes the Company's historical results of operations as
a percentage of total sales for fiscal 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total revenue 100% 100% 100%
Gross profit 30 38 38
Selling, general and administrative 23 19 18
Research and development 11 10 11
Employee severance and other one-time charges 2 - -
- ----------------------------------------------------------------------------------------------------------------------------------
Total operating expenses 36 29 29
(Loss) income from operations (6) 9 9
Other expense, net (2) (1) (6)
Income tax benefit (expense) 3 (3) 2
- ----------------------------------------------------------------------------------------------------------------------------------
Net (loss) income (5)% 5% 5%
==================================================================================================================================
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
Revenues. Total revenues decreased by 2% to $54.7 million for the year ended
June 30, 1998 from $56.0 million for the same period ended June 30, 1997. The
decrease was primarily due to a slowdown in the semiconductor and data storage
industries, which resulted in reduced customer capital spending for FIB systems.
For the year ended June 30, 1998, two customers represented 25% and 15% of total
revenues. The loss of one of these customers could have a material adverse
effect on the financial statements of the Company.
Product revenues primarily consisted of revenues from the sale of systems, but
also included spare and replacement parts and services provided with respect to
systems. Product revenues decreased 4% to $52.6 million for the year ended June
30, 1998 as compared to $54.8 million for the same period ended June 30, 1997.
The decrease was due to decreased sales of FIB systems resulting from a softness
in demand for semiconductor capital equipment. Although the Company continues to
see market acceptance of its FIB products, particularly the Process Verification
systems used by disk drive manufacturers and the Flip-Chip FIB systems used by
semiconductor manufacturers, the level of capital spending by customers
decreased in the second half of the fiscal year which significantly affected
product revenues.
Contract revenues increased 79% to $2.1 million for the year ended June 30, 1998
from $1.2 million for the same period ended June 30, 1997. The increase was due
to a new contract with a commercial customer to develop a future generation FIB
system which resulted in the Company recording $1.3 million of revenue in fiscal
1998 under this contract. Although the Company will receive contract revenue
from this customer during fiscal year 1999, the Company expects research and
development contract revenues not be a significant part of total revenues in the
future.
Gross Profit. Total gross profit decreased 22% to $16.6 million for the year
ended June 30, 1998 from $21.2 million for the same period ended June 30, 1997.
As a result of the slowdown in the semiconductor industry and the overall
worldwide reduction in customer capital spending, the Company recorded a charge
against operations of $4.0 million, which was recorded in the fourth quarter to
cover costs associated with asset valuation and inventory reserves for
obsolescence.
The Company's gross margin varies due to the product mix, distribution channels
and geographical location of customers. Gross profit on product revenues
decreased 24% to $16.0 million for the year ended June 30, 1998 from $21.0
million for the same period ended June 30, 1997. The decrease was primarily due
to the lower number of FIB system sales and also due to
14
<PAGE> 15
the special charges that were recorded to cost of sales. The gross margin on
product revenues, excluding the special charge of $4.0 million decreased to 38%
for the year ended June 30, 1998 from 38.3% for the year ended June 30, 1997.
Gross profit on contract revenues increased to $0.63 million for the year ended
June 30, 1998 as compared to $0.19 million for the same period ended June 30,
1997. The increase is due to a higher mix of commercial contract revenues during
the period, which generally yield a higher profit margin. The Company's gross
margin on contract revenues increased to 30.3% for the year ended June 30, 1998
from 16.8% for the year ended June 30, 1997. The increase was due to a higher
mix of contract revenues from commercial entities during the period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 20% to $12.6 million for the year ended June
30, 1998 from $10.5 million for the same period ended June 30, 1997. The
increase is primarily attributable to $1.4 million for additional personnel in
applications support and sales, $.075 million for customer support personnel to
support the expanded worldwide installed base of FIB systems and $0.2 million
for the creation of a subsidiary in the UK and a branch office in Taiwan.
Research and Development Expense. The Company's research and development expense
increased 9% to $6.3 million for the year ended June 30, 1998 from $5.8 million
for the same period ended June 30, 1997. This increase was due to the Company's
additional development activity for new products and enhancements and an
increase in the number of engineering and research employees during the year.
Research and development expense as a percentage of total revenues increased to
12% for the year ended June 30, 1998 from 10% for the same period ended June 30,
1997.
Employee Severance and Other One-time Charges. As a result of the slowdown in
both the semiconductor and data storage industries, the Company took steps to
reduce its expense levels and took a one-time charge of $998,000 in the third
fiscal quarter ended March 31, 1998. Employee severance of $398,000 included
costs of termination, employee assistance, COBRA health insurance and other
employee benefits as a result of a workforce reduction. Other one-time charges
of $600,000 consisted primarily of costs associated with asset valuation and
redirected engineering projects to meet the demands of complex integrated
circuits and disk drive components.
Other Expense, net. Other expense, net for the year ended June 30, 1998
consisted primarily of interest expense from the bank line of credit, long term
debt, and capital lease borrowings. The increase during fiscal year 1998 was due
to the entering into a term loan during the first quarter of fiscal 1998, which
resulted in increased interest expense of approximately $700,000.
Income Tax Benefit (Expense). The Company's effective tax rate for fiscal 1998
was 35%.
Year 2000. Management is aware of the potential software logic anomalies
associated with the year 2000 date change. The Company has taken steps to review
and analyze its information technology along with its non-information technology
systems in order to access the year 2000 change.
During fiscal 1998, the Company completed an inventory of its computer systems,
which included questionnaires regarding hardware and software logic. The Company
also analyzed its internal manufacturing, accounting, and management information
systems and believes that its internal systems addresses all core year 2000
issues.
In the first half of fiscal 1999, the Company has requested documentation in the
form of questionnaires from its vendors and suppliers to determine the adequacy
of the year 2000 date change. Because the assessment is not complete at this
time, the Company is unable to determine vendor compliance with year 2000. To
date, the Company has not received any notification as to a material deficiency
from any vendor or supplier.
The Company has also assessed the year 2000 compliance regarding the products it
manufactures. A program is underway to test each of the products sold by the
Company to customers following standards suggested to Sematech. While testing
will not be completed on all products until early in calendar 1999, the Company
has not encountered any significant issues based upon the preliminary data
completed.
At this time, the Company expects the cost of addressing all year 2000 issues
will not to have a material effect upon the Company's financial position,
results of operations, or cash flows in future periods.
FISCAL 1997 COMPARED TO FISCAL 1996
Revenues. Total revenues increased by 42% to $56.0 million for the year ended
June 30, 1997 from $39.5 million for the same period ended June 30, 1996. The
increase was primarily due to increased product revenues as a result of
increased sales of FIB systems.
15
<PAGE> 16
Product revenues consist of revenues from the sale of systems, spare and
replacement parts and services provided with respect to systems. Product
revenues increased 43% to $54.8 million for the year ended June 30, 1997 as
compared to $38.3 million for the same period ended June 30, 1996. The increase
was due to increased sales of FIB systems resulting from increased spending by
semiconductor manufacturing companies and continued market acceptance of
Micrion's FIB products, particularly the MicroMill HT head trimming systems used
by disk drive manufacturers and the Flip-Chip FIB systems used by semiconductor
manufacturers.
Contract revenues decreased 7% to $1.16 million for the year ended June 30, 1997
from $1.25 million for the same period ended June 30, 1996. The decrease was due
to the reduction of spending on a government contract during fiscal 1997. The
Company expects research and development contract revenue to decrease in the
future and not be a significant part of total revenues as a result of the
reduction of spending by the government for research and development contracts.
Gross Profit. Total gross profit increased 41% to $21.2 million for the year
ended June 30, 1997 from $15.0 million for the same period ended June 30, 1996.
This increase was primarily due to an increased number of shipments of FIB
systems during fiscal 1997.
The Company's gross margin varies due to the product mix, distribution channels
and geographical location of customers. Gross profit on product revenues
increased 40% to $21.0 million for the year ended June 30, 1997 from $15.0
million for the same period ended June 30, 1996. The increase was primarily due
to the higher number of FIB system sales. The gross margin on product revenues
decreased to 38% for the year ended June 30, 1997 from 39% for the year ended
June 30, 1996.
Gross profit on contract revenues increased to $0.19 million for the year ended
June 30, 1997 as compared to $0.005 million for the same period ended June 30,
1996. The increase is due to a higher mix of commercial contract revenues during
the period, which generally yield a higher profit margin. The Company's gross
margin on contract revenues increased to 17% for the year ended June 30, 1997
from 0.4% for the year ended June 30, 1996. The increase was due to a higher mix
of contract revenues from commercial entities during the period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses increased 46% to $10.5 million for the year ended June
30, 1997 from $7.2 million for the same period ended June 30, 1996. The increase
is primarily attributable to additional personnel in applications support,
sales, the installation of a customer call center, increases in customer support
personnel to support the expanded installed base of FIB systems and the
expansion of field service operations in Japan and Europe.
Research and Development Expense. The Company's research and development expense
increased 36% to $5.8 million for the year ended June 30, 1997 from $4.2 million
for the same period ended June 30, 1996. This increase was due to the Company's
additional development activity for new products and enhancements and an
increase in the number of engineering and research employees during the year.
