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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X ANNUAL REPORT PURSUANT TO Section 13 OR 15(d) OF THE SECURITIES
----- EXCHANGE ACT OF 1934 (Fee Required)
For the fiscal year ended June 30, 1996
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: 0-26222
ONTRAK SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA 77-0074302
(State of incorporation) (IRS employer identification number)
1010 RINCON CIRCLE, SAN JOSE, CA 95131
(Address of principal executive offices and zip code)
(408) 577-1010
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of Exchange on which registered
- ------------------- ------------------------------------
NONE NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES 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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on August 31,
1996, as reported on the Nasdaq National Market, was approximately $56,900,302.
Shares of Common Stock held by each officer, director and holder of 5% or more
of the outstanding Common Stock have been excluded in that such persons may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
Outstanding shares of COMMON STOCK, NO PAR VALUE, as of August 31, 1996:
7,557,964
DOCUMENTS INCORPORATED BY REFERENCE
Parts of the registrant's Proxy Statement for its Annual Meeting of Shareholders
to be held on November 21, 1996 are incorporated by reference into Part III of
this Form 10-K Report.
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PART I
ITEM 1. BUSINESS.
OnTrak Systems, Inc. ("OnTrak" or the "Company") was incorporated in
California in June 1985. OnTrak is a leading provider of semiconductor capital
equipment for use in the chemical mechanical planarization, or CMP process step.
CMP is a process that enables the fabrication of advanced semiconductor devices
featuring design rules of 0.5 micron and below with multiple metal layers. CMP
consists of two steps: first, polishing the wafer through the use of a chemical
and mechanical polishing process; and, second, cleaning the residue from the
polished wafer.
OnTrak has focused on CMP since 1991 and has gained expertise in CMP
process technology through its close customer working relationships and industry
technology collaboration activities. The Company believes it is a leader in
providing CMP cleaning systems. OnTrak's DSS-200 product line removes residual
slurries and other contaminants from wafer surfaces after each polishing step.
In addition to CMP cleaning, OnTrak's cleaning systems can be used before and
after a number of essential semiconductor process steps, such as chemical vapor
deposition, etch and photoresist removal. As a result, OnTrak's cleaning
systems are used repeatedly in the fabrication cycle to remove yield impairing
residue and contaminants from wafer surfaces.
OnTrak's strategy is to maintain a leading market position in CMP cleaning
systems, to pursue additional cleaning applications, and to leverage its CMP
expertise to develop and introduce a CMP polishing system. The Company's CMP
polishing system, the Aurora, is currently under development. See "Products -
CMP Polisher Under Development" below.
The Company markets and sells its cleaning systems to leading semiconductor
manufacturers worldwide, including Advanced Micro Devices, Hewlett-Packard, IBM,
Intel, LSI Logic, Micron Technology, Motorola, Samsung, SGS Thomson, Siemens and
Texas Instruments.
INDUSTRY BACKGROUND
The worldwide market for semiconductor devices has experienced significant
growth in recent years, exceeding $140 billion in 1995. This growth is due to
the increasing demand for electronic devices, such as personal computers,
cellular telephones, multimedia systems, and other electronic devices for
business and consumer use. This growth is also being driven by increasing
semiconductor content within these electronic devices and other products, such
as automobiles, consumer appliances and factory automation and control systems.
Many of these new applications have been made possible by semiconductor devices
with higher performance and greater complexity. In response to the growing
demand for semiconductor devices, in recent years semiconductor manufacturers
have been increasing manufacturing capacity through expansion and upgrades of
existing facilities and the construction of new facilities. According to
industry sources, as of August 1996, there were approximately 130 wafer
fabrication facilities under construction, under expansion or scheduled to
commence construction. A majority of these fabrication facilities are estimated
to be for manufacturing 200mm wafers with design geometries of 0.5 micron line
widths or less. The cost of advanced wafer fabrication facilities can exceed
$1.5 billion, most of which is composed of capital equipment.
The fabrication of semiconductor devices is becoming increasingly complex
as design geometries continue to shrink and the number of metal layers continues
to increase. As recently as 1990, the latest generation microprocessor (Intel's
"386") was characterized by geometries of 0.8 micron line widths and two metal
layers. Today's most advanced logic devices, such as Intel's Pentium chip and
IBM's PowerPC chip, have design geometries of 0.5 micron and 0.35 micron line
widths with four and five metal layers, respectively. Today's 16 megabit
dynamic random access memory ("DRAM") devices have design geometries of 0.5
micron line widths and two metal layers. The next generation of advanced memory
devices, 64 megabit DRAMs, are expected to have design geometries of 0.35 micron
line widths and up to three metal layers.
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The trends of decreasing design geometries and an increasing number of
metal layers are prompting demand for increasingly sophisticated semiconductor
processing equipment. Photolithography equipment, which is used to print
circuit patterns on the surface of the silicon wafer and often represents the
single largest investment in a modern semiconductor fabrication facility, is
reaching the limits of its ability to function effectively at the line width
geometries required by today's most advanced semiconductor devices. As
geometries decrease to 0.5 micron line widths and less, current optical
photolithography equipment can encounter depth of focus problems resulting from
topographical variations on the wafer surface. If topographical variations on
wafer surfaces exceed the depth of focus budget of the photolithography
equipment, the circuit pattern cannot be printed clearly on the wafer, rendering
semiconductor devices on that part of the wafer inoperable.
To remove or minimize topographical variations across the surface of a
wafer, semiconductor manufacturers use a variety of planarization techniques.
Planarization creates a level surface for the deposition of the next layer on
the wafer, and improves the ability of photolithography equipment to print clear
circuit patterns onto the wafer surface. Traditional planarization techniques
include reflow glass, spin-on-glass, resist etchback and deposition with etch
sequences. These techniques generally achieve planarity by filling gaps with a
dielectric oxide film or low viscosity fluid, which is then removed in the
latter two processes by a chemical etch process. While these technologies have
traditionally proven effective, they can only achieve planarity over a small
portion of each individual die (typically 10-100 microns), which is referred to
as local planarity, rather than across each die and the entire wafer surface,
which is referred to as global planarity. Additionally, these technologies
begin to lose their effectiveness in manufacturing devices that have geometries
of less than 0.5 micron line widths with three or more metal layers due to their
inability to achieve both local and global planarity.
CHEMICAL MECHANICAL PLANARIZATION
CMP is a process that enables advanced semiconductor manufacturers to
achieve global planarity, thereby improving die yields and device reliability.
CMP consists of two steps: first, polishing the wafer through the use of a
chemical and mechanical polishing process; and, second, cleaning the residue
from the polished wafer. In the first process, the wafer is pressed against a
moving pad saturated with an abrasive chemical slurry (or polishing grit) to
smooth its surface. During the cleaning process, the polished wafer is cleaned
to remove the abrasive chemical slurry and other contaminants from the wafer
surface. Due to CMP's ability to achieve global planarity over the entire wafer
surface, the Company believes that CMP is becoming widely adopted in the
fabrication of advanced semiconductor devices with design geometries of 0.5
micron line widths or less and with multiple metal layers.
Currently, the CMP process is most frequently used on the intermetal
dielectric oxide layers of the wafer, and it is often used on metal and metal
interconnect layers, primarily tungsten. On a typical four metal layer device
structure, CMP could be utilized to polish and clean at each of the oxide and
metal layers (or 8 polishing and cleaning steps). As device geometries continue
to shrink and the number of metal layers continues to increase, it is expected
that CMP will be used on an increasing number of layers. According to
Dataquest, an international research firm, the CMP polishing equipment market
was $197 million in 1995 and is projected to exceed $670 million in 2000.
ONTRAK STRATEGY
The Company's goal is to become a leading supplier of CMP processing
systems to the worldwide semiconductor industry. The Company believes that it
has gained CMP process expertise through its internal research and development
programs, its extensive worldwide customer relationships, and its technology
collaboration activities with industry consortia and with suppliers of
complementary equipment and consumables. The Company is the market leader in
sales of CMP cleaning systems, according to Dataquest. The Company intends to
leverage its knowledge of the CMP process and CMP cleaning to develop and
introduce a CMP polishing system.
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PRODUCTS
The Company offers products to address the requirements of its customers
for CMP and other application-specific cleaning systems. The Company currently
offers a family of products for wafer cleaning applications and is developing a
CMP polishing system.
CLEANING SYSTEMS
At June 30, 1996, the Company had an installed base of over 300 cleaning
systems, the majority of which are used for CMP cleaning. The Company's
cleaning systems incorporate a number of features which the Company believes
distinguishes its cleaning systems from alternative cleaning methods. A
double-sided design permits simultaneous scrubbing of both sides of the wafer
while limiting wafer handling contact, which can contaminate the backside of the
wafer. Throughput on the OnTrak cleaning systems is typically greater than 60
wafers per hour. For selected applications, the Company believes that its brush
cleaning systems provide significant advantages over traditional batch wet bench
cleaning systems, including improved cleaning efficiency, reduced chemical
usage, a smaller footprint, lower operating costs and greater process
flexibility. In addition, the single wafer design minimizes the risks inherent
in processing wafers in batches. The Company's cleaning systems can accommodate
a variety of chemical cleaning solutions. The Company works with its customers
to incorporate a customer's unique requirements into its cleaning systems. The
Company's cleaning systems range in price from approximately $150,000 to
$525,000, depending on the configuration and options.
CMP POLISHER UNDER DEVELOPMENT
Through the development of its cleaning systems and close relationships
with customers and suppliers, the Company has acquired expertise in the CMP
process. The Company is applying this expertise to the development of a CMP
polishing system based on a technological approach different than conventional
polishers which utilize a rotating table and rotating heads. The Company has
developed a proprietary linear polishing method and has designed its polishing
system to be installed in a Class 1 clean room environment, to planarize
patterned films on wafers, and to polish wafers at higher rates and achieve the
uniformity and planarity that is necessary to manufacture advanced semiconductor
devices.
The Company's CMP polishing system, the Aurora, is currently under
development. In November 1995, the Company shipped its first development-stage
polisher unit to a customer for process testing. The development unit has been
returned to the Company, and the information and data obtained is being used to
develop a production-version unit. Based on the current development schedule,
shipments of production-version polisher units are expected to begin in the
second half of calendar year 1997. The Company's CMP polishing systems are
intended to compete with polishers that currently have selling prices ranging
from approximately $500,000 to $2,000,000.
The Company has expended and expects to continue to expend substantial
research, development and engineering resources to develop the CMP polishing
system. There can be no assurance that the Company will not experience
difficulties or delays in developing the polishing system, that such efforts
will be successful or that the polishing system will satisfy customer
requirements or achieve market acceptance. See "Item 7. -- Future Performance
and Risk Factors -- Risk of Developing and Marketing CMP Polishing System."
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CUSTOMERS
The Company sells its products to leading semiconductor manufacturers
located throughout the United States, Europe and the Pacific Rim. Sales to
Intel accounted for approximately 21% of net revenues in fiscal 1996; sales to
Intel and Motorola accounted for approximately 23% and 14%, respectively, of net
revenues in fiscal 1995; and sales to Intel and Texas Instruments accounted for
approximately 22% and 12%, respectively, of net revenues in fiscal 1994. The
Company expects that sales of its products to relatively few customers will
continue to account for a high percentage of its net revenues in the foreseeable
future. See "Item 7. -- Future Performance and Risk Factors -- Customer
Concentration."
BACKLOG
The Company schedules production of its systems based upon backlog,
informal customer commitments and general economic forecasts for its targeted
markets. The Company includes in its backlog only those customer orders for
systems for which it has accepted purchase order numbers and for which delivery
has been specified within twelve months as well as orders for spare parts and
service and support of systems. The Company has entered into purchase
agreements with certain large customers, which specify the terms and conditions
for the sale of the Company's products. There are no firm purchase commitments
under any of these agreements. Customers commit to purchase the Company's
products by issuing purchase orders. The timing of the purchase orders'
issuance is subject to the customer's delivery requirements.
