UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
Form 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 2007
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ____ to _____
Commission file number: 1-16525
CVD EQUIPMENT CORPORATION
(Name of Small Business Issuer in Its Charter)
New York 11-2621692
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
1860 Smithtown Avenue
Ronkonkoma, New York 11779
(Address including zip code of registrant's Principal Executive Offices)
(631) 981-7081
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section
12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par value $0.01 NASDAQ Capital Markets
Securities registered under Section 12(g) of the Act:
None
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 [_]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [_] No [X]
State issuer's revenues for its most recent fiscal year. $13,577,772.
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of a
specified date within the past 60 days. Shares of common stock held by each
officer and director and by each person who owns 5% or more of the outstanding
common stock have been excluded, in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily conclusive
determination for other purposes: $ 7,915,873 at March 25, 2008.
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 4,733,500 shares of Common Stock,
$0.01 par value at March 25 2008.
DOCUMENTS INCORPORATED BY REFERENCE
None.Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
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PART I
Item 1. Description of Business.
We design and manufacture customized state-of-the-art equipment used in the
development, design and manufacture of advanced electronic components, materials
and coatings for research and industrial applications. We offer a broad range of
chemical vapor deposition, gas control and other equipment that is used by our
customers to research, design and manufacture semiconductors, solar cells,
carbon nanotubes, nanowires, LEDs and MEMS, and industrial coatings, as well as
equipment for surface mounting of components onto printed circuit boards. Our
proprietary products are generally customized to meet the particular
specifications of individual customers. We also offer a number of standardized
products that are based on the expertise and know how we have developed in
designing and manufacturing our customized products.
Based on more than 25 years of experience, we provide leading-edge design and
manufacturing solutions to our customers. We use engineering, design and
manufacturing expertise to provide technologically advanced equipment that
enables laboratory and research scientists to develop the precise processes for
the manufacture of next generation semiconductors and other electronic
components. We also develop and manufacture production equipment based on our
designs. We have built a significant library of design expertise, know-how and
innovative solutions to assist our customers in developing these intricate
processes. This library of solutions, along with our vertically integrated
manufacturing facilities, allows us to provide superior design and manufacturing
solutions to our customers on a cost effective basis.
In the fourth quarter of 2006, we began implementing a strategy to target
opportunities in the research and development market, with a focus on
higher-growth applications such as carbon nanotubes, nanowires, MEMS and LEDs.
To expand our penetration into this market, we started introducing a line of
proprietary standardized products and systems targeted at this market.
Historically, we manufactured these products on a custom one-at-a-time basis to
meet an individual customer's specific research requirements. Our new
proprietary systems leverage the technological expertise that we have developed
through designing these custom systems onto a standardized basic core. This core
is easily adapted through a broad array of available add-on options to meet the
diverse product and budgetary requirements of the research community. By
manufacturing the basic core of these systems in higher volumes, we are able to
reduce both the cost and delivery time for our systems. These systems, which we
market and sell under the "EasyTube" product line, are sold to researchers at
universities and laboratories in the United States and throughout the world.
We also grow the sales of our proprietary standard and custom systems by
building on the success of our installed customer base, which includes several
Fortune 500 companies. Historically, revenues have grown primarily through sales
to existing customers with additional capacity needs or new requirements, as
well as to new customers. We have generally gained new customers through word of
mouth, the movement of personnel from one company to another, and limited print
advertising and trade show attendance. We are now increasing the awareness of
our company in the marketplace with results from our internal research
laboratory, from increased participation in trade shows, and internet
advertising.
1
The core competencies we have developed in equipment and software design, as
well as in systems manufacturing, are used to engineer our finished products.
Our proprietary Windows-based, real-time, software application allows for rapid
configuration, and provides our customers with powerful tools to understand,
optimize and repeatedly control their processes. Our vertically integrated
structure allows us to control the manufacturing process, from bringing raw
metal and components into our manufacturing facilities to shipping out finished
products. These factors significantly reduce our costs, improve our quality and
reduce the time it takes from customer order to shipment of our products.
We conduct our operations through three divisions: (1) CVD, including the First
Nano product line ("CVD/First Nano"); (2) Stainless Design Concept ("SDC"); and
(3) Conceptronic, including the Research International product line
("Conceptronic/Research"). Each division operates on a day-to-day basis with its
own operating manager while product development, sales and administration are
managed at the corporate level.
Operating Divisions
CVD/First Nano is a supplier of state-of-the-art chemical vapor deposition
systems for use in the research, development and manufacturing of
semiconductors, LEDs, carbon nanotubes, nanowires, solar cells and a number of
industrial applications. We utilize our expertise in the design and manufacture
of chemical vapor deposition systems to work with laboratory scientists to bring
state-of-the-art processes from the research laboratory into production, as well
as to provide production equipment based on our designs.
SDC designs and manufactures ultra-high purity gas and chemical delivery control
systems for state-of-the-art semiconductor fabrication processes, LEDs, carbon
nanotubes, nanowires, solar cells and a number of industrial applications. Our
systems are sold on a stand-alone basis, as well as together with our CVD/First
Nano systems. In addition, SDC's field service group provides our customers with
ultra-high purity equipment installations, contract maintenance and equipement
removal. SDC operates out of a 22,000 square foot facility fitted with Class 10
and Class 100 clean room manufacturing space located in Saugerties, New York.
Conceptronic/Research designs and manufactures reflow ovens and rework stations
for the printed circuit board assembly and semi-conductor packaging industries.
Our equipment is designed to melt solder in a controlled process to form
superior connections between components. This, in turn, creates complete
electronic circuits for computers and telecommunication systems, as well as for
the automotive and defense industries.