Research and development expense as a percentage of total revenues decreased to
10% for the year ended June 30, 1997 from 11% for the same period ended June 30,
1996.
Other Income and Expense. Other income and expense for the year ended June 30,
1997 consists primarily of interest expense from the bank line of credit and
capital lease borrowings. Also, interest income decreased to $0.16 million for
the period ended June 30, 1997 from $0.22 million for the same period ended June
30, 1996. The decrease is primarily due to a lower average cash position during
the period.
Income Tax Expense. The Company's effective tax rate for fiscal 1997 was 35%.
LIQUIDITY AND CAPITAL RESOURCES
The Company had $3.3 million in cash and cash equivalents at June 30, 1998, an
increase of $0.7 million from June 30, 1997.
In fiscal 1998, net cash used by operating activities amounted to $3.0 million
and consisted of a decrease in inventories offset in part by a decrease in
accounts payable and accrued expenses. The Company's inventories decreased $3.3
million as a result of a non-cash special charge booked to reserve against
inventory values. Accounts payable decreased due to management's decision to
reduce inventory purchases during the downturn in both the semiconductor and
data storage industries.
Investing activities in fiscal 1998 used $0.7 million, consisting primarily of
capital expenditures related to customer support, research and development and
manufacturing functions.
Net cash provided by financing activities in fiscal 1998 was $4.3 million and
consisted of $8.0 million from the proceeds of a long-term loan, offset
primarily by a repayment of $3.3 million against the outstanding balance on the
Company's working
16
<PAGE> 17
capital line of credit. At June 30, 1998, the Company had total debt outstanding
of $13.0 million, which comprised $3.6 million related to the bank line of
credit, $1.4 million related to capitalized lease obligations and $8.0 million
related to the long-term loan. On September 22, 1998, the Company re-negotiated
the long term debt and the line of credit with the bank. See Note 16 of the
Notes to Consolidated Financial Statements.
The Company's existing bank line of credit provides for borrowings of up to
$10.0 million. The bank line of credit expires on December 1, 1998 and is
secured by the Company's assets and intellectual property. The Company may
borrow up to the lesser of (i) $10 million or (ii) an amount equal to the sum of
80% of eligible accounts receivables and $2 million of eligible inventory. Under
the terms of the line of credit, the Company must maintain a current ratio of
not less than 1.75, a minimum net worth of $28.7 million, a debt to net worth
ratio of not less than 1.25, a quick ratio of not less than 1.25, a cash flow
leverage ratio of not more than 3.0, a debt service ratio of not less than 1.25,
and a net profit of not less than $3.0 million. As of June 30, 1998, the Company
was in violation of the profitability covenant, the cash flow leverage covenant
and the debt service covenant. The Company has received a waiver of such
violations from the bank. See Notes 6 and 16 of the Notes to Consolidated
Financial Statements.
The Company believes that existing cash balances, together with its available
and expected lines of credit, will be sufficient to finance the Company's
operations and meet its foreseeable cash requirements at least through fiscal
1999.
OTHER
At June 30, 1998, the Company had available for financial statement and federal
income tax purposes tax credit carryforwards of approximately $480,000. The tax
credit carryforwards expire in varying amounts in the years 2003 through 2008.
See Note 11 of the Notes to Consolidated Financial Statements.
Significant portions of the Company's revenues are subject to the risks
associated with international sales; For the year ended June 30, 1998, 62% of
the Company's revenues were international sales. Although the Company's prices
are generally denominated in United States currency, customers in foreign
countries usually evaluate purchases of the Company's products on the purchase
price expressed in the customers' currencies. Therefore, changes in foreign
currency exchange rates may adversely affect the sale of the Company's products.
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Under this concept, certain revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. SFAS 130, which becomes effective for the Company in
its fiscal year ending June 30, 1999, is not expected to have a material impact
on the consolidated financial statements of the Company. The only additional
item currently to be included in comprehensive income is the Company's
cumulative translation adjustment.
In March, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The statement is effective for
fiscal years beginning after December 15, 1998. Earlier application is
encouraged in fiscal years for which annual financial statements have not been
issued. The statement defines which costs of computer software developed or
obtained for internal use are capital and which costs are expensed. The Company
will adopt SOP 98-1 in fiscal 2000. The adoption of SOP 98-1 is not expected to
have a material impact on the consolidated financial statements.
In April, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities." The statement is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company will adopt SOP 98-5
in fiscal year 2000. The adoption of SOP 98-5 is not expected to have a material
impact on the consolidated financial statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company will adopt SFAS 133 in
fiscal year 2000. The adoption of SFAS 133 is not expected to have a material
impact on the consolidated financial statements.
17
<PAGE> 18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Micrion Corporation:
We have audited the accompanying consolidated balance sheets of Micrion
Corporation and subsidiaries as of June 30, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended June 30, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Micrion Corporation
and subsidiaries as of June 30, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
August 10, 1998, except for footnote 16,
which is as of September 22, 1998
18
<PAGE> 19
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
1998 1997
----------- -----------
ASSETS (note 6)
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $ 3,349,100 $ 2,676,500
Accounts receivable (notes 3, 9 and 10) 18,303,300 18,755,200
Inventories (note 4) 21,689,500 24,986,200
Prepaid expenses and other current assets 635,400 668,200
Net deferred income taxes (note 11) 3,156,000 1,367,200
- ---------------------------------------------------------------------------------------------------------------------------
Total current assets 47,133,300 48,453,300
- ---------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (notes 5 and 7) 4,711,000 5,821,000
OTHER ASSETS, net 3,100 109,500
- --------------------------------------------------------------------------------------------------------------------------
Total assets $51,847,400 $54,383,800
===========================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable to bank (notes 6 and 16) $ 3,605,000 $ 6,855,000
Current portion of long-term debt (notes 6 and 16) 4,000,000 --
Accounts payable 2,681,700 7,029,900
Accrued expenses 3,566,000 4,575,100
Accrued warranty expenses 1,499,300 1,211,600
Current installments of obligations under capital leases (note 7) 668,000 658,700
Customer deposits and deferred revenue 1,213,900 251,000
- ---------------------------------------------------------------------------------------------------------------------------
Total current liabilities 17,233,900 20,581,300
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt, net of current portion (notes 6 and 16) 4,000,000 --
Obligations under capital leases, net of current installments (note 7) 687,700 1,354,600
COMMITMENTS AND CONTINGENCIES (notes 7 and 14)
STOCKHOLDERS' EQUITY (note 8):
Preferred stock, no par value; authorized 5,000,000 shares -- --
Common stock, no par value; authorized 12,300,000 shares 31,825,500 31,551,000
(Accumulated deficit) retained earnings (1,963,800) 876,600
Other equity 64,100 20,300
- ---------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 29,925,800 32,447,900
- ---------------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $51,847,400 $54,383,800
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE> 20
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the years ended June 30,
1998 1997 1996
Revenues:
<S> <C> <C> <C>
Product revenues (notes 9 and 10) $52,583,400 $54,822,700 $38,290,000
Contract revenues 2,073,800 1,156,600 1,246,200
- ---------------------------------------------------------------------------------------------------------------------------
Total revenues 54,657,200 55,979,300 39,536,200
- ---------------------------------------------------------------------------------------------------------------------------
Cost of revenues:
Cost of product revenues 36,626,100 33,782,700 23,270,100
Cost of contract revenues 1,446,100 962,400 1,241,700
- ---------------------------------------------------------------------------------------------------------------------------
Total cost of revenues 38,072,200 34,745,100 24,511,800
- ---------------------------------------------------------------------------------------------------------------------------
Gross profit 16,585,000 21,234,200 15,024,400
Operating expenses:
Selling, general and administrative expenses 12,595,400 10,449,500 7,179,000
Research and development expenses 6,326,900 5,775,800 4,234,500
Employee severance and other one-time charges 998,300 -- --
- ---------------------------------------------------------------------------------------------------------------------------
Total operating expenses 19,920,600 16,225,300 11,413,500
- ---------------------------------------------------------------------------------------------------------------------------
(Loss) income from operations (3,335,600) 5,008,900 3,610,900
Other (expense) income:
Litigation settlement expense (note 13) -- -- (2,684,500)
Interest income 200,900 158,000 223,300
Interest expense (1,192,900) (471,600) (93,300)
Other (41,800) 2,500 70,400
- ---------------------------------------------------------------------------------------------------------------------------
Total other expense (1,033,800) (311,100) (2,484,100)
- ---------------------------------------------------------------------------------------------------------------------------
(Loss) income before income taxes (4,369,400) 4,697,800 1,126,800
Benefit (provision) for income taxes (note 11) 1,529,000 (1,648,600) 877,300
- ---------------------------------------------------------------------------------------------------------------------------
Net (loss) income $ (2,840,400) $ 3,049,200 $ 2,004,100
===========================================================================================================================
(Loss) earnings per share:
Basic $ (.70) $ .76 $ .51
===========================================================================================================================
Diluted $ (.70) $ .72 $ .49
===========================================================================================================================
Weighted average number of shares:
Basic 4,056,700 4,036,400 3,923,600
===========================================================================================================================