The Company's backlog was approximately $25.0 million, $18.6 million, and
$3.7 million at the end of fiscal 1996, 1995, and 1994, respectively. None of
the backlog pertains to the CMP polishing system under development. The
equipment requirements of new semiconductor fabrication facilities cannot be
determined with accuracy, and therefore the Company's backlog at any particular
date is not indicative of future growth. In addition, because of possible
changes in system delivery schedules, cancellations and the rescheduling of
system orders, orders being subject to cancellation, deferral or rescheduling by
the customer with limited or no penalties, and potential delays in system
shipments, the Company's backlog at any particular date is not necessarily
representative of actual sales for any succeeding period.
MARKETING, SALES AND CUSTOMER SUPPORT
The Company markets and sells its products in the United States, Europe and
the Pacific Rim primarily through distributors and manufacturers' sales
representatives. The Company's domestic representation agreements generally
provide that domestic sales representatives sell the Company's products on an
exclusive basis in a specific territory for a term of two years, which term is
automatically extended for an additional one year, if the agreement is not
sooner terminated. The agreements generally may be terminated by either party
only for cause. Each sales representative has agreed not to sell products which
compete with the Company's products, within the defined territory or outside of
the defined territory, during the term of the agreement. Certain of the
Company's major customers are excluded from the territories covered by the
agreements, as the Company sells direct to these major customers through its
sales personnel. The Company's international representation agreements
generally provide that international distributors sell the Company's products on
an exclusive basis in a specific territory for a definite term, generally one to
two years, which term is automatically extended for an additional one year, if
the agreement is not sooner terminated. The agreements generally may be
terminated by either party only for cause. Each international distributor has
agreed not to sell products which compete with the Company's products, within
the defined territory or outside of the defined territory, during the term of
the agreement.
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The Company's sales and marketing activities are monitored and coordinated
by sales management personnel located at the Company's headquarters in San Jose,
California, and at a regional sales, service, and training office in Austin,
Texas. The Company sells direct to selected major customers through its sales
management personnel, and expects to expand its direct sales force in the
future. The Company also utilizes product marketing engineers to support the
Company's sales and marketing activities. To date, the Company's marketing
efforts have principally involved advertising in trade magazines and
participating in trade shows and technical conferences.
The Company believes its sales, service and customer support organizations
are important to its long term customer relationships. The Company's field
service and applications engineers and process engineers provide technical
support in the Company's sales efforts and assist customers in defining process
specifications and in qualifying and implementing their CMP processes on the
Company's systems. The Company's field service and applications engineers and
process engineers therefore provide a key link between the Company and its
customers. The Company believes its investment in customer service facilitates
greater adoption of its systems by leading semiconductor manufacturers
throughout the world.
The Company is devoting significant resources to expand the adoption of its
products in the Pacific Rim. To date, demand for the Company's products in the
Pacific Rim has been limited, due in part to the concentration of semiconductor
memory device manufacturers in this region, the majority of which have not
adopted the CMP manufacturing process. In 1994, the Company entered into a
distribution agreement with Seki Technotron, one of the largest distributors of
semiconductor capital equipment in Japan, to distribute the Company's products
in Japan. Sales in the Pacific Rim increased to 14% in fiscal 1996 from 12% in
fiscal 1995 and 9% in fiscal 1994. See "Item 7. -- Future Performance and Risk
Factors -- Risks Associated with the Japanese Market."
The Company generally offers standard warranty terms of one year on parts
and labor. The Company also offers service contracts to its customers for
continued maintenance of systems that are not covered by warranty. The
Company's field service personnel directly support domestic warranty service,
post-warranty contract service and equipment installations. The Company's
distributors and international manufacturers' sales representatives provide
service and support for the Company's equipment in the United States, Europe and
the Pacific Rim.
RESEARCH, DEVELOPMENT AND ENGINEERING
The semiconductor capital equipment market generally, and in particular the
CMP market in which the Company competes, are characterized by rapid
technological development and product innovation. To maintain its leadership
position in CMP cleaning, the Company intends to devote substantial resources to
continuously improve its wafer cleaning technology and surface science expertise
and to work closely with its customers to improve the capabilities of its
advanced CMP cleaning systems. The Company has an on-site clean room with full
metrology capabilities to mirror customers' operations, demonstrate its systems,
develop new processes and conduct research and development. In addition, the
Company participates in development or cooperative programs with industry
groups, research institutes and suppliers. The Company believes that such
collaborative activities benefit the Company and its customers through the
development and characterization of CMP processes and complementary technologies
among various suppliers to enhance the total CMP solution.
Since the quarter ended June 30, 1994, OnTrak has expended and expects to
continue to expend substantial resources to design and develop a CMP polishing
system. The resources devoted to the development of the CMP polishing system
are in addition to the Company's ongoing research and development activities and
represented a significant portion of the Company's total research, development
and engineering expenditures in fiscal 1996 and fiscal 1995. There can be no
assurance that the Company will not experience difficulties or delays in its
development efforts or that such efforts will be successful. If the Company's
polishing system is successfully developed, there can be no assurance that the
Company will be successful in marketing and selling its CMP polishing system.
The Company is also devoting research, development and engineering resources to
adapt its cleaning systems to other cleaning
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applications. See "Item 7. -- Future Performance and Risk Factors -- Dependence
on New Product Development and Acceptance" and "-- Risk of Developing and
Marketing CMP Polishing System."
Historically, the Company has devoted a significant portion of its
financial resources to research, development and engineering programs and
expects to continue to allocate significant resources to these efforts. As of
June 30, 1996, 104 of the Company's 323 full-time employees were engaged in
research, development and engineering. For fiscal 1996, 1995, and 1994, total
research, development and engineering expenditures were approximately $13.9
million, $6.8 million, and $2.0 million, respectively, and represented
approximately 25%, 26% and 17% of the Company's net revenues, respectively.
MANUFACTURING
The Company's manufacturing activities consist primarily of assembling and
testing components and subassemblies which are acquired from third party
suppliers and then integrated into a finished system by the Company. Although
most components are standard products, some components are manufactured by
others to the Company's specifications. To date, the Company has not outsourced
a significant portion of its assembly work. In order to lower production costs
and achieve greater operational flexibility, the Company expects to increase the
utilization of subcontractors to manufacture certain subassemblies, assemble
components and perform other non-critical manufacturing activities in the
future. The Company will continue to perform manufacturing activities that
require specialized knowledge or proprietary technology. The increased reliance
on subcontractors will result in reduced control over pricing and timely
delivery of components and subassemblies. In fiscal 1996, the Company moved its
manufacturing operations to a larger facility and increased its manufacturing
capacity to support the growth in cleaning system shipments and the introduction
of the CMP polishing system under development.
Certain components, including the brushes used in its cleaning systems,
subassemblies and services necessary for the manufacture and operation of the
Company's systems are obtained from sole suppliers or a limited group of
suppliers. See "Item 7. -- Future Performance and Risk Factors -- Dependence on
Key Suppliers."
COMPETITION
The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by customers to install and integrate capital
equipment into a semiconductor production line. The Company believes that as a
result, once a semiconductor manufacturer has selected a particular supplier's
capital equipment, the manufacturer generally relies upon that equipment for the
specific production line application and frequently will attempt to consolidate
its other capital equipment requirements with the same supplier. Accordingly,
the Company would expect to experience difficulty in selling to a given customer
if that customer had initially selected or selects a competitor's capital
equipment.
The Company's current principal product line is the DSS-200 cleaning
system, which is primarily designed for cleaning during the CMP process and, to
a lesser extent, general wafer cleaning. In CMP cleaning applications, the
Company's principal competitor is Dainippon Screen Manufacturing Co. Ltd.
("Dainippon Screen"). The Company expects that it will face increased
competition from Integrated Process Equipment Corp. ("IPEC"), which is a major
supplier of CMP polishing systems and also offers a CMP cleaning system, as well
as other competitors as the CMP process matures. In general cleaning
applications, the Company's principal competitors include Dainippon Screen and
others. Many of these competitors and potential competitors have greater
financial, marketing, technical and other resources, broader product lines,
greater customer service capabilities and larger and more established sales
organizations than the Company. In addition, Dainippon Screen has a large
installed base of cleaning systems in Japan and IPEC offers its CMP cleaning
system in an integrated system with its CMP polishing tool, and has a large
installed base of polishers with many of the Company's current and potential
customers.
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The CMP polishing system under development by the Company is expected to
face significant competition from multiple current and future competitors.
Companies currently offering polishing systems include Applied Materials, Cybeq
Systems, Ebara Corporation, IPEC, Strasbaugh, SpeedFam Corp. and Sumitomo Metal
Industries Ltd. IPEC currently has the largest installed base of CMP polishers
and also offers an integrated CMP polishing and cleaning system. The Company
believes that other companies are developing polishing systems and are planning
to introduce new products to this market before or during the same time frame as
the Company's planned introduction of its CMP polishing system. Many of these
current and potential new competitors have greater financial, marketing,
technical and other resources, broader product lines, long-time customer
relationships, greater customer service capabilities and larger and more
established sales organizations than the Company.
The principal elements of competition in the Company's markets are
technological innovation, supplier reputation, total cost of ownership of the
systems, including yield, price, product performance and throughput capability,
quality, and reliability, and customer service and support. Although the
Company believes that it competes favorably with respect to each of these
factors, there can be no assurance that the Company's competitors will not
develop enhancements to and future generations of competitive products that may
offer improved price or performance features. New product introductions,
announcements and enhancements by the Company's competitors could cause a
significant decline in sales or loss of market acceptance of the Company's
existing systems or make the Company's systems or technology less competitive or
obsolete.
The Company believes that to remain competitive will require the investment
of significant financial resources in developing new product features and
enhancements, and to maintain customer service and support centers worldwide.
In marketing its products, the Company will face competition from suppliers
employing new technologies in order to extend the capabilities of competitive
products beyond their current limits or increase their productivity. In
addition, increased competitive pressure could lead to intensified price-based
competition, resulting in lower prices and margins, which would materially
adversely affect the Company's business and results of operations.
The Company believes that increased penetration of the Pacific Rim,
particularly Japan, will be important to its future financial performance. The
Company must compete in Japan against Japanese process equipment manufacturers
that are well established in the Japanese process equipment market. This market
has traditionally been difficult for non-Japanese process equipment
manufacturers to penetrate. Furthermore, Japanese semiconductor manufacturers
have extended their influence outside of Japan by licensing products and process
technologies to non-Japanese semiconductor manufacturers. Such licenses could
result in a recommendation to use certain semiconductor capital equipment
manufactured by Japanese companies. Therefore, the Company is at a distinct
competitive disadvantage compared to leading Japanese suppliers which have
longstanding collaborative relationships with Japanese semiconductor
manufacturers. The Company has not established itself as a competitor in the
Japanese market and there can be no assurance that the Company will be able to
achieve significant sales to Japanese semiconductor manufacturers. See "Item 7.
- -- Future Performance and Risk Factors -- Risks Associated with the Japanese
Market."
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INTELLECTUAL PROPERTY RIGHTS AND LICENSES
The Company currently holds several United States patents which expire
beginning in 2012. The Company also has several United States and foreign
patent applications pending. However, the Company believes that its success
will depend more upon the innovation, technological expertise and marketing
abilities of its employees than upon the protection provided by its patents,
trademarks, copyrights and other intellectual property rights.
Although the Company attempts to protect its intellectual property rights
through patents, copyrights, trade secrets and other measures, there can be no
assurance that the Company will be able to protect its technology adequately or
that competitors will not be able to develop similar technology independently.
There can be no assurance that any of the Company's pending patent applications
will be issued or that foreign intellectual property laws will protect the
Company's intellectual property rights. There can be no assurance that any
patent issued to the Company will not be challenged, invalidated or circumvented
or that the rights granted thereunder will provide competitive advantages to the
Company. Furthermore, there can be no assurance that others will not
independently develop similar products, duplicate the Company's products, or, if
the patents are issued to the Company, design around the patents issued to the
Company.
There has been substantial litigation regarding patents and other
intellectual property rights in semiconductor-related industries. As is typical
in the semiconductor capital equipment industry, the Company has received
notices from time to time from third parties alleging infringement claims.
