-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S5yLxTbGabyLhf9yvQep4TMfcTmYHDBiLH3FDfmyD9dlk/h1hA62syt2C8rm0usn NuuZxSjFrho2i9KBHa6XBw== 0000906768-98-000006.txt : 19980615 0000906768-98-000006.hdr.sgml : 19980615 ACCESSION NUMBER: 0000906768-98-000006 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980612 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: MRS TECHNOLOGY INC CENTRAL INDEX KEY: 0000906768 STANDARD INDUSTRIAL CLASSIFICATION: SPECIAL INDUSTRY MACHINERY, NEC [3559] IRS NUMBER: 042904966 STATE OF INCORPORATION: MA FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-21908 FILM NUMBER: 98647134 BUSINESS ADDRESS: STREET 1: 10 ELIZABETH DRIVE CITY: CHELMSFORD STATE: MA ZIP: 01824-4112 BUSINESS PHONE: 5082500450 MAIL ADDRESS: STREET 1: 10 ELIZABETH DRIVE CITY: CHELMSFORD STATE: MA ZIP: 01824 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934 For the Fiscal Year Ended March 31, 1998 Commission File Number 0-21908 MRS Technology, Inc. (exact name of registrant as specified in its charter) Massachusetts 04-2904966 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 10 Elizabeth Drive, Chelmsford, MA 01824-4112 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (978)250-0450 Securities registered pursuant to Section 12(b) of the Act: None Exchange on which securities are registered: NASDAQ Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.01 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of June 1, 1998, the aggregate market value of outstanding shares of the voting stock held by non-affiliates was $1.4375. As of June 1, 1998, 6,858,763 shares of the registrant's Common Stock, par value $.01 per share, were issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement relating to the Annual Meeting of Shareholders to be held on July 28, 1998 are incorporated by reference into Part III of this Report. PART I Item 1. Business General MRS Technology, Inc. was founded in February 1986 to develop and manufacture photolithographic equipment for the production of flat panel displays (FPDs), principally active matrix liquid crystal displays (AMLCDs). The Company's innovative photolithographic system, the PanelPrinter, is a "stitching step-and-repeat" imaging system which prints large-area integrated circuit patterns, a critical step in the FPD production process. Two years and $10,000,000 were spent developing the first PanelPrinter, which pioneered the high speed stitching of integrated circuit (IC) images using the thin film transistor (TFT) process. With technology superior to its competitors, especially for larger, higher-resolution FPDs, the Company succeeded in winning a dominant share of the market for FPD research and development laboratories and pilot production lines. This success led to an initial public offering (IPO) in July 1993, in which the Company raised $15,600,000 of additional capital. From fiscal 1993, just prior to the Company's IPO, through fiscal 1995, the Company generated three successive years of profitable operations, attaining revenues of $22,400,000 and profits of $1,600,000 in fiscal 1995. Since its inception, through IPO funding, Defense Advanced Research Projects Agency (DARPA) contracts and from margins on over $50,000,000 of products sold, MRS continued to develop and advance the technology required for production of much larger FPDs on increasingly larger substrates. MRS succeeded in capturing a portion of the worldwide research and development market and substantially all of the U.S. FPD production market. However, the U.S. production market has not developed as a volume producer of FPDs. Additionally, MRS was unsuccessful in penetrating the Japanese market, the largest producer of FPDs, which is dominated by Nikon and Canon, the Company's principal competitors. Japanese manufacturers received little or no competitive pressure for FPD manufacturing from the rest of the world. Therefore advances in display sizes and resolution came slowly, delaying the need for the Company's principal competitive advantages. As a result of these factors, in late fiscal 1997, the Company reduced its expense base. Additionally, in early fiscal 1998, the Company narrowed its focus to the high volume FPD manufacturing market for its growth rather than the lower volume research and development market. More specifically, the Company primarily focused on the Asian market where the production plans for desktop FPDs were greatest and requirements for larger, higher resolution displays better matched the Company's strengths. However, the Asian economic crisis in the Company's fiscal 1998 prevented the Company from achieving its expected growth. Additionally, desktop FPDs remain an expensive, optional luxury further delaying market demand. All of these factors left the Company with extensive technology designed for markets which were either already dominated by competitors' products or which did not grow as expected, and are not expected to show significant growth in the near term. In the fourth quarter of fiscal 1998, the Company identified a new potential market for its large-area photolithograpic technology. The Company observed that fabricators of advanced chip (IC) packaging applications are experiencing yield loss related to rapidly increasing complexity and operating speeds of microprocessors and other logic chips. Resulting demands on printed circuit board (PCB) manufacturing technology include reduced linewidths and tightened registration, demands which are beyond the capability of traditional contact printing techniques. In March 1998, the Company announced that it would enter a new large-area lithography market of high density interconnect (HDI). The HDI market is being driven by the factors described above. The Company believes that certain of its existing product capabilities encompass the functionality required to reduce the yield loss being experienced. In April 1998, the Company received its first order for a Model 5200 PanelPrinter from an HDI fabricator. HDI Overview The Company plans to use its existing PanelPrinter inventory to help key customers through process development. The first such sale was announced on April 21, 1998. Information and experience gained in these initial installations will be applied to the development of a new product optimized for HDI market requirements, using much of the Company's existing technology. The initial focus will be on the chip packaging segment of the HDI market where linewidth reduction and layer-to-layer registration requirements have been greatest. Other segments of the much larger total HDI market will be targeted after a significant market share has been established in the chip packaging segment. Downstream development of these systems will be driven by industry and customer requirements as these evolve. The printed circuit industry is in the midst of significant technological change aimed at producing a significant increase in density at no additional cost to the board purchaser. The fabrication technology that is enabling this change is called microvia construction. This technology, which is useful over a wide range of electronics interconnect applications, is being driven primarily by: Area array silicon platforms. Ball grid array and chip scale substrates are needed for bare silicon applications providing access to high device leadcounts in small package areas. These high I/O count requirements outstrip the traditional, single metal, peripheral leadframes that have formed the backbone of silicon packaging since the integrated circuit was invented. They result in film, rigid, and build up multilayer silicon platforms to provide electrical access and a standardized physical interface to leading edge silicon. Interconnection of area array platforms. Ball grid arrays and chip scale packages will coexist with traditional surface mount components for many years. Their increased use means more solder joints per square centimeter of substrate. This increases the density of the substrate in two ways: first, connection access to the array grids with via structures and line widths that can be accommodated within the array, and; second, interconnection between arrays and other components. Both of these requirements increase demand for microvias. Small form factor systems. Eighteen percent of the world's electronic systems fall into the category of being complex enough and small enough to potentially demand microvia substrates. These systems are often dense double-sided assemblies with solder joint densities that are typically double today's conventional multilayer-based assemblies. These systems are not limited to hand-held applications (e.g., cellphones), they are also seen in such areas as automotive electronics and embedded processor modules. All of these small form factor systems are driving toward the need for microvias, as manufacturers must produce smaller, denser system packages, which in turn, increase system performance and decrease system cost. Microvia substrate fabrication, which involves the sequential build-up of multiple levels of interconnect, is reaching a limit in interconnect density due to poor layer to layer registration control and inadequate feature definition below 3 mils (0.003 inches). In order to meet the Semiconductor Industry Association road maps for chip carriers, the industry must change the way it performs the imaging process on microvia substrates. Projection lithography has been commonly accepted as the solution, however, no particular projection lithography method has yet emerged as the best choice. Up to this point, no tool has offered the combination of higher resolution, better registration, and high throughput. The Company believes that its stepper technology is ideally suited to satisfy all three of these demands. Several methods of fine feature formation are being explored by the industry including scanning projection lithography, laser drilling of via holes, laser direct imaging, and laser ablation of metallization levels. None of these techniques, however, offer the level of process control afforded by large area step-and-repeat lithography. There is no consensus in the market for which method will ultimately dominate, but there is a clear precedent in the wafer processing industry. The situation is closely analogous to that of twenty years ago in the integrated circuit industry, when increasing chip-level device and interconnect densities moved beyond the ability of then current manufacturing equipment, contact and proximity printers. The first wafer stepper was installed in an integrated circuit production line in 1979. Today, the wafer stepper is the dominant imaging tool for integrated circuits with a total available, worldwide equipment market measured in billions of U.S. Dollars. The HDI market for lithography tools is split between circuit layer patterning and via hole patterning. The split is primarily the result of the dramatically different throughput constraints for these two segments due to the nature of the photo materials used. Laser drilling of vias is seen as a significant competitive technology in via formation for low via-count applications, but suffers a dramatic throughput disadvantage in the high via-count chip carrier segment. The chip carrier segment is projected to be the fastest growing segment of the microvia market and is the one best suited to the Company's step-and-repeat technology. The Company has a good entry position for supplying tools into the chip carrier market through the existing 5200 PanelPrinter systems. This machine is not optimized for the market, but will satisfy the needs of early adopter manufacturers anxious to supply high performance chip carrier substrates. Medium and long term market growth for the Company will be based on an evolved 5200 platform that provides large substrate support (such as the 18-inch by 24-inch substrate now standard in the PCB industry), a wide field i-line projection lens, and a cost-reduced manufacturing infrastructure. Manufacturing Technology In the context of electronics manufacturing, photolithography provides accurate and precise imaging by replicating detailed patterns from master artwork sources onto successive layers of conductive, semiconductive and insulating materials to form microstructures, such as transistors, diodes, resistors, connecting lines and holes, all intended to result in a product which performs specific functions, most often involving the sensing, storing, transmitting, processing or displaying of information. This multi-layer production process is used to manufacture integrated circuits, FPDs, and more recently, multi-layer printed circuit boards and chip carriers, products which contain large numbers of microstructures and the patterns which connect them. The layers are built up one by one on a substrate base. For the first layer, a material is applied to the substrate. Next, a coating of light-sensitive photoresist chemical is applied. A series of master patterns is then successively imaged onto the photoresist by a photolithography system, using a projection lens and an illuminator. Each pattern exposed onto the photoresist is then developed and etched. Developing removes the exposed photoresist pattern, while unexposed photoresist remains. Through a chemical process, etching then removes the metal layer in the exposed area, leaving the pattern replicated from the master artwork. For the second layer, an insulating material, such as silicon nitride, is applied on top of the previous layer. Again, a coating of photoresist is added and the plate is exposed, developed and etched. These steps are typically repeated several times, or as many times as there are layers in the process. The size, shape and electrical property of each material remnant, and the order in which they have been layered into the microstructure, determine the functionality of the microstructure. For each layer in the process, the substrate moves through a production line, with each item of equipment in the line performing one or more of the fabrication steps. A typical line includes deposition equipment to apply thin-film layers, photoresist equipment to apply coatings of photoresist, a photolithographic system to image patterns in each layer of material and other equipment to perform the development, etching and inspection steps. In a single production line, the substrate must pass through all production steps as many times as there are layers. For volume production, one production line, including one photolithographic system, is dedicated to each layer. Precise coordination of machine systems is necessary to achieve the accuracy required to position adjacent images and registration of the various image layers of a large area integrated circuit. The technological challenges of image positioning and registration alignment are made even more complicated by the distortion in substrate shape that can occur as a result of temperature changes during the production process. In addition, photolithographic systems must operate with sufficient speed to make volume production of products possible. Imaging equipment used in HDI fabrication is evaluated in terms of registration, resolution, and cost or value of ownership. Alternate technologies and competing equipment options each have benefits on one or more category of performance. The Company believes that its new HDI system will be the first to excel in all three of the categories. - - Registration A board's capacity can be increased by adding layers of circuitry. Advanced PCBs typically require four to sixty layers, with the majority between the four and ten layers. Circuit traces from one layer must be connected to at least one other layer. Connection between layers is accomplished by a variety of via technologies. A via is typically a hole placed in a "pad" area of a signal trace, cut through one or more insulating layers, and plated or filled to provide electrical continuity to a lower layer. The pad in the upper layer must be positioned accurately with respect to the lower layer. The relative alignment of pads on corresponding layers is referred to as registration. - - Resolution Smaller features allows more signals to be routed through a given area on a board. Shorter run lengths also have a benefit of better impedance control, resulting in faster switching rates and lower power requirements. Lithography tools must be able to produce patterns in very thick layers of photoresist and on substrates with large planar deviations (warp, bow, taper, etc.). - - Cost of Ownership Cost of ownership is made up of many contributing factors. The purchase price is typically allocated over three years. In addition to the cost of the system, fabricators consider the cost of factory clean room space, utilities, maintenance costs, and tooling, such as the cost of master artwork reticles or photomasks. Additional factors are becoming more significant as equipment costs rise and production specifications increase, the most significant of which are utilization, or up-time, and product yield, the percentage of good parts produced to total parts produced. Competing equipment options for imaging equipment used in HDI fabrication include contact printing, projection scanning, laser direct imaging, and step and repeat lithography. Contact printing is currently used for the majority of PCB fabrication. With an average selling price of $100,000 to $600,000 and little maintenance, it is a cost effective method for low to medium resolution work. Many leaders participating in small scale production of laminate multi-chip modules and other chip carriers, as well as those producing dense miniature boards for portable applications, have reduced contact printing resolution to 3 to 4 mil (75 to 100 microns), but suffer from extremely low yield at this resolution level, mostly as a result of particle contamination. The most significant problem with contact printing is inaccurate layer-to-layer registration. Standard processes between exposure steps cause the boards to shrink or expand while master artwork is fixed in size, causing registration errors in scaled boards. An initiative has been put in place to characterize dimensional instability in the boards so masks can be created with prescaled artwork. This may improve registration on average, but board-to-board scale variation and within-board scale variation cannot be corrected. Contact printing does benefit from the lowest initial purchase price. Simplicity allows for a very low maintenance cost and high utilization. However, for high resolution, yield loss becomes a significant factor in the overall cost of ownership. Projection scanning systems have been developed to provide a large field non-contact lithography process. The initial purchase price of a scanning system is approximately $1,200,000, or twice that of a contact printer. The optics are capable of producing better than 4 micron images without potential contamination from contact. However, in actual production the 4 micron specification has not been achieved due to thick, low contrast resists typically used, and the inability to automatically change focus during exposure. Limited depth of focus of the optics may cause problems with many of the warped and tapered boards. Thick photoresist layers and focusing requirements over rolling topography make matter much worse. Scanning requires large, expensive mater artwork masks to produce the images. This process lends itself well to large format boards which require nonrepetitive artwork. However, it is less effective for small format boards such as chip carriers and portable applications. Such applications can use less expensive and more precise small format masks with patterns stepped and repeated across the substrate. Registration on projection scanners is better than that of a typical contact printer due to use of advanced alignment systems. Complicated motions of both mask and substrate make registration accuracy more difficult to achieve than with step and repeat systems. In addition, the fixed 1:1 relationship between artwork and printed image does not allow a simple means to adjust for board scaling. Complexity of the system, and reputed poor reliability raise the total cost. With the potential failure to meet resolution goals, the yield improvement may not justify the increase in other cost factors. Laser Direct Imaging (LDI) is a relatively new technology which has some advantages for PCB R & D and prototyping. The initial purchase price of an LDI tool is in the range of $850,000 to $1,400,000. Its non-contact lithography process eliminates the contamination problem associated with contact printers. The laser beam is directed to create an image directly from a computer file without the need for an expensive mask. LDI systems produce finer resolution than contact printers, but at a cost of reduced throughput. Registration on LDI tools is better than that on contact printers. Control of the writing beam is accurate. The writing pattern may be adjusted to correct for a predetermined substrate scale. Compensation for board-to-board variation and within-board variation may also be possible in the future, but with a potentially significant loss in throughput due to computation time. The Cost of ownership on LDI tools may be too high for a high-volume production environment, due to high cost and relatively low throughput. Optics for step and repeat systems can be built to resolve sub-micron features, but this capability will not be required in the HDI market for several years. The Company's new HDI system balances lens cost with resolution and field size to achieve the initially required 12.5 micron resolution with the best customer cost of ownership. The resulting lens has a large depth of focus to compensate for warped and bowed substrates. The HDI system design provides the tightest registration control of all HDI imaging technologies. The alignment system can accurately measure substrate scaling. Corrections may be applied at each exposure site allowing compensation for board to board variations and within board variations. The average selling price of step-and-repeat systems is expected to be approximately $1,600,000. The cost of small masks used on step and repeat systems is less than the larger masks for scanners. Reliability is better than that of LDI and scanners, but not as good as contact printers. The total cost of ownership is lowest because throughput approaches that of contact printing, and higher yields are achievable at lower resolution levels. The Company's Technology Since its organization in 1986, the Company has devoted substantially all of its resources to the design and manufacture of photolithographic systems that meet technological challenges faced by manufacturers. The Company has focused on the following system features: - - Alignment - A combination of a vision system with proprietary algorithms and proprietary motions software provides highly accurate layer-to-layer registration. - - Scalability - Detecting and measuring microscopic distortion in substrate shape compensates for distortion by adjusting the image projected on the substrate. - - Ease of Use and Flexibility - Employing proprietary set-up, self-calibration and user interface software simplifies the set-up, testing, imaging and resetting processes, thereby improving productivity. - - Reliability/Ease of Maintenance - Designed to employ low-friction air bearings and advanced diagnostic capabilities -- both on-site and from remote locations -- the Company's system minimizes downtime and enhances throughput capability. Alignment. Accurate measurement is critical to precise image positioning and registration, the accurate superimposition of images on successive layers. The PanelPrinter uses laser interferometry to accurately measure and control the position of the substrate, and a machine vision system to precisely measure the location of alignment mark images on the substrate. Job execution software compares the location of the measured marks to reference marks stored in the system computer. The results are then translated by the software and used to correct the position of the stage and camera hardware to bring the substrate into accurate "alignment" with the system. Scalability. Substrates tend to distort when subjected to high