Diluted 4,056,700 4,218,800 4,077,200
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 21
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
RETAINED
EARNINGS OTHER TOTAL
COMMON STOCK (ACCUMULATED EQUITY STOCKHOLDERS'
SHARES AMOUNT DEFICIT) (DEFICIT) EQUITY
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 3,901,326 $ 28,814,400 $ (4,176,700) $ (700) $ 24,637,000
Issuance of common stock
pursuant to employee
stock purchase plan 6,536 58,800 -- -- 58,800
Issuance of common stock
pursuant to employee
stock option plan 1,750 19,100 -- -- 19,100
Issuance of common stock
pursuant to settlement
of litigation (note 13) 119,202 2,534,500 -- -- 2,534,500
Effect of foreign currency
translation -- -- -- (45,500) (45,500)
Decrease in loans to
shareholders -- -- -- 33,000 33,000
Amortization of unearned
compensation (note 8) -- -- -- 15,800 15,800
Net income -- -- 2,004,100 -- 2,004,100
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1996 4,028,814 31,426,800 (2,172,600) 2,600 29,256,800
Issuance of common stock
pursuant to employee
stock purchase plan 10,217 107,400 -- -- 107,400
Issuance of common stock
pursuant to employee
stock option plan 1,531 16,800 -- -- 16,800
Effect of foreign currency
translation -- -- -- 13,700 13,700
Amortization of unearned
compensation (note 8) -- -- -- 4,000 4,000
Net income -- -- 3,049,200 -- 3,049,200
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 1997 4,040,562 31,551,000 876,600 20,300 32,447,900
Issuance of common stock
pursuant to employee
stock purchase plan 13,604 181,300 -- -- 181,300
Issuance of common stock
pursuant to employee
stock option plan 8,633 93,200 -- -- 93,200
Effect of foreign currency
translation -- -- -- 42,700 42,700
Amortization of unearned
compensation (note 8) -- -- -- 1,100 1,100
Net loss -- -- (2,840,400) -- (2,840,400)
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 4,062,799 $31,825,500 $(1,963,800) $64,100 $29,925,800
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 22
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended June 30,
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,840,400) $ 3,049,200 $ 2,004,100
Adjustments to reconcile net income to net cash
used by operating activities:
Depreciation and amortization 1,946,700 1,596,400 795,800
Unearned compensation 1,100 4,000 15,800
(Increase) decrease in deferred income taxes (1,788,900) 448,800 (1,346,400)
Litigation settlement -- -- 2,534,500
Changes in operating assets and liabilities:
Accounts receivable 451,600 (7,653,800) (1,380,500)
Inventories 3,296,700 (2,505,200) (11,908,000)
Prepaid expenses and other current assets 38,000 (41,900) (361,600)
Accounts payable (4,348,200) 557,200 3,198,000
Accrued expenses (1,009,100) 1,679,000 1,233,100
Accrued warranty expenses 280,200 (34,500) 717,600
Customer deposits and deferred income 962,900 (138,000) 33,500
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by operating activities (3,009,400) (3,038,800) (4,464,100)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchase of property and equipment (1,767,800) (2,914,900) (1,705,000)
Disposition of property and equipment 1,117,500 -- --
Increase in other assets (82,000) (42,000) (1,100)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (732,300) (2,956,900) (1,706,100)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from capital lease obligations -- 494,400 1,106,600
Repayments of capital lease obligations (659,200) (564,000) (147,700)
Net (repayments) borrowings from line of credit (3,250,000) 6,515,000 340,000
Net proceeds from long-term debt issuance 7,960,000 -- --
Proceeds from sale of common stock, net 274,500 124,000 77,900
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 4,325,300 6,569,400 1,376,800
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 89,000 21,600 23,500
- ---------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 672,600 595,300 (4,769,900)
Cash and cash equivalents, beginning of year 2,676,500 2,081,200 6,851,100
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 3,349,100 $ 2,676,500 $ 2,081,200
===========================================================================================================================
SUMMARY OF NONCASH FINANCING TRANSACTIONS:
Equipment acquired under capital lease -- $ 1,058,500 $ 689,300
===========================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 1,131,600 $ 440,000 $ 56,400
===========================================================================================================================
Income taxes $ 661,000 $ 953,000 $ 154,100
===========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS
Micrion Corporation (the "Company") and its subsidiaries are engaged in the
development, production and marketing of capital equipment used in the
manufacturing and processing of semiconductor and other high technology devices.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of Micrion
Corporation and its wholly owned subsidiaries, Micrion Japan Corporation KK,
Micrion GmbH, Micrion Corporation Limited and Micrion Foreign Sales Corporation.
All significant intercompany balances and transactions have been eliminated in
consolidation.
B. Inventories
Inventories are stated at the lower of cost or market (net realizable value).
Cost is determined using the first-in, first-out (FIFO) method.
C. Revenue Recognition
Product revenues are recorded at the time of factory acceptance by the customer,
with the exception of certain systems with significant engineering costs, which
are accounted for under the percentage-of-completion accounting method. Sales of
spare parts are recorded at the time of shipment and maintenance service
revenues are billed in advance as deferred revenue and are recognized as the
service is performed.
Contract revenues are accounted for under the percentage-of-completion
accounting method. Losses are recognized in full when they become known.
D. Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of
property and equipment, leasehold improvements and assets under capital leases
are provided by straight-line or accelerated methods over the estimated useful
lives of the respective assets as follows:
Furniture and fixtures 7 - 10 years
Computer, engineering and production equipment 3 - 7 years
Sales demonstration systems 5 years
Leasehold improvements 5 - 10 years
Property under capital leases 3 - 5 years
License fees, which are included in other assets, are amortized using the
straight-line method over their estimated useful life, generally five years.
In accordance with Financial Accounting Standards Board No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," the Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If it is determined that the carrying amount of an asset cannot
be fully recovered, an impairment loss is recognized.
E. Stock-Based Compensation
In 1997, the Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation," (SFAS 123), which established
financial accounting and reporting standards for stock-based employee
compensation plans. As permitted by SFAS 123, the Company measures compensation
cost in accordance with Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." Therefore, the adoption of SFAS 123 was not
material to the Company's financial condition or results of operations. However,
the pro forma impact on net income (loss) has been disclosed in the Notes to
Consolidated Financial Statements as required by SFAS 123.
F. Research and Development
Expenditures for research and development are charged against operations as
incurred. For the years ended June 30, 1998, 1997 and 1996, aggregate research
and development costs were $7,313,200, $6,439,300 and $5,132,100, respectively,
including $986,300, $663,500 and $897,600, respectively, of costs recovered
under research and development contracts.
G. Foreign Currency Translation
Assets and liabilities of the Company's foreign operations are translated into
U.S. dollars at the exchange rate in effect at the balance sheet date, and
revenue and expenses are translated at average rates in effect during the
period. The resulting translation adjustment is reflected within other equity on
the consolidated balance sheets. Transaction gains and losses are reflected in
the consolidated statements of operations and are immaterial.
23
<PAGE> 24
H. Net (Loss) Earnings Per Share
In December 1997, the Company adopted Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share," (SFAS 128). All previously reported
earnings per share information presented has been restated to reflect the impact
of adopting SFAS 128.
Under SFAS 128, basic net (loss) earnings per common share is computed by
dividing net (loss) earnings available to common stockholders by the weighted
average number of common shares outstanding for the period. Diluted net (loss)
earnings per common share reflect the maximum dilution that would have resulted
from the assumed exercise and share repurchase related to dilutive stock options
and is computed by dividing net (loss) earnings by the weighted average number
of common shares and all dilutive securities outstanding.
I. Cash Equivalents
Cash equivalents consist of short-term investments with original maturities of
three months or less.
J. Fair Value of Financial Instruments
The carrying value for cash and cash equivalents, accounts receivable, accounts
payable, capital lease obligations and short-term debt approximates fair value
because of the short maturity of these instruments. Long term debt approximates
fair value due to variable interest rates.
K. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of
credit risk consist primarily of temporary cash and cash equivalents and
accounts receivable. The Company invests its excess cash primarily in high
quality securities of short duration and limits the amount of credit exposure to
any one financial institution. The Company also provides credit, in the normal
course of business, primarily to large multinational corporations. Credit risk
on trade receivables is minimized as the result of the strong financial position
of the Company's customer base.
L. Use of Estimates
The preparation of consolidated 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 consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
M. New Accounting Pronouncements
In June, 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income," which establishes standards for reporting and
display of comprehensive income and its components in a full set of
general-purpose financial statements. Under this concept, certain revenues,
expenses, gains and losses recognized during the period are included in
comprehensive income, regardless of whether they are considered to be results of
operations of the period. SFAS 130, which becomes effective for the Company in
its fiscal year ending June 30, 1999, is not expected to have a material impact
on the consolidated financial statements of the Company. The only additional
item currently to be included in comprehensive income is the Company's
cumulative translation adjustment.
In March, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." The statement is effective for
fiscal years beginning after December 15, 1998. Earlier application is
encouraged in fiscal years for which annual financial statements have not been
issued. The statement defines which costs of computer software developed or
obtained for internal use are capital and which costs are expensed. The Company
will adopt SOP 98-1 in fiscal 2000. The adoption of SOP 98-1 is not expected to
materially impact the consolidated financial statements.