Although there currently are no pending claims or lawsuits against the Company
regarding any possible infringement claims, there can be no assurance that
infringement claims by third parties or claims for indemnification resulting
from infringement claims in the future will not be asserted or that such
assertions, if proven to be true, will not materially adversely affect the
Company's business, financial condition and results of operations. If any such
claims are asserted against the Company, the Company may seek to obtain a
license under the third party's intellectual property rights. There can be no
assurance that a license will be available on reasonable terms or at all. The
Company could decide, in the alternative, to resort to litigation to challenge
such claims. Such challenges could be extremely expensive and time consuming
and could materially adversely affect the Company's business, financial
condition and results of operations.
In June 1995, the Company entered into a worldwide, non-exclusive patent
and technology license agreement with Silicon Valley Group, Inc., a manufacturer
of semiconductor capital equipment. The license agreement resulted from a
disputed claim by the licensor that the Company's products infringed a patent
owned by the licensor. Although the Company believed that the patent would not
have been enforceable against it, the Company negotiated the license agreement
to avoid the inherent risks and costs of litigation. Under the license
agreement, the Company paid $1.5 million upon the closing of the Company's
initial public offering in July 1995 for royalties for periods prior to
October 1, 1995. Subsequent to October 1, 1995, the Company is obligated to pay
royalties equal to 1.5% of covered sales of the Company's cleaning systems, up
to a maximum of $1.5 million.
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EMPLOYEES
At June 30, 1996, the Company had 323 full-time employees, including 104
engaged in research, development and engineering, 22 in sales and marketing, 62
in customer service and support, 108 in manufacturing and 27 in general
administration and finance. None of the employees of the Company is covered by
a collective bargaining agreement. The Company considers its relationships with
its employees to be good.
The Company believes its future success will depend in large part on the
Company's ability to recruit and retain qualified employees, particularly those
highly skilled design, process and test engineers involved in the manufacture of
existing systems and the development of new systems and processes. The
competition for such personnel is intense. There can be no assurance that the
Company will be successful in recruiting or retaining key personnel.
ITEM 2. PROPERTIES.
The Company maintains its headquarters, research and development and
manufacturing operations in four leased facilities in San Jose, California and
Milpitas, California, which together comprise approximately 118,000 square feet.
The leases on these facilities expire at various dates through March 2001. The
Company also leases service and sales offices in various locations in the U.S.
and overseas. The Company believes that its existing facilities will be
adequate to meet its currently anticipated requirements and that suitable
additional or substitute space will be available as needed.
ITEM 3. LEGAL PROCEEDINGS.
In April 1996, Homayoun Talieh, who was the Company's Vice President, CMP
Systems Division through September 1995, filed a demand for arbitration pursuant
to an employment agreement between the Company and Mr. Talieh. Mr. Talieh seeks
unspecified damages allegedly based on his employment contract and upon
allegations that he was wrongfully terminated. The arbitration hearing has been
scheduled for October 1996. The Company intends to defend the action
vigorously, and believes that the outcome of the arbitration will not have a
material adverse effect on its financial condition or results of operations.
In July 1996, the Company entered into a settlement agreement with Rick
Lutz, a former employee, director, and shareholder of the Company, under which
all claims asserted by Mr. Lutz in a lawsuit filed in October 1995 were resolved
for an immaterial sum.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not Applicable.
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EXECUTIVE OFFICERS OF THE COMPANY
The names and certain information about the executive officers of the
Company are as follows:
NAME AGE POSITION
James W. Bagley 57 Chairman of the Board of Directors
and Chief Executive Officer
Jerauld J. Cutini 37 Executive Vice President, Sales,
Marketing, and Customer Support,
Secretary and Director
Patrick C. O'Connor 48 Vice President, Chief Financial
Officer and Assistant Secretary
Wilbur Krusell, Ph.D. 48 Executive Vice President, Process
Technology, and Chief Technical
Officer
Mr. Bagley has served as Chairman of the Board and Chief Executive Officer
of the Company since June 1996. Prior to joining OnTrak, Mr. Bagley was
employed by Applied Materials, Inc. for 15 years in various management
positions, most recently as Vice Chairman of the Board of Directors. He joined
Applied Materials in 1981 as Senior Vice President, was Chief Operating Officer
from 1987 through October 1995, served as President from December 1987 to
December 1993, and was appointed Vice Chairman of the Board of Directors in
December 1993. Mr. Bagley was employed by Texas Instruments before he joined
Applied Materials. Mr. Bagley is also a director of Tencor Instruments,
Teradyne, Inc. and Kulicke and Soffa Industries, Inc.
Mr. Cutini joined the Company in August 1990 as Vice President of Sales. He
has served as a director of the Company since November 1990. He served as the
Company's Chief Financial Officer from November 1990 until September 1992. He
became Secretary in September 1992, and became Executive Vice President, Sales
and Marketing in November 1994. From February 1989 to August 1990, Mr. Cutini
was Senior Sales Engineer for Applied Materials. From September 1988 to
February 1989, Mr. Cutini was Western Regional Sales Manager for Solitec, Inc.,
a semiconductor equipment company. From May 1981 to September 1988, Mr. Cutini
was employed by Silicon Valley Group in various positions in sales, marketing,
and customer service.
Mr. O'Connor joined the Company in June 1992 and has served as
Vice-President, Chief Financial Officer and Assistant Secretary since
September 1992. He served as a director of the Company from September 1992 to
November 1994. Mr. O'Connor was an independent management consultant from
May 1991 through December 1994, when he became a full-time employee of the
Company. From 1979 to May 1991, Mr. O'Connor was employed by Silicon Valley
Group, in various positions, including Senior Vice President of Corporate
Development; Vice President, Operations; and Vice President of Customer
Services. From 1973 to 1979, Mr. O'Connor was the Chief Financial Officer or
Corporate Controller for the Semiconductor Equipment Division of Eaton
Corporation and its predecessors.
Dr. Krusell joined the Company in November 1992 as Vice President, Process
Technology, and Chief Technical Officer. From February 1992 to October 1992,
Dr. Krusell was employed by Watkins-Johnson Company, first as Manager, Single
Wafer Process Research and Development, and subsequently as Manager of CVD
Research and Development. From September 1990 to January 1992, Dr. Krusell was
Director of Process Development for Advantage Production Technology, Inc., a
semiconductor equipment company. From 1976 to September 1990, Dr. Krusell was
employed by MEMC in various positions, most recently as Wafer Process Manager.
The executive officers serve at the discretion of the Board of Directors,
until their successors are appointed.
10
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company consummated an initial public offering on July 10, 1995. Prior
to the offering, there was no trading market for the Company's Common Stock. The
Common Stock is traded on the Nasdaq National Market under the symbol ONTK. The
following table sets forth the high and low sale prices for the Common Stock for
the periods indicated, as reported by the Nasdaq National Market:
High Low
---- ---
FISCAL YEAR 1996
First Quarter (July 10 - September 30, 1995). . . $34-3/4 $23-1/2
Second Quarter (October 1 - December 31, 1995) . . $27 $14
Third Quarter (January 1 - March 31, 1996) . . . . $17-3/4 $12
Fourth Quarter (April 1 - June 30, 1996) . . . . . $28-3/4 $11-1/2
On August 31, 1996, the last reported sale price of the Common Stock on the
Nasdaq National Market was $14 5/8 per share. On August 31, 1996, there were
approximately 360 holders of record of the Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain future earnings, if any, for its
business and does not anticipate paying any cash dividends on the Common Stock
in the foreseeable future. In addition, the Company's bank line of credit
agreement prohibits the payment of cash dividends without the prior approval of
the bank.
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<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net revenue $55,829 $26,024 $11,497 $5,451 $3,244
Cost of revenue 26,334 10,889 4,776 2,492 1,808
------ ------ ------ ------ -----
Gross profit 29,495 15,135 6,721 2,959 1,436
------ ------ ------ ------ -----
Operating Expenses:
Research, development and engineering 13,886 6,828 1,991 1,204 554
Selling, general and administrative 9,689 5,504 2,333 1,283 854
Charge for past royalties -- 1,250 -- -- --
------ ------- ------ ------ -----
Total operating expenses 23,575 13,582 4,324 2,487 1,408
------ ------ ------ ------ -----
Income from operations 5,920 1,553 2,397 472 28
Interest and other income (expense), net 1,442 (27) (48) (51) (34)
------ ----- ------ ------ -----
Income (loss) before provision (benefit)
for income taxes 7,362 1,526 2,349 421 (6)
Provision (benefit) for income taxes 2,575 458 836 97 (40)
------ ----- ------ ------ -----
Net income $ 4,787 $ 1,068 $1,513 $ 324 $ 34
------- ------- ------ ------ ------
------- ------- ------ ------ ------
Net income per share (1) $ 0.59 $0.17 $ 0.24 $ 0.06 $ 0.01
------ ----- ------ ------ ------
------ ----- ------ ------ ------
Weighted average common and common
equivalent shares (1) 8,167 6,134 6,344 5,585 5,427
<CAPTION>
AT JUNE 30,
--------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA:
<S> <C> <C> <C> <C> <C>
Working capital $ 45,970 $ 6,024 $ 1,995 $ 634 $ 311
Total assets 62,132 15,767 5,275 2,300 1,196
Long-term obligations (excluding current
portion) 1,173 1,471 805 612 464
Mandatorily redeemable preferred stock -- 6,522 -- -- --
Total shareholders' equity 52,090 836 1,884 406 38
</TABLE>
(1) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
12
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Except for the historical information contained herein, the matters
discussed in this Form 10-K include forward-looking statements which are subject
to a number of risks and uncertainties that could cause the actual results to
differ materially from the statements made. These include, but are not limited
to, the matters discussed below under the caption "Future Performance and Risk
Factors" and under "Item 1. - Business".
OVERVIEW
The Company was incorporated in 1985 to provide third party sales of spare
parts for certain silicon wafer processing and semiconductor manufacturing
equipment. In 1990, the Company changed its focus and began developing a wafer
cleaning system. Sales of the Company's cleaning systems have increased as new
wafer processing requirements, such as CMP, have driven the need for improved
cleaning processes. As of June 30, 1996, the Company has shipped over 300
cleaning systems to customers worldwide. The Company has been profitable in
each of its last five fiscal years.
The Company has been undergoing a period of rapid growth. The Company has
significantly increased its operations to support increased revenues, including
the hiring of additional personnel, and has made substantial investments in
research, development and engineering to support product development. The
Company's expansion has resulted in significantly higher operating expenses and
the Company expects that its operating expenses will continue to increase
significantly. In the quarter ended June 30, 1994, the Company commenced
development of a CMP polishing system. This development has resulted in a
significant increase in research, development and engineering expenses and a
corresponding decrease in operating margins. In June 1995, the Company entered
into a worldwide, non-exclusive patent and technology license agreement with
Silicon Valley Group whereby the Company paid $1.5 million upon the closing of
its initial public offering in July 1995. This payment relates to royalties for
periods prior to October 1, 1995. Subsequent to October 1, 1995, the Company is
obligated for royalties of 1.5% of covered sales of the Company's cleaning
systems, up to a maximum of $1.5 million. See Note 9 of Notes to Consolidated
Financial Statements.
The Company's gross margins have been and will continue to be affected by a
variety of factors, including the mix and average selling prices of systems, the
mix of customers, the costs associated with new system introductions and
enhancements, and the customization of systems. In addition, sales to
international distributors in Europe and Japan are at discounted prices which
reduce gross margins. Gross margins for initial shipments of new products are
typically lower than those for mature products until volume manufacturing is
achieved due to the inefficiencies associated with the start-up of manufacturing
operations.