temperatures used during the production process. Compensation for such distortion is done with the scalability feature. Measurement data taken during the alignment process is used to determine the substrate shape changes. Job execution software compensates for these changes by "scaling" the stepping motions of the stage, and by adjusting the magnification of the projected image. These corrections optimize the size, shape and position accuracy of the projected image over the underlying, previously exposed image. Ease of Use and Flexibility. The complexity inherent in operating a photolithographic system makes ease of use and flexibility particularly desirable to customers. The Company's software incorporates advanced computer graphics and flexible, simple user interfaces to set up and carry out machine instructions. The software facilitates the production of a variety of product types and sizes and improves productivity. Measurements and correction software provides rapid set-up and self-calibration routines. A number of tests, including statistical analyses, can be run to verify system performance. This software, among other functions, calibrates the position of the lens and enables automatic adjustment of image positioning. This self-calibration routine eliminates the need to expose and develop test substrates and reduces set-up time from the hours generally required by mechanical means to under ten minutes. One of the Company's software modules leads the user through a graphical, step-by-step process of electing patterns and their appropriate printing sequence. Once a job execution program is entered into the system, it can be initiated with a single command. Other software modules provide operators with access to extensive, on-line interactive manuals, which are customized for specific machine configurations and periodically updated. All of the technology referred to above were developed for the FPD market, but will also be useful in addressing the needs of the HDI market. Although the Company believes its existing technology is sufficient to meet the needs of HDI in the short term, additional technology will need to be developed for completing the new product optimized for the HDI market. Initially, this will involve relaxing some of the precision and resolution previously developed to achieve higher throughput and reduce costs. Previously developed precision and resolution can be worked back in on future systems, as industry technology road maps suggest may be required, but additional technology will need to be developed to maintain high throughput. There can be no assurance that the Company will have adequate resources todevelop such additional technology. Customers and Marketing Historically, photolithographic systems such as the Company's PanelPrinter have been used for commercial and research purposes. Potential commercial customers included manufacturers of electronic products that incorporate FPDs. Potential commercial customers also include original equipment manufacturers that seek to manufacture and sell FPDs as individual components. The capital and technological investments required for manfacturers entering the FPD market are substantial. As a result, there has been a limited number of potential customers for the Company's PanelPrinter. Of the limited number of potential customers, the majority are located outside the United States to date, principally in Japan and Korea. The Company's ability to compete effectively in the Japanese and Korean markets has been limited by its small size, its geographic location and its selection of regional representatives. The chip carrier segment of the HDI market is an emerging market, with the initial fabricators representing the initial potential customers, most of whom are in the process of evaluating new lithography methods for high performance chip carrier production requirements. The Company intends to serve these customers with simple variants of the Company's existing stepper products having only minor modifications from the standard FPD configurations. These tools are expected to be used in pilot production lines where new and/or modified processes will be required. Through strategic partnerships with these initial customers, especially those who are volume manufacturers, the Company expects to leverage its early relationships into a marketing program which is reference driven; manufacturers recommending to other manufacturers. The Company believes these partnerships will establish the credibility necessary to penetrate the broader HDI market. Historically, cooperation with the U.S. government has been an important factor in achieving technological leadership in the FPD manufacturing equipment industry. Since 1990, the Company has received funding from agencies of the U.S. government for certain feasibility studies and production of a next-generation FPD photolithographic system. Under these funding arrangements, the U.S. government generally has limited rights to use certain critical technical data and computer software, however, the Company retains ownership of the developed technology. The Company does not intend to seek funding from the U.S. government for developing technology for the HDI market. In North America, the Company sells directly to customers through the efforts of its marketing and sales staff and through relationships that its management have with customers throughout the industry. Overseas, in addition to its efforts to sell directly, the Company uses distributors and foreign sales representatives to sell its product. Products The Model 5200 PanelPrinter features an optical projection system, a high-speed, laser-metered substrate stage, an automated reticle handler and a sophisticated substrate alignment system, all integrated with the Company's proprietary software. For certain applications, the PanelPrinter currently is capable of an hourly throughput rate of up to 80 large-area substrates. The Company offers both single and dual camera optical systems with several projection lens options. In the Company's patented dual camera system, each camera lens offers 2X reduction and an 80 millimeter image field, insuring equally sharp detail at the edges of the image as in the center of the lens field. Two cameras increase throughput by simultaneously exposing two images on the substrate. The PanelPrinter includes as a standard feature a reticle library, with storage for 38 reticles, reducing the time required in changing reticle patterns for exposure. Other Products The Company's high-speed substrate handling system moves the substrate through the PanelPrinter. One available option is an automatic substrate loading and unloading system. The substrate handler is designed for maximum flexibility, by accommodating many different substrate sizes and thicknesses. Linear induction motors, controlled by laser measurement systems, effect highly accurate stage movement. Substrate handler pre-alignment and movement throughout the photolithography process is made more accurate through the use of air bearings, as well as a vibration isolation and dampening system supporting a solid granite base. The substrate handling system also permits easy interface to other production line equipment. A Class 10 environmental enclosure chamber controls temperature and reduces particulate contamination, thereby increasing production yields. The Company has several software products that enhance productivity. The Company's job setup software -- PanelCADTM -- uses a graphical interface rather than complicated programming language, to set up and edit jobs. PanelCALTM -- the Company's automatic calibration software -- allows the user to constantly monitor imaging performance without the need for test substrates, off-line measurements or manual mechanical adjustments. The Company's PanelSCALETM software allows for automatic adjustment for process-induced substrate distortions. The PanelPrinter's automatic measurement and topography software adjusts stage and camera positioning to maximize stitching and registration accuracy. Future Product A new lithography system for cost effective, high volume HDI fabrication will be developed. The initial specifications for this system have been established. Additional refinements to the specification will be provided by likely users. This development project will incorporate a newly designed i-line lens (purchased) and illumination system (purchased), a new motions system with at least 18 x 24 inches of travel (purchased), a new machine-vision based alignment system (purchased), and a new substrate handling system (purchased). The remaining subsystems will be primarily MRS designed and will, wherever practicable, use existing MRS designs (modified) from the Model 5200, 6700, and 11000 PanelPrinter systems. Operations Historically, the Company has operated primarily as an assembly, test and systems integration company. Except for extensive motion systems, vision systems and proprietary software, most other components of the PanelPrinter are either manufactured by others as custom components or are standard electronic components purchased from major manufacturers or distributors. The Company generally builds PanelPrinters to order and lead times can be up to nine months. The manufacturing process for the PanelPrinter has two stages. The first stage is assembly. Because the Company purchases most of the system components, the Company performs little processing of raw materials. The major components that make up the assembly of a PanelPrinter are the main projection lens, illuminator, environmental chamber, granite base, stage, air bearings, laser systems, boards and plate handlers. Following assembly, testing an integration of the system, the second stage of the process begins. At this point, the system software is installed and trial panels are manufactured to ensure that lens assembly and stage motions are coordinated. The Company generally orders individual components from a single or a limited group of suppliers in order to assure quality and obtain quantity discounts. The Company believes that, with the possible exception of the main projection lens, it could find alternate sources for all components and subassemblies of the PanelPrinter without significant disruption in its production schedule. The lead times for major components range from three to four months for the stage and up to nine months for the lenses. Without incurring significant additional cost, the Company has been able to shorten the lead time for lenses to three months by pre-ordering the glass used to make the lenses. To date, the Company has not experienced any material delays in production due to component unavailability or delay. Nonetheless, termination or disruption of supplies from these sources could result in production delays, reductions in PanelPrinter shipments or increased costs that would have an adverse effect on the Company's operations. While the Company is exploring ways to reduce its dependence on these sole and limited-source suppliers, there can be no assurance that the Company will be successful in doing so. While many of the components of the PanelPrinter are available from a variety of outside vendors, the main projection lens is available only from a limited number of sources. Management believes that a total of four or five companies worldwide have the ability to manufacture lenses of the quality used in the PanelPrinter. Two of these manufacturers, Nikon and Canon, are direct competitors of the Company. To date, substantially all of the Company's lenses have been provided by Tropel, a precision optics and metrology products manufacturer. Although an alternative source for PanelPrinter lenses would likely require at least 12 months to produce a lens to the Company's specifications, the Company has established relationships with other lens manufacturers. The primary difference in operations based on the plan for entering the HDI market will be to place an even greater reliance on purchased subsystems over Company-developed subsystems. The objective will be to build lower-cost, higher throughput systems which increase the value of ownership of such systems to customers. Competition The market for FPD manufacturing equipment is intensely competitive and subject to rapid technological change. Historically, the Company competed directly with two other major manufacturers of large-area projection photolithographic systems, Nikon and Canon. For both HDI and FPD markets, there are a number of bases on which manufacturers of photolithographic systems compete. The relative importance of these varies depending on whether the system is being purchased for use in a research environment or for use in a volume production environment. In the research environment, the most important competitive factors are technical performance (including resolution and uniform critical dimension control), reliability and technical features (including scaling, motions technology and systems integration). In the volume production environment, the critical competitive factors are throughput, reliability, long-term relationship with the manufacturer, technical performance and the manufacturer's reputation and financial stability. While precise statistics are not available, the Company believes that Nikon is the FPD lithography market leader, with the largest installed base of large-area photolithographic machines used in the manufacture of AMLCDs. At present, most AMLCD production takes place in Japan, and Nikon is the primary source for photolithographic systems in the Japanese market. Nikon regularly announces new features for its line of photolithography machines. The Company's other major competitor is Canon. Both Nikon and Canon have much greater financial resources, broader product lines and greater customer service capability than the Company. Additionally, they are located in a major market area and have larger, more established customer bases. Imaging equipment used in HDI fabrication includes contact printers, projection scanners, laser direct imaging systems, and most recently, step and repeat lithography systems. There are a large number of manufacturers of contact printers. Performance of contact printing is not expected to match the requirements for HDI. There is one strong competitor for projection scanning, Tamarack, supplying a mature scanning system to both flat panel and PCB markets (Tamarack also produces contact printing equipment). There are also two competitors, Anvik and Ultratech, with systems in prototype phase. The Tamarack system has achieved a fair level of success in flat panel manufacturing, primarily in production of color filter plates. This application requires fairly high resolution (approximately 5.0 microns), but less than 5 micron registration control. Anvik has been working on various models under a number of government funded projects. Anvik systems have yet to be placed into actual production. Ultratech has also applied their 1X optics to a prototype high resolution scanning machine, but only at the smaller silicon wafer sizes. Both Anvik and Ultratech claim lower depth of focus than the Tamarack system. Two competitors in laser direct imaging, ETEC and Jenoptik, produce laser direct imaging equipment for PCB applications. Jenoptik's Model DP-40 was installed at one customer site, and never reached either throughput or reliability goals. The Jenoptik product line is now marketed by Israel-based Orbotech. Resolution performance falls below the requirements for HDI applications with no indication that a high resolution model is on the way. ETEC acquired Polyscan to add to their world leadership portfolio of e-beam and laser direct write systems for mask generation. The original product was based on lower resolution, like the Jenoptik DP-40. New optics have allowed migration to competitive resolution, at the cost of throughput. Emphasis on mask generation equipment may hamper efforts to develop registration improvements. The Company believes that it is the only company actively pursuing step and repeat technology for HDI applications. Barriers to entry include material handling, scale compensation, and imaging requirements through a large depth of focus. Companies that could have the ability to develop step and repeat equipment for HDI applications are those with current wafer stepper or flat panel display stepper experience, such as ASM Lithography, Canon, Nikon, Silicon Valley Group, and Ultratech Stepper. All of these companies have historically focused substantially all of their development efforts on their primary market, wafer steppers, however. Research and Development Since inception, the Company has strived to develop the highest performance tools for the FPD market. Because of this and the complexity of photolithographic technology, very few outside vendors had the capability to provide modules at the subsystem level that would meet the demanding performance criteria expected. As a result, many of the mechanical and electrical components in the PanelPrinter were custom designed and fabricated internally by the Company. This has led to a relatively high cost structure for the existing PanelPrinter products. The performance level requirements of the HDI market, although high, are not expected to require that the Company continue to design and manufacture many of the mechanical and electrical components internally. The Company's product development strategy for HDI lithography systems is expected to incorporate purchased, commercial components and subsystems wherever practicable. Internal development of proprietary components and subsystems will only be done where necessary in cases which exploit our core competencies in precision mechanics, optics, and software. Photolithographic equipment design requires the cooperation and management of four distinct engineering disciplines: electrical, mechanical, optical and software. As of March 31, 1998, of the Company's 18 engineers, 3 are administrative, 2 are electrical engineers, 7 opto-mechanical, and 6 software. The Company's primary research focus has been the design and development of enhancements to its PanelPrinter. In the fiscal years ended March 31, 1998, 1997 and 1996, the Company incurred aggregate research and development costs of $3.4 million, $3.5 million and $4.9 million, respectively. Those costs include $1.1 million, $0.5 million and $2.6 million, respectively, allocable to product development or contract research related contracts in these periods. See "Management's Discussion and Analysis of Financial Condition and Results of Operations". Intellectual Property and Proprietary Technology The Company believes that it would be difficult to reproduce the accumulated know-how embodied in the PanelPrinter and that this is its primary source of protection. For instance, the Company believes that its software, which is central to its motions, throughput, and image control technology, would be difficult to duplicate without access to the source code. However, there can be no assurance that the Company's accumulated know-how could not be reproduced, or that its intellectual property and proprietary rights are adequately protected or can be adequately policed. There may also be pending or issued patents of which the Company is not aware which the Company might be required to license or to challenge at possible considerable expense to the Company. There can be no assurance that any such license would be available on acceptable terms, if at all, or that the Company would prevail in any such challenge. The Company also relies on a combination of patents and confidentiality agreements. The Company holds four patents in the United States relating to optical alignment within the photolithographic and precision motion systems. The Company currently has a total of eight patent applications pending, five in the United States and three overseas. Employees As of March 31, 1998, the Company had 55 employees, of whom 18 are employed primarily in research and development, 10 are employed in manufacturing, 9 are employed in customer support, 4 are employed in sales and marketing, and 14 are employed in general and administrative functions. The Company has historically not encountered difficulties with its employees and turnover has primarily been associated with workforce reductions taken by the Company. The Company is highly dependent on certain management and technical employees in such critical areas as the development of hardware, software and motions and imaging technology. The loss of any such personnel could have a material adverse effect on the operations of the Company, and there is no assurance that the Company will be able to retain such personnel. Backlog Backlog at March 31, 1998 was $0.5 million as compared with $1.5 million at March 31, 1997 and $2.2 million at March 31, 1996. The Company includes in backlog only those orders for product shipments and contract billings for which a confirmed order has been received by the date on which the backlog is computed. Backlog for which delivery had been specified within twelve months at March 31, 1998, March 31, 1997 and March 31, 1996 was $0.5 million, $1.5 million and $2.1 million. Because of the possibility of customer changes in delivery schedules, cancellation of orders and potential delays in product shipments and contract performance, the Company's backlog as of any particular date may not be representative of revenues for any succeeding period. Item 2. Properties The Company leases 34,579 square feet of space in its sole manufacturing and research facility, located at 10 Elizabeth Drive in Chelmsford, Massachusetts. The Chelmsford facility is also the Company's headquarters. Management believes that existing space and space otherwise available is adequate to support Company operations through fiscal 1999. Item 3. Legal Proceedings On January 24, 1997, Micron Display Technology ("Micron Display") brought suit in Idaho against the Company alleging in five counts of breach of contract, breach of implied warranties, and breach of express warranties, in connection with a Model 5200 PanelPrinter (the "PanelPrinter") which the Company alleged Micron Display purchased from the Company in 1996. On January 30, 1997, the Company filed an action in Massachusetts against Micron Display alleging in two counts breach of contract and violation of M.G.L. c. 93A, in connection with Micron Display's nonpayment for the PanelPrinter. The parties disputed which documents constituted the contract between them. Further, Micron Display alleged, among other things, that the PanelPrinter failed to meet certain performance specifications contained in what it contended constituted the contract, and that, as a consequence, it was entitled to the return of its $1.0 million deposit and the conversion of the parties' relationship to a lease of the PanelPrinter, or a PanelPrinter of like quality. The Company maintained that other documents constituted the contract, pursuant to which there was no right to convert the relationship to a lease, and further denied that the PanelPrinter failed to meet specifications set forth in the document cited by Micron Display. The Company sought approximately $1.4 million as the balance of the unpaid contract price, and additional remedies under the Massachusetts Unfair Business Practices Act. On July 23, 1997, the parties executed a Settlement Agreement resolving their disputes and releasing all claims against each other. Both lawsuits have now been dismissed. While the specific terms of the Settlement Agreement are confidential, the settlement generally provided for a lump sum payment to be made by Micron Display to the Company at the time the Settlement Agreement was executed, and further monthly installment payments to be made thereafter. These payments, together with Micron Display's initial deposit, constitute payment in full for the PanelPrinter. The Company in turn has agreed to provide Micron Display with an extended warranty with respect to the PanelPrinter, as well as technical assistance and certain modifications to the PanelPrinter. No significant amounts due to or from Micron remain outstanding at March 31, 1998. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders during the fourth quarter of fiscal 1998.