In April, 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-5 ("SOP 98-5"), "Reporting on the Costs of Start-Up
Activities." The statement is effective for fiscal years beginning after
December 15, 1998. The statement requires costs of start-up activities and
organization costs to be expensed as incurred. The Company will adopt SOP 98-5
in fiscal year 2000. The adoption of SOP 98-5 is not expected to materially
impact the consolidated financial statements.
In June, 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." The statement
requires companies to recognize all derivatives as either assets or liabilities,
with the instruments measured at fair value. The accounting for changes in fair
value, gains or losses, depends on the intended use of the derivative and its
resulting designation. The statement is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company will adopt SFAS 133 in
fiscal year 2000. Adoption of SFAS 133 is not expected to have a material impact
on the consolidated financial statements.
24
<PAGE> 25
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of:
<TABLE>
<CAPTION>
June 30,
1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
Trade accounts $16,842,200 $15,655,400
Billed:
Research and development
contracts in progress 50,600 190,700
Unbilled:
Product revenues with significant
engineering costs 1,320,400 2,791,000
Research and development
contracts in progress 90,100 118,100
- ------------------------------------------------------------------------
Total receivables $18,303,300 $18,755,200
========================================================================
</TABLE>
4. INVENTORIES
Inventories consist of:
<TABLE>
<CAPTION>
June 30,
1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Raw materials and
manufactured parts, net $ 9,217,200 $14,429,800
Work in process 7,829,000 8,863,600
Finished goods 4,643,300 1,692,800
- --------------------------------------------------------------
Total inventories $21,689,500 $24,986,200
==============================================================
</TABLE>
5. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
June 30,
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Furniture and fixtures $ 820,700 $ 708,400
Computer, engineering and
production equipment 6,317,900 5,872,400
Sales demonstration systems -- 345,200
Leasehold improvements 590,200 536,900
Property under capital lease 3,464,300 3,473,300
- ---------------------------------------------------------------
11,193,100 10,936,200
Accumulated depreciation and
amortization (6,482,100) (5,115,200)
- ---------------------------------------------------------------
Net property and equipment $4,711,000 $5,821,000
===============================================================
</TABLE>
At June 30, 1998 and 1997, accumulated amortization for property under capital
lease was $2,172,700 and $1,494,100 respectively.
6. INDEBTEDNESS
On November 17, 1995, the Company modified its line of credit agreement with
Fleet Bank, N.A. to provide borrowings up to $5.0 million. Amounts borrowed bore
interest at the bank's prime rate. On May 16, 1996, the Company entered into a
second modification of the line of credit agreement to provide borrowings up to
$10.0 million. Amounts borrowed bear interest at the bank's prime rate (8.5% at
June 30, 1998). At June 30, 1998 and 1997, $3,605,000 and $6,855,000,
respectively, were outstanding against the line of credit.
The bank line of credit expires on December 1, 1998 and is secured by
the Company's assets and intellectual property. The Company may borrow up to the
lesser of (i) $10 million or (ii) an amount equal to the sum of 80% of eligible
accounts receivable and $2 million of eligible inventory. Under the terms of the
agreement, the Company must maintain certain covenants. As of June 30, 1998 the
Company is in violation of three covenants. The Company has received a waiver
for such covenant violations. See note 16.
In July 1997, the Company entered into a secured long-term debt loan agreement
with Fleet Bank, N.A. for $8,000,000. The loan is secured by the Company's
assets and intellectual property. The term loan bears interest at the bank's
prime rate plus 1.5% (10% at June 30, 1998). This agreement with the bank calls
for eight quarterly payments of $1,000,000 starting in the quarter ending
September 30, 1998 through the quarter ending June 30, 2000. The proceeds were
used to pay down a portion of the then outstanding balance on the line of
credit. See note 16.
7. LEASES
The Company occupies facilities under operating leases. During fiscal 1995, the
Company's headquarters lease was renegotiated with the expiration date extended
to February 2005. During fiscal 1997, the Company entered into a second
operating lease, expiring in July 2001, to expand its manufacturing capacity.
Rent expense was approximately $877,800, $832,500 and $592,900 for the years
ended June 30, 1998, 1997 and 1996, respectively. Capital lease obligations
consist of amounts due under equipment leases expiring in fiscal 2001. Property
25
<PAGE> 26
under capital lease consists primarily of computers, engineering equipment,
marketing demonstration systems and related software.
At June 30, 1998, future minimum lease payments under these non-cancelable
agreements are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending June 30: Lease Lease
- ------------------------------------------------------------------
<S> <C> <C>
1999 $737,300 $1,933,500
2000 583,100 1,919,500
2001 134,500 1,611,300
2002 -- 1,158,100
2003-2005 -- 1,342,600
- ------------------------------------------------------------------
Minimum future lease payments 1,454,900 $7,965,000
==================================================================
Less amounts representing interest (99,200)
- ------------------------------------------------------------------
Present value of minimum
future lease payments 1,355,700
Less current installments (668,000)
- ------------------------------------------------------------------
Obligations under capital lease,
net of current installments $687,700
==================================================================
</TABLE>
In addition, the Company is responsible for additional operating expenses
incurred by the lessor under the operating leases. Such expenses are
approximately $185,000, annually.
8. STOCKHOLDERS' EQUITY
A. Preferred Stock
On March 31, 1994, the stockholders approved the creation of a new undesignated
class of preferred stock consisting of 5,000,000 shares, no par value. No shares
of this class of preferred stock have been issued as of June 30, 1998.
B. Common Stock
In August 1993, the Board of Directors voted to adopt the 1993 Common Stock
Incentive Plan which provides for the award of up to 500,000 shares of common
stock to key employees and consultants. As of June 30, 1998, 429,698 shares of
stock have been awarded. The shares vest over a period of two to five years
depending on the employee's years of service with the Company. For the years
ended June 30, 1998, 1997 and 1996, the Company recorded $1,100, $4,000 and
$15,800, respectively, as compensation expense in connection with these awards.
In conjunction with its 1994 initial public offering (IPO), the Company issued
warrants to the underwriters for the purchase of an aggregate of 100,000 shares
of common stock at a price of $6.60 per share. The warrants are exercisable
beginning May 10, 1995 through May 10, 1999. As of June 30, 1998, none have been
exercised.
C. Rights Agreement
On August 4, 1997, the Company distributed a dividend of one purchase right
("Right") for every outstanding share of the Company's common stock. The terms
of the Rights are set forth in a Rights Agreement dated as of July 30, 1997 (the
"Rights Agreement") between the Company and BankBoston, N.A. The Rights
Agreement provides for the issuance of one Right for every share of common stock
issued and outstanding on August 4, 1997 and for each share of
<TABLE>
<CAPTION>
Stock option transactions for the Omnibus Stock Plan were as follows: Weighted average
Shares of exercise price of
common stock shares under plan
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at June 30, 1995 163,390 $11.09
- ---------------------------------------------------------------------------------------------------------------------------
Granted 240,000 10.65
Exercised (1,750) 10.91
Canceled (875) 10.75
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1996 400,765 10.83
- ---------------------------------------------------------------------------------------------------------------------------
Granted 63,000 10.00
Exercised (1,531) 10.95
Canceled (1,219) 10.93
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1997 461,015 9.35
- ---------------------------------------------------------------------------------------------------------------------------
Granted 443,800 15.00
Exercised (8,633) 10.80
Canceled (237,211) 18.68
- ---------------------------------------------------------------------------------------------------------------------------
Outstanding at June 30, 1998 658,971 $10.73
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
The following statement summarizes information concerning currently outstanding
and exercisable options as of June 30, 1998:
<TABLE>
<CAPTION>
Options outstanding Options exercisable
Weighted average
Remaining Weighted Weighted
Range of Number contractual life average Number average
Exercise prices outstanding (years) exercise price exercisable exercise price
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 9.50-$10.75 290,543 7.60 $10.42 185,448 $10.48
$10.76-$20.00 368,038 8.43 10.96 160,289 11.04
$20.01-$30.00 390 1.93 30.00 390 30.00
- ---------------------------------------------------------------------------------------------------------------------------
658,971 346,127
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
common stock which is issued or sold after that date and prior to the
Distribution Date (as defined below).
Each Right entitles the holder to purchase from the Company one one-thousandth
of a share of a Series A Junior Preferred Stock, $.01 par value, of the Company,
at a price of $90 per one one-thousandth of a share, subject to the adjustments
in certain events. The Rights will expire on July 30, 2007, or upon the earlier
redemption of the Rights, and are not exercisable until the Distribution Date.
The Rights will separate from the Common Stock on the Distribution Date. Unless
otherwise determined, the Distribution Date will occur on the earlier of (i) the
tenth business day following the date of a public announcement that a person has
acquired or obtained the rights to acquire beneficial ownership of 15% or more
of the outstanding shares of Common Stock or (ii) the tenth business day
following commencement of a tender offer or exchange offer that would result in
any person owning 15% or more of the outstanding Common Stock.
D. Stock Options and Stock Purchase Plan
On May 8, 1990, the Company adopted the 1990 Nonqualified Stock Option Plan.