13
<PAGE>
RESULTS OF OPERATIONS FOR THE FISCAL YEARS ENDED JUNE 30, 1996, 1995, AND 1994
The following table sets forth the consolidated statement of operations
data of the Company expressed as a percentage of net revenues for the periods
indicated:
YEAR ENDED JUNE 30,
-------------------------
1996 1995 1994
------ ------ ------
Net revenue 100.0% 100.0% 100.0%
Cost of revenue 47.2 41.8 41.5
------ ------ ------
Gross profit 52.8 58.2 58.5
------ ------ ------
Operating expenses:
Research, development and engineering 24.9 26.2 17.3
Selling, general and administrative 17.3 21.2 20.3
Charge for past royalties -- 4.8 --
------ ------ ------
Total operating expenses 42.2 52.2 37.6
------ ------ ------
Income from operations 10.6 6.0 20.9
Interest and other income (expense), net 2.6 (0.1) (0.4)
------ ------ ------
Income before provision for income taxes 13.2 5.9 20.5
Provision for income taxes 4.6 1.8 7.3
------ ------ ------
Net income 8.6% 4.1% 13.2%
------ ------ ------
------ ------ ------
NET REVENUE. Net revenues increased by 115% to $55.8 million in fiscal 1996,
compared to $26.0 million in fiscal 1995, which represented an increase of 126%
compared to $11.5 million in fiscal 1994. The increase in each period was
primarily attributable to increased sales of cleaning systems for use in the CMP
production process. To a lesser extent, increases in average selling prices in
each period also contributed to the increases in net revenues. The DSS-200
Series II cleaning system, which has a higher average selling price than
previous systems, was introduced in fiscal 1995, and represented a higher
proportion of total systems sales in fiscal 1996 compared to fiscal 1995.
International sales accounted for 32.3%, 27.2%, and 30.9% of net revenues in
fiscal 1996, 1995 and 1994, respectively. Sales to customers in Europe were
$10.1 million, $3.9 million, and $2.4 million in fiscal 1996, 1995, and 1994,
respectively. Sales to customers in the Pacific Rim were $7.9 million, $3.2
million, and $1.1 million in fiscal 1996, 1995, and 1994, respectively. The
increase in international sales in each period was primarily attributable to
increased shipments of cleaning systems for use in the CMP production process.
It is anticipated that international sales will continue to represent a
significant portion of net revenues for the foreseeable future. All of the
Company's sales are recorded in U.S. dollars.
GROSS MARGIN. Gross margin decreased to 52.8% in fiscal 1996 from 58.2% in
fiscal 1995 and from 58.5% in fiscal 1994. The decrease in fiscal 1996 compared
to fiscal 1995 was primarily attributable to the effect of distributor discounts
on international shipments. In addition, the decrease in fiscal 1996 reflected
the incremental effect of field application engineering and
14
<PAGE>
royalty expenses which totaled approximately 3% of net revenues; the effect of
these items on gross margin in fiscal 1995 was not significant. The slight
decrease in fiscal 1995 compared to fiscal 1994 was primarily attributable to
the introduction of the DSS-200 Series II system and the effect of distributor
discounts on international shipments.
RESEARCH, DEVELOPMENT, AND ENGINEERING. Research, development, and engineering
expenses increased to $13.9 million, or 24.9% of net revenues, in fiscal 1996,
from $6.8 million, or 26.2% of net revenues, in fiscal 1995, and from $2.0
million, or 17.3% of net revenues, in fiscal 1994. The increase in absolute
dollars in fiscal 1996 compared to fiscal 1995 was primarily attributable to the
continued investment in the development of the CMP polishing system. It is
anticipated that research, development, and engineering expenses will remain at
a relatively high level, both in terms of absolute dollars and as a percentage
of net revenues, until the polishing system is in commercial production. The
increase in research, development, and engineering expenses in fiscal 1995
compared to fiscal 1994 was also primarily attributable to research and
development expenses for the Company's CMP polishing system, which the Company
commenced developing in the fourth quarter of fiscal 1994. To a lesser extent,
the increase in fiscal 1995 was attributable to continuing investment in
improving the Company's cleaning systems.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general, and administrative
expenses increased to $9.7 million, or 17.3% of net revenues, in fiscal 1996,
from $5.5 million, or 21.2% of net revenues, in fiscal 1995, and from $2.3
million, or 20.3% of net revenues, in fiscal 1994. The increase in absolute
dollars in fiscal 1996 compared to fiscal 1995 was primarily attributable to
increased sales and marketing activities; however, these expenses decreased as a
percentage of net revenues due to a higher growth in sales. In addition, sales
commissions were approximately 1.5% lower as a percentage of net revenues in
fiscal 1996 compared to fiscal 1995, due to variations in the Company's
worldwide sales mix, including increased levels of non-commission distributor
and direct sales. The increase in fiscal 1995 compared to fiscal 1994 was
primarily attributable to the expansion of the Company's sales and marketing
organization to support the increased sales. Sales commissions were also higher
as a percentage of net revenues in fiscal 1995 compared to fiscal 1994 due to
variations in the Company's worldwide sales mix.
CHARGE FOR PAST ROYALTIES. In June 1995, the Company entered into a worldwide,
non-exclusive license agreement under which the Company agreed to pay $1.5
million upon the closing of its initial public offering in July 1995. The
portion of the payment which related to the use of the technology prior to March
31, 1995 was reflected as a non-recurring, $1.3 million charge to operations in
fiscal 1995. For sales after March 31, 1995, royalty expense relating to the
license agreement has been approximately 1.5% of net revenues and has been
included in cost of sales.
INCOME TAXES. The Company's effective tax rate was 35.0%, 30.0%, and 35.6% of
net revenues in fiscal 1996, 1995, and 1994, respectively. The increase in
fiscal 1996 compared to fiscal 1995 was primarily attributable to the expiration
of the federal research and development credit and variations in the Company's
worldwide sales mix, offset by a lower effective state tax rate, which was due
to increased sales activities in states with lower tax rates. The decrease in
fiscal 1995 compared to fiscal 1994 was primarily attributable to the effect of
research and development tax credits applied against lower pre-tax income.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its growth primarily through cash flows from operations
and proceeds raised in equity offerings, including its initial public offering
in July 1995 and a private placement of preferred stock in November 1994. Net
cash provided by operations was $2.5 million in fiscal 1996, compared to net
cash used for operations of $2.0 million in fiscal 1995 and net cash provided by
operations of $1.3 million in fiscal 1994. Cash provided by operations in
fiscal 1996 was primarily attributable to increased sales and profitability,
which was partially offset by increases in accounts receivable and inventory.
Net accounts receivable increased by $3.7 million in fiscal 1996, due primarily
to the increased sales volume. Inventory increased by $2.3 million during
fiscal 1996, primarily to support the increased production requirements
resulting from the increase in sales.
Investing activities consist primarily of capital expenditures and purchases and
sales of short-term investments. Capital expenditures totaled $6.1 million in
fiscal 1996, and consisted primarily of leasehold improvements for the Company's
new headquarters and manufacturing facility and equipment purchased for research
and development activities. Net purchases of short-term investments totaled
$12.4 million in fiscal 1996. Cash flows from financing activities totaled
$38.4 million in fiscal 1996, consisting primarily of the net proceeds of $41.4
million from the Company's initial public offering, offset by the payment of
$3.5 million to redeem the Company's Mandatorily Redeemable Preferred Stock.
At June 30, 1996, the Company had working capital of $46.0 million, with its
primary source of liquidity provided by $36.6 million in cash and short-term
investments. The Company also has a $10.0 million line of credit agreement
which expires in November 1996; no borrowings are outstanding under the
agreement. At June 30, 1996, the Company had $1.2 million of long-term
obligations, consisting primarily of a five year term loan agreement, which
replaced the equipment financing obligations outstanding at June 30, 1995.
Capital expenditures in fiscal 1997 are expected to approximate the amount spent
in fiscal 1996, and are expected to include the expansion of the Company's
manufacturing and service facilities, and equipment and facility improvements
for research, development, and engineering purposes, including the continued
development of the CMP polishing system. As a result of these capital
expenditures, the Company's depreciation and amortization costs are expected to
increase significantly. In addition, the Company expects to incur increased
research, development, and engineering expenses in fiscal 1997 relating to the
CMP polishing system.
The Company believes that its existing cash and short-term investments,
anticipated cash flow from operations, and cash available under line of credit
agreements will be sufficient to meet the Company's cash requirements through
fiscal 1997. However, after that period, depending on its rate of growth and
profitability, the Company may require additional equity or debt financing to
meet its cash requirements. There can be no assurance that such financing will
be available when required or, if available, will be on terms satisfactory to
the Company.
16
<PAGE>
FUTURE PERFORMANCE AND RISK FACTORS
THE COMPANY'S FUTURE BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION
ARE SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THOSE DESCRIBED BELOW.
CYCLICALITY OF SEMICONDUCTOR INDUSTRY
The Company's business depends upon capital expenditures by manufacturers
of semiconductor devices, primarily for the opening of new or expansion of
existing fabrication facilities, which, in turn, depends upon the current and
anticipated market demand for semiconductor devices and products utilizing such
devices. The semiconductor industry is highly cyclical and historically has
experienced periods of oversupply, resulting in significantly reduced demand for
capital equipment. The semiconductor industry has experienced significant
growth in recent years, which has resulted in significant growth in the
semiconductor capital equipment industry, and from which the Company has
benefited. However, the growth in the semiconductor and semiconductor capital
equipment industries has recently slowed and there are indications that a
downturn in the semiconductor capital equipment industry may be occurring.
There can be no assurance that growth in the Company's business can be
sustained. The Company anticipates that a significant portion of new orders
will depend upon demand from semiconductor manufacturers building or expanding
large fabrication facilities for advanced multi-level semiconductor devices with
design rules of 0.5 micron and below, and there can be no assurance that such
demand will exist. Moreover, the Company's business and results of operations
will be materially adversely affected by future downturns or slowdowns in the
semiconductor industry.
HIGHLY COMPETITIVE INDUSTRY
The semiconductor capital equipment industry is intensely competitive. A
substantial investment is required by semiconductor manufacturers to install and
integrate capital equipment into a semiconductor production line. The Company
believes that as a result, once a semiconductor manufacturer has selected a
particular supplier's capital equipment, the manufacturer generally relies upon
that equipment for the specific production line application and frequently will
attempt to consolidate its other capital equipment requirements with the same
supplier. Accordingly, the Company would expect to experience difficulty in
selling to a given customer if that customer had initially selected or selects a
competitor's capital equipment.
Many of the Company's competitors and potential competitors have greater
financial, marketing, technical and other resources, broader product lines,
greater customer service capabilities, and larger and more established sales
organizations than the Company. There can be no assurance that the Company's
competitors will not develop enhancements to and future generations of
competitive products that may offer improved price or performance features. New
product introductions, enhancements of existing products, or announcements
relating to the planned introduction of new products or enhancements to existing
products by the Company's competitors could cause a significant decline in sales
or loss of market acceptance of the Company's systems or otherwise make the
Company's systems or technology obsolete or noncompetitive. In addition, by
virtue of the Company's reliance on sales of cleaning systems, the Company could
be at a disadvantage compared to competitors that offer integrated CMP polishing
and cleaning systems if those systems gain broader market acceptance. The
Company believes that it will continue to face competition from current and new
suppliers. Increased competitive pressure could lead to reduced demand and
lower prices for the Company's products, which could materially adversely affect
the Company's business and results of
17
<PAGE>
operations. There can be no assurance that the Company will be able to compete
successfully in the future. See "Item 1. Business -- Competition."
ACCEPTANCE OF CMP PROCESS
The Company's products are primarily intended for use by semiconductor
manufacturers in the CMP process. Although the Company believes that the CMP
process is important for achieving the planarity required for the manufacture of
advanced semiconductor devices with multiple metal layers and design geometries
of 0.5 micron line widths and below, the CMP process is in an early stage of
implementation and has not yet been adopted by a majority of manufacturers. To
date, the Company's products have been used primarily in the manufacture of
advanced semiconductor logic devices. The Company has sold only a limited
number of CMP cleaning systems for use in the manufacture of advanced
semiconductor memory devices in part because, the Company believes, the
manufacture of these devices has not yet required significant use of the CMP
process. There can be no assurance that the CMP process will be utilized on a
widespread basis for manufacturing memory devices or that alternative processes
will not be used to achieve planarity in the manufacture of advanced logic or
memory devices. In addition, there are a number of patents relating to the CMP
process held by third parties. Accordingly, semiconductor manufacturers who use
the CMP process may be required to obtain licenses from the holders of one or
more of such patents, which may impede the adoption of CMP technology by other
semiconductor manufacturers. If the CMP process is not accepted in the market,
or if alternatives to the CMP process emerge, or other planarization
technologies improve to serve the industry's planarity requirements, the
Company's business and results of operations would be materially adversely
affected. See "Item 1. Business -- Industry Background."