Item 4a. Executive Officers of the Registrant Name Position with the Company Carl P. Herrmann President, CEO and Chairman of the Board Patricia F. DiIanni Vice President and Chief Financial Officer John L. Steele, Jr. Vice President, Secretary and General Counsel
Executive officers of the Company are elected by the Board of Directors on an annual basis and serve at the discretion of the Board of Directors or until their successors are duly elected and qualified. There are no family relationships among any of the directors or executive officers of the Company. Carl P. Herrmann, has been President, CEO and Chairman of the Board since February 1998. Mr. Herrmann has been serving on the Board of Directors since May of 1997. Prior to joining the Company's Board of Directors he had been an independent management and international marketing consultant since December 1994. From July 1991 to November 1994, he was at Solbourne Computer, Inc. from April 1992 as President and Chief Executive Officer. From May 1989 to November 1990 he was the Hong Kong-based Director of Asia/Pacific Operations for Amphenol Corp. From October 1984 to April 1989 he was Managing Director of GenRad Inc.'s regional operations based in Singapore. From August 1983 to September 1984 he was the Tokyo-based Vice President of TEL-GenRad, KK, a joint venture developing and manufacturing PC board and semiconductor test systems. Mr. Herrmann received a BA from the University of Pennsylvania and an MBA from the Wharton School. Patricia F. DiIanni, Vice President and Chief Financial Officer. Ms. DiIanni has served as Chief Financial Officer since July 1996 and prior to that as Controller of the Company from June 1993. From November 1991 to May 1993, Ms. DiIanni was employed by Symbolics, Inc., a manufacturer of computers and software for artificial intelligence, most recently as Manager, Treasury and Financial Planning and Analysis. From 1961 to November 1991, Ms. DiIanni was employed by GenRad, Inc., a manufacturer of automatic testing equipment, where she held a variety of financial positions,including Manager, Worldwide Planning and Analysis from 1990 to November 1991. John L. Steele, Jr., Vice President, Secretary and General Counsel. Mr. Steele, a founder of the Company, has served as Vice President, Secretary and General Counsel since March 1993. Prior to March 1993, he had served as Vice President, Administration since theCompany's organization in February 1986. Prior to the Company's formation, Mr. Steele was the Secretary and General Counsel of GenRad, Inc., a manufacturer of automatic testing equipment. Mr. Steele received an A.B. from Dartmouth College and a J.D. from Suffolk University. PART II Item 5. Market for Registrant's Common Stock and Related Shareholders Matters Stock Market Information The Company's Common Stock began trading on the NASDAQ National Market System on July 23, 1993. The following table sets forth the high and low sales price per share of Common Stock as reported on the NASDAQ National Market System for the periods indicated.
High Low 1998 First Quarter $1.3750 $0.7500 Second Quarter $1.7500 $1.0000 Third Quarter $2.0000 $0.6250 Fourth Quarter $1.7500 $0.6875 1997 First Quarter $6.0000 $3.5630 Second Quarter $3.8750 $2.3750 Third Quarter $3.2500 $1.8130 Fourth Quarter $3.0000 $1.2500
Holders As of June 1, 1998, there were 127 stockholders of record of the Company's Common Stock, and the estimated number of beneficial owners of such stock on such date was 2,500. Dividends The Company has never paid dividends on its Common Stock and has no present plans to do so.
Item 6. Selected Consolidated Financial Information The following table contains certain selected consolidated financial information and is qualified by reference to and should be read in conjunction with the Consolidated Financial Statements and related Notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere herein. Year ended March 31, 1998 1997 1996 1995 1994 Statement of Operations Data: Revenues Product $ 5,265 $ 5,173 $ 7,699 $16,897 $ 7,607 Contract research 0 579 2,858 5,501 7,586 Service and other 1,883 1,389 0 0 0 Total revenues 7,148 7,141 10,557 22,398 15,193 Cost of revenues Product 6,276 4,040 7,389 10,893 4,496 Contract research 0 579 2,891 5,337 7,171 Service and other 1,382 1,485 0 0 0 Total cost of revenues 7,658 6,104 10,280 16,230 11,667 Gross margin (510) 1,037 277 6,168 3,526 Operating expenses Research and development 2,237 3,042 2,279 1,945 727 Selling, general and administrative 2,414 2,944 3,715 2,862 1,379 Other charges 0 0 4,469 0 0 Income (loss) from operations (5,161) (4,949) (10,186) 1,361 1,420 Other income (expense), net 18 1,819 245 347 228 Income before provision for income taxes (5,143) (3,130) (9,941) 1,708 1,648 Provision for income taxes 0 0 0 72 62 Net income (loss) ($5,143) ($3,130) ($9,941) $ 1,636 $ 1,586 Net income (loss) per share Basic ($0.75) ($0.47) ($1.52) $0.25 $0.29 Diluted ($0.75) ($0.47) ($1.52) $0.24 $0.26 Weighted average common shares outstanding Basic 6,814 6,717 6,550 6,480 5,533 Diluted 6,814 6,717 6,550 6,952 6,146 1998 1997 1996 1995 1994 Balance Sheet Data: Cash and cash equivalents $ 1,095 $ 3,291 $ 4,218 $ 8,340 $12,147 Working capital 5,605 10,130 10,097 18,174 18,776 Total assets 7,884 13,428 16,301 26,993 24,104 Long-term debt 0 1,000 11 15 17 Stockholders' equity 4,832 9,870 12,864 22,600 20,788
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations This document and documents incorporated by reference include forward-looking statements about the Company's businesses, revenues and expenses, effective tax rate and operating and capital requirements. Forward-looking statements made or incorporated by reference herein are not guarantees of future performance. In addition, forward-looking statements may be included in various other Company documents to be issued in the future and in various oral statements by the Company representatives to security analysts and investors from time to time. Any forward-looking statements are subject to risks that could cause the actual results to vary materially. Such risks are discussed below ("Risk Factors Which May Effect Future Results") and in related portions of this document, including documents incorporated by reference. Overview Since it's inception in 1986, the Company has devoted substantially all of its resources toward the research, development and manufacture of advanced lithography systems for the flat panel display and other large area electronic devices markets. Through fiscal 1998, the Company has principally sold its products for research and development purposes. The Company has also generated sales of its products for purposes of volume production of flat panel displays, however, these sales have been limited and have been principally to U.S. manufacturers. The Company's sales have been declining since fiscal 1996. This has been due to several factors including intense competition in the Japanese market, the principal market for volume production of flat panel displays, because that market is dominated by competitors such as Nikon and Canon. Additionally, due to a number of unforeseen market and economic conditions, there has been little or no competitive pressure for manufacturers to increase display sizes or resolution which are the Company's competitive advantages. Therefore, the market for volume production of FPDs has not expanded beyond Japan or into technology where the Company expected it would have the ability to effectively compete. As a result of these circumstances, in late fiscal 1997 and early fiscal 1998, the Company reduced its workforce, implemented cost reduction programs and directed its efforts to the Asian market where the vast majority of worldwide production of desktop PCs, including those with FPDs, occurred. The Asian economic crisis, which began in the Company's fiscal 1998 caused a substantial decline in the growth of the PC market and further reduced the Company's sales through fiscal 1998. As a result of these circumstances, the Company has continued to experience significant losses from operations and negative cash flows and has defaulted on debt covenants during fiscal 1998. Recent Developments During the fourth quarter of fiscal 1998, the Company identified a potential new market opportunity for the Company's large area photolithography technology, the high density interconnect (HDI ) market. HDI manufacturers are faced with a demand to produce printed wiring boards (PWB) with increasing complexity and component density. Growth in portable consumer products (cell phones, PDAs, etc.) as well as a number of high speed data applications is creating a requirement for new manufacturing technologies. Leading the increased density demand is an area of integrated circuit packaging referred to as chip carriers. High numbers of input and output signals must be routed through the PWB in a limited area, requiring tight circuit dimensions and precise layer to layer interconnect registration. The Company's technology is uniquely suited to meet these requirements. See also "Business". The Company believes that its existing products are uniquely well suited for the needs of the HDI market and, therefore has refocused its marketing efforts from the flat panel display industry to the HDI market. As a result of this refocus, the Company received its first HDI purchase order for a Model 5200 PanelPrinter in April 1998. Although the Company received its first HDI purchase in April 1998, the HDI market is an emerging market which is currently represented by a limited number of customers. Most of these customers are in the process of evaluating new lithography methods in anticipation of expected significant growth in high performance chip carrier production. The Company believes that its lithography tool and related technology are best suited to meet the needs of these customers. However, there are a number of risks associated with the Company's transition to the HDI market including, but not limited to the Company's ability to obtain sufficient financing to continue to fund its operations and its research and development efforts. Though the technology foundation is in place, a considerable effort is required to develop new technologies which will meet the needs of the HDI market in the longer-term. Further, the ability of the Company to develop strategic partnerships with HDI manufacturers to gain acceptance of its products and technology, the risks attendant to an emerging market including its actual potential size and success, and the market's acceptance of the Company's product as the, or one of the, methods for future fabrication are also potential risks. As a result of the Company's transition to a new market for its technology, the Company terminated its work under its contract with the United States Display Consortium (USDC), an industry-led public/private partnership, in March 1998. The contract with the USDC was entered into in June 1998 for the research, development and manufacture of an advanced large-area high throughput step-and-repeat imaging tool. Under the contract, MRS and the USDC would share in the cost of the new imaging tool which was expected to be delivered to a member of the USDC at the end of the contract. As a result of the contract prior to cancellation the Company earned product revenue and incurred research and development costs which have been allocated to the contract and included in cost of product revenues. See "Liquidity" and Note A to Notes to Consolidated Financial Statements.
Results of Operations Fiscal Years 1998 and 1997 Revenues ($ in 000's) Year ended March 31, 1998 1997 Product $5,265 74% $5,173 72% Contract research 0 0% 579 8% Service and other 1,883 26% 1,389 20% Total revenues $7,148 100% $7,141 100%
Product revenues remained relatively consistent in fiscal 1998 as compared to fiscal 1997, however, the mix of product revenues varied. Revenues for fiscal 1998 included the sale of two PanelPrinters at selling prices consistent with the Company's historical average selling prices. Revenues for fiscal 1997 also included the sale of two PanelPrinters, however, one of these systems was sold at a substantially higher than average selling price as a result of its more complex configuration. The impact of the lower average selling prices in fiscal 1998 as compared to fiscal 1997 were offset by revenues from the Company's contract with the USDC. Service and other revenues increased 36% year to year as the Company continued its efforts to increase service contracts and sales of spares and consumables to its installed base of customers in the flat panel display market.
Gross Margin ($ in 000's) Year ended March 31, 1998 1997 1996 %Change %Change Product ($1,011) -189% $1,133 265% $310 As % of revenue -19% 22% Contract research 0% -100% ($33) As % of revenue 0 0 Service and other $ 501 -622% ($96) 0% $ 0 As % of revenue 27% -7% Total gross margin ($ 510) -7% $1,037 275% $277
Product gross margin in fiscal 1998 declined as a result of inventory provisions of $1.0 million recorded in the fourth quarter. These inventory provisions were recorded to reduce inventory to its net realizable value as a result of the Company's change in market direction. Product gross margin in fiscal 1998 was further reduced by underabsorped manufacturing costs due to lower than expected demand and product revenues under the USDC contract which had no gross profit. Service and other gross margin increased due to revenues increasing faster than the related costs. This was due to the Company having invested in its service infrastructure in fiscal 1997, therefore, its infrastructure costs remained relatively constant. See also "Business Developments," "Factors Affecting Future Results," and Note A to Notes to Consolidated Financial Statements.
Research and Development ($ in 000's) Year ended March 31, 1998 1997 1996 %Change %Change Research and development $2,237 -26% $3,042 33% $2,279 As a % of revenue 31% 43%
Research and development expenses declined 26% in fiscal 1998 compared to fiscal 1997 due to the Company's reduction in headcount in the fourth quarter of fiscal 1997. Historically the Company has funded a substantial portion of its aggregate research and development costs through contracts with the Defense Advanced Research Projects Agency ("DARPA"), an agency of the U.S. government, in addition to the contract with the USDC in fiscal 1998. Aggregate research and development costs declined in fiscal 1998 to $3.4 million from $3.5 million in fiscal 1997 also as a result of the headcount reduction. Research and development expenditures allocated to contracts were $1.1 million in fiscal 1998 compared to $0.5 million in fiscal 1997. The fiscal 1998 contract-related costs resulted from the initial phase of the USDC contract which required more effort than the fiscal 1997 efforts under the DARPA contract which ended that year. The Company does not expect to continue to fund its aggregate research and development costs through similar contracts. See also "Business Developments," "Factors Affecting Future Results," and Notes A and B to Notes to Consolidated Financial Statements.
Selling, General and Administrative ($ in 000's) Year ended March 31, 1998 1997 1996 %Change %Change Selling, general and administrative $2,414 -18% $2,944 -21% $3,715 As % of revenue 34% 41%
Selling, general and administrative expenses declined 18% in fiscal 1998 compared to fiscal 1997 as a result of generally lower expenses across all expense categories due to headcount reductions and efforts to control costs which were taken in the fourth quarter of fiscal 1997. Other Income/Expense Interest expense grew year to year as a result of the line of credit that the Company entered into during the fourth quarter of fiscal 1997 with a $1 million required minimum borrowing. Other income dropped in fiscal 1998 compared to an unusual high fiscal year 1997 which had a gain on the sale of $1.7 million of certain assets. Results of Operations Fiscal Years 1997 and 1996 Revenues Product revenues decreased 33% from $7.7 million in fiscal 1996 to $5.2 million in fiscal 1997. This decrease is attributable to the sale of two new PanelPrinters in fiscal 1996 versus the sale of one new PanelPrinter in fiscal 1997. Fiscal 1996 also had significant product revenues from a substantial amount of work to rebuild and re-validate PanelPrinters previously sold to one customer as a result of fire damage in their facility compared to fiscal 1997 which included a lens upgrade and the sale of a PanelPrinter previously held for lease which reflected lower selling prices. Service and support revenues grew during fiscal 1997 to $1.4 million or 19% of total revenues from approximately 8% of total revenues in fiscal 1996 and 2% of total revenues in fiscal 1995. As the number of machines in the field now off warranty increased, the need for both service contracts and replacement, spare and consumable parts has grown significantly making this business a growing part of the Company's total revenues. Contract research revenues decreased 80% from $2.9 million in fiscal 1996 to $0.6 million in fiscal 1997 due to the Company reaching the end of its contract with DARPA during the year. The current year activity with DARPA was recognized under the final phase of a $19.2 million contract which was originally awarded in February of 1992. This contract was converted during fiscal 1996 to a fixed price contract with no additional fee to be billed. Gross Margin Product gross profit increased 267% from $0.3 million in fiscal 1996 to $1.1 million in fiscal 1997. The increase is due to the inventory charges taken in fiscal 1996 to reduce the value of inventory as a result of the decline in revenue and backlog, offset by underabsorption in fiscal 1997 resulting from lower production levels. In addition, the fiscal 1996 costs reflected costs of full systems and low margin revenues associated with re-validating damaged customer owned PanelPrinters compared to higher margin upgrades and previously leased equipment. Contract research gross profit was relatively flat in fiscal 1997 compared to fiscal 1996 due to the change to a fixed price no fee contract early in fiscal 1996. Research and Development Research and development expenses increased from $2.3 million in fiscal 1996 to $3.0 million in fiscal 1997 or 34%. This increase is due to the decreased work on the DARPA contract resulting in a lower absorption of labor and overhead costs. Costs before the absorption of DARPA costs dropped from $4.9 million in fiscal 1996 to $3.5 million in fiscal 1997 or 29% as a result of lower costs across all expense categories resulting from employment actions taken in January 1997. Selling, General and Administrative Selling, general and administrative expenses (net of allocation to cost of contract research) decreased $0.8 million from $3.7 million in fiscal 1996 to $2.9 million in fiscal 1997 or 22%. This reduction in expense levels is the result of generally lower expenses across all expense categories in both Administration and Sales and Marketing being partially offset by higher patent cost activity and consulting expenses. Other Income/Expense Other income for fiscal 1997 reflects a gain on the sale of the Company's interests in Integrated Circuit Testing GmbH (ICT). During fiscal 1997, a portion of ICT business was spun-off to form Electron-Beam Technology GmbH (EBETECH), a separate corporation owned by MRS, Siemens AG (Siemens) and a group of other investors. ICT was sold to Opal in October 1996, and EBETECH was sold to Etec Systems, Inc. (ETEC) in March 1997. MRS received $2.5 million from these sales resulting in a gain of $1.7 million. Seasonality and Inflation The Company's business is not seasonal in nature. The Company does not believe that its operations have been materially affected by inflationary forces during its three most recent fiscal years. Liquidity and Capital Resources The Company had cash and cash equivalents at March 31, 1998 of $1.1 million, a decrease of $2.2 million from March 31, 1997. This decrease was mainly the result of negative cash flows from operations in fiscal 1998 which have resulted from declining sales and, therefore, significant losses from operations. Historically, the Company has required significant working capital to support its research and development efforts and to meet its ongoing production, selling and general and administrative costs. Additionally, the Company's transition to a new market will require substantial investments to develop new technologies specifically for this new market as well as substantial funding for its ongoing operations until such time as orders from this new market are sufficient to meet its working capital needs. In addition, historically, the Company has funded a substantial portion of its aggregate research and development costs through contracts with an agency of the U.S. government and other contracts. However, the Company does not expect to continue to fund its research and development efforts through similar contracts in the future. The Company's ability to develop new technologies is dependent upon its ability to fund research and development through working capital and/or other financing alternatives. In the past, the Company has been able to meet its working capital requirements through its existing cash balances and amounts available under its line of credit. However, as a result of its significant net loss in fiscal 1998, the Company was not in compliance with a financially restrictive debt covenant, minimum tangible net worth, as of March 31, 1998. The Company has received a waiver of the covenant default for the period March 31 through June 30, 1998. However, it is probable that the Company will not be in compliance with this covenant for the remainder of fiscal 1999. Management's plans in regard to these circumstances are discussed below. In the fourth quarter of fiscal 1998, the Company hired a new chief executive officer with extensive experience in the high technology industry. Under the direction of the new chief executive, the Company refocused its marketing efforts toward a new market which the Company believes provides significant opportunity in the future. The Company is actively seeking strategic relationships with customers in the new market in order to gain new orders for its products, in the short-term, and market acceptance of its technology in the longer-term. Additionally, the Company is in the process of renegotiating its line of credit agreement to less restrictive covenants and is seeking potential additional financing through private equity offerings. There is no assurance that the Company will be successful in obtaining sufficient additional financing to fund its operations and research and development efforts or renegotiate the terms of its line of credit on terms acceptable to the Company. Additionally, there is no assurance that the Company will be successful in attracting new customers in the HDI market or that its products and technologies will be accepted by the new market. These circumstances raise substantial doubt as to the Company's ability to continue as a going concern. See Note A to Notes to Consolidated Financial Statements. Factors Affecting Future Results In addition to the risks discussed in "Recent Developments" and "Liquidity and Capital Resources" above, the ability of the Company to attain the financial or other results that may be planned, forecasted or projected from time to time is subject to a number of factors, including the ability to obtain new orders, the timing of recording the related revenue, the ability to develop and manufacture new products, the ability to respond to competitive technology and pricing pressures, adequate availability of major components, and the ability to maintain key employees. In addition, the Company has historically been dependent upon a limited number of markets and geographic areas to sell its product, the PanelPrinter. Therefore, the Company's financial position and results of operations may be impacted by economic and market conditions in the markets and regions into which it sells its products. PanelPrinters and optional equipment generally have ranged in price from $1.2 to $2.7 million. Any delay in revenue recognition or cancellation of an order would adversely affect the Company's results of operations, cash flows, or both. Fluctuations in product revenues, and consequently quarterly and annual net income or loss, are largely related to revenue recognition on sales of PanelPrinter units. In addition, the process for turning prospects into firm purchase commitments and subsequently selling the systems is often lengthy. Year 2000 Computer Systems Compliance Concerns have been widely expressed regarding the inability of certain computer programs to process date information beyond year 1999. These concerns focus on the impact of the Year 2000 problem on business operations and the potential costs associated with identifying and addressing the problem. The Company is in the process of evaluating and taking steps to deal with the potential impact of this problem in areas under its control, in particular its products, its administrative and business systems, and its sources of supply. Based on its review to date, the Company believes that its own products are "Year 2000 compliant". The Company is in the process of upgrading its business systems. The upgrade will enable proper processing of transactions relating to the Year 2000 and beyond. The Company has also undertaken a program to survey suppliers to determine the status and schedule for their Year 2000 compliance. Where it is believed that a particular supplier's situation poses unacceptable risks, the Company plans to identify an alternative source. Costs incurred in the compliance effort will be expensed as incurred. While the Company's Year 2000 compliance evaluation is not yet complete, the Company does not foresee a material impact on its business, operating results or financial position from the Year 2000 problem. The Company cannot, of course, predict the nature or materiality of the impact on its operations or operating results of noncompliance by parties outside its control. Item 8. Financial Statements and Supplementary Data (a) Financial Statements
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Consolidated Financial Statements Page No. Report of Independent Accountants 24 Consolidated Balance Sheets at March 31, 1998 and 1997 25 Consolidated Statements of Operations, Years ended March 31, 1998, 1997 and 1996 26 Consolidated Statements of Stockholders' Equity, Years ended March 31, 1998, 1997 and 1996 27 Consolidated Statements of Cash Flows, Years ended March 31, 1998, 1997 and 1996 28 Notes to Consolidated Financial Statements 29 Quarterly Financial Information (Unaudited) 40
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders of MRS Technology, Inc.: We have audited the accompanying consolidated balance sheets of MRS Technology, Inc. and subsidiaries as of March 31, 1998 and 1997 and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three fiscal years in the period ended March 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of MRS Technology, Inc. and subsidiaries as of March 31, 1998 and 1997 and the consolidated results of its operations and its cash flows for each of the three fiscal years in the period ended March 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the financial statements, the Company has suffered recurring losses from operations, negative cash flows, default on debt covenants and requires additional financing. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note A. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Boston, Massachusetts May 5, 1998 COOPERS & LYBRAND.L.L.P.