Four hundred eighty-five (485) shares of common stock are reserved for issuance
under this plan. At June 30, 1998, 390 options to purchase common stock at $30
per share were outstanding, all of which are exercisable. There has been no
activity under the plan in fiscal 1998, 1997 or 1996.
On March 31, 1994, the Company's stockholders approved the 1994 Omnibus Stock
Plan which provided for the issuance of up to 200,000 shares of common stock
pursuant to the grant of incentive stock options to employees and the grant of
nonqualified options or restricted stock to employees, consultants, directors
and officers of the Company. The stockholders also approved the 1994 Employee
Stock Purchase Plan which provides for the sale of up to 100,000 shares of
common stock to eligible employees at a price at the lesser of 85% of fair
market value at either the date of grant or the date of exercise. On November 3,
1995 and November 3, 1997, the Company's shareholders approved amendments to the
Company's 1994 Omnibus Stock Plan increasing the aggregate number of shares
issuable under such plan from 200,000 to 500,000 shares and from 500,000 to
1,000,000 shares, respectively.
On November 17, 1994, the Company's stockholders approved the 1994 Non-Employee
Director Stock Option Plan (the "Director Plan"). The Director Plan provides for
the issuance of a maximum amount of 50,000 shares of common stock pursuant to
the grant of stock options to eligible directors of the Company at an exercise
price equal to the fair market value of the common stock on the date of grant.
As of June 30, 1998, 30,000 options have been granted under this plan at a
weighted average exercise price of $14.63 per share, of which 25,625 shares were
exercisable and none of which have been exercised.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" and related interpretations in accounting for its
stock option and employee stock purchase plans. Accordingly, no compensation
expense has been recognized in the consolidated financial statements for such
plans. Had compensation cost for the Company's stock option plans been
determined based upon the fair value at the grant date for awards under these
plans consistent with the methodology prescribed under SFAS 123, "Accounting for
Stock-based Compensation," the Company's net income would have been reduced to
the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Net (loss) income:
As reported ($2,840,400) $3,049,200
Pro forma (3,206,100) 2,571,900
</TABLE>
27
<PAGE> 28
The following assumptions were used in the calculation of these values for
fiscal 1998 and 1997: volatility of 82.01% and 177.3%, risk free interest rate
of 6.00 and 5.89% and expected life of 5.0 and 4.0 years, respectively. The
effect of applying SFAS 123 as shown in the above pro forma disclosure is not
representative of the pro forma effect of net income in future years because it
does not take into consideration pro forma compensation expense related to
grants made prior to fiscal 1996.
D. EPS Reconciliation
The reconciliation of the numerators and denominators of the basic and diluted
net (loss) income per common share computations for the Company's reported net
(loss) income is as follows:
<TABLE>
<CAPTION>
Net (loss) Per Share
Year ended June 30, 1998 income Shares Amount
- -----------------------------------------------------------------
<S> <C> <C> <C>
Basic net loss per share $(2,840,400) 4,056,700 ($0.70)
Net additional common shares
upon exercise of common
stock options -- -- --
- -----------------------------------------------------------------
Diluted net loss per share $(2,840,400) 4,056,700 ($0.70)
=================================================================
Year ended June 30, 1997
Basic net income per share $3,049,200 4,036,400 $0.76
Net additional common shares
upon exercise of common
stock options -- 182,400 --
- -----------------------------------------------------------------
Diluted net income per share $3,049,200 4,218,800 $0.72
=================================================================
Year ended June 30, 1996
Basic net income per share $2,004,100 3,923,600 $0.51
Net additional common shares
upon exercise of common
stock options -- 153,600 --
- -----------------------------------------------------------------
Diluted net income per share $2,004,100 4,077,200 $0.49
=================================================================
</TABLE>
For the year ending June 30, 1998, net additional common shares upon exercise of
common stock options outstanding of 208,300 were not included in the
calculations of diluted net (loss) income per share because the effects were
anti-dilutive.
9. MARKETING AGREEMENT
In March 1988, the Company entered into a marketing agreement with a Japanese
distributor, Tokyo Electron Limited ("TEL"). The agreement grants TEL the right
to market, distribute, sell and service in Japan the Company's focused ion beam
products. The agreement will remain in force unless terminated by mutual written
agreement or 60 days written notice by either party. For the years ended June
30, 1998, 1997 and 1996, sales of $13,578,300, $8,321,500 and $8,044,700,
respectively, were made to TEL. At June 30, 1998 and 1997, receivables of
$1,468,800 and $2,151,000, respectively, were due.
10. GEOGRAPHIC AND CUSTOMER INFORMATION
The following table summarizes the geographic distribution of the Company's
revenues:
<TABLE>
<CAPTION>
For the years ended June 30,
Total revenue: 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
North America $20,978,000 $20,363,600 $12,402,200
Far East exports 23,561,800 29,158,300 23,260,800
Other foreign exports 10,117,400 6,457,400 3,873,200
- ---------------------------------------------------------------
Total revenues $54,657,200 $55,979,300 $39,536,200
===============================================================
</TABLE>
The following table summarizes sales to significant customers stated as a
percentage of total revenues:
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------
<S> <C> <C> <C>
Company A 25% 15% 20%
Company B 15% 10% 35%
Company C -- 25% --
- ----------------------------------------------------------------
40% 50% 55%
================================================================
</TABLE>
At June 30, 1998, Company A and B represented 27% of total accounts receivable.
11. INCOME TAXES
The components of the net deferred tax assets recognized in the consolidated
balance sheets are as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
- ----------------------------------------------------------------
<S> <C> <C>
Deferred tax assets $3,282,000 $1,583,300
Deferred tax liabilities (126,000) (216,100)
- ----------------------------------------------------------------
Net deferred tax assets $3,156,000 $1,367,200
================================================================
</TABLE>
The approximate tax effect of temporary differences and tax credit carry
forwards is as follows:
<TABLE>
<CAPTION>
June 30,
Deferred tax assets 1998 1997
- ---------------------------------------------------------------
<S> <C> <C>
Reserves $2,802,000 $1,098,600
Tax credit carryforwards 480,000 484,700
- ---------------------------------------------------------------
Deferred tax assets $3,282,000 $1,583,300
===============================================================
</TABLE>
The deferred tax liabilities relate to property and equipment, principally the
difference between book and tax depreciation expense.
28
<PAGE> 29
The amount recorded as net deferred tax assets as of June 30, 1998 represents
the amount of tax benefits of existing deductible temporary differences or
carryforwards that are more likely than not to be realized through the
generation of sufficient future taxable income within the carryforward period.
The Company believes that the net deferred tax asset of $3,156,000 at June 30,
1998 will more likely than not be realized in the carryforward period using
anticipated results from operations. The Company continuously re-evaluates the
recoverability of deferred tax assets.
The components of the benefit (provision) for income taxes are as follows:
<TABLE>
<CAPTION>
For the years ended June 30,
Total revenue: 1998 1997 1996
- --------------------------------------------------------------------------------
Federal:
<S> <C> <C> <C>
Current $ (250,000) $(1,065,000) $ (360,700)
Deferred 1,594,000 (266,700) 1,067,800
State:
Current (9,000) (120,000) (74,900)
Deferred 196,000 (182,300) 278,600
Foreign:
Current (2,000) (14,600) (33,500)
Deferred -- -- --
- --------------------------------------------------------------------------------
Benefit (provision) for
income taxes $ 1,529,000 $(1,648,600) $ 877,300
================================================================================
</TABLE>
The actual income tax benefit (provision) differs from the "expected" income tax
expense computed by applying the U.S. Federal corporate tax rate of 34% to
income before benefit (provision) for income taxes as follows:
<TABLE>
<CAPTION>
For the years ended June 30,
Total revenue: 1998 1997 1996
- -------------------------------------------------------------------------------------------
Computed "expected" income
<S> <C> <C> <C>
tax benefit (expense) $ 1,486,000 $(1,597,300) $ (383,100)
Reduction (increase)
in income taxes resulting from:
State taxes, net of federal
income tax benefit 120,000 (153,800) (46,200)
Foreign taxes (2,000) (16,400) (66,900)
Foreign sales corporation
benefit (15,800) 298,500 204,900
Litigation settlement -- -- (861,800)
Other (59,200) (179,600) 174,000
Change in valuation
allowance -- -- 1,856,400
- -------------------------------------------------------------------------------------------
Benefit (provision) for
income taxes $ 1,529,000 $(1,648,600) $ 877,300
===========================================================================================
</TABLE>
For income tax purposes, the Company has tax credit carryforwards of
approximately $480,000 at June 30, 1998. The tax credit carryforwards expire in
varying amounts in the years 2003 through 2008. The Company expects to utilize
the full amount of its tax credit carryforwards.
12. EMPLOYEE BENEFIT PLAN
The Company has a tax-qualified employee savings and retirement plan under
Internal Revenue Code Section 401(k) ("Plan"), covering all of the Company's
employees following three months of service and attainment of the age of 18.
Participants may elect to contribute to the Plan up to the lesser of the
statutorily prescribed annual limit or 20% of their pre-tax compensation. The
Plan permits, but does not require, additional matching contributions by the
Company on behalf of all participants in the Plan. Effective January 1, 1996 the
Company began matching one half of each employee's contribution up to 3% of
their salary. For fiscal 1998 and 1997, the company made matching contributions
of $307,900 and $272,000, respectively, to the plan.