RELIANCE ON SINGLE PRODUCT FAMILY
Substantially all of the Company's revenues to date have been attributable
to the Company's cleaning systems. Should the demand for, or pricing of, the
Company's cleaning systems decline, due to increased competitive pressure, the
introduction of superior systems or processes, changes in the semiconductor
industry or other factors, the Company's business and results of operations
would be materially adversely affected. The ability of the Company to diversify
its operations through the introduction and sale of new products, including its
proposed CMP polishing system, and broader acceptance of its cleaning system in
general cleaning applications, is dependent on the success of the Company's
continuing research, development and engineering activities, as well as its
marketing efforts. No assurance can be given that the Company will be able to
develop, acquire, introduce or market new products in a timely or cost-effective
manner or that any new products or improvements will achieve market acceptance.
Accordingly, the Company will be dependent on overall market acceptance of the
CMP process and sales of the Company's cleaning systems for use in CMP slurry
removal applications. See "Item 1. Business -- Products."
DEPENDENCE ON NEW PRODUCT DEVELOPMENT AND ACCEPTANCE
The semiconductor capital equipment industry is characterized by rapid
technological change, frequent new product introductions and continually
evolving industry standards. The Company believes that its future success will
depend in part upon its ability to continue to enhance its existing cleaning
systems and their process capabilities, to adapt its cleaning systems to other
cleaning applications not currently addressed by the Company, and to design and
develop new technologies, processes, and systems, including but not limited to
the CMP polishing system under development, that compete effectively on the
basis of price, performance
18
<PAGE>
and features that adequately address customer requirements. The success of the
Company in developing, introducing, and selling new and enhanced equipment
depends upon a variety of factors, including timely and efficient completion of
product design and development and implementation of manufacturing and assembly
processes, and product performance in the field, as well as effective sales and
marketing. There can be no assurance that any new or enhanced product will be
successfully developed, manufactured or marketed. Because new product
development commitments must be made well in advance of sales, new product
decisions must anticipate both the future demand for the type of integrated
circuits under development by leading semiconductor manufacturers and the
equipment required to produce such integrated circuits.
The Company must also manage product transitions successfully, as
introductions of new products could adversely affect sales of existing products.
There can be no assurance that the Company will be able to develop and introduce
new products, including its CMP polishing system, or enhancements to its
existing products and processes in a manner which satisfies customer needs or
achieves market acceptance. The Company's inability to complete the development
or meet the technical specifications of any new systems or enhancements, or to
manufacture and ship these systems or enhancements in volume and in a timely
manner would materially adversely affect the Company's business and results of
operations, as well as its customer relationships. In addition, the Company may
incur substantial unanticipated costs to ensure the functionality and
reliability of its future product introductions early in the product's life
cycle and to ensure compliance with regulatory requirements. If new products
experience reliability or quality problems, the Company could encounter a number
of difficulties, including reduced orders, higher manufacturing costs, delays in
collection of accounts receivable and additional service and warranty expenses,
which events could materially adversely affect the Company's business and
results of operations. See "Item 1. Business -- CMP Polisher Under Development"
and "-- Research, Development and Engineering."
RISK OF DEVELOPING AND MARKETING CMP POLISHING SYSTEM
The Company has expended and expects to continue to expend substantial
research, development and engineering resources to develop a CMP polishing
system. The Company has not previously offered a CMP polishing system and there
can be no assurance that the Company will not experience difficulties or delays
in its development efforts or that such efforts will be successful. The CMP
polishing system is based on a new technological approach and is being developed
primarily by new employees who have not previously designed or developed a
product for the Company. Even if the Company's polishing system is successfully
developed, the Company may encounter problems or delays as it commences
manufacturing the CMP polishing system, for which it has no prior experience.
The Company's polishing system, if developed, will compete against polishing
systems marketed by suppliers with significant installed bases as well as
products that are expected to be introduced by new competitors. There can be no
assurance that the Company will be successful in marketing and obtaining
acceptance of its CMP polishing system. The failure to complete development of
the CMP polishing system on a timely basis or to achieve market acceptance for
the Company's CMP polishing system could have a material adverse effect on the
Company's business and results of operations. See "Item 1. Business -- CMP
Polisher Under Development" and "-- Research, Development and Engineering."
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<PAGE>
CUSTOMER CONCENTRATION
Historically, the Company has sold a significant proportion of its systems
in any particular period to a limited number of customers. The Company expects
that sales of its products to relatively few customers will continue to account
for a high percentage of its net revenues in the foreseeable future. Although
the composition of the group comprising the Company's largest customers has
varied from year to year, the loss of a significant customer or any reduction in
orders from any significant customer, including reductions due to customer
departures from recent buying patterns, delays or postponement of expansion
programs, market, economic or competitive conditions in the semiconductor
industry or in the industries that manufacture products utilizing semiconductor
devices could materially adversely affect the Company's business, financial
condition and results of operations. The Company's ability to maintain or
increase its sales in the future will depend in part upon its ability to obtain
orders from new customers, as well as the financial condition and success of its
customers, conditions in the semiconductor industry and the general business
economy, of which there can be no assurance. See "Item 1. Business --
Customers" and "-- Backlog."
FLUCTUATIONS IN OPERATING RESULTS
The Company derives a substantial portion of its revenues from the sale of
a relatively small number of systems, which typically range in purchase price
from approximately $150,000 to $525,000. As a result, a small reduction in the
number of systems shipped in a quarter could have a material adverse effect on
the Company's revenues and results of operations for that quarter. It is
expected that the purchase price for the Company's CMP polishing systems will be
higher than the price for its cleaning systems, which would exacerbate this
effect. A delay in shipment near the end of a particular quarter, due to, for
example, unanticipated shipment rescheduling, cancellation or deferral by
customers or unexpected manufacturing difficulties experienced by the Company,
may cause financial results in a particular quarter to fall significantly below
the Company's expectations and may materially adversely affect the Company's
results of operations for such quarter. In addition, the Company's intention to
expand its direct sales force and the need for continued investment in research,
development, engineering, marketing, customer service and support capabilities
will limit the Company's ability to reduce expenses in response to any such
decrease in sales. Moreover, all customer purchase orders are subject to
cancellation or rescheduling by the customer with limited or no penalties and,
therefore, backlog at any particular date is not necessarily representative of
actual sales for any succeeding period. If the Company's anticipated level of
revenues is not achieved for a particular period, the Company's operating
results could be adversely affected by its inability to reduce these costs.
Because the Company builds its systems according to forecast, a reduction in
customer orders or backlog could present future difficulties regarding the
Company's ability to plan production and inventory levels, which could adversely
affect the Company's business and results of operations. The impact of these
and other factors on the Company's operating results in any future period cannot
be accurately forecast. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY SUPPLIERS
Certain components, including the brushes used in its cleaning systems,
subassemblies and services necessary for the manufacture and operation of the
Company's systems are obtained from sole suppliers or a limited group of
suppliers. The Company has experienced temporary shortages of such supplies in
the past. The Company does not maintain any long-term agreements in excess of
one year with any of its suppliers and intends to increasingly rely on outside
suppliers to manufacture certain subassemblies and assemble components. The
20
<PAGE>
Company's reliance on sole or a limited group of suppliers and increased
reliance on subcontractors involve several risks, including a potential
inability to obtain an adequate supply of required components and reduced
control over pricing and timely delivery of components and subassemblies. The
disruption or termination of these sources could have a material adverse effect
on the Company's business and results of operations. The Company believes that
alternative sources could be obtained and qualified to supply these components,
if necessary. Nevertheless, any inability to obtain adequate deliveries or any
other circumstance that would require the Company to seek alternative sources of
supply or to manufacture such components internally could delay the Company's
ability to ship its products, which could damage relationships with current and
prospective customers and could have a material adverse effect on the Company's
business and results of operations. See "Item 1. Business -- Manufacturing."
RELIANCE ON MANUFACTURERS' SALES REPRESENTATIVES AND INTERNATIONAL DISTRIBUTORS
The majority of the Company's sales are made through manufacturers' sales
representatives and international distributors, whose activities are not within
the control of the Company. In addition, the Company's distributors also
provide service and support to the Company's international customers.
Therefore, a reduction in the sales efforts or financial viability of such
distributors and manufacturers' sales representatives, or a termination of the
Company's relationship with such entities, could adversely affect the Company's
sales, its financial results and its ability to support its customers. Although
management believes that it maintains good relations with its distributors and
manufacturers' sales representatives, there can be no assurance that such
relationships will continue. See "Item 1. Business -- Marketing, Sales and
Customer Support."
RISKS ASSOCIATED WITH THE JAPANESE MARKET
The Company believes that increased penetration of the Pacific Rim market,
particularly Japan, will be important to its future financial performance. The
Japanese semiconductor market represents a substantial percentage of the
worldwide semiconductor manufacturing capacity and has been difficult for non-
Japanese companies to penetrate. Furthermore, the licensing of products and
process technologies by Japanese semiconductor manufacturers to non-Japanese
semiconductor manufacturers could result in a recommendation to use certain
semiconductor capital equipment manufactured by Japanese companies. In
addressing this market, the Company is at a distinct competitive disadvantage
compared to leading Japanese suppliers, many of which have longstanding
collaborative relationships with Japanese semiconductor manufacturers. In
addition, Japanese manufacturers have also tended to concentrate on
manufacturing memory devices, which has not required the use of the CMP process.
Although the Company intends to devote greater resources to marketing its
products in the Pacific Rim, including Japan, there can be no assurance that the
Company will be able to achieve significant sales to the Japanese semiconductor
market. See "Item 1. Business -- Marketing, Sales and Customer Support."
21
<PAGE>
INTERNATIONAL BUSINESS
A significant portion of the Company's revenues have been attributable to
sales for installation in semiconductor fabrication facilities outside the
United States. Sales to customers outside the United States are subject to
certain risks, including unexpected changes in regulatory requirements, tariffs
and other barriers, political and economic instability, natural disasters,
difficulties in accounts receivable collection, extended payment terms, and the
greater difficulty in administering business overseas, as well as general
economic conditions. Although the Company's international sales are denominated
in United States dollars, sales to international customers may be affected by
changes in demand resulting from fluctuations in interest and currency exchange
rates. The Company is also subject to the risks associated with the imposition
of governmental controls and import and export regulations. The Company cannot
predict whether tariffs, quotas, duties, taxes or other charges or restrictions
will be implemented by the United States or any other country upon the
importation or exportation of the Company's products in the future. There can
be no assurance that these factors will not have a material adverse effect on
the Company's business and results of operations. Furthermore, although the
Company endeavors to meet technical standards established by foreign regulatory
bodies, it has in the past incurred delays attributable to the need to comply
with such technical standards. There can be no assurance that the Company will
be able to comply with changes in foreign standards in the future. The
inability of the Company to design products to comply with foreign standards
could have a material adverse effect on the Company's business and results of
operations. In addition, the laws of certain foreign countries may not protect
the Company's intellectual property to the same extent as do the laws of the
United States. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Item 1. Business -- Marketing, Sales and
Customer Support."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in significant part upon the contributions
of its management and key technical personnel, many of whom would be difficult
to replace. The loss of any key person could have a material adverse effect on
the Company's business and results of operations. In addition, the Company's
future operating results depend in part upon its ability to attract and retain
qualified management and key technical personnel for its operations.