MRS Technology, Inc. Consolidated Balance Sheets March 31, ASSETS 1998 1997 Current Assets Cash and cash equivalents $ 1,094,636 $ 3,290,982 Accounts receivable, net of allowance for doubtful accounts of $21,000 and $21,000, respectively 862,155 1,978,994 Inventories 5,643,432 7,313,982 Deposits 20,989 169,730 Other current assets 56,076 102,605 Total current assets 7,677,288 12,856,293 Property and equipment, net 176,969 533,244 Other assets 29,965 37,979 Total assets $ 7,884,222 $13,427,516 LIABILITIES & STOCKHOLDERS' EQUITY Current liabilities Accounts payable $ 723,516 $ 370,644 Accrued expenses 1,187,700 813,224 Short-term debt 1,000,000 0 Current portion of obligations under capital leases 0 11,096 Customer deposits 0 1,312,389 Other current liabilities 140,714 49,746 Total current liabilities 3,051,930 2,557,099 Long-term debt 0 1,000,000 Total liabilities 3,051,930 3,557,099 Commitments and contingencies (Notes A, E, H, and K) Stockholders' equity Common stock, $.01 par value; authorized, 20,000,000 shares;issued and outstanding 6,838,165 and 6,776,355 shares, respectively 68,381 67,763 Additional paid-in-capital 36,487,455 36,383,258 Accumulated deficit (31,723,544) (26,580,604) Total stockholders' equity 4,832,292 9,870,417 Total liabilities & stockholders' equity- $ 7,884,222 $13,427,516 The accompanying notes are an integral part of the consolidated financial statements.
MRS Technology, Inc. Consolidated Statement of Operations Years ended March 31, 1998 1997 1996 Revenues Product $ 5,265,075 $ 5,173,273 $ 7,699,267 Contract research 0 578,483 2,857,927 Service and other 1,883,035 1,388,941 0 Total revenues 7,148,110 7,140,697 10,557,194 Cost of revenues Product 6,275,561 4,040,747 7,389,402 Contract research 0 578,483 2,890,661 Service and other 1,382,257 1,484,554 0 Total cost of revenues 7,657,818 6,103,784 10,280,063 Gross margin (509,708) 1,036,913 277,131 Operating expenses Research and development 2,237,321 3,042,186 2,279,383 Selling, general and administrative 2,413,903 2,944,188 3,714,918 Other charges 0 0 4,469,120 Loss from operations (5,160,932) (4,949,461) (10,186,290) Interest income 109,345 112,566 335,803 Interest expense 116,771 653 4,906 Other income (expense), net 25,418 1,706,753 (85,333) Net loss ($5,142,940) ($3,130,795) ($9,940,726) Net loss per share - Basic and Diluted ($0.75) ($0.47) ($1.52) Weighted average common and common equivalent shares outstanding - Basic and Diluted 6,814,000 6,717,000 6,549,672 The accompanying notes are an integral part of the consolidated financial statements.
MRS Technology, Inc. Consolidated Statements of Changes in Stockholdrs' Equity Years ended March 31, 1996, 1997 and 1998 Class A Common Stock Additional Shares $.01 Par Value Paid-In-Capital Balance, March 31,1995 6,455,731 $64,557 $36,045,022 Issuance of common shares in connection with employee stock purchase plan 21,866 219 86,533 Issuance of common shares in connection with employee stock option plan 129,814 1,298 116,003 Issuance of common shares in connection with warrant exercise 66,909 669 (669) Net loss Balance, March 31, 1996 6,674,320 66,743 36,246,889 Issuance of common shares in connection with employee stock purchase plan 24,577 245 65,087 Issuance of common shares in connection with employee stock option plan 77,458 775 71,282 Net Loss Balance, March 31, 1997 6,776,355 67,763 36,383,258 Issuance of common shares in connection with employee stock purchase plan 17,014 170 14,263 Compensation associated with stock option grant to a consultant 50,000 Issuance of common shares in connection with employee stock option plan 44,796 448 39,934 Net loss Balance, March 31, 1998 6,838,165 $68,381 $36,487,455 The accompanying notes are an integral part of the consolidated financial statements.
MRS Technology, Inc. Consolidated Statements of Changes in Stockholdrs' Equity Years ended March 31, 1996, 1997 and 1998 Total Accumulated Stockholders Deficit Equity Balance, March 31,1995 ($13,509,083) $22,600,496 Issuance of common shares in connection with employee stock purchase plan 86,752 Issuance of common shares in connection with employee stock option plan 117,301 Issuance of common shares in connection with warrant exercise Net loss (9,940,726) (9,940,726) Balance, March 31, 1996 (23,449,809) 12,863,823 Issuance of common shares in connection with employee stock purchase plan 65,332 Issuance of common shares in connection with employee stock option plan 72,057 Net loss (3,130,795) (3,130,795) Balance, March 31, 1997 (26,580,604) 9,870,417 Issuance of common shares in connection with employee stock purchase plan 14,433 Compensation associated with stock option grant to a consultant 50,000 Issuance of common shares in connection with employee stock option plan 40,382 Net loss (5,142,940) (5,142,940) Balance, March 31, 1998 ($31,723,544) $4,832,292 The accompanying notes are an integral part of the consolidated financial statements.
MRS Technology, Inc. Consolidated Statements of Cash Flows Years ended March 31, 1998 1997 1996 Cash flows from operating activities Net loss ($5,142,940) ($3,130,795) ($9,940,726) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation 342,676 643,554 795,286 Amortization 2,232 2,232 66,667 Gain on sale of investment in business alliance 0 (1,717,032) 0 Other charges 50,000 0 4,468,879 Inventory provisions 1,400,000 200,000 2,493,232 Changes in assets and liabilities: Accounts receivable 1,116,839 (862,013) 4,454,018 Inventories 311,654 579,032 (4,591,902) Other assets 203,284 663,327 (437,430) Accounts payable 352,872 (1,497,112) (370,771) Accrued expenses 374,479 (643,753) 27,100 Other current liabilities 90,968 (47,778) 97,524 Customer deposits (1,312,389) 1,312,389 (840,000) Net cash used in operating activities (2,210,325) (4,497,949) (3,778,123) Cash flows from investing activities Purchases of property and equipment (29,740) (79,463) (531,795) Proceeds from sale of investment in business alliance 0 2,517,033 0 Net cash provided by (used in) investing activities (29,740) 2,437,570 (531,795) Cash flows from financing activities Proceeds from stock purchases under employee stock purchase plan 14,433 65,332 86,752 Proceeds from employee stock option exercises 40,382 72,057 117,301 Net borrowings under line of credit 0 1,000,000 0 Principal payments under capital lease obligations (11,096) (3,908) (16,421) Net cash provided by financing activities 43,719 1,133,481 187,632 Net decrease in cash and cash equivalents (2,196,346) (926,898) (4,122,286) Cash and cash equivalents at beginning of year 3,290,982 4,217,880 8,340,166 Cash and cash equivalents at end of year $1,094,636 $3,290,982 $4,217,880 Supplemental cash flow information Interest paid $109,345 $653 $4,906 Income taxes paid 0 0 $27,120 Supplemental disclosure of non-cash investing and financing activities Property and equipment transferred to inventory 41,104 0 0 The accompanying notes are an integral part of the consolidated financial statements.
A. Nature of Business and Basis of Presentation MRS Technology, Inc. was founded in February 1986 to develop and manufacture photolithographic equipment for the production of flat panel displays (FPDs), principally active matrix liquid crystal displays (AMLCDs). Through fiscal 1998, the Company's equipment was used primarily for the production of and research on FPDs. The Company's innovative photolithographic system, the PanelPrinter, is a "stitching step-and-repeat" imaging system which prints large-area integrated circuit patterns, a critical step in the FPD production process. The accompanying financial statements have been prepared assuming the Company will continue as a going concern which contemplates the continuity of operations, realization of assets and satisfaction of liabilities in the normal course of business. The Company has suffered recurring losses from operations, negative cash flows, default of debt covenants and requires additional financing. These factors raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might result from the outcome of this uncertainty. Risks and Uncertainties and Management's Plan Since it's inception in 1986, the Company has devoted substantially all of its resources toward the research, development and manufacture of advanced lithography systems for the flat panel display and other large area electronic devices markets. Through fiscal 1998, the Company has principally sold its products for research and development purposes. The Company has also generated sales of its products for purposes of volume production of flat panel displays, however, these sales have been limited and have been principally to U.S. manufacturers. The Company's sales have been declining since fiscal 1996. This has been due to several factors including intense competition in the Japanese market, the principal market for volume production of flat panel displays, because that market is dominated by competitors such as Nikon and Canon. Additionally, due to a number of unforeseen market and economic conditions, there has been little or no competitive pressure for manufacturers to increase display sizes or resolution which are the Company's competitive advantages. Therefore, the market for volume production of FPDs has not expanded beyond Japan or into technology where the Company expected it would have the ability to effectively compete. As a result of these circumstances, in late fiscal 1997 and early fiscal 1998, the Company reduced its workforce, implemented cost reduction programs and directed its efforts to the Asian market where the vast majority of worldwide production of desktop PCs, including those with FPDs, occurred. The Asian economic crisis, which began in the Company's fiscal 1998 caused a substantial decline in the growth of the PC market and further reduced the Company's sales through fiscal 1998. As a result of the Company's declining sales, the Company continued to experience significant losses from operations and negative cash flows and have defaulted on debt covenants during fiscal 1998. During the fourth quarter of fiscal 1998, the Company identified a potential new market opportunity for the Company's large area photolithography technology, the high density interconnect (HDI) market. HDI manufacturers are faced with a demand to produce printed wiring boards (PWB) with increasing complexity and component density. Growth in portable consumer products (cell phones, PDAs, etc.) as well as a number of high speed data applications is creating a requirement for new manufacturing technologies. Leading the increased density demand is an area of integrated circuit packaging referred to as chip carriers. High numbers of input and output signals must be routed through the PWB in a limited area, requiring tight circuit dimensions and precise layer to layer interconnect registration. The Company's technology is uniquely suited to meet these requirements. See also "Business" . The Company believes that its existing products are uniquely well suited for the needs of the HDI market and, therefore has refocused its marketing efforts from the flat panel display industry to the HDI market. As a result of this refocus, the Company received its first HDI purchase order for a Model 5200 PanelPrinter in April 1998. Although the Company received its first HDI purchase in April 1998, the HDI market is an emerging market which is currently represented by a limited number of customers. Most of these customers are in the process of evaluating new lithography methods in anticipation of expected significant growth in high performance chip carrier production. The Company believes that its lithography tool and related technology are best suited to meet the needs of these customers. However, there are a number of risks associated with the Company's transition to the HDI market including, but not limited to the Company's ability to obtain sufficient financing to continue to fund its operations and its research and development efforts. Though the technology foundation is in place, a considerable effort is required to develop new technologies which will meet the needs of the HDI market in the longer-term. Further, the ability of the Company to develop strategic partnerships with HDI manufacturers to gain acceptance of its products and technology, the risks attendant to an emerging market including its actual potential size and success, and the market's acceptance of the Company's product as the, or one of the, methods for future fabrication are also potential risk. Historically, the Company has required significant working capital to support its research and development efforts and to meet its ongoing production, selling and general and administrative costs. Additionally, the Company's transition to a new market will require substantial investments to develop new technologies specifically for this new market as well as substantial funding for its ongoing operations until such time as orders from this new market are sufficient to meet its working capital needs. In addition, historically, the Company has funded a substantial portion of its aggregate research and development costs through contracts with the U.S. government and other contracts. However, the Company does not expect to continue to fund its research and development efforts through similar contracts in the future. The Company's ability to develop new technologies is dependent upon its ability to fund research and development through working capital and/or other financing alternatives. In the past, the Company has been able to meet its working capital requirements through its existing cash balances and amounts available under its line of credit. However, as a result of its significant net loss in fiscal 1998, the Company was not in compliance with a financially restrictive debt covenant, minimum tangible net worth, as of March 31, 1998. The Company has received a waiver of the covenant default for the period of March 31, 1998 through June 30, 1998. However, it is probable that the Company will not be in compliance with this covenant for the remainder of fiscal 1999. Management's Plans in Regard to These Circumstances In the fourth quarter of fiscal 1998, the Company hired a new chief executive officer with extensive experience in the high technology industry. Under the direction of the new chief executive, the Company refocused its marketing efforts toward a new market which the Company believes provides significant opportunity in the future. The Company is actively seeking strategic relationships with customers in the new market in order to gain new orders for its products, in the short-term, and market acceptance of its technology in the longer-term. Additionally, the Company is in the process of renegotiating its line of credit agreement to less restrictive covenants and is seeking potential additional financing through private equity offerings. There is no assurance that the Company will be successful in obtaining sufficient financing to fund its operations and research and development efforts or to renegotiate the terms of its line of credit on terms acceptable to the Company. Additionally, there is no assurance that the Company will be successful in attracting new customers in the HDI market, or that its products and technologies will be accepted by the new market. These circumstances raise substantial doubt as to the Company's ability to continue as a going concern. In addition to the risks and uncertainties discussed above, the ability of the Company to attain the financial or other results that may be planned, forecasted or projected from time to time is subject to a number of factors, including the ability to obtain new orders, the timing of recording the related revenue, the ability to develop and manufacture new products, the ability to respond to competitive technology and pricing pressures, adequate availability of major components, and the ability to maintain key employees. In addition, the Company has historically been dependent upon a limited number of markets and geographic areas to sell its product, the PanelPrinter. Therefore, the Company's financial position and results of operations may be impacted by economic and market conditions in the markets and regions into which it sells its products. PanelPrinters and optional equipment generally have ranged in price from $1.2 to $2.7 million. Any delay in revenue recognition or cancellation of an order would adversely affect the Company's results of operations, cash flows or both. Fluctuations in product revenues, and consequently quarterly and annual net income or loss, are largely related to revenue recognition on sales of PanelPrinter units. In addition, the process for turning prospects into firm purchasing commitments and subsequently selling the systems is often lengthy. B. Summary of Significant Accounting Policies Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates relate to the effects of the Company's ability to continue as a going concern. Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiaries, MRS Securities Corporation and MRS Asia, Inc. Intercompany accounts and transactions have been eliminated in consolidation. Cash and Cash Equivalents Cash equivalents are highly-liquid securities which include certificates of deposit, money market funds, or other securities having a maturity of three months or less at date of acquisition. Cash equivalents are stated at cost plus accrued interest which approximates market value. Financial Instruments Financial instruments which potentially expose the Company to concentrations of credit risk include cash, cash equivalents and accounts receivable. The Company's cash and cash equivalents are invested in accounts at high quality institutions. The Company's accounts receivables are generally due from large, well established companies. Therefore, in management's opinion, no significant concentration of credit risk exists for the Company. Revenue Recognition The Company generally records product revenues upon completion of all significant contractual obligations and product shipment. In certain situations, where the Company has met all significant obligations and the customer requests that shipment be delayed for certain post-contract activity, such as the integration of third party equipment with the PanelPrinter, revenue is recognized upon customer acceptance at the Company's facility. Advance payments are recorded as customer deposits. In situations where the Company enters into a contract to perform research and development or to develop and manufacture a product over a long-term period, the Company records revenue under such contracts under the percentage-of-completion method of accounting, whereby revenue and profit, if any, under the contract are recognized throughout the contract. Costs under contracts for the long-term development and manufacture of a product include direct labor and materials. Costs under research and development contracts with the U.S. government include direct labor and other direct costs as well as allocated research and development overhead and general and administrative costs. Estimates of costs to complete are reviewed periodically, and adjustments to profit resulting from any revisions are recorded in the accounting period in which the revisions are made. Losses on contracts are recorded in full when they become evident. There were no U.S. government contracts in fiscal 1998. The Company recognizes post-contract customer support revenue as the services are performed on a time and material basis. Warranty and Installation The Company warrants its products for a period of 12 months from delivery to an end user. A provision for the estimated future cost of system installation and warranty is included in cost of sales at the time the associated revenue is recognized. Research and Development Research and development costs for internal products are charged to expense when incurred until technological feasibility has been established for the product. Thereafter, all software costs are capitalized until the product is available for general release to customers. The cost of purchased software is capitalized for products determined to have reached technological feasibility; otherwise the cost is charge to expense. Capitalized software costs are amortized using the straight line method over the economic life of the product or based upon the anticipated revenues of the product. The financial statements do not contain any capitalized software development costs as either the requirements for capitalization have not been met or the impact of capitalization was insignificant. Aggregate research and development costs are as follows (000's):
Year ended March 31, 1998 1997 1996 Research and development expenses $2,237 $3,042 $2,279 Contract-related research and development costs 0 488 2,664 Product development related research and development costs 1,115 0 0 Aggregate research and development costs $3,352 $3,530 $4,943
Inventories Inventories are stated at the lower of cost or market, determined on a first-in, first-out (FIFO) method. This method requires the periodic assessment of net realizable value. The difference between cost and market is charged to operations in the period the impairment is determined. Foreign Currency For foreign operations, the U.S. dollar has been determined to be the functional currency. Monetary assets and liabilities are translated at rates of exchange in effect at the end of the fiscal year, while non-monetary items are translated at historical rates. Income and expense items are translated at average exchange rates prevailing during the year. Additionally, the Company may hedge certain portions of its exposure to foreign currency fluctuations through the purchase of forward exchange contracts. Gains and losses associated with currency rate changes on forward contracts are recorded in results of operations unless the contract hedges a firm commitment, in which case any gains and losses are deferred and included as a component of the related transaction. No forward exchange contracts were outstanding at March 31, 1998 or 1997. The effect of exchange gains and losses, which may include transactions denominated in a foreign currency as well as hedges, is included in the results of operations. No significant gains or losses were recorded in fiscal 1998, 1997 or 1996. Long Lived Assets Long lived assets are stated at cost and amortized using the straight-line method over the assets' estimated useful lives. The Company evaluates the possible impairment of long-lived assets whenever events or circumstances indicate that the carrying value of the assets may be impaired. The Company made an evaluation of such impairment in connection with its transition to a new market and no writedown of long-term assets was deemed necessary assuming the Company continues as a going concern. Property and Equipment Property and equipment are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful lives of the related assets as follows: Equipment and software 3-5 years Furniture and fixtures 3-5 years Leased equipment 2-5 years Leasehold improvements are amortized over the lesser of the life of the lease or the estimated useful life of the improvement. Cost of additions and improvements are capitalized while expenditures for maintenance and repairs are charged to expense as incurred. When assets are retired, the related cost and accumulated allowances are removed from the accounts, and any gain or loss is reflected in income. Income Taxes Income taxes are accounted for under the liability method. Under this method, deferred tax assets and liabilities are recorded based on temporary differences between the financial statement amounts and tax bases of assets and liabilities measured using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company periodically evaluates the realizability of its net deferred tax asset. A valuation allowance against the net deferred tax asset is established if, based upon the available evidence, it is more likely than not that some or all of the deferred tax asset will not be realized.
Net Loss Per Common Share Net loss per share is calculated as follows: (In thousands, except per share amounts) Year ended March 31, 1998 1997 1996 Net loss ($5,143) ($3,131) ($9,941) Basic and Diluted Weighted-average common shares outstanding 6,814 6,717 6,550 Net loss per common share ($0.75) ($0.47) ($1.52)
Stock options to purchase 1,457,608, 914,203 and 966,765 shares of common stock were outstanding during the years ended March 31, 1998, 1997 and 1996, respectively, but were not included in the calculations of diluted EPS because their effect would be antidilutive. Although these options were antidilutive in 1998, 1997 and 1996, because they were still outstanding, they may be dilutive in future years' calculations should the Company be profitable in those years. Reclassifications Certain prior year balances have been reclassified to conform to the current year's presentation.
C. Inventories Inventories consist of the following (000's): March 31, 1998 1997 Finished goods $ 0 $ 726 Work in process 4,585 5,647 Purchased parts 1,058 941 $5,643 $7,314
D. Property and Equipment Property and equipment consist of the following (000's): March 31, 1998 1997 Equipment $2,765 $2,792 Software 375 375 Leasehold improvements 582 582 Furniture and fixtures 172 172 3,894 3,921 Less: accumulated depreciation and amortization (3,717) (3,388) $ 177 $ 533
E. Commitments and Contingencies Leasing Arrangements The Company leases its principal office and manufacturing facility and certain other facilities under operating leases. In fiscal years ended March 31, 1998, 1997 and 1996, rental expense under such operating leases was approximately $193,146, $173,367, and $249,502, respectively. The lease terms expire at various dates through January 2001. The terms require future minimum base rent payments under noncancellable leases of $259,343 in each of the fiscal years ending March 31, 1999, 2000 and 2001. The Company is obligated to pay additional rent comprised of property taxes, utilities, and facility operating expenses. Litigation On January 24, 1997, Micron Display Technology ("Micron Display") brought suit in Idaho against the Company alleging in five counts breach of contract, breach of implied warranties, and breach of express warranties, in connection with a Model 5200 PanelPrinter (the "PanelPrinter") which the Company alleged Micron Display purchased from the Company in 1996. On January 30, 1997, the Company filed an action in Massachusetts against Micron Display alleging in two counts breach of contract and violation of M.G.L. c. 93A, in connection with Micron Display's nonpayment for the PanelPrinter. The parties disputed which documents constituted the contract between them. Further, Micron Display alleged, among other things, that the PanelPrinter failed to meet certain performance specifications contained in what it contended constituted the contract, and that, as a consequence, it was entitled to the return of its $1.0 million deposit and the conversion of the parties' relationship to a lease of the PanelPrinter, or a PanelPrinter of like quality. The Company maintained that other documents constituted the contract, pursuant to which there was no right to convert the relationship to a lease, and further denied that the PanelPrinter failed to meet specifications set forth in the document cited by Micron Display. The Company sought approximately $1.4 million as the balance of the unpaid contract price, and additional remedies under the Massachusetts Unfair Business Practices Act. On July 23, 1997, the parties executed a Settlement Agreement resolving their disputes and releasing all claims against each other. Both lawsuits have now been dismissed. While the specific terms of the Settlement Agreement are confidential, the settlement generally provided for a lump sum payment to be made by Micron Display to the Company at the time the Settlement Agreement was executed, and further monthly installment payments to be made thereafter. These payments, together with Micron Display's initial deposit, constitute payment in full for the PanelPrinter. The Company in turn has agreed to provide Micron Display with an extended warranty with respect to the PanelPrinter, as well as technical assistance and certain modifications to the PanelPrinter. No significant amounts due to or from Micron remain outstanding at March 31, 1998.
F. Accrued Expenses Accrued expenses consist of the following (000's): March 31, 1998 1997 Payroll and related costs $ 641 $376 Professional fees 83 132 Warranty 104 124 Other 360 181 $1,188 $813
G. Income Taxes No provision for income taxes was recorded in fiscal 1998, 1997, or 1996 due to taxable losses in those years. A reconciliation of the provision for income taxes at the federal statutory rate is as follows: March 31, 1998 1997 1996 Provision for income taxes at the federal statutory rate (34.0%) (34.0%) (34.0%) Net operating loss carryforward 34.0 34.0 34.0 Provision for income taxes 0.0% 0.0% 0.0%
The components of the deferred tax assets and the related valuation allowance are as follows (000's): March 31, 1998 1997 Net operating loss and credit carryforwards $ 9,902 $ 9,715 Capitalized research and development expenses 2,370 1,789 Inventory reserves 1,102 690 Depreciation and other reserves 286 180 Total deferred tax assets $ 13,660 $ 12,374 Valuation allowance ($13,660) ($12,374) Net deferred tax assets $ 0 $ 0
Due to the uncertainty surrounding the timing of realizing the benefits of its favorable tax attributes in future tax returns, the Company has established a full valuation allowance against its net deferred tax asset. At March 31, 1998, the Company had net operating loss carryforwards for federal income tax purposes of approximately $23,600,000 which will expire from 2003 to 2013. Approximately $1,510,000 of the net operating loss carryforward relates to option related deductions which, when benefited will result in a credit to additional paid-in-capital of approximately $513,000 rather than a reduction in the current tax provision. At March 31, 1998, federal and state research and development credit carryforwards were approximately $1,338,000 which will expire from 2002 to 2013. In general, such carryforwards may be used to reduce future taxable income or reduce future taxes. However, certain provisions of the Internal Revenue Code could potentially limit annual utilization of the operating loss and research and development tax credit carryforwards if there has been a fifty percent ownership change within the prior three year period. As a result of the Company's initial public offering, the Company believes that certain of its annual limits are in effect. H. Investment in Business Alliance In October 1994, the Company entered into a strategic partnership with Integrated Circuits Testing, GmbH ("ICT") to develop and introduce an electrical test system for AMLCD's. In addition, in fiscal 1995 the Company acquired a 10% equity interest in ICT. During fiscal 1997, a portion of ICT was spun-off to Electron-Beam Technology GmbH (EBETECH), a separate corporation owned by the Company, Seimens AG (Seimens) and a group of other investors. ICT was sold to Opal in October 1996 and EBETECH was sold to ETEC Systems Inc. (ETEC) in March 1997. Under the terms of the Company's sale of its ownership interest in EBETECH, the Company is jointly and severally liable for any claims under an indemnification clause up to a maximum of $292,000. The amount of potential escrow decreases quarterly through the indemnification period which ends in September 1998. I. Stockholders' Equity Stock-Based Compensation Plans The Company has adopted the disclosure requirements of Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation", for stock options granted in fiscal 1996 and 1997. The Company continues to recognize compensation costs using the intrinsic value based method described in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees". Compensation cost of $50,000 was recognized in fiscal 1998. No compensation cost was recognized in fiscal 1997 and 1996. For the purpose of providing pro forma disclosures, the fair values of options granted were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1998, 1997 and 1996, respectively: a risk-free interest rate of 6.2%, 6.4% and 6.3%, and an expected life of 6 years, expected volatility of 90% and no expected dividends for each of the three years in the period ended March 31, 1998.
Net loss and net loss per share as reported in these consolidated financial statements and on a pro forma basis, as if the fair value based method described in SFAS No. 123 had been adopted, are as follows (in thousands, except per share amounts): Year Ended March 31, 1998 1997 1996 Net loss As reported (5,143) (3,131) (9,941) Pro forma (5,430) (4,115) (10,726) Basic net loss per share As reported ($0.75) ($0.47) ($1.52) Pro forma ($0.80) ($0.61) ($1.64) Diluted net loss per share As reported ($0.75) ($0.47) ($1.52) Pro forma ($0.80) ($0.61) ($1.64)
The effects of applying SFAS No. 123 for the purpose of providing pro forma disclosures may not be indicative of the effects on reported net income and net income per share for future years, as the pro forma disclosures include the effects of only those awards granted after April 1, 1995. Stock Option Plans In July 1986, the Company adopted the 1986 Stock Option Plan (the "1986 Plan"). The 1986 Plan provides for the granting of incentive stock options (within the meaning of Section 422A of the Internal Revenue Code) and nonstatutory options to key employees and consultants to purchase shares of the Company's Common Stock at not less than fair market value at the date of grant. Options granted pursuant to the plan are exercisable for a period of ten years from grant and typically vest over four years beginning on the first anniversary of the grant. The 1986 Plan was terminated on March 29, 1993. As of March 31, 1998 there are 123,010 options outstanding. In March 1993, the Company adopted the 1993 Stock Option Plan (the "1993 Plan") which has substantially the same terms as the 1986 Plan and which provides for the granting of incentive stock options (within the meaning of Section 422A of the Internal Revenue Code) and nonstatutory options to key employees, directors, and consultants. In July 1994, the Stockholders approved a stock option plan for non-employee directors. Options are granted according to a formula based on term of office and are exercisable for a period of ten years from date of grant. Stock options usually vest 25% on each of the first four anniversary dates. The Company has reserved 1,500,000 shares of Common Stock for issuance pursuant to the 1986 and 1993 Plans. At March 31, 1998, 134,834 shares were available for option grants and options for 412,161 shares were exercisable. The Company has reserved 100,000 shares of Common Stock for issuance pursuant to the 1994 Non-Employee Director Plan. At March 31, 1998, 2,084 shares were available for option grant and options for 80,833 shares were exercisable. On August 21, 1995, the Company granted 199,643 options at the current fair market value with similar terms and conditions to previously issued but unexercised grants. In exchange for the new grant, employees agreed to a cancellation of the prior options. On February 12, 1997 the Company granted 548,027 options at the current fair market value with similar terms and conditions to previously issued but unexercised grants. In exchange for the new grant, employees agreed to a three-for-four cancellation of the prior options.