13. SETTLEMENT OF LITIGATION
On May 7, 1996, the Company reached settlement with KLA Instruments Corporation
of litigation initiation by KLA in December, 1993, which alleged that the
Company had failed to abide with the Massachusetts Business Corporation Law and
its Articles of Organization in connection with the refinancing and
recapitalization of the Company during the period June through August 1993.
Under the terms of the noncash settlement, the Company issued 119,202 shares of
Micrion common stock in exchange for the release of all claims in the
litigation, and recorded the related expense of $2,684,500 in the fiscal 1996
fourth quarter.
14. LITIGATION
During fiscal 1997, two complaints were filed in the U.S. district Court for the
District of Massachusetts against the Company and certain of its officers, which
complaints were subsequently amended and consolidated. The consolidated
complaint purports to be brought on behalf of a class of purchasers of the
Company's common stock from April 26, 1996 through June 21, 1996. It asserts
claims for violations under the federal securities laws, alleging that the
Company made false and misleading statements to the public concerning the nature
of its sales agreement with a customer. The Company filed a motion to dismiss
the consolidated complaint
29
<PAGE> 30
15. UNAUDITED INTERIM FINANCIAL INFORMATION
Quarterly financial information is as follows:
<TABLE>
<CAPTION>
(in thousands, except per share data)
For the quarters ended September 30, December 31, March 31, June 30,
- ---------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1998
<S> <C> <C> <C> <C>
Revenues $14,778 $14,565 $11,941 $ 13,373
Gross profit 5,484 6,046 4,470 585
Net income (loss) 636 640 (1,255) (2,861)
Net income (loss) per share .15 .15 .31 (.70)
- ---------------------------------------------------------------------------------------------------------------------------
Year ended June 30, 1997
Revenues $13,241 $13,394 $14,123 $15,221
Gross profit 5,269 5,550 5,217 5,198
Net income 982 993 542 532
Net income per share .24 .24 .13 .13
</TABLE>
Note: Due to rounding, some totals may not add.
for failure to state a claim. This motion was denied on April 30, 1997.
Thereafter, actual discovery was completed and the Company has filed a motion
for summary judgment to dismiss the case, which is pending before the court. The
Company believes the consolidated complaint to be without merit and intends to
continue to vigorously defend itself against the claims. There can be no
assurance, however, that the company will be successful in defending this
lawsuit or that money damages, if awarded, would not have a material adverse
effect on the Company.
16. SUBSEQUENT EVENT
On September 22, 1998 the Company modified its line of credit and long term loan
with Fleet Bank, N.A. In connection with the modification, the bank agreed to
waive the violations at June 30, 1998 of the three loan covenants described in
note 6. The Company and the bank also agreed to changes in the various loan
covenants and the terms of the long-term note. Under the terms of the new
agreement, twelve quarterly payments of $667,000 are required starting in
quarter ending September 30, 1998 through September 30, 2001. Also, the bank
extended the expiration of the line of credit to December 1, 1999.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
30
<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The following are the names, ages, positions with the Company and a
brief description of the business experience during the last five years of the
directors and executive officers of the Company.
NAME AGE POSITION AND BUSINESS EXPERIENCE
Thomas W. Folger......... 70 Director.
Mr. Folger, a Director of the Company since
1985, has been a General Partner of the sole
General Partner of DeMuth, Folger &
Wetherill, a venture capital firm, since its
formation in 1994, and a General Partner of
the sole General Partner of DeMuth, Folger &
Terhune, a venture capital firm, since its
formation in 1983. Prior to 1983, Mr. Folger
was Vice President and a member of the Board
of Directors of Kidder, Peabody & Co.
Incorporated. Mr. Folger is a director of
IEC Electronics Corp., a provider of
contract manufacturing services for
electronics companies.
Louis P. Valente......... 68 Director.
Mr. Valente, a Director of the Company since
1989, became a director of Palomar Medical
Technologies, Inc., a publicly held company,
in February, 1997, and in May, 1997, he was
elected President and Chief Executive
Officer of Palomar. Palomar designs,
manufactures and sells cosmetic lasers and
operates centers for cosmetic treatments. He
was a Senior Vice President of Acquisitions,
Mergers and Investments of EG&G, Inc., a
diversified high technology company, from
1991 until his retirement in 1995, and was
Vice President of Corporate Development from
1984 through 1991. Mr. Valente, a certified
public accountant, is also a director of
several privately held companies.
Charles M. McKenna....... 53 Director.
Mr. McKenna, a Director of the Company since
1995, has been Vice President of Varian
Semiconductor Equipment and General Manager
of Varian's Ion Implant Systems, a
semiconductor equipment manufacturer, since
1989. He has previously held technical
positions with Varian Corporation, IBM and
Hughes Research Laboratories.
31
<PAGE> 32
Nicholas P. Economou..... 49 Chairman, Director, President and Chief
Executive Officer.
Dr. Economou has been President and a
Director of the Company since February 1990,
Chief Executive Officer since August 1993
and Chairman of the Board since November
1997. Dr. Economou joined the Company in
1984 as the Director of Engineering and was
subsequently promoted to Vice President,
Engineering, prior to becoming President.
Dr. Economou has been a director of Palomar
Medical Technologies, Inc. since November
13, 1997.
David M. Hunter.......... 54 Vice President, Finance and Administration,
Chief Financial Officer and Treasurer.
Mr. Hunter has been Vice President, Finance
and Administration of the Company, since
January 1993. Mr. Hunter joined the Company
in 1984 as Treasurer.
Charles J. Libby......... 53 Vice President, Engineering.
Mr. Libby has been Vice President,
Engineering, since August 1993. Mr. Libby
joined the Company in 1989 as Director of
Software Engineering and was subsequently
promoted to Director of Engineering prior to
becoming Vice President, Engineering.
John A. Doherty.......... 52 Senior Vice President, Marketing.
Mr. Doherty has been Senior Vice President,
Marketing, since January 1997 and was Vice
President, Marketing, from 1983 to January
1997, and was a Director of the Company from
1983 to 1988, from 1991 to 1993 and from
1994 until 1996.
Billy W. Ward............ 45 Director and Senior Vice President, Chief
Engineer.
Mr. Ward has been Senior Vice President and
Chief Engineer since January 1996 and was
Vice President and Chief Engineer from 1983
to January 1996 and a Director of the
Company from 1983 to 1984, from 1988 to
1991, from 1993 to 1994 and since November
1996.
Robert K. McMenamin...... 56 Vice President, Sales.
Mr. McMenamin has been Vice President,
Sales, since 1990. Mr. McMenamin joined the
Company in 1988 as Sales Manager.
Frank Frontiero.......... 44 Vice President, Manufacturing.
Mr. Frontiero has been Vice President,
Manufacturing, since November 1996. Prior to
that time, he served in various capacities
since joining the Company in 1984 and was
Director of Manufacturing, from January 1994
to November 1996.
32
<PAGE> 33
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act"), requires the Company's officers and directors and persons who own
more than ten percent of its common stock to file reports with the Securities
and Exchange Commission disclosing their ownership of stock in the Company and
changes in such ownership. Copies of such reports are also required to be
furnished to the Company. Based solely on a review of the copies of such reports
received by it, the Company believed that, during fiscal 1998, all such filing
requirements were complied with.
ITEM 11. EXECUTIVE OFFICER COMPENSATION.
The following summary compensation table sets forth the compensation
paid or accrued for services rendered in fiscal 1998, 1997 and 1996 to the chief
executive officer and the other four most highly compensated executive officers
of the Company (the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
------------
COMPENSATION
------------
ANNUAL COMPENSATION AWARDS
-------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
NAME AND FISCAL BONUS(s) COMPENSATION UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR SALARY ($) ($) ($)(1) OPTIONS (#) ($)
------------------ ------ ---------- -------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Nicholas P. Economou - 1998 $200,761 $ -- $10,800 30,000 $5,764(2)
Chairman, President and 1997 183,268 25,000 10,800 20,000 6,590
Chief Executive Officer 1996 159,716 50,000 10,800 35,000 3,432
John A. Doherty - 1998 176,379(3) -- 10,800 10,000 3,983(4)
Senior Vice President, 1997 155,785(5) -- 10,800 6,667 3,865
Marketing 1996 146,076(6) 10,000 11,145 7,500 16,086
Robert K. McMenamin - 1998 159,238(7) -- 10,800 10,000 3,636(8)
Vice President, Sales 1997 188,394(9) -- 10,800 6,666 3,515
1996 144,239(10) 7,000 10,800 5,000 1,948
Billy W. Ward - 1998 150,587 -- -- 5,000 5,453(11)
Senior Vice President 1997 150,587 10,000 -- -- 5,540
Chief Engineer 1996 126,547 18,000 -- 50,000 19,790
Charles J. Libby - 1998 125,468 -- -- 10,000 4,544(12)
Vice President, 1997 118,001 10,000 -- 6,667 4,320
Engineering 1996 107,432 20,000 -- 5,000 2,259
</TABLE>
- ---------
(1) Includes annual personal car allowance in the amount of $10,800.