Competition for such personnel is intense, and there can be no assurance that
the Company will be successful in attracting or retaining such personnel. There
is currently an industry-wide shortage of technical personnel which makes it
more difficult to attract and retain such personnel. The failure to attract or
retain such persons could materially adversely affect the Company's business and
results of operations. See "Item 1. Business -- Employees" and " -- Executive
Officers of the Company."
22
<PAGE>
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated since its
initial public offering in July 1995 and is subject to material fluctuation in
the future in response to a variety of factors, including: quarter to quarter
variations in operating results; announcements of developments related to the
Company's business; fluctuations in the Company's order levels; general
conditions in the semiconductor industry or the worldwide economy; announcements
of technological innovations; new products or product enhancements by the
Company or its competitors; developments relating to patents or other
intellectual property rights or disputes; and developments in the Company's
relationships with its customers, distributors and suppliers. In addition, in
recent years the stock market in general, and the market for shares of small
capitalization stocks in particular, has experienced extreme price fluctuations
which have often been unrelated to the operating performance of affected
companies. Such fluctuations could adversely affect the market price of the
Company's Common Stock.
23
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
ONTRAK SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
----
Report of Independent Accountants 25
Consolidated Balance Sheet at June 30, 1996 and 1995 26
Consolidated Statement of Operations for the years ended
June 30, 1996, 1995 and 1994 27
Consolidated Statement of Shareholders' Equity for the years ended
June 30, 1996, 1995 and 1994 28
Consolidated Statement of Cash Flows for the years ended
June 30, 1996, 1995 and 1994 29
Notes to Consolidated Financial Statements 30
Financial Statement Schedules
All financial statement schedules are omitted because they
are not applicable or not required, or because the required
information is presented in the financial statements or
related notes, or such amounts are immaterial.
24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of OnTrak Systems, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of OnTrak
Systems, Inc. and its subsidiaries at June 30, 1996 and 1995, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1996, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Jose, California
July 25, 1996
25
<PAGE>
ONTRAK SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
June 30, 1996 1995
- --------------------------------------------------------------------------------
IN THOUSANDS
ASSETS
Current assets:
Cash and cash equivalents $ 24,217 $ 1,767
Short-term investments 12,372 -
Accounts receivable, less allowance for
doubtful accounts of $400 and $56 8,918 5,280
Inventory 6,892 4,548
Refundable income taxes 575 117
Deferred income taxes 1,579 544
Prepaid expenses and other assets 286 706
- --------------------------------------------------------------------------------
Total current assets 54,839 12,962
Property and equipment, net 7,293 2,798
Deferred income taxes - 7
- --------------------------------------------------------------------------------
$ 62,132 $ 15,767
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 283 $ 279
Accounts payable 3,124 2,576
Accrued liabilities 5,462 4,083
- --------------------------------------------------------------------------------
Total current liabilities 8,869 6,938
Long-term obligations 1,173 1,471
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 9)
Mandatorily Redeemable Preferred Stock - 6,522
Shareholders' equity:
Undesignated Preferred Stock, no par value, 3,000 shares authorized;
none issued or outstanding - -
Common stock, no par value, 30,000 shares authorized;
7,518 and 2,660 shares issued and outstanding 46,666 199
Retained earnings 5,424 637
- --------------------------------------------------------------------------------
Total shareholders' equity 52,090 836
- --------------------------------------------------------------------------------
$62,132 $15,767
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these financial statements
26
<PAGE>
ONTRAK SYSTEMS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT PER SHARE DATA
Net revenue $ 55,829 $ 26,024 $ 11,497
Cost of revenue 26,334 10,889 4,776
- --------------------------------------------------------------------------------
Gross profit 29,495 15,135 6,721
- --------------------------------------------------------------------------------
Operating expenses:
Research, development and engineering 13,886 6,828 1,991
Selling, general and administrative 9,689 5,504 2,333
Charge for past royalties - 1,250 -
- --------------------------------------------------------------------------------
Total operating expenses 23,575 13,582 4,324
- --------------------------------------------------------------------------------
Income from operations 5,920 1,553 2,397
Interest and other income (expense), net 1,442 (27) (48)
- --------------------------------------------------------------------------------
Income before provision for income taxes 7,362 1,526 2,349
Provision for income taxes 2,575 458 836
- --------------------------------------------------------------------------------
Net income $ 4,787 $ 1,068 $ 1,513
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Net income per share $ 0.59 $ 0.17 $ 0.24
Weighted average common and
common equivalent shares 8,167 6,134 6,344
The accompanying notes are an integral part
of these financial statements
27
<PAGE>
ONTRAK SYSTEMS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Total
- ----------------------------------------------------------------------------------------------------
IN THOUSANDS
<S> <C> <C> <C> <C>
Balance at June 30, 1993 2,970 $ 93 $ 313 $ 406
Repurchase of Common Stock (40) (1) (79) (80)
Sale of Common Stock 200 45 - 45
Net income - - 1,513 1,513
- ----------------------------------------------------------------------------------------------------
Balance at June 30, 1994 3,130 137 1,747 1,884
Repurchase of Common Stock (760) (23) (2,178) (2,201)
Sale of Common Stock 4 10 - 10
Net issuance under employee stock plans 286 75 - 75
Net income - - 1,068 1,068
- ----------------------------------------------------------------------------------------------------
Balance at June 30, 1995 2,660 199 637 836
Net proceeds from Initial Public Offering 2,690 41,404 - 41,404
Conversion of Preferred Stock 1,790 3,072 - 3,072
Net issuance under employee stock plans 378 770 - 770
Tax benefit of stock option transactions - 1,221 - 1,221
Net income - - 4,787 4,787
- ----------------------------------------------------------------------------------------------------
Balance at June 30, 1996 7,518 $ 46,666 $ 5,424 $ 52,090
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part
of these financial statements
28
<PAGE>
ONTRAK SYSTEMS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended June 30, 1996 1995 1994
- ----------------------------------------------------------------------------------------------------
IN THOUSANDS
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,787 $ 1,068 $ 1,513
Adjustments to reconcile net income to
net cash provided by (used for) operating activities:
Depreciation and amortization 1,564 486 89
Allowance for doubtful accounts 344 56 -
Tax benefits from stock option transactions 1,221 - -
Deferred income taxes (1,028) (88) (180)
Changes in assets and liabilities:
Accounts receivable (3,982) (3,805) (719)
Inventory (2,344) (3,136) (666)
Prepaid expenses and other assets 420 (630) (53)
Accounts payable 548 2,001 273
Accrued liabilities 1,379 3,048 290
Income taxes payable (refundable) (458) (978) 713
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used for) operating activities 2,451 (1,978) 1,260
- ----------------------------------------------------------------------------------------------------
Cash used for investing activities:
Net purchases of short-term investments (12,372) - -
Investment in property and equipment (6,059) (1,700) (152)
- ----------------------------------------------------------------------------------------------------
Net cash used for investing activities (18,431) (1,700) (152)
- ----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from Initial Public Offering 41,404 - -
Borrowings under long-term obligations 1,170 - -
Repayments of long-term obligations (1,464) (205) (41)
Repurchase of outstanding Common Stock - (2,201) (80)
Proceeds from issuance of Common Stock 770 85 45
Proceeds from (Redemption of) Mandatorily
Redeemable Preferred Stock (3,450) 6,522 -
- ----------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities 38,430 4,201 (76)
- ----------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 22,450 523 1,032
Cash and cash equivalents at beginning of year 1,767 1,244 212
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 24,217 $ 1,767 $ 1,244
- ----------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------
Supplemental cash flow disclosures:
Income taxes paid $ 2,719 $ 745 $ 310
Interest paid 164 134 60
Supplemental non-cash investing and financing disclosures:
Equipment financing - 1,035 262
Conversion of Mandatorily Redeemable Preferred
Stock into Common Stock 3,072 - -
</TABLE>
The accompanying notes are an integral part
of these financial statements
29
<PAGE>
ONTRAK SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OnTrak Systems, Inc. ("the Company") was incorporated in California in
June 1985. The Company is a leading provider of semiconductor capital equipment
for chemical mechanical planarization and operates in a single industry segment.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
which affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the financial
statements of OnTrak Systems, Inc. and its wholly-owned subsidiaries. All
significant intercompany accounts and balances have been eliminated.
REVENUE RECOGNITION
Revenue related to systems and parts sales is generally recognized upon
shipment. Customers are not given the right to return systems; however,
occasionally customers are provided with an evaluation system, and since
customers can return such systems at any time with limited or no penalty, the
Company does not recognize the associated revenue until the system is accepted
by the customer. A provision for the cost of system installation and warranty
is recorded at the time revenue is recognized. Service and maintenance revenue
is recognized ratably over the period of the related service contract.
CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid investments with remaining maturities of three months or less
when purchased to be cash equivalents. Cash equivalents generally consist of
treasury notes and money market deposits. Short-term investments consist of
treasury notes and municipal bonds purchased with remaining maturities greater
than three months. The Company has classified its short-term investments as
"available for sale" in accordance with the provisions of Statement on Financial
Accounting Standards No. 115 (SFAS 115), "Accounting for Certain Investments in
Debt and Equity Securities."
INVENTORY
Inventory is stated at the lower of standard cost, which approximates actual
cost (on a first-in, first-out basis), or market.
30
<PAGE>
PROPERTY AND EQUIPMENT
Property and equipment is stated at historical cost, less accumulated
depreciation and amortization. Depreciation of property and equipment is
computed using the straight-line method based upon the useful lives of the
assets, which range from three to seven years. Leasehold improvements are
amortized over the useful lives of the improvements or the lease term, whichever
is shorter.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the tax bases of assets and
liabilities and their financial statement reported amounts.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents, short-term investments, and
trade accounts receivable. The Company limits the amount of credit exposure to
any one financial institution or commercial issuer. A majority of the Company's
accounts receivable are derived from sales to large multinational semiconductor
manufacturers and semiconductor equipment distributors. At June 30, 1996,
receivables from two customers represented 25% and 18% of accounts receivable,
respectively. At June 30, 1995, receivables from three customers represented
45%, 13% and 10% of accounts receivable, respectively. Concentrations of credit
risk with respect to accounts receivable are considered to be limited due to the
quality of the Company's customer base and the diversity of its geographical
sales areas. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit and
security agreements, whenever deemed necessary. The Company maintains an
allowance for potential credit losses but has not experienced significant losses
to date.
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of common and
common equivalent shares outstanding during the period. Common equivalent
shares consist of Series A Mandatorily Redeemable Preferred Stock (using the
if-converted method), and stock options and warrants (using the treasury stock
method). Pursuant to the requirements of the Securities and Exchange
Commission, stock options and warrants issued from June 1, 1994 through the
effective date of the Company's initial public offering ("IPO") have been
included in the computation for all pre-IPO periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed of." SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. The adoption of SFAS 121
in fiscal 1997 is not expected to have a material effect on the Company's
results of operations or financial position.
In October 1995, the Financial Accounting Standards Board issued SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 will be effective for
fiscal years beginning after December 15, 1995, and will require that the
Company either recognize in its financial statements costs related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans, or to make pro forma disclosures of such costs in a footnote to the
financial statements. The Company intends to elect the disclosure method upon
the adoption of SFAS 123 in fiscal 1997. Accordingly, SFAS 123 is not expected
to have a material effect on the Company's results of operations or financial
position.
31
<PAGE>
NOTE 2 - FINANCIAL INSTRUMENTS
INVESTMENTS
Investments at June 30, 1996 consisted of the following:
Due in three Due in three
months or less months or more Total
- --------------------------------------------------------------------------------
IN THOUSANDS
Money market funds $ 96 $ - $ 96
U.S. Government notes and bonds 21,380 - 21,380
Municipal notes and bonds - 12,372 12,372
- --------------------------------------------------------------------------------
$ 21,476 $ 12,372 $ 33,848
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
At June 30, 1996, $21.5 million of investments were included in cash and cash
equivalents on the consolidated balance sheet, and the remainder were classified
as short-term investments. The difference between the cost and fair market
value of short-term investments was not significant at June 30, 1996. The
Company manages its cash equivalents and short-term investments as a single
portfolio of highly marketable securities, all of which are intended to be
available to meet the Company's current cash requirements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company has evaluated the estimated fair value of its financial instruments
using available market quotes and other relevant information. The amounts
reported for financial instruments, including cash equivalents, short-term
investments, and long-term obligations, reasonably estimate their fair value.