The following table summarizes the Company's stock option plans at March 31: 1998 1997 1996 Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding at beginning of year 914,203 $2.0628 1,004,043 $4.5960 887,327 $4.9424 Granted 692,666 $1.0524 1,017,127 $2.1838 611,843 $5.3925 Exercised (17,014) $0.8483 (77,458) $0.9303 (129,814) $0.9036 Forfeited (132,247) $2.4606 (1,029,509) $4.7382 (365,313) $8.0835 Outstanding at end of year 1,457,608 $1.5607 914,203 $2.0628 1,004,043 $4.5960 Options exercisable at yearend 492,994 379,836 415,202
March 31, 1998 1997 1996 Weighted-average grant-date fair value of options granted during the year $0.7281 $0.9779 $3.9338
The following table summarizes information about stock options outstanding at March 31, 1998. Options Outstanding Weighted Average Weighted Remaining Average Range of Number Contractual Exercise Exercise Price Outstanding Life (In Years) Price $0.6000 $0.9000 96,814 2.13 $0.8992 0.9690 0.9690 467,500 8.54 0.9690 1.0000 1.1250 32,916 9.59 1.0556 1.2500 1.2500 154,750 9.29 1.2500 1.5000 1.5000 29,696 5.33 1.5000 1.6250 1.6250 570,266 7.54 1.6250 2.5000 5.7500 60,000 8.22 3.4063 7.1250 7.1250 40,000 6.33 7.1250 7.2000 7.2000 666 4.95 7.2000 8.2500 8.2500 5,000 6.49 8.2500 $0.6000 $8.2500 1,457,608 7.67 $1.5607
The following table summarizes information about stock options outstanding at March 31, 1998 Options Exercisable Weighted Average Range of Number Exercise Exercise Price Exercisable Price $0.6000 $0.9000 96,814 $0.8992 0.9690 0.9690 0 0.0000 1.0000 1.1250 10,833 1.0868 1.2500 1.2500 0 0.0000 1.5000 1.5000 26,196 1.5000 1.6250 1.6250 280,985 1.6250 2.5000 5.7500 32,500 4.1154 7.1250 7.1250 40,000 7.1250 7.2000 7.2000 666 7.2000 8.2500 8.2500 5,000 8.2500 $0.6000 $8.2500 492,994 $2.1491
Employee Stock Purchase Plan Under the 1994 Employee Stock Purchase Plan, employees are entitled to purchase shares of Common Stock through payroll deductions of up to 10% of their compensation. The price paid for the Common Stock is equal to 85% of the lower of the fair market value of the Company's Common Stock on either the first or last day of the offering period. The offering is a six month period starting each May and November 1st. The Company has reserved 200,000 shares of Common Stock for issuance pursuant to the 1994 Employee Stock Purchase Plan. At March 31, 1998, 106,529 shares have been issued and 93,471 shares were available for future participants. Shares purchased under the Employee Stock Purchase Plan total 44,796 in fiscal 1998, 24,577 in fiscal 1997 and 21,866 in fiscal 1996. Weighted average grant date fair value of shares purchased under the Employee Stock Purchase Plan was $0.592 in fiscal 1998, $1.83 in fiscal 1997 and $1.52 in fiscal 1996. For the purpose of providing pro forma disclosures, the fair values of shares purchased were estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used for purchases in 1998, 1997 and 1996, respectively: a risk-free interest rate of 5.56%, 5.33% and 5.64%, and an expected life of 6 months, expected volatility of 90% and no expected dividends for each of the three years in the period ended March 31, 1998. J. Accounts Receivable The Company had approximately $83,000 of unbilled receivables included in the accounts receivable at March 31, 1998 and March 31, 1997. This balance relates to amounts due under contracts with DARPA and is subject to the final closing of the contract by a government administrative agency. K. Line of Credit In March 1997, the Company entered into a three year asset-based revolving line of credit agreement which provides for borrowings of up to $4.0 million based on accounts receivable and inventory balances. The line of credit requires a minimum outstanding balance of $1.0 million for the first year and is collateralized by a first priority lien on all assets of the Company. The line of credit bears an interest rate charged on the outstanding balance of the prime rate plus 2.25% but in no event less than 9% per annum. The borrowing base for accounts receivable is up to 80% of the Company's eligible receivables and the inventory borrowing base is up to 30% of the Company's eligible inventory. The line is subject to the Company's compliance with certain financial covenants the most restrictive of which relates to tangible net worth. Under the line of credit, the Company is required to maintain tangible net worth of at least $6 million. At March 31, 1998, the Company was in default of this covenant. The Company has obtained a waiver of the default as of March 31 through June 30, 1998. However, it is probable that the Company will not meet the covenant in fiscal 1999. Therefore, the debt has been classified as short-term on March 31, 1998. L. Export Sales Export sales have been made to Japan, Korea, Taiwan, Europe and Canada. For the years ended March 31, 1998, 1997 and 1996, export sales accounted for approximately $0, $1,000,000, and $4,700,000, respectively of total revenues. M. Significant Customers During the fiscal years ended March 31, 1998, 1997 and 1996, the Company's product revenue included sales to three customers of $1.4 million, $1.7 million and $1.8 million, sales to three customers of $0.8 million, $1.3 million and $2.7 million, and sales to three customers of $2.0 million, $2.1 million and $2.4 million, respectively. Additionally, contract research revenues from an agency of the U. S. government for the years ended March 31, 1998, 1997, and 1996 accounted for approximately $0, $579,000, and $2,858,000 of total revenues, respectively. N. 401(k) Savings Plan Effective April 1, 1993, the Company established the MRS Technology, Inc. 401(k) Savings Plan (the "Plan"). The Plan is a defined contribution plan which covers substantially all of the Company's employees. Participants may make voluntary contributions of 1% to 15% of their annual compensation. Contributions by the Company are discretionary. The Company made no contributions to the Plan during the fiscal years ended March 31, 1998, 1997 and 1996.
Quarterly Financial Information (Unaudited) (In thousands, except per share amounts) First Second Third Fourth Year Year ended March 31, 1998 Total revenues $ 418 $3,215 $2,328 $1,187 $7,148 Gross margin (127) 806 620 (1,809) (510) Net loss (1,131) (384) (339) (3,290) (5,143) Net loss per share - Basic (0.17) (0.06) (0.05) (0.48) (0.75) Year ended March 31, 1997 Total revenues $1,711 $3,487 $1,588 $355 $7,141 Gross margin 216 786 150 (115) 1,037 Net income (loss) (1,280) (595) (1,374) 118 (3,131) Net income (loss) per share - Basic (0.19) (0.09) (0.20) 0.02 (0.47)
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. PART III
ITEM 10. Directors and Executive Officers of the Registrant (Executive Officers listed in Part I) (a) Directors Director Position with Director Term of Office Name Since the Company Class will expire Ronald K. Haigh 1994 Director III 1998 Paul Wiefels 1998 Director III 1998 Pierre Fougere 1998 Director I 1999 Robert P. Schechter 1988 Director I 1999 Carl P. Herrmann 1997 President, CEO, II 2000 & Chairman
Ronald K. Haigh, Director. Mr. Haigh has been an independent manufacturing technology consultant since July 1994. From 1988 to June 1994, he was at Summit Technology, a manufacturer of laser-based ophthalmic surgery systems, most recently as Vice President, Manufacturing. Prior to that he had significant semiconductor equipment manufacturing experience at Eaton Corporation. Paul Wiefels, Director. Mr. Wiefels has been a partner with The Chasm Group, a consulting firm focused on helping technology companies achieve market leadership positions, since 1992. He provides counsel ranging from strategy development and marketing communications planning to market research and product planning. Prior to joining the The Chasm Group, he served as director of marketing consulting with Landor Associates, an international branding and identity consultancy. Prior to joining Landor, he was a worldwide director of product marketing for Ingres Corporation (now a division of Computer Associates). Mr. Wiefels began his high tech career with Apple Computer, where he served in marketing management positions with Apple's U.S. and international operations. Pierre Fougere, Director. Mr. Fougere's career spans more than thirty years of international management expertise in electronics and high technology components and systems. Prior to establishing his own consulting business in 1989, Mr. Fougere held several positions within the MATRA Group, most recently as Executive Vice President, Chairman and CEO of Matra Datavision (CAD/CAM software). Mr. Fougere currently serves on several other boards and is the Chairman of the Board of Financiere Saint Florentin, Chateau Lilian Ladouys and Matra Datavision Inc. Robert P. Schechter, Director. Mr. Schechter joined Natural MicroSystems Corporation as President and Chief Executive Officer in April 1995 and in May 1996 was also elected Chairman of the Board. From 1987 to December 1994 he was at Lotus Development Corporation, most recently as Senior Vice President, International Business Group. From 1973 and until he joined Lotus, Mr. Schechter was associated with Coopers & Lybrand, most recently as a Partner and Northeast Regional Chairman of Coopers & Lybrand's High Technology Industry Group. Mr. Schechter is a director of Raptor Systems, Inc. and Natural MicroSystems Corporation. Carl P. Herrmann, has been President, CEO and Chairman of the Board since February 1998. Mr. Herrmann has been serving on the Board of Directors of MRS since May of 1997. Prior to joining MRS' Board of Directors he has been an independent management and international marketing consultant since December 1994. From July 1991 to November 1994, he was at Solbourne Computer, Inc. from April 1992 as President and Chief Executive Officer. From May 1989 to November 1990 he was the Hong Kong-based Director of Asia/Pacific Operations for Amphenol Corp. From October 1984 to April 1989 he was Managing Director of GenRad Inc.'s regional operations based in Singapore. From August 1983 to September 1984 he was the Tokyo-based Vice President of TEL-GenRad, KK, a joint venture developing and manufacturing PC board and semiconductor test systems. Mr. Herrmann received a BA from the University of Pennsylvania and an MBA from the Wharton School. (b) Reports of Beneficial Ownership. See the information under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" on page 13 of the Proxy Statement, which information is incorporated by reference. ITEM 11. Executive Compensation See the information under the caption "Executive Compensation" beginning on page 6 of the Proxy Statement, which information is incorporated by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management See the information under the caption "Share Ownership of Principal Stockholders and Management" beginning on page 2 of theProxy Statement, which information is incorporated by reference. ITEM 13. Certain Relationships and Related Transactions See the information under the caption "Compensation Committee Interlocks and Insider Participation" on page 11 of the Proxy Statement, which information is incorporated by reference. PART IV ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) 1 (a). Financial Statements See Index to Consolidated Financial Statements on Page 23. All schedules are omitted as the required information is not applicable or the information is presented in the Consolidated Financial Statements or Notes thereto. (b) Reports on Form 8-K. No reports on Form 8-K were filed and no matters submitted to a vote of security holders during the fourth quarter of fiscal 1998.
(c) Exhibits Exhibit Description Page 3.0 Articles of Incorporation and Bylaws 3.1 Restated Articles of Organization A 3.2 Amended and Restated By-Laws A 3.3 Articles of Amendment to the Articles ofOrganization B 4.0 Instruments defining the rights of security holders, including indentures: 4.0 Specimen Certificate of Common Stock A 10.0 Material Contracts 10.1 DARPA Contact A 10.12 CRADA Agreement for Development of Illumination System 10.13 CRADA Agreement for Development of a High Accuracy Transport System A 10.14 Lease relating to Company's Headquarters A 10.15 1986 Stock Option Plan A,F 10.16 1993 Stock Option Plan C,F 10.17 DARPA Modification B 10.18 Lease relating to Company's Headquarters - Third Amendment B 10.22 1994 Employee Stock Purchase Plan 10.23 Stock Option Plan for Non-Employee Directors 10.25 Lease relating to Company's Headquarters Fourth Amendment Dated February 1, 1995 D 10.27 DARPA Modification - SPIN #P0004 D 10.28 DAPRA Modification - SPIN #P0005 D 10.29 DAPRA Modification - SPIN #P0006 D 10.30 DAPRA Modification - SPIN #P0007 D 10.31 DAPRA Modification - SPIN #P0008 D 10.32 October 19, 1994 Business Agreement with ICT Integrated Circuit Testing GmbH D 10.33 October 19, 1994 First Amendment to Business Agreement with ICT D 10.34 November 17, 1994 Subscription Agreement with Warranty and Shareholder Agreement (ICT) D 10.35 Common Stock Purchase Warrant dated October 19, 1994 and delivered November 17, 1994. D 10.36 Statement of Takeover Pursuant toLimited Liability Company Act Section 55(1) dated February 16, 1995. D 10.37 Acceleration of ICT Part III Agreement E 10.39 DARPA Modification E 10.42 Employment Agreement Letters E 10.43 Share Purchase Agreement ETEC/EBETECH F 10.44 Employment Agreement Letter F 10.45 Employment Agreement G 10.46 Consulting Agreement G 21.0 Subsidiaries of the Registrant 21.0. Subsidiaries A 23.0 Consents of Experts and Counsel 23.1 Consent of Coopers & Lybrand L.L.P.
A Incorporated by reference from Registration Statement on Form S-1 (Commission File No. 33-64220). These contracts relate to Executive Compensation. B Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending March 31, 1994. C Incorporated by reference to the Company's Proxy Statement for the Annual Meeting of Stockholders held on July 28, 1994. D Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending March 31, 1995. E Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending March 31, 1996. F Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending March 31, 1997. G Incorporated by reference to the Company's Annual Report on Form 10-K for the year ending March 31, 1998. SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, authorized officers. MRS Technology, Inc. (Registrant) By: /s/ Carl P. Herrmann President and Chief Executive Officer Date: 6/5/98 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date (1) Principal Executive Officer: /s/ Carl P. Herrmann President and Chief Executive Officer 6/5/98 (2) Principal Financial Officer: /s/ Patricia F. DiIanni Chief Financial Officer 6/5/98 (3) A majority of the Board of Directors: /s/ Carl P. Herrmann Chairman of the Board 6/5/98 /s/ Ronald K. Haigh Director 6/5/98 /s/ Pierre Fougere Director 6/5/98 /s/ Paul Wiefels Director 6/5/98 /s/ Robert P. Schechter Director 6/5/98 June 12, 1998 Securities and Exchange Commission Washington, DC 20549 Gentlemen: Pursuant to the requirements of the Securities Exchange Act of 1934, we are transmitting herewith the attached Form 10-K. Sincerely, MRS Technology, Inc. /s/Patricia F.DiIanni Vice President and Chief Financial Officer EX-23 2 Exhibit 23.1 Consent of Independent Accountants We consent to the incorporation by reference in the registration statements of MRS Technology, Inc. on Form S-8 (File Nos. 33-79476, 33-85148, 33-85262) of our report dated May 5, 1998 on our audits of the consolidated financial statements of MRS Technology, Inc. as of March 31, 1998 and 1997, and for each of the three years in the period ended March 31, 1998, which report is included in this Annual Report on Form 10-K. /s/ Coopers & Lybrand L.L.P. Boston, Massachusetts June 11, 1998 EX-27 3
5 These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the fiscal year ended March 31, 1998. 0000906768 MRS TECHNOLOGY, INC. YEAR MAR-31-1998 APR-01-1997 MAR-31-1998 1,094,636 0 883,200 21,045 5,643,432 7,677,288 3,893,884 3,716,914 7,884,222 3,051,930 0 0 0 68,381 4,763,911 7,884,222 5,265,075 7,148,110 6,275,561 7,657,818 0 0 109,345 (5,142,940) 0 0 0 0 0 (5,142,940) (0.75) (0.75)
EX-99 4 EXHIBIT 10.45 MRS TECHNOLOGY, INC. EMPLOYMENT AGREEMENT AGREEMENT dated as of February 13, 1998 between MRS Technology, Inc., a Massachusetts corporation with its principal place of business at 10 Elizabeth Drive, Chelmsford, Massachusetts 01824-4112 (the "Company"), and Carl P. Herrmann, an individual residing at 8380 Greenwood Drive, Niwot, Colorado 80503 (the "Executive"). 1. FREEDOM TO CONTRACT. The Executive represents that he is free to enter into this Agreement, that he has not made and will not make any agreements in conflict with this Agreement, and that he will not disclose to the Company, or use for the Company's benefit, any trade secrets or confidential information which is the property of any other party. 2. EMPLOYMENT. The Company agrees to employ the Executive as Chief Executive Officer of the Company and Chairman of the Company's Board of Directors. The Executive agrees, while employed hereunder, to perform his duties faithfully and to the best of his ability. The Executive shall have all of the authority and responsibility customarily accorded to his titles. The Executive shall work out of the Company's offices in Colorado. 3. TERM. The employment of the Executive hereunder shall begin on the date hereof and shall continue through the occurrence of a Termination Date, as defined in Section 6 (the "Term"). 4. COMPENSATION 4.1 Base Salary. As compensation for the Executive's services during the Term, the Company shall pay the Executive an annual Base Salary at the rate of $190,000 per year, payable with the same frequency as salaries paid to other senior executive officers. Prior to each December 31 during the Term, beginning December 31, 1998, the Compensation Committee of the Board of Directors (the "Committee") shall undertake an evaluation of the services of the Executive during the year then ended. The Committee shall consider the performance of the Executive, his contribution to the success of the Company, and other factors and shall fix an annual Base Salary to be paid to the Executive during the ensuing year. 4.2 Incentive Compensation. For each year, the Committee will establish an incentive compensation program. For the year ending December 31, 1998, incentive compensation will be based on the raising of not less that $4,000,000 in cash for the Company (including without limitation equity, debt, sales revenue derived from the sales of existing inventory and licensing revenue other than that associated with the sales and service of Panel Printers). The Executive shall be entitled to incentive compensation equal to 40% of his Base Salary if and only if the target is reached or exceeded. For the year 1999 and each subsequent year, incentive compensation will be based on the achievement of performance criteria determined by the Committee after discussion with the Executive. Within a reasonable period after operating results have been determined for each year, payment of the incentive compensation for the immediately preceding year shall be made in cash, subject to applicable employment and withholding taxes, promptly after calculation. However, no bonus shall be paid to the Executive where the Executive has been terminated as a result of a Discharge for Cause prior to the date of payment. If the Executive's termination is other than as a result of a Discharge for Cause, the Executive shall be paid a prorata portion of his bonus. 4.3. Disability. If the Executive is prevented by disability, for a period of six consecutive months, from continuing fully to perform his obligations hereunder, the Executive shall perform his obligations hereunder to the extent he is able and the Company may reduce his annual base salary to reflect the extent of the disability; provided that in no event may such rate, when added to payments received by him under any disability or qualified retirement or pension plan to which the Company contributes or has contributed, be less than one-half of the annual base salary in effect at the Executive's disability, disability shall be determined by the Board of Directors of the Company based upon a report from a physician who shall have examined the Executive. If the Executive claims disability, the Executive agrees to submit to a physical examination at any reasonable time or times by a qualified physician designated by the Company and reasonably acceptable to the Executive. 5. EQUITY. As of the date of this Agreement, the Company will grant to the Executive, as an incentive for joining the Company as an employee and his entering into this Agreement, options to purchase 400,000 shares of the Company's common stock. These stock options will be issued with an exercise price equal to the fair market value of the Company's common stock on February 13, 1998, and will vest 50,000 shares on August 13, 1998, with 10,000 shares vesting per month for the 35 consecutive months thereafter; provided, however, that in the event the Executive's employment with the Company is terminated at any time after the first anniversary of the date of grant or award, on the date of termination of the Executive's employment he shall immediately be vested in that number of stock options as equal to the unvested portion of such stock options that would otherwise vest on the next scheduled monthly vesting date [plus the unvested portion of such stock options that would have vested during the term of any severance or similar payment arrangements if the Executive were still employed by the Company during the period of time while severance payments, if any, are being made to the Executive.] Stock options granted under this Section 5 shall be subject to the same risks as those facing other shareholders of the Company, including without limitation, the possibility of dilution in the event that the Company issues additional shares of common stock. The terms of the Executive's stock options shall provide that they will vest immediately in the event of either a change in control of the Company or the attainment of a $10.00 per share or higher closing price for the Company's common stock for a period of 60 consecutive trading days. The Executive shall also be eligible for future grants of options and/or restricted stock, as a member of the Company's executive management team. 6. EMPLOYEE BENEFITS. The Executive shall participate in all "employee pension benefit plans" and in all "employee welfare benefit plans" (each as defined in the Employee Retirement Income Security Act of 1974) and all other benefits plans available to any of the Company's officers maintained by the Company, on a basis no less advantageous to the Executive than the basis on which similarly situated executives participate (collectively, "Benefits"). Without limiting the generality of the foregoing, the Executive shall be entitled to the following Benefits: 6.1 Medical Insurance. The Executive and the Executive's dependents shall be covered by medical insurance comparable in scope to the coverage afforded on the date hereof, with only such contribution by the Executive toward the cost of such insurance as may be required from time to time from other similarly situated executive employees. 