(2) Consists of (i) insurance premiums with respect to term life insurance in
the amount of $1,092 and (ii) Company contributions to 401(k) account in
the amount of $4,672.
(3) Includes sales commissions in the amount of $65,966.
(4) Consists of (i) insurance premiums with respect to term life insurance in
the amount of $686, (ii) Company contributions to 401(k) account in the
amount of $3,297.
(5) Includes sales commission in the amount of $49,802.
33
<PAGE> 34
(6) Includes sales commissions in the amount of $45,943.
(7) Includes sales commissions in the amount of $58,847.
(8) Consists of (i) insurance premiums with respect to term life insurance in
the amount of $624 and (ii) Company contributions to 401(k) account in
the amount of $3,012.
(9) Includes sales commissions in the amount of $92,038.
(10) Includes sales commissions in the amount of $53,166.
(11) Consists of (i) insurance premiums with respect to term life insurance in
the amount of $936 and (ii) Company contributions of 401(k) account in
the amount of $4,517.
(12) Consists of (i) insurance premiums with respect to term life insurance in
the amount of $780 and (ii) Company contributions to 401(k) account in
the amount of $3,764.
OPTIONS GRANTS IN LAST FISCAL YEAR
The following table shows all stock option grants to the Named
Executive Officers during fiscal 1998.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF SHARES PERCENT OF TOTAL OPTIONS ASSUMED ANNUAL RATE OF
UNDERLYING OPTIONS GRANTED TO EMPLOYEES EXERCISE PRICE EXPIRATION STOCK PRICE APPRECIATION FOR
NAME GRANTED (#) IN FISCAL YEAR PER SHARE DATE OPTION TERM(1)
---- ------------------ ------------------------ -------------- ---------- -----------------------------
5% 10%
-------- --------
<S> <C> <C> <C> <C> <C> <C>
Nicholas P. Economou..... 30,000(2) 13.6% $10.88 3/23/08 $205,271 $520,198
John A. Doherty.......... 10,000(2) 4.6% 10.88 3/23/08 68,424 173,399
Robert K. McMenamin...... 10,000(2) 4.6% 10.88 3/23/08 68,424 173,399
Billy W. Ward............ 5,000(2) 2.3% 10.88 3/23/08 34,212 86,700
Charles J. Libby......... 10,000(2) 4.6% 10.88 3/23/08 68,424 173,399
</TABLE>
- ----------------------
(1) As required by the rules of the Securities and Exchange Commission,
potential values stated are based on the prescribed assumption that the
Company's common stock will appreciate in value from the date of grant
to the end of the option term at rates (compounded annually) of 5% and
10%, respectively, and therefore are not intended to forecast possible
future appreciation, if any, in the price of the Company's common
stock.
(2) These options vest in sixteen (16) equal quarterly installments,
commencing on March 23, 1998, the date of grant, subject to continuing
employment.
FISCAL YEAR-END OPTION VALUES
During fiscal 1998, none of the Named Executive Officers exercised stock
options issued by the Company. The following table sets forth information
regarding the number of vested and unvested options and the unrealized value or
spread (the difference between the exercise price and the market value) of the
unexercised options issued by the Company and held by the Named Executive
Officers on July 1, 1998.
<TABLE>
<CAPTION>
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS(#) IN-THE-MONEY OPTIONS($)
--------------------------- -----------------------
NAME VESTED UNVESTED VESTED UNVESTED
- ---- ------ -------- ------ --------
<S> <C> <C> <C> <C>
Nicholas P. Economou............. 51,995 48,125 $2,500 $2,500
John A. Doherty.................. 16,787 14,896 833 833
Robert K. McMenamin.............. 15,068 14,114 833 834
Billy W. Ward.................... 38,938 23,594 -- --
Charles J. Libby................. 15,068 14,115 833 833
</TABLE>
34
<PAGE> 35
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding beneficial
ownership of the Company's common stock as of August 17, 1998 by (a) each
director and nominee for director of the Company, (b) each of the executive
officers named in the Summary Compensation Table below and (c) all current
directors and executive officers as a group. Except as otherwise indicated, each
person has sole investment and voting power with respect to the shares shown as
being beneficially owned by such person, based on information provided by such
owners. To the Company's knowledge, no person beneficially owned 5% or more of
the Company's Common Stock as of August 15, 1998.
COMMON STOCK PERCENT OF
NAME BENEFICIALLY OWNED OUTSTANDING SHARES
- ---- ------------------ ------------------
Nicholas P. Economou..................... 144,115 (1) 3.5
John A. Doherty.......................... 70,789 (2) 1.7
Robert K. McMenamin...................... 49,433 (3) 1.2
Billy W. Ward............................ 54,079 (4) 1.3
Charles J. Libby......................... 42,988 (5) 1.1
David M. Hunter.......................... 32,257 (6) *
Thomas W. Folger......................... 15,000 (7) *
Louis P. Valente ........................ 11,000 (8) *
Charles M. McKenna....................... 7,500 (9) *
All current directors and executive
officers as a group (10 persons)....... 450,635 (10) 10.5
- ------------
* Less than 1%.
(1) Includes options to purchase 60,120 shares which are exercisable within
60 days after August 15, 1998.
(2) Includes options to purchase 19,391 shares which are exercisable within
60 days after August 15, 1998.
(3) Includes options to purchase 17,516 shares which are exercisable within
60 days after August 15, 1998.
(4) Includes options to purchase 43,470 shares which are exercisable within
60 days after August 15, 1998, and 3,717 shares held in trust under the
Billy W. Ward Family Trust, as to which shares Mr. Ward shares voting and
investment power and disclaims beneficial ownership.
(5) Includes options to purchase 17,516 shares which are exercisable within
60 days after August 15, 1998.
(6) Includes options to purchase 19,404 shares which are exercisable within
60 days after August 15, 1998.
(7) Includes options to purchase 10,000 shares which are exercisable within
60 days after August 15, 1998.
(8) Includes options to purchase 10,000 shares which are exercisable within
60 days after August 15, 1998.
(9) Consists of options to purchase 7,500 shares which are exercisable within
60 days after August 15, 1998.
(10) Includes options to purchase 225,058 shares which are exercisable within
60 days after August 15, 1998 held by executive officers and directors of
the Company.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements
The following consolidated financial statements are incorporated by
reference in Item 8:
Consolidated Balance Sheets as of June 30, 1998 and 1997
Consolidated Statements of Operations for the years ended June 30,
1998, 1997 and 1996
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended June 30,
1998, 1997 and 1996
(a) 2. Financial Statement Schedules
All schedules have been omitted since the required information is not
present or not present in amounts sufficient to require submission of the
schedule, or because the information required is included in the consolidated
financial statements or the notes thereto.
(a) 3. Listing of Exhibits
The exhibit numbers in the following list correspond to the numbers
assigned to such exhibit in the Exhibit Table of Item 601 of Regulation S-K. The
Company will furnish to any stockholder, upon written request, any exhibit
listed below upon payment by such stockholder to the Company of the Company's
reasonable expense in furnishing such exhibit.
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
*3.1 Restated Articles of Organization of the Registrant.
ss.3.2 Amended and Restated By-laws of the Registrant (as amended
March 28, 1997).
+4.1 Specimen Stock Certificate.
(treb clef)4.2 Rights Agreement dated July 30, 1997 between the Company as
Rights Agent (including exhibits thereto).
X+10.1 Registrant's Incentive Stock Plan, as amended (the "1986
Plan").
X+10.2 Form of Stock Restriction Agreement under the 1986 Plan.
X+10.3 Registrant's 1990 Nonqualified Stock Option Plan, as amended
(the "1990 Option Plan").
X+10.4 Form of Stock Option Agreement under the 1990 Option Plan.
X+10.5 Registrant's 1993 Common Stock Incentive Plan, as amended (the
"1993 Plan").
X+10.6 Form of Stock Restriction Agreement under the 1993 Plan,
together with vesting schedule for executive officers.
Xss.10.7 Registrant's 1994 Amended and Restated Omnibus Stock Plan.
36
<PAGE> 37
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
X+10.8 Registrant's 1994 Stock Purchase Plan.
X#10.8.1 Registrant's 1994 Non-Employee Director Stock Option Plan.
+10.9 Lease dated as of December 21, 1987 between the Registrant and
Centennial Park Associates Limited Partnership I (the
"Lease").
@10.9.1 Second Amendment to the Lease, dated as of March 1, 1995.
+10.10 Development Agreement, dated as of June 10, 1993, by and
between the Registrant and SEMATECH, Inc.
+10.11 Agreement dated as of May 6, 1993, by and between the
Registrant and U.S. Army Research Laboratory, as amended.
+10.12 Distributor Agreement between the Registrant and Tokyo
Electron Limited, dated as of March 1, 1988.
+10.23 Form of Employee Agreement.