32
<PAGE>
NOTE 3 - BALANCE SHEET COMPONENTS
June 30, 1996 1995
- --------------------------------------------------------------------------------
IN THOUSANDS
Inventory:
Raw materials $ 3,338 $ 2,009
Work-in-process 3,481 2,340
Finished goods 73 199
- --------------------------------------------------------------------------------
$ 6,892 $ 4,548
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Property and equipment:
Machinery and equipment $ 6,269 $ 2,552
Furniture and fixtures 1,337 534
Leasehold improvements 1,760 369
Less: accumulated depreciation and amortization (2,073) (657)
- --------------------------------------------------------------------------------
$ 7,293 $ 2,798
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Accrued liabilities:
Warranty and installation $ 1,822 $ 795
Employee compensation 1,443 811
Customer deposits 431 450
Accrued commissions 417 413
Accrued royalties 223 1,374
Other 1,126 240
- --------------------------------------------------------------------------------
$ 5,462 $ 4,083
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 4 - BORROWING AGREEMENTS AND OTHER LIABILITIES
Long-term obligations consist of the following:
June 30, 1996 1995
- --------------------------------------------------------------------------------
IN THOUSANDS
Notes payable $ 1,091 $ -
Equipment financing obligations - 1,188
Working capital loan - 156
Deferred compensation 365 406
- --------------------------------------------------------------------------------
1,456 1,750
Less: current portion (283) (279)
- --------------------------------------------------------------------------------
$ 1,173 $ 1,471
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
33
<PAGE>
The Company has a note payable to a bank which is secured by all of the assets
of the Company, bears interest at the bank's prime rate (8.25% at June 30,
1996), and is payable in monthly installments of principal and interest through
February 2000. The Company also has a $10.0 million line of credit agreement
with the bank which expires in November 1996; borrowings under the agreement
bear interest at the bank's prime rate. No borrowings were outstanding under
the agreement at June 30, 1996. The note payable and line of credit agreements
each contain restrictive covenants relating to profitability and various
financial ratios. The Company was in compliance with these covenants at June
30, 1996. During the year ended June 30, 1996, the Company arranged for the
early repayment of the equipment financing and working capital obligations
outstanding at June 30, 1995; there was no significant difference between the
book value of these obligations and their redemption amount.
The Company has an agreement for deferred compensation to a former officer and
current shareholder of the Company for past services which requires annual
payments of $72,500 through January 2003. The future obligations under the
agreement have been discounted using an interest rate of 8%.
Future principal payments under long-term obligations are as follows:
Year Ending June 30,
- --------------------------------------------------------------------------------
IN THOUSANDS
1997 $ 283
1998 286
1999 290
2000 295
2001 200
Thereafter 102
- --------------------------------------------------------------------------------
$ 1,456
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NOTE 5 - RELATED PARTY TRANSACTIONS
The Company received financial advisory services under an agreement with a
consulting firm, a principal of which became a director in April 1995. The
agreement, which was terminated in February 1996, provided for a consulting fee
of $10,000 per month. A total of $80,000, $125,000, and $110,000 was paid to
the consulting firm under this agreement during the years ended June 30, 1996,
1995, and 1994, respectively. In November 1994, the Company paid $288,000 to
the consulting firm as a finder's fee and issued warrants to purchase 98,000
shares of Common Stock of the Company at an exercise price of $3.542 per share
in consideration of services related to the preferred stock financing. These
warrants expire in November 1997.
34
<PAGE>
NOTE 6 - INCOME TAXES
The provision for income taxes consisted of the following:
Year Ended June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
IN THOUSANDS
Current:
Federal $ 3,157 $ 466 $ 772
State 446 80 244
- --------------------------------------------------------------------------------
3,603 546 1,016
- --------------------------------------------------------------------------------
Deferred:
Federal (883) (66) (155)
State (145) (22) (25)
- --------------------------------------------------------------------------------
(1,028) (88) (180)
- --------------------------------------------------------------------------------
Provision for income taxes $ 2,575 $ 458 $ 836
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a reconciliation of the federal income taxes at statutory rates
to the provision for income taxes:
Year Ended June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
IN THOUSANDS
Federal income taxes at statutory rate of 34% $ 2,502 $ 519 $ 799
State income taxes, net of federal tax benefits 414 124 159
Nontaxable FSC income (174) (51) (68)
Research and development and other credits (203) (153) (56)
Other 36 19 2
- --------------------------------------------------------------------------------
Provision for income taxes $ 2,575 $ 458 $ 836
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Deferred tax assets (liabilities) are comprised of the following:
June 30, 1996 1995
- --------------------------------------------------------------------
IN THOUSANDS
Deferred tax assets:
Deferred compensation $ 147 $ 149
Warranty and installation accrual 731 319
Deferred state taxes 80 13
Reserves not currently deductible and other 696 183
- --------------------------------------------------------------------
1,654 664
Deferred tax liabilities:
Depreciation (75) (113)
- --------------------------------------------------------------------
Net deferred tax assets $ 1,579 $ 551
- --------------------------------------------------------------------
- --------------------------------------------------------------------
35
<PAGE>
NOTE 7 - SHAREHOLDERS' EQUITY
In November 1994, the Company authorized and issued 974,061 shares each of
Series A Mandatorily Redeemable Preferred Stock ("Series A") and Series B
Redeemable Preferred Stock ("Series B") for a total of $6.5 million, net of
issuance costs of $0.4 million. A portion of the proceeds from this sale was
used to repurchase 760,000 shares of Common Stock from a former employee at
$2.90 per share for approximately $2.2 million. Upon the close of the IPO in
July 1995, the Series A converted into 1,789,483 shares of the Company's common
stock and the Series B was redeemed for $3.5 million.
INITIAL PUBLIC OFFERING
The Company completed an initial public offering of 2,690,078 shares of the
Company's Common Stock in July 1995, resulting in a net increase to equity of
$41.4 million.
STOCK OPTION PLANS
The Company has adopted an incentive and nonstatutory stock option plan (the
"Employee Plan") for which 2,000,000 shares of Common Stock have been reserved
for issuance. Incentive stock option and nonstatutory stock option grants under
the Employee Plan must be at prices of at least 100% of the fair market value of
the stock on the date of grant. The options generally vest 25% per year.
In May 1995, the Company adopted the 1995 Director Stock Option Plan (the
"Director Plan") and reserved 125,000 shares of Common Stock for issuance
thereunder. The Director Plan provides for the grant of nonstatutory stock
options to nonemployee directors of the Company pursuant to an automatic,
nondiscretionary grant mechanism.
The following table summarizes the combined activities under the Employee and
Director Stock Option Plans:
Shares Options Option
available outstanding price
- --------------------------------------------------------------------------------
IN THOUSANDS, EXCEPT OPTION PRICES
Balance at June 30, 1993 132 740 $ 0.15 - $ 0.23
Options granted (40) 40 $ 0.45 - $ 2.00
Options canceled 10 (10) $ 2.00
- --------------------------------------------------------------------------------
Balance at June 30, 1994 102 770 $ 0.15 - $ 2.00
Shares authorized 1,253 - -
Options granted (838) 838 $ 2.00 - $10.20
Options exercised - (286) $ 0.23
- --------------------------------------------------------------------------------
Balance at June 30, 1995 517 1,322 $ 0.15 - $10.20
Options granted (483) 483 $14.00 - $30.75
Options canceled 243 (243) $ 6.00 - $30.75
Options exercised - (363) $ 0.15 - $10.20
- --------------------------------------------------------------------------------
Balance at June 30, 1996 277 1,199 $ 0.23 - $30.75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
36
<PAGE>
At June 30, 1996, a total of 310,000 options were exercisable under the Employee
and Director Plans. In addition, options to purchase 800,000 shares of Common
Stock at an exercise price of $17.25 per share were granted outside of the
Employee and Director Plans during the year ended June 30, 1996. A total of
400,000 of these options were exercisable at June 30, 1996, with the remainder
vesting in equal annual installments of 25% on each anniversary date of the
grant, subject to accelerated vesting based on achievement of certain
predetermined milestones.
EMPLOYEE STOCK PURCHASE PLAN
In May 1995, the Company adopted the 1995 Employee Stock Purchase Plan (the
"Purchase Plan") and reserved 200,000 shares of Common Stock for issuance
thereunder. The initial offering period under the Purchase Plan commenced on
September 1, 1995. The Purchase Plan enables eligible employees to contribute up
to 10% of their base salary towards the purchase of shares of the Company's
common stock at approximately 85% of the fair market value at the beginning or
end of each six-month purchase period. The Purchase Plan is intended to qualify
as an "employee stock purchase plan" under Section 423 of the U.S. Internal
Revenue Code. During the year ended June 30, 1996, 14,740 shares of Common
Stock were issued under the Purchase Plan.
OTHER EMPLOYEE BENEFIT PLANS
The Company maintains an employee savings and retirement plan (the "Plan")
qualified under Section 401(k) of the Internal Revenue Code. The Plan allows
participants to contribute up to 14% of the total compensation that would
otherwise be paid to them by the Company, not to exceed the maximum allowed by
the applicable Internal Revenue Service guidelines. The Company matches 100% of
the salary deferral contributions made by each participating employee, up to a
maximum of 6% of total employee compensation. Company contributions are 25%,
50% and 100% vested after an employee's second year, third year and fourth year
of service, respectively. The Company contributed $459,000, $264,000, and
$56,000 to the Plan during the years ended June 30, 1996, 1995, and 1994,
respectively.
In March 1994, the Company approved a profit-sharing plan, whereby an aggregate
amount of 5% of the Company's operating profits, as defined, is paid to
employees semi-annually beginning July 1, 1994. The Company recorded
compensation expense of $345,000 and $187,000 under the profit sharing plan
during the years ended June 30, 1996 and 1995, respectively.
NOTE 8 - GEOGRAPHIC INFORMATION AND SIGNIFICANT CUSTOMERS
Substantially all of the Company's revenues and expenses are denominated in U.S.
dollars. The Company has one manufacturing facility located in the U.S, and has
no significant assets located outside of the U.S.
Net revenues from export sales were as follows:
Year Ended June 30, 1996 1995 1994
- --------------------------------------------------------------------------------
IN THOUSANDS
Pacific Rim $ 7,939 $ 3,207 $ 1,092
Europe 10,102 3,880 2,455
- --------------------------------------------------------------------------------
$ 18,041 $ 7,087 $ 3,547
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Percentage of total net revenues 32.3% 27.2% 30.9%
37
<PAGE>
For the purposes of determining sales to significant customers, the Company
includes sales to customers through its distributors, and excludes the
distributors as significant customers. For the year ended June 30, 1996, sales
to one customer represented 21% of net revenues. For the year ended June 30,
1995, sales to two customers represented 23% and 14% of net revenues,
respectively. For the year ended June 30, 1994, sales to two customers
represented 22% and 12% of net revenues, respectively.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company occupies its facilities under noncancelable operating lease
agreements which expire at various dates through March 2001 and which require
payment of property taxes, insurance, maintenance and utilities. Total rent
expense related to these operating leases was $776,000, $319,000, and $151,000
for the years ended June 30, 1996, 1995 and 1994, respectively.
Future minimum lease payments under noncancelable leases at June 30, 1996 are as
follows:
Year Ending June 30,
- --------------------------------------------------------------------------------
IN THOUSANDS
1997 $ 1,056
1998 1,043
1999 1,047
2000 1,041
2001 426
- --------------------------------------------------------------------------------
$ 4,613
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In the normal course of business, the Company receives and makes inquiries with
regard to possible patent infringement and other legal matters. Where deemed
advisable, the Company may seek to enter into or extend licenses or negotiate
settlements. Outcomes of such negotiations may not be determinable at any one
point in time; however, management does not believe that the outcome of pending
legal matters will have a material effect on the Company's financial position or
results of operations.