6.2 Expenses. The Company shall reimburse the Executive from time to time for the reasonable expenses incurred by the Executive in connection with the performance of his obligations hereunder, subject to compliance with reasonable documentation procedures. 6.3 Holidays and Vacations. The Executive shall be entitled to legal holidays and to annual paid vacation of up to four weeks, all in accordance with the Company's holiday and vacation policy. 6.4 Pension Plans. The Executive shall participate in such pension and retirement plans as are made available by the Company to any of its management. 6.5 Legal Fees. The Company shall reimburse the Executive for legal fees and expenses he incurs in negotiating and documenting his employment and equity arrangement with the Company in the amount of the first $3,000 for such fees and expenses, plus 50% of the amount in excess of $3,000, subject to a maximum reimbursement of $5,000. 6.6 Relocation. The Company shall not require the Executive to relocate from the Company's offices in Niwot, Colorado. In the event that the Executive does relocate (for example, to the Company's offices in Massachusetts), the Company shall reimburse the Executive for reasonable relocation expenses, and, where necessary, will gross up the Executive's compensation to account for taxes payable by him with respect to the reasonable relocation expenses paid by the Company. 6.7 Travel. The Company acknowledges and agrees that the Executive may determine the class of airline and hotel which all members of management, including the Executive, shall use while on Company business. 7. TERMINATION DATE; CONSEQUENCES FOR COMPENSATION AND BENEFITS. 7.1 Definition of Termination Date. The first to occur of the following shall be the Termination Date: 7.1.1. The date on which the Executive becomes entitled to receive long-term or short-term disability payments by reason of total and permanent disability; 7.1.2. The Executive's death; 7.1.3. Voluntary resignation after one of the following events shall have occurred, which event shall be specified to the Company by the Executive at the time of resignation: (1) any change which limits or reduces the responsibility, authority, title, power or duty of the Executive; (2) any reduction in Executive's Base Salary without the Executive's prior written consent; (3) any relocation of the Executive from the Company's offices in Niwot, Colorado mandated by the Company's Board of Directors; (4) any failure by the Company to continue in effect any Benefit, or any action by the Company which would adversely affect the Executive's participation in or reduce the Executive's benefit under any Benefit, without the Executive's prior written consent; or (5) any other material breach by the Company of any provision of this Agreement resulting from action by the Board of Directors, which breach continues for 10 business days following notice by the Executive to the Company setting forth the nature of the breach ("Resignation with Reason"); 7.1.4. Voluntary resignation by the Executive which does not constitute Resignation with Reason as defined in Section 7.1.3 ("General Resignation"); 7.1.5. Discharge of the Executive by the Company after one of the following events shall have occurred, which event shall be specified to the Executive by the Company at the time of discharge: a material act by the Executive against the Company involving moral turpitude; material willful misconduct in the discharge of his duties; conviction of the Executive or the entry of a plea of guilty or nolo contendere by the Executive to any crime involving moral turpitude; or any material breach of any term of this Agreement by the Executive which is not cured within 30 days after written notice from the Board of Directors of the Company to the Executive setting forth the nature of the breach ("Discharge for Cause"); 7.1.6. Discharge of the Executive by the Company not accompanied by a notice of cause described in Section 7.1.5 ("General Discharge"). 7.2. Consequences for Compensation and Benefits. If the Termination Date occurs by reason of disability, death, General Resignation or Discharge for Cause, the Company shall pay compensation to the Executive through the Termination Date (including accrued vacation and a prorated portion of the Executive's accrued bonus and incentive compensation) and shall pay to the Executive all Benefits accrued through the Termination Date, payable in accordance with the respective terms of the plans, practices and arrangements under which the Benefits were accrued. If the Termination Date occurs by reason of General Discharge or Resignation with Reason, the Company shall pay to the Executive, in addition to the amounts described in the preceding paragraph, an amount equal to one times the Executive's annual Base Salary and Benefits; such amount shall not be reduced by the receipt of Earned Income through subsequent employment and shall be paid in two equal installments. The first installment shall be paid immediately and the second installment shall be paid six months thereafter. Receipt of Earned Income means receipt of wages or self-employment income, whether from consulting or otherwise, from any source. 8. INDEMNIFICATION. The Company shall indemnify the Executive against all loss, cost, liability and expense arising from the Executive's service to the Company, whether as officer, director, employee, fiduciary of any employee benefit plan or otherwise, upon terms at least as favorable to the Executive as those provided by the Articles of Organization and By-laws of the Company on the date hereof. 9. AGREEMENT NOT TO COMPETE. The Executive agrees that, while serving as an Executive of the Company, he will not serve as an employee or director of any business entity other than the Company, but may serve as a director of a reasonable number of not-for-profit corporations and may devote a reasonable amount of time to charitable and community service. For the period beginning on the Termination Date and continuing for six months, the Executive shall not directly or indirectly, engage in, or enter into or participate in, at any place within the rest of the United States any Competitive Business (as defined below), either as an individual for his own account, or as a partner or a joint venture, or as an officer, director, independent contractor or holder of more than a 1% equity interest in any other person, firm, partnership or corporation, or as an employee, agent or salesperson for any person. For purposes of this Section 9: the term "Competitive Business" shall mean any business or commercial activity that directly competes with or is reasonably likely to directly compete with or adversely affect any part or area of the Company's current business or any proposed business relating to microlithography which has been actively considered, and not rejected by, the Company's Board of Directors at any time throughout the entire period of the Executive's employment by the Company. 10. AGREEMENT NOT TO SOLICIT OR INTERFERE. (a) During the Executive's employment by the Company, the Executive will comply with all policies and rules that may from time to time be established by the Company, and will not engage directly or indirectly in any business or enterprise which in any way is competitive or conflicting with the interests or business of the Company. (b) During the six-month period after termination of employment by the Company, regardless of the reason or absence of reason for termination of employment (such period not to include any period(s) of violation of this Section 10(b) or period(s) of time required for litigation to enforce it provisions), the Executive shall not, directly or indirectly: (i) solicit, service, accept orders from, or otherwise have business contact with any person or entity who has, within the three-year period immediately prior to such termination of Executive's employment, been a customer (including, without limitation, a reseller and/or end user of products) of the Company, if such contact could directly or indirectly divert business from or adversely affect the business of the Company; (ii) interfere with the contractual relations between the Company and any of its employees; or (iii) employ or cause to be employed in any capacity, or retain or cause to be retained as a consultant, any person who was employed by the Company at any time during the six-month period ended on the date of termination of the Executive's employment. (c) If at any time any of the provisions of this Section 10 shall be deemed invalid or unenforceable or are prohibited by the laws of the state or place where they are to be performed or enforced, by reason of being vague or unreasonable as to duration or geographic scope or scope of activities restricted, or for any other reason, such provisions shall be considered divisible and shall become and be immediately amended to include only such restrictions and to such extent as shall be deemed to be reasonable and enforceable by the court or other body having jurisdiction over this Agreement; and the Company and the Executive agree that the provisions of this Section 10, as so amended, shall be valid and binding as though any invalid or unenforceable provision had not been included herein. 11. CONFIDENTIAL INFORMATION. (a) The Executive recognizes and acknowledges that during the course of his employment, he may have exposure to and develop special knowledge and skills concerning certain of the Company's Confidential Information (as defined below) vital to the Company's ability to compete successfully in its business. The Executive further acknowledges that it is vital to the Company's legitimate business interests that the confidentiality of such Confidential Information be preserved, and that use or reliance on such Confidential Information by or on behalf of any other business or commercial activity in competition with the Company could result in irreparable harm to the Company. The Executive further acknowledges that the Confidential Information is a valuable, special and unique asset of the Company's business, and that the Confidential Information is and shall remain the exclusive property of the Company and nothing in this Agreement shall be construed as a grant to the Executive of any rights, title or interest in the Confidential Information. (b) Without the prior written consent of the Company, the Executive shall not, at any time either during or subsequent to his employment by the Company, use any Confidential Information (as defined below) for the benefit of anyone other than the Company, or disclose any Confidential Information to any person or party; the Executive may, however, use or disclose Confidential Information as required by his obligations to the Company or as necessary or desirable (and for the benefit of the Company) in connection with the Company's business (but all such permitted uses and disclosures shall be made under circumstances and conditions reasonably appropriate to preserve the Confidential Information as the Company's confidential property). In particular, without limiting the generality of the foregoing, the Executive shall not remove any Confidential Information, however embodied, from the Company's premises, facilities or place of business, except as required in the course of employment by the Company. (c) After the term of the Executive's employment with the Company, the foregoing restrictions shall not apply to Confidential Information which the Executive can establish by competent written proof: (i) was known, other than under binder of secrecy, to the Executive prior to his employment by the Company; or (ii) was subsequently obtained by the Executive, other than under binder of secrecy, from a third party not acquiring the information under an obligation of confidentiality from the disclosing party. (d) The term "Confidential Information" includes all confidential or trade secret proprietary information which is acquired by the Executive from the Company, its other employees, its suppliers or customers, its agents or consultants, or others, during his employment by the Company, and which relates to the present or potential businesses and products of the Company, as well as any other information as may be designated by the Company as confidential. The term Confidential Information may relate, for example, to Inventions (as defined below), trade secrets, computer software, research, development, design, engineering, manufacturing, purchasing, supplier lists, customer lists, price lists, accounting, profit margins, marketing or sales volume information or strategic plans; may include information contained, for example, in drawings, models, data, specifications, reports, compilations or computer programs; and may be in the nature of unwritten knowledge or technical or manufacturing know-how; but shall not in any event include any information which becomes generally known or available to persons in the business or industry of the Company other than as a result of acts or omissions attributable to the Executive. 12. ARBITRATION. In the event that any party hereto has any claim under this Agreement or other issues relating to the Executive's employment by the Company, the party shall promptly notify each other party of such claim. If within 30 days of the receipt of such notice of claim, the parties cannot agree on a resolution of such claim, the parties agree to submit such dispute to binding arbitration to be held in Boston, Massachusetts if initiated by the Company and in Boulder, Colorado if initiated by the Executive under the rules of the American Arbitration Association. Any such arbitration shall be conducted by three arbitrators, one of whom shall be selected by the Executive, one of whom shall be selected by the Company and one of whom shall be selected by the arbitrators so selected. The expenses of any such arbitration, including legal fees of the prevailing party, shall be paid by the non-prevailing party, as determined by the final order of the arbitrators. 13. SPECIFIC ENFORCEMENT. Notwithstanding the provisions of Section 12, the parties acknowledge that the Executive's breach of the provisions of Section 9, 10 or 11 of this Agreement will cause irreparable harm to the Company; it is agreed and acknowledged that the remedy of damages will not be adequate for the enforcement of such provisions and that such provisions may be enforced by equitable relief, including injunctive relief or specific performance, which relief shall be cumulative and in addition to any other relief to which the Company may be entitled. 14. GOVERNING LAW. This Agreement shall be deemed a contract made and performed in The Commonwealth of Massachusetts and shall be governed by the laws of The Commonwealth of Massachusetts. 15. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement of the parties and may be altered or amended or any provision hereof waived only by an agreement in writing signed by the party against whom enforcement of any alteration, amendment, or waiver is sought. No waiver by any party of any breach of this Agreement shall be considered as a waiver of any subsequent breach. 16. BINDING OBLIGATIONS. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns and the Executive and his personal representatives. 17. ASSIGNABILITY. Neither this Agreement nor any benefits payable to the Executive hereunder shall be assigned, pledged, anticipated, or otherwise alienated by the Executive, or subject to attachment or other legal process by any creditor of the Executive, and notwithstanding any attempted assignment, pledge, anticipation, alienation, attachment, or other legal process, any benefit payable to the Executive hereunder shall be paid only to the Executive or his estate. IN WITNESS WHEREOF, the Company, by its officer hereunto duly authorized, and the Executive have signed and sealed this Agreement as of the date first written above. MRS TECHNOLOGY, INC. By: Robert P. Schechter CARL P. HERRMANN MRS TECHNOLOGY, INC. NON-PLAN STOCK OPTION AGREEMENT This Stock Option Agreement (this "Agreement") dated as of February 13, 1998 (the "Grant Date"), is by and between MRS Technology, Inc. (the "Company"), a Massachusetts corporation and Carl P. Herrmann (the "Optionee"), an individual presently residing at 8380 Greenwood Drive, Niwot, Colorado 80503. 1. Optioned Shares. Subject to the terms and conditions set forth herein, the Company hereby grants to the Optionee an option (the "Option") to purchase from the Company all or any part of a total of 400,000 shares (the "Optioned Shares") of the Company's Common Stock, $0.01 par value per share ("Common Stock"). For purposes of the restrictions on transfer and repurchase rights set forth herein, the term "Optioned Shares" shall include any securities issued in respect of, in lieu of, or in exchange for the securities originally covered by the Option. 2. Price. The per share purchase price payable for the Optioned Shares upon exercise of the Option is $0.96875, which is, in accordance with the Company's policy, the price of the Company's Common Stock at the close of the market on the date prior to the grant. 3. Termination of Option. The Option shall terminate on the earlier of (a) the 10th anniversary of the Grant Date and (b) if the Optionee's employment ends for any reason, or the Optionee's employer is no longer the Company or a subsidiary (as defined in Section 424 of the Internal Revenue Code of 1986 (the "Code")), the applicable date determined from the following table: Event Causing Termination Date (i) death of employee one year thereafter (ii) total and permanent disability of employee within the meaning ofone year thereafter Section 22(e)(3) of the Code (iii) termination of employment other 10th anniversary of the than by reason of (i) or (ii) above Grant Date Military or sick leave shall not be deemed a termination of employment provided that it does not exceed the longer of 90 days or the period during which the absent employee's reemployment rights are guaranteed by statute or by contract. 4. Exercise of Option 4.1 Subject to Section 4.2 hereof, 50,000 shares of the Optioned Shares will vest on August 13, 1998, with 10,000 shares of the remaining Optioned Shares vesting per month for the 35 consecutive months thereafter. 4.2 In the event the Optionee's employment with the Company is terminated at any time after the first anniversary of the Grant Date, on the date of termination of the Optionee's employment he shall immediately be vested in that number of Optioned Shares as equal to the unvested portion of such Optioned Shares that would vest on the next scheduled monthly vesting date [plus the unvested portion of such stock options that would have vested during the term of any severance or similar payment arrangements if the Executive were still employed by the Company during the period of time while severance payments, if any, are being made to the Executive.] Further, the Optionee shall be immediately vested in the event of either a change in control of the Company or the attainment of a $10.00 per share or higher closing price for the Company's common stock for a period of 60 consecutive trading days. 4.3. The Option may be exercised by the Optionee (or, in the event of the Optionee's death, and to the extent described in this Section 4 and Section 3 above, by the Optionee's executor or administrator or any person or persons to whom the Option may have been transferred by will or by the laws of descent and distribution) as of the date first above written by giving written notice, in the manner provided in Section 13, specifying the number of shares as to which the Option is being exercised, accompanied by full payment for such shares in the form of a certified or bank check payable to the Company, in an amount equal to the option price of the shares to be purchased. Receipt by the Company of such notice and payment shall constitute the exercise of the Option or a part of it. Within 20 days, the Company shall deliver or cause to be delivered to the Optionee a certificate or certificates for the number of shares then being purchased by him or her. Such shares shall be fully paid and nonassessable. The minimum number of shares with respect to which an Option may be exercised, in whole or in part, at any time shall be the lesser of 500 shares or the maximum number of shares available for purchase under the Option at the time of exercise. If any law or applicable regulation of the Securities and Exchange Commission or other public regulatory authority shall require the Company or the Optionee to register or qualify under the Securities Act of 1933, as amended (the "Securities Act"), any similar federal statute then in force or any state law regulating the sale of securities, any such shares with respect to which notice of intent to exercise shall have been delivered to the Company or to take any other action in connection with such shares, the delivery of the certificate or certificates for such shares shall be postponed until completion of the necessary action, which the Company shall take in good faith, without any delay and at its own expense. 4.4. Upon each exercise of the Option prior to the registration contemplated by Section 6 hereof, the Optionee will be required to give a representation in form satisfactory to counsel for the Company that the shares are being purchased for investment and not with a view to distribution and that the Optionee will make no transfers of the shares in violation of the Securities Laws. The Company may, at its discretion, make a notation on any certificate delivered upon exercise of the Option to the effect that the shares are subject to any restrictions contained in this Plan and the shares represented by the certificate may not be transferred except in accordance with any transfer restrictions contained in the Company's Articles of Organization and after receipt by the Company of an opinion of counsel satisfactory to it to the effect that such transfer will not violate the Securities Laws, and may issue "stop transfer" instructions to its transfer agent, if any, and make a "stop transfer" notation on its books, as appropriate. Notwithstanding the foregoing, the Company may release the Optionee from the investment representation if the shares of the Stock subject to the Option have been registered with the Securities and Exchange Commission. 