*10.25 Common Stock Purchase Warrants issued to RvR Securities Corp.
and Fechtor, Detwiler & Co., Inc., in connection with
Registrant's initial public offering.
ss.10.31 Letter Agreement, dated July 31, 1997, by and between the
Registrant and Fleet National Bank ("Fleet").
ss.10.32 Promissory (Term) Note of the Registrant in favor of Fleet,
dated July 31, 1997.
ss.10.33 Promissory (Revolving) Note of the Registrant in favor of
Fleet, dated July 31, 1997.
ss.10.34 Inventory, Accounts Receivable and Intangibles Security
Agreement from the Registrant to Fleet.
ss.10.35 Supplemental Security Agreement from the Registrant to Fleet.
ss.10.36 Security Agreement (Patents) from the Registrant to Fleet.
ss.10.37 Security Agreement (Trademarks) from the Registrant to Fleet.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG Peat Marwick LLP.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule (for FY 1997).
99.1 Cautionary Statement for Purposes of the "Safe Harbor"
Provisions of the Private Securities Litigation Reform Act of
1995.
- ------------------------------
+ Incorporated by reference to the same exhibit number to the Registrant's
Registration Statement on Form SB-2 (Registration No. 33-75784) or an
amendment thereto.
* Incorporated by reference to the same exhibit number to the Registrant's
Report on Form 10-QSB filed on June 24, 1994.
# Incorporated by reference to the same exhibit number to the Registrant's
Report on Form 10-KSB filed on September 29, 1994.
X Management contract or compensatory plan or arrangement.
37
<PAGE> 38
* Incorporated by reference to the same exhibit number to the
Registrant's Registration Statement on Form SB-2 (Registration
No. 33-86008) or an amendment thereto.
@ Incorporated by reference to the same exhibit number to the
Registrant's Report on Form 10-KSB filed on September 29, 1995.
(treb clef) Incorporated by reference from the Registrant's Registration
Statement on Form 8-A filed with the Commission on July 30, 1997.
ss. Incorporated by reference to the same exhibit number to the
Registrant's Report on Form 10-K filed with the Commission on
September 26, 1997.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on April 14, 1998 under Item 5 of such Form.
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MICRION CORPORATION
Date: September 28, 1998 By: /s/ Nicholas P. Economou
-------------------------------
Nicholas P. Economou, Chairman,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Nicholas P. Economou Chairman, President, Chief September 28, 1998
- ----------------------------------- Executive Officer and Director
Nicholas P. Economou (Principal Executive Officer)
/s/ David M. Hunter Vice President, Finance and September 28, 1998
- ----------------------------------- Administration (Principal
David M. Hunter Financial and Accounting Officer)
/s/ Billy W. Ward Senior Vice President, Chief September 28, 1998
- ----------------------------------- Engineer and Director
Billy W. Ward
/s/ Charles M. McKenna Director September 28, 1998
- -----------------------------------
Charles M. McKenna
/s/ Louis P. Valente Director September 28, 1998
- -----------------------------------
Louis P. Valente
/s/ Thomas W. Folger Director September 28, 1998
- -----------------------------------
Thomas W. Folger
</TABLE>
<PAGE> 1
Exhibit 21.1
- ------------
Subsidiaries of Registrant
JURISDICTION IN WHICH ENTITY FORMED NAME
----------------------------------- ----
Feldkirchen, Germany Micrion GmbH
Tokyo, Japan Micrion Japan Corporation KK
Bristol, United Kingdom Micrion Corporation, Limited
St. Thomas, USVI Micrion Foreign Sales Corporation
<PAGE> 1
Exhibit 23.1
- ------------
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statements on
Form S-8 (Nos. 333-40803, 33-99850 and 33-87928) of Micrion Corporation of our
report dated August 10, 1998, with respect to the consolidated financial
statements of Micrion Corporation for the year ended June 30, 1998, which report
appears under Item 8 hereof.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
September 28, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,349
<SECURITIES> 0
<RECEIVABLES> 18,303
<ALLOWANCES> 0
<INVENTORY> 21,690
<CURRENT-ASSETS> 47,133
<PP&E> 11,193
<DEPRECIATION> (6,482)
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<PAGE> 1
EXHIBIT 99.1
CAUTIONARY STATEMENT FOR PURPOSES OF THE
"SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Micrion Corporation (the "Company") desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is including this Exhibit 99.1 in its Form 10-K in order to do so.
The Company wishes to caution readers that the following important
factors, among others, in some cases have affected, and in the future could
affect, the Company's actual results and could cause the Company's actual
consolidated results for the Company's current quarter and beyond, to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company:
The exercise of cancellation or termination provisions contained in the
Company's multiple-system purchase agreement with Read-Rite Corporation,
including provisions that entitle the customer to cancel issued purchase orders
or to terminate the agreement for convenience.
A significant portion of the Company's revenues historically has been
generated from the Far East. Given the current turmoil and confusion that
surrounds the Asian market, it is possible that some or all of the Company's
customers in that region could continue to reduce spending for new capital
equipment, which would have a material adverse effect on the Company's
operations in future quarters.
The inability of the Company to make deliveries required under the
multiple-system purchase agreement referenced in the second preceding paragraph
or any other purchase orders as a result of a lack of production capacity,
manpower, inability to acquire necessary materials for manufacturing, or
otherwise.
Difficulties associated with the use of the Company's machines for
production applications, which are new applications of the Company's equipment,
by the customer who is a party to the multiple-system purchase agreement
referenced in the preceding paragraph or by any other customers similarly using
the Company's machines, and the warranty, service and other costs that might
result in connection with such difficulties.
Any factor adversely affecting the semiconductor and data storage
industries, which are highly cyclical, or particular segments within those
industries.
A variety of factors which vary substantially over time, including:
conditions in the semiconductor and data storage industries; competitive pricing
pressures; the timing of orders from customers; the timing of new product
introductions by the Company and competitors; customer acceleration,
cancellation or delay of shipments; changes in the mix of types of systems sold;
changes in the mix of systems, service and parts revenues; the length of sales
cycles; the relative proportions of domestic and foreign shipments; the mix of
product and contract revenues; the mix and timing of government and commercial
contracts activity; the level and timing of selling, general and administrative
expenses and research and development expenses; specific feature needs of
customers, some of which may be available in competitors' systems but not in the
Company's systems; production delays; and currency exchange rate fluctuations.
The timing of recognition of revenue from a single system order, either
pursuant to customer acceptance of a system or percentage of completion contract
accounting; announcements by the Company or its competitors of new products and
technologies; the deferral or loss of an anticipated order could have a material
adverse effect on the Company's results of operations.
<PAGE> 2
Difficulties in developing and introducing new products and
enhancements on a timely and cost effective basis or in product selection,
timely and efficient completion of product design, implementation of
manufacturing and assembly processes and effective sales and marketing;
reliability or quality problems with new products.
Inability to anticipate both future demand and the availability of
technology to satisfy that demand in the development of new products.
Factors in connection with the facts that certain of the Company's
competitors and potential competitors have substantially greater financial,
marketing, technological and production resources than the Company and that
certain of these competitors are themselves semiconductor manufacturers, and,
therefore, familiar with semiconductor manufacturing.
Inability of the Company to manage growth in production and in its
employee base, which has placed, and will continue to place, a significant
strain on the Company's management, financial and operating resources, and to
expand its customer services and support, increase personnel throughout the
Company, expand operational and financial systems and implement new control
procedures; inability to attract qualified personnel or successfully manage
expanded operations; factors that may impact the valuation of inventories;
inability to deal with constraints that might adversely affect its ability to
satisfy customer demand in a timely fashion or to provide consistent levels of
support to existing customers.
Factors inherent in international operations, including changes in
demand resulting from fluctuations in exchange rates, the risk of government
financed or subsidized competition, changes in trade policies and tariff
regulations, difficulties in obtaining U.S. export licenses and geopolitical
risks, and fluctuations in foreign currencies that might impact the prices
quoted by the Company to prospective customers and thereby affect the Company's
ability to obtain orders from such foreign customers.
Factors related to the fact that the Company markets and sells its
products through independent sales representatives and a Japanese distributor,
which results in lower gross profit margins on sales to foreign customers and
the fact that an increase in the proportion of international sales could
negatively affect the Company's gross profit margins.
A lack of success, or associated costs, in defending pending lawsuits
brought by certain stockholders of the Company, each of which purports to be
brought on behalf of a class of purchasers of the Company's common stock from
April 26, 1996 through June 21, 1996, alleging that the Company made false and
misleading statements to the public concerning the nature of its sales agreement
with Read-Rite Corporation.
The loss of one or more significant customers or the inability of the
Company to attract new customers to replace these customers.
Risks associated with the expenditures of substantial funds and
management effort in anticipation of a sale even though a sale may not result
from the effort, as a result of lengthy sales cycles.
The risk of significant delays or interruptions in the delivery of
components or parts, such as high voltage power suppliers, from current
suppliers, receipt of defective components or parts, as well as difficulties or
delays in shifting manufacturing capacity to new suppliers.
Inability to attract and retain certain qualified employees, such as
key scientific, marketing and management personnel, who are in limited supply
and are difficult to attract and retain.
Difficulties in protecting the Company's technology or in responding to
the development of similar technology by others.
<PAGE> 3
Interruption by fire, earthquakes or other catastrophic events, power
failures, work stoppages, regulatory actions or other causes to either of the
Company's production facilities, where the Company's manufacturing inventory is
maintained.