In June 1995, the Company entered into a worldwide, nonexclusive patent and
license agreement with a manufacturer of semiconductor capital equipment. The
license agreement resulted from a disputed claim by the licensor that the
Company's products infringed a patent owned by the licensor. Although the
Company believed that the patent would not have been enforceable against it, the
Company negotiated the license agreement to avoid the inherent risks and costs
of litigation. Under the license agreement, the Company made a $1.5 million
payment upon the closing of the IPO for past royalties through October 1, 1995.
Additionally, the Company is obligated for royalties equal to 1.5% of covered
sales of the Company's cleaning systems, until an additional $1.5 million has
been paid. The Company charged $1.25 million to expense in the nine months
ended March 31, 1995 for the royalty related to prior periods. Royalty expense
of $719,000 for the year ended June 30, 1996 and $125,000 for the three month
period ended June 30, 1995 was charged directly to cost of sales. At June 30,
1996, the potential future obligation under the royalty agreement was $906,000.
38
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not Applicable.
PART III
Certain information required by Part III (Items 10, 11, 12 and 13) is
omitted from this Report in accordance with General Instruction G of Form 10-K
in that the Company intends to file its proxy statement for its Annual Meeting
of Shareholders to be held on November 21, 1996 pursuant to Regulation 14A (the
"Proxy Statement") not later than 120 days after the end of the fiscal year
covered by this Report. The Part III information shall be incorporated by
reference from the Company's Proxy Statement, or provided by an amendment to
this Report, to be filed not later than October 28, 1996.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information concerning the Company's directors required by this
Item is incorporated by reference from "Election of Directors" in the Company's
Proxy Statement for the 1996 Annual Meeting of Shareholders. The information
required by this Item relating to the Company's executive officers is included
under the caption "Executive Officers of the Company" in Part I of this Form 10-
K Report.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated by reference
from the Company's Proxy Statement for the 1996 Annual Meeting of Shareholders
under the heading "Executive Compensation."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the Company's Proxy Statement for the 1996 Annual Meeting of Shareholders
under the heading "Principal Shareholders and Share Ownership by Management."
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
from the Company's Proxy Statement for the 1996 Annual Meeting of Shareholders
under the heading "Certain Transactions."
39
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Report:
(1) and (2) Financial Statements and Financial Statement
Schedules.
See Index to Consolidated Financial Statements in Item 8 of this
Report.
(3) Exhibits.
The exhibits listed on the accompanying Exhibit Index are filed
as part of, or are incorporated by reference into, this Report.
The exhibits include the following executive compensation plans
and arrangements:
Amended and Restated 1992 Stock Option Plan - Exhibit 10.21.
Employee Stock Purchase Plan - Exhibit 10.22.
1995 Director Stock Option Plan - Exhibit 10.23.
Employment Agreement between the Company and James W. Bagley
dated May 17, 1996 - Exhibit 10.39.
(b) Reports on Form 8-K during the quarter ended June 30, 1996:
Form 8-K Report dated May 20, 1996 -- to report the election of
James W. Bagley as Chairman of the Board and Chief Executive
Officer of the Company.
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized.
ONTRAK SYSTEMS, INC.
Dated: September 27, 1996 By: /s/ James W. Bagley
-------------------
James W. Bagley
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints James W. Bagley and Patrick C. O'Connor, or
either of them, his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities to sign any and all amendments to this Report
on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or either of them, or their or his
substitutes or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ James W. Bagley Chairman of the Board and September 27, 1996
- --------------------------- Chief Executive Officer
James W. Bagley
/s/ Patrick C. O'Connor Vice President - Finance and September 27, 1996
- --------------------------- Chief Financial Officer
Patrick C. O'Connor (Principal Financial and
Accounting Officer)
/s/ Michael C. Child Director September 27, 1996
- ---------------------------
Michael C. Child
/s/ Jerauld J. Cutini Director September 27, 1996
- ---------------------------
Jerauld J. Cutini
/s/ Gary Hultquist Director September 27, 1996
- ---------------------------
Gary Hultquist
Director September __, 1996
- ---------------------------
Richard J. Elkus, Jr.
41
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Description Reference
- ------ ------------------- ---------
3.1 Amended and Restated Articles of Incorporation
of the Registrant (2)
3.2 Bylaws of the Registrant, as amended (1)
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2 Form of Common Stock Certificate (1)
10.1 Series A and Series B Preferred Stock Purchase
Agreement dated November 2, 1994, by and among the
Registrant and the persons named as Purchasers therein (1)
10.2 Business Loan Agreement dated November 17, 1993 between
the Registrant and Silicon Valley Bank, as modified (1)
10.3 Financing commitment letters to Registrant dated
January 5, 1995 and July 25, 1994 from Belvedere
Equipment Financing Corporation, and financing
commitment letter to Registrant dated September 1,
1993 from Oak Capital (1)
10.4 Equipment Financing Agreement (No. 93121003) dated
January 19, 1994 between the Registrant and University
National Bank & Trust Company (1)
10.5 Equipment Financing Agreement (No. 94071102) dated
October 25, 1994 between the Registrant and Orix
USA Corporation (1)
10.6 Equipment Financing Agreement (No. 94071104) dated
November 18, 1994 between the Registrant and
Bank of the West (1)
10.7 Equipment Financing Agreement (No. 94121402) dated
February 28, 1995 between the Registrant and Bay
Area Bank (1)
* 10.8 Purchase Agreement dated May 17, 1993, between the
Registrant and Intel Corporation (1)
42
<PAGE>
* 10.9 Equipment Purchase Agreement dated April 15, 1994,
between the Registrant and Motorola, Inc. (1)
*10.10 Contract between the Registrant and Transpacific
Technology GmbH for Siemens Microelectronics Center (1)
10.11 Form of International Representation Agreement
of the Registrant (1)
10.12 Form of Domestic Representation Agreement of
the Registrant (1)
10.13 Standard Lease Agreement dated January 28, 1994
between the Registrant and South Bay Tech Center (1)
10.14 Standard Industrial Sublease dated March 14, 1994
between the Registrant and Peripheral Computer Support,
Inc.; and Standard Lease Agreement dated October 7,
1994 between the Registrant and South Bay Tech Center (1)
10.15 Standard Lease Agreement dated April 20, 1992,
as amended on October 10, 1994, between the
Registrant and South Bay Tech Center (1)
10.16 Agreement for Financial Advisory Services dated
March 3, 1995 between the Registrant and Bridgemere
Capital, Inc. (1)
10.17 Form of Stock Purchase Warrant dated November 2,
1994 issued to certain affiliates of Bridgemere
Capital, Inc. (1)
10.18 Shareholders' Agreement dated November 2, 1994
by and among the Registrant and the undersigned
holders of capital stock of the Registrant (1)
10.19 Employment Agreement dated January 1, 1995
between the Registrant and Homayoun Talieh (1)
10.20 Form of Indemnification Agreement between the
Registrant and its directors and certain of its
officers and significant shareholders (1)
10.21 Amended and Restated 1992 Stock Option Plan and
forms of agreement thereunder (incorporated by
reference to Exhibits 4.3, 4.4 and 4.5 of Registrant's
Form S-8 Registration Statement (No. 33-95560)
filed with the Commission on August 9, 1995)
43
<PAGE>
10.22 1995 Employee Stock Purchase Plan and form of
subscription agreement thereunder (incorporated by
reference to Exhibit 4.6 of Registrant's Form S-8
Registration Statement (No. 33-95560) filed with
the Commission on August 9, 1995)
10.23 1995 Director Stock Option Plan and forms of
agreements thereunder (incorporated by reference
to Exhibit 4.7 of Registrant's Form S-8 Registration
Statement (No. 33-95560) filed with the
Commission on August 9, 1995)
10.24 401(k) Plan of the Registrant (1)
10.25 Cafeteria Plan of the Registrant (1)
10.26 Employee Profit Sharing Plan of the Registrant (1)
10.27 Common Stock Purchase Agreement dated April 30,
1992 between the Registrant and Patrick C. O'Connor (1)
10.28 Common Stock Purchase Agreement dated June 30, 1993
between the Registrant and Patrick C. O'Connor (1)
10.29 General Settlement Agreement, License and Mutual
General Release dated June 6, 1995 (1)
10.30 Employment Agreement dated June 9, 1995 between the
Registrant and Robert L. Piccioni (2)
10.31 Lease Agreement dated July 18, 1995 between the
Registrant and Orchard Investment Company Number 751 (2)
10.32 Loan Modification Agreement dated August 18, 1995 to the
Business Loan Agreement dated November 17, 1993 between
the Registrant and Silicon Valley Bank (2)
10.33 First Amendment to Lease dated November 30, 1995 to the
Lease Agreement dated July 18, 1995 between the
Registrant and Orchard Investment Company Number 751 (3)
10.34 Loan Modification Agreement dated November 15, 1995 to the
Business Loan Agreement dated November 17, 1993 between
the Registrant and Silicon Valley Bank (3)
10.35 Loan Modification Agreement dated January 19, 1996 to the
Business Loan Agreement dated November 17, 1993 between
the Registrant and Silicon Valley Bank, and related
Promissory Note and Collateral Assignment, Patent Mortgage
and Security Agreement (3)
44
<PAGE>
10.36 First Amendment to Lease dated March 29, 1996 to the
Lease Agreement dated October 7, 1994 between the
Registrant and South Bay Tech Center Associates (4)
10.37 Sublease Agreement and Consent of Master Lessor dated
March 31, 1996, relating to the Lease Agreement dated
April 20, 1992 between the Registrant and South Bay Tech
Center Associates (4)
10.38 International Distribution Agreement dated October 27,
1995 between the Registrant and Metron Technology BV (4)
10.39 Employment Agreement between the Company and
James W. Bagley (incorporated by reference to
Exhibit 10.39 to the Registrant's Form 8-K Report
dated May 20, 1996)
13.1 Annual Report to Shareholders (in lieu of an Annual Report
to Shareholders, the Registrant will provide a copy of its
Report on Form 10-K to each of its shareholders)
21.1 Subsidiaries of the Registrant (1)
23.1 Consent of Price Waterhouse LLP
24.1 Power of Attorney. Reference is made to page 41
of this Report
27 Financial Data Schedule
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Exhibits of corresponding number to
Registrant's Form SB-2 Registration Statement (No. 33-93260-LA) filed with
the Commission on June 7, 1995, as amended.
(2) Incorporated by reference to the Exhibits of corresponding number to
Registrant's Annual Report on Form 10-K for the fiscal year ended June 30,
1995.
(3) Incorporated by reference to the Exhibits of corresponding number to
Registrant's Quarterly Report on Form 10-Q for the quarter ended December
31, 1995.
(4) Incorporated by reference to the Exhibits of corresponding number to
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1996.
* Confidential treatment has been requested for portions of each of these
agreements.
45
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-95560) of OnTrak Systems, Inc. of our report dated
July 25, 1996 appearing on page 25 of this Form 10-K.
PRICE WATERHOUSE LLP
San Jose, California
September 27, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF ONTRAK SYSTEMS, INC. FOR THE YEAR ENDED
JUNE 30, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000946732
<NAME> ONTRAK SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 24,217
<SECURITIES> 12,372
<RECEIVABLES> 9,318
<ALLOWANCES> 400
<INVENTORY> 6,892
<CURRENT-ASSETS> 54,839
<PP&E> 9,366
<DEPRECIATION> 2,073
<TOTAL-ASSETS> 62,132
<CURRENT-LIABILITIES> 8,869
<BONDS> 0
0
0
<COMMON> 46,666
<OTHER-SE> 5,424
<TOTAL-LIABILITY-AND-EQUITY> 62,132
<SALES> 55,829
<TOTAL-REVENUES> 55,829
<CGS> 26,334
<TOTAL-COSTS> 49,909
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 164
<INCOME-PRETAX> 7,362
<INCOME-TAX> 2,575
<INCOME-CONTINUING> 4,787
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,787
<EPS-PRIMARY> 0.59
<EPS-DILUTED> 0
</TABLE>