5. Restrictions on Issue of Shares. Notwithstanding any other provision of this Agreement, if, at any time, in the reasonable opinion of the Company the issuance of shares of Stock covered by the exercise of any Option may constitute a violation of law, then the Company may delay such issuance and the delivery of a certificate for such shares until (i) approval shall have been obtained from such governmental agencies, other than the Securities and Exchange Commission, as may be required under any applicable law, rule, or regulation; and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the Securities and Exchange Commission, one of the following conditions shall have been satisfied: (a) the shares with respect to which such Option has been exercised are at the time of the issue of such shares effectively registered under the Securities Act; or (b) a no action letter in form and substance reasonably satisfactory to the Company with respect to the issuance of such shares shall have been obtained by the Company from the Securities Exchange Commission. The Company shall make all reasonable efforts to bring about the occurrence of said events. 6. Registration. The Company shall register under the Securities Act or other applicable statutes the Optioned Shares no later than six months from the Grant Date. The Company shall take such action at its own expense. The Company may require from each Option holder, or each holder of shares of Stock acquired pursuant to the Plan, such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for such purpose and may require reasonable indemnity to the Company and its officers and directors from such holder against all losses, claims, damage and liabilities arising from such use of the information so furnished caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. 7. Restriction Against Transfer of Option. During the lifetime of the Optionee, the Option may be exercised only by the Optionee (or, in the event of legal incapacity or incompetency, the Optionee's guardian or legal representative). The Option and all rights and privileges conferred hereby may not be transferred, assigned, pledged, or hypothecated (whether by operation of law or otherwise) except by will or by the laws of descent and distribution, and shall not be subject to execution, attachment, or similar process. Upon any attempt to transfer, assign, pledge, hypothecate, or otherwise dispose of the Option or any right or privilege conferred hereby, contrary to the foregoing, or upon the sale or levy or any attachment or similar process upon the rights and privileges conferred hereby, the Option shall thereupon terminate and become null and void. 8. Capital Changes 8.1 If the Company effects a subdivision or consolidation of shares or other capital readjustment, the payment of a stock dividend, or other increase or reduction of the number of shares of the Common Stock outstanding, without receiving compensation therefor in money, services, or property, then the number, class, and per-share price of shares of stock subject to the Option shall be appropriately adjusted in such a manner as to entitle the Optionee to receive upon exercise of the Option, for the same aggregate cash consideration, the same total number and class of shares that the owner of an equal number of outstanding shares of Common Stock would own as a result of the event requiring the adjustment. 8.2. Adjustments other than under Section 8.4 of this Agreement shall be determined by the Board or the Committee and such determinations shall be conclusive. The Board and the Committee shall have the discretion and power in any such event to determine and to make effective provision for acceleration of the time or times at which the Option or any portion thereof shall become exercisable. No fractional shares of Common Stock shall be issued on account of any adjustment specified above. 8.3. The issue by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, or upon the exercise of rights or warrants to subscribe therefore, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, or other increase or decrease in such shares affected without receipt of consideration by the Company, shall affect, and an adjustment by reason thereof shall be made with respect to, the number or price of shares of Common Stock then subject to the Option. 8.4. If the Company is a party to a reorganization or merger with one or more other corporations and the Company is the surviving or resulting corporation, after the effective time of such transaction the Option shall remain outstanding, and upon exercise in accordance with its terms, the Optionee shall be entitled to receive, instead of the shares of Common Stock otherwise deliverable upon such exercise, shares of stock or other securities equivalent in value to those that the Optionee would have received if the Option had been so exercised prior to such transaction and no disposition thereof had subsequently been made. If the Company consolidates with or into one or more other corporations, or if the Company is liquidated or sells or otherwise disposes of substantially all of its assets to another corporation (individually or collectively, as the case may be, a "Transaction"), in any such event while the Option is outstanding, then the Optionee shall be immediately and 100% vested in any and all unexercised Optioned Shares and shall have the right to exercise the Option, notwithstanding any other provision of this Agreement to the contrary. The Optionee shall be provided with 30 days written notice of such Transaction. 9. Reservation of Shares. The Company shall at all times during the term of this Agreement reserve and keep available such number of shares of the Common Stock as will be sufficient to satisfy the requirements of this Agreement and shall pay all fees and expenses necessarily incurred by the Company in connection therewith. 10. Limitation of Rights in Option Shares. The Optionee shall not be deemed for any purpose to be a stockholder of the Company with respect to any of the Option Shares, except to the extent that the Option shall have been exercised with respect thereto and in addition thereto a stock certificate shall have been issued therefor and delivered to the Optionee. Any stock issued pursuant to the Option shall be subject to all restrictions upon the transfer thereof that may now or hereafter be imposed by the Articles of Organization, and the By-laws of the Company. 11. Power of Company. The existence of the Option shall not affect in any way the right or power of the Company or its stockholders to make or authorize any or all adjustments, recapitalizations, reorganizations, or other changes in the Company's capital structure or its business, or any merger or consolidation of the Company, or any issue of Common Stock, or any issue of bonds debentures, or preferred or prior preference stock ahead of or affecting the Common Stock or the rights thereof, or dissolution or liquidation of the Company, or any sale or transfer of all or any part of its assets or business, or any other corporate act or proceeding, whether of a similar character or otherwise. 12. Withholding. The Company's obligation to deliver shares upon the exercise of any Option shall be subject to the Optionee's satisfaction of all applicable tax withholding requirements. 13. Notices and Other Communications. Except as otherwise provided herein, any communication or notice required or permitted to be given under this Agreement shall be effective if in writing and if delivered or sent by certified or registered mail, return receipt requested, (a) if to the Company, at 10 Elizabeth Drive, Chelmsford, Massachusetts 01824 marked "Attention Secretary" or to such other person as the Company may specify, and (b) if to the Optionee, to the address set forth on the first page of this Agreement or such other address, in each case, as the addressee shall last have furnished to the communicating party. 14. Characterization of Option for Tax Purposes. The Option is intended to be treated as a "nonqualified stock option" rather than an "incentive stock option" under the Internal Revenue Code of 1986, as amended and is not issued under any stock option plan of the Company. 15. Disclaimer of Rights. No provision in this Agreement shall be construed to confer upon the Optionee the right to remain in the employ of the Company, interfere in any way with the right and authority of the Company either to increase or decrease the compensation of the Optionee at any time, or to terminate the employment or any other relationship between the Optionee and the Company. 16. Governing Law. This Agreement shall be governed by and interpreted and construed in accordance with the internal laws of the Commonwealth of Massachusetts (without reference to principles of conflicts or choice of law). IN WITNESS WHEREOF, the parties have executed this agreement as of the date first above written. MRS TECHNOLOGY, INC. By: Robert P. Schechter By: Carl P. Herrmann, Optionee EX-99 5 EXHIBIT 10.46 MRS TECHNOLOGY, INC. CONSULTING AGREEMENT AGREEMENT, dated February 13, 1998, between MRS Technology, Inc., a Massachusetts corporation with its principal place of business at 10 Elizabeth Drive, Chelmsford, MA 01824-4112 (the "Company"), and Griffith L. Resor III, an individual residing at 5 Proctor Street, Acton, MA 01720 (the "Consultant"). 1. FREEDOM TO CONTRACT; INDEPENDENT CONTRACTOR. The Consultant represents that he is free to enter into this Agreement, that he has not made and will not make any agreements in conflict with this Agreement, and will not disclose to the Company, or use for the Company's benefit, any trade secrets or confidential information now or hereafter in the Consultant's possession which is the property of any other party. This Agreement shall be construed as an independent contractor's agreement for all purposes, and Consultant shall be independent and not an employee of the Company or any affiliate of the Company. Consultant and the Company are not partners or joint venturers with each other with respect to the matters subject to this Agreement and nothing herein shall be construed so as to make them such partners or joint venturers or to impose any liability as such on them. 2. CONSULTING SERVICES. Subject to the general direction of the Board of Directors of the Company, the Consultant shall act as an advisor and consultant to the Company and Consultant hereby accepts such engagement upon the terms and conditions set forth herein. The Consultant shall report to the Chief Executive Officer of the Company. 3. TERM 3.1. General. This Agreement shall take effect as of the date hereof and shall remain in effect through the 14th day of August, 1998, or until earlier terminated under the provisions of this Section 3. This Agreement may be renewed by mutual written agreement of the parties. 3.2. Survival of Certain Provisions. The provisions of Sections 3.3, 4, 5, 6, 7, and 8 shall survive the termination of this Agreement. 3.3. Termination. The Company shall have the right upon thirty (30) days notice to terminate this Agreement without cause, and immediately upon notice to terminate this Agreement with cause (as defined below), with no compensation to accrue or to be owing in respect of any period after the effective date of such termination and no liability of any kind to accrue on account of such termination. The term "cause" shall mean termination due to breach of this Agreement or to an act or acts by the Consultant in willful contravention of the directions of the Chief Executive Officer or Board of Directors of the Company. 4. COMPENSATION, EXPENSES AND TAXES. 4.1. Compensation and Expenses. For the term of this Agreement, the Consultant shall be paid at a rate of One Hundred Sixty Eight Thousand Dollars ($168,000) per year, in consideration for the Consultant's availability for consulting services to the Company. The Consultant's compensation shall be payable on a bi-weekly basis in accordance with the Company's customary payroll practices. Consultant is entitled to continuation of health insurance coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA"). If the Consultant elects continuation coverage under COBRA, the Company will pay any required premium contributions on behalf of the Consultant until the earlier to occur of: (i) the termination of this Agreement, or (ii) the Consultant's eligibility for coverage under a health insurance plan maintained by a subsequent employer of the Consultant. The Consultant currently has vested but unexercised options to purchase seventy seven thousand seven hundred forty eight (77,748) shares of the Company's Common Stock. In accordance with the terms of the MRS Technology, Inc. 1993 Stock Option Plan, Consultant may exercise such options, in whole or in part, at any time within three (3) months after termination of this Agreement unless such options are earlier terminated by their terms. In addition, the Consultant is hereby granted an option (the "Option") to purchase sixty seven thousand five hundred (67,500) shares of the Company's Common Stock. 4.2. Terms of the Option. The Option shall (i) be a nonstatutory option, (ii) granted as of the date hereof, (iii) have an exercise price equal to the average of the bid and asked price of the Company's Common Stock on the business day first preceding the date hereof, (iv) vest in all events on the termination of this agreement, (v) to the extent vested, be exercisable for a period of three (3) months following termination of this Agreement, and (vi) be subject to the terms and conditions of the Company's Stock Option Plan and the Option Agreement representing the Option. 4.3 Responsibility for Taxes. All compensation to be paid to Consultant hereunder shall be paid without deduction or withholding of any federal, state, local or foreign taxes, and Consultant shall be solely responsible for and pay all federal, state, local and foreign taxes due with respect thereto. Consultant agrees to indemnify the Company and hold it harmless from and against any liability, cost or expense (including, without limitation, court costs and attorney's fees) resulting from Consultant's breach of his obligations under this paragraph. The Company shall have the right to set off against any payments owing to Consultant any amounts owed to the Company by the Consultant as a result of any breach of the Consultant's obligations under this paragraph. 5. AGREEMENT NOT TO COMPETE. This Section 5 is effective during the term of this Agreement and shall continue in effect for the period beginning on the date of termination of this Agreement and continuing for: (i) one (1) year; or (ii) in the event of termination of this Agreement prior to the 14th day of August, 1998, six (6) months. During such time, the Consultant shall not directly or indirectly, engage in, or enter into or participate in, at any place within the rest of the United States any Competitive Business (as defined below), either as an individual for his own account, or as a partner or a joint venture, or as an officer, independent contractor or holder of more than a five percent (5%) equity interest in any other person, firm, partnership or corporation, or as an employee, agent or salesperson for any person. For purposes of this Section 5, the term "Competitive Business" shall mean stitching step and repeat lithography tools for FPD (flat panel display) R&D and/or production, or for HDI (High Density Interconnect) R&D and/or production. In the event that the Company no longer has an interest one of the industries described in the foregoing sentence, such industry shall no longer be considered a Competitive Business and the terms of this Section 5 shall no longer apply solely with respect to that industry. 6. CONFIDENTIAL INFORMATION. (a) The Consultant recognizes and acknowledges that he may have exposure to and develop special knowledge and skills concerning certain of the Company's Confidential Information (as defined below) vital to the Company's ability to compete successfully in its business. The Consultant further acknowledges that it is vital to the Company's legitimate business interests that the confidentiality of such Confidential Information be preserved, and that use or reliance on such Confidential Information by or on behalf of any other business or commercial activity in competition with the Company could result in irreparable harm to the Company. The Consultant further acknowledges that the Confidential Information is a valuable, special and unique asset of the Company's business, and that the Confidential Information is and shall remain the exclusive property of the Company and nothing in this Agreement shall be construed as a grant to the Consultant of any rights, title or interest in the Confidential Information. (b) The Company and the Consultant understand that, prior to the effective date of this Agreement, the Consultant received and generated Confidential Information which may or may not have been documented as such. After the effective date of this Agreement, all "new" Confidential Information, e.g. Confidential Information disclosed after such effective date, will be identified: (i) in writing on such documents or, (ii) if disclosed orally, by an oral caution that the Consultant is being given Confidential Information, with written confirmation of the oral notice within two (2) weeks of such disclosure. (c) Without the prior written consent of the Company, the Consultant shall not, at any time either during or subsequent to his consulting relationship with the Company, use any Confidential Information (as defined below) for the benefit of anyone other than the Company, or disclose any Confidential Information to any person or party; the Consultant may, however, use or disclose Confidential Information as required by his obligations to the Company or as necessary or desirable (and for the benefit of the Company) in connection with the Company's business (but all such permitted uses and disclosures shall be made under circumstances and conditions reasonably appropriate to preserve the Confidential Information as the Company's confidential property). The Company will give due consideration to any request by the Consultant to use or disclose such Confidential Information. (d) After the term of the Consultant's consulting relationship with the Company, the foregoing restrictions shall not apply to Confidential Information which the Consultant can establish by competent written proof: (i) was known, other than under binder of secrecy, to the Consultant prior to his employment by the Company; or (ii) was subsequently obtained by the Consultant, other than under binder of secrecy, from a third party not acquiring the information under an obligation of confidentiality from the disclosing party. (e) The term "Confidential Information" includes all information acquired by the Consultant from the Company, its other employees, its suppliers or customers, its agents or consultants, or other, during his relationship with the Company, and which relates to the present or potential businesses and products of the Company, as well as any other information designated by the Company as confidential. The term Confidential Information may relate, for example, to inventions, trade secrets, computer software, research, development, design, engineering, manufacturing, purchasing, supplier lists, customer lists, price lists, accounting, profit margins, marketing or sales volume information or strategic plans; may include information contained, for example, in drawings, models, data, specifications, reports, compilations or computer programs; and may be in the nature of unwritten knowledge or technical or manufacturing know-how; but shall not in any event include any information which becomes generally known or available to persons in the business or industry of the Company other than as a result of acts or omissions attributable to the Consultant. 7. STANDARD OF CONDUCT. The Consultant shall act at all times in the best interest of the Company as determined from time to time by the Company in its sole discretion, acting through its Board of Directors and/or its Chief Executive Officer. The Consultant shall promote the policies and practices of the Company, as adopted and interpreted form time to time by the Company in its sole discretion, acting through its Board of Directors and/or its Chief Executive Officer. 8. ARBITRATION. In the event that any party hereto has any claim under this Agreement or other issues relating to the Consultant's consulting relationship with the Company, the party shall promptly notify each other party of such claim. If within 30 days of the receipt of such notice of claim, the parties cannot agree on a resolution of such claim, the parties agree to submit such dispute to binding arbitration to be held in Boston, Massachusetts under the rules of the American Arbitration Association. Any such arbitration shall be conducted by three arbitrators, one of whom shall be selected by the Consultant, one of whom shall be selected by the Company and one of whom shall be selected by the arbitrators so selected. The expenses of any such arbitration shall be paid by the non-prevailing party, as determined by the final order of the arbitrators. 9. SPECIFIC ENFORCEMENT. Notwithstanding the provisions of Section 8, the parties acknowledge that the Consultant's breach of Sections 5, 6 and 7 of this Agreement will cause irreparable harm to the Company; it is agreed and acknowledged that the remedy of damages will not be adequate for the enforcement of such provisions and that such provisions may be enforced by equitable relief, including injunctive relief or specific performance, which relief shall be cumulative and in addition to any other relief to which the Company may be entitled. 10. GOVERNING LAW. This Agreement shall be deemed a contract made and performed in the Commonwealth of Massachusetts and shall be governed by the laws of the Commonwealth of Massachusetts. 11. ENTIRE AGREEMENT; AMENDMENT. This Agreement constitutes the entire agreement of the parties and may be altered or amended or any provision hereof waived only by an agreement in writing signed by the party against whom enforcement of any alteration, amendment, or waiver is sought. No waiver by any party of any breach of this Agreement shall be considered as a waiver of any subsequent breach. 12. BINDING OBLIGATIONS. This Agreement shall be binding upon and inure to the benefit of the Company and its successors and assigns and the Consultant and his personal representatives. 13. ASSIGNABILITY. Neither this Agreement nor any benefits payable to the Consultant hereunder shall be assigned, pledged, anticipated, or otherwise alienated by the Consultant, or subject to attachment or other legal process by any creditor of the Consultant, and notwithstanding any attempted assignment, pledge, anticipation, alienation, attachment, or other legal process, any benefit payable to the Consultant hereunder shall be paid only to the Consultant or his estate. IN WITNESS WHEREOF, the Company, by its officer hereunto duly authorized, and the Consultant have signed and sealed this Agreement as of the date first written above. MRS TECHNOLOGY, INC. By:Carl P. Herrmann Chief Executive Officer Griffith L. Resor III -----END PRIVACY-ENHANCED MESSAGE-----