To address pricing pressure in what is now a mature industry for standardized
reflow ovens, we have begun to offer customized products for complex heating and
drying applications. We expect that this will maintain and potentially improve
our future profit margins in this product line.
2
Principal Products
Chemical Vapor Deposition - A process which passes a gaseous compound over a
target material surface that is heated to such a degree that the compound
decomposes and deposits a desired layer onto substrate material. The process is
accomplished by combining appropriate gases in a reaction chamber, of the kind
produced by the Company, at elevated temperatures (typically 300-1,800 degrees
Celsius). Our Chemical Vapor Deposition systems are complete and include all
necessary instrumentation, subsystems and components. We provide such standard
systems and also specifically engineered products for particular customer
applications. Some of the standard systems we offer are for Silicon,
Silicon-Germanium, Silicon Dioxide, Silicon Nitride, Polysillicon, Liquid Phase
Epitaxial, Metalorganic Chemical Vapor Deposition, Carbon Nanotubes and
Nanowires.
Our Chemical Vapor Deposition systems are available in a variety of models that
can be used in production and laboratory research. All models can be offered
with total system automation, a microprocessor control system by which the user
can measure, predict and regulate gas flow, temperature, pressure and chemical
reaction rates, thus controlling the process in order to enhance the quality of
the materials produced. Our standard microprocessor control system is extremely
versatile and capable of supporting the complete product line and most custom
system requirements. These Chemical Vapor Deposition systems are priced up to
$1,500,000.
Rapid Thermal Processing ("RTP") - Used to heat semiconductor materials to
elevated temperatures of 1,000 degrees Celsius at rapid rates of up to 200
degrees Celsius per second. Our RTP systems are offered for implant activation,
oxidation, silicide formation and many other processes. We offer systems that
can operate both at atmospheric or reduced pressures. Our RTP systems are priced
up to $600,000.
Annealing and Diffusion Furnaces - Used for diffusion, oxidation, implant
anneal, solder reflow and other processes. The systems are normally operated at
atmospheric pressure with gaseous atmospheres related to the process. An
optional feature of the system allows for the heating element to be moved away
from the process chamber allowing the wafers to rapidly cool or be heated in a
controlled environment. Our cascade temperature control system enables more
precise control of the wafers. The systems are equipped with an automatic
process controller, permitting automatic process sequencing and monitoring with
safety alarm provisions. Our annealing and diffusion furnace systems are priced
up to $900,000.
Ultra-high Purity Gas and Liquid Control Systems - Our standard and custom
designed gas and liquid control systems, which encompass, gas cylinder storage
cabinets, custom gas and chemical delivery systems, gas and liquid valve
manifold boxes and gas isolation boxes, provide safe storage and handling of
pressurized gases and chemicals. Our system design allows for automatic or
manual control from both a local and remote location. A customer order often
includes multiple systems and can total up to $1,000,000.
Quartzware - We provide standard and custom fabricated quartzware used in our
equipment and other customer tools. We also provide repair and replacement of
existing quartzware.
3
Reflow Furnaces and Rework Stations - We provide standard and custom systems for
the printed circuit board and surface mount technology industries. Our equipment
is designed to melt solder in a controlled process to form superior connections
between components, creating complete electronic circuits for computers and
telecommunication systems, as well as for the automotive and defense industries.
Markets and Marketing
Due to the highly technical nature of our products, we believe it is essential
to contact customers directly through our sales personnel and through a network
of domestic and international independent sale representatives and distributors
specializing in the type of equipment we sell. Our primary marketing activities
include direct sales contacts, participation in trade shows and our internet
websites. We are focusing our efforts on being in the top listings on many
search engines in order to increase the number of "hits" to our websites.
Customers
We are continuing to work on expanding our product offerings. Many of these
products are used in research and in production applications. We sell our
products primarily to semiconductor manufacturers, institutions involved in
semiconductor and electronic component research (such as universities,
government and industrial laboratories) and to electronic assembly
manufacturers. We have both an international and domestic installed customer
base of approximately 200 customers to whom we have sold systems within the last
three years. For the twelve months ended December 31, 2007 approximately 21% of
our revenues were generated from foreign exports compared to 31% for the twelve
months ended December 31, 2006. Sales to a single customer in any one year can
exceed 10.0% of our total sales; however, we are not dependent on any single
customer. In fiscal years 2007 and 2006, one customer represented 7.1% and 9.0%
of our annual sales each year. No other customer represented more than 5.6% or
6.5% of our total sales in fiscal years 2007 or 2006, respectively.
Warranties
We warrant our equipment for a period of twelve to twenty four months after
shipment, depending on the product, and pass along any warranties from original
manufacturers of components used in our products. We provide for our own
equipment servicing with in-house field service personnel. Warranty costs,
including those incurred in fiscal year 2007, have been historically
insignificant and expensed as incurred.
Competition
We are subject to intense competition. We are aware of other competitors that
offer a substantial number of products comparable to ours. Many of our
competitors (including customers who may elect to manufacture systems for
internal use) have financial, marketing and other resources greater than ours.
To date, we believe that each one of our three operating divisions has been able
to compete in markets that include these competitors, primarily on the basis of
technical performance, quality, delivery and price.
4
CVD/First Nano competes primarily with in-house design and engineering personnel
at research and university laboratories with the capacity to design and build
their own equipment internally. Due to budgetary and funding constraints, many
of these customers are extremely price sensitive. CVD/First Nano also competes
with companies that have substantially greater financial, marketing and other
resources to develop new products and support customers worldwide, as well as
smaller competitors. We believe that our systems are among the most advanced
available.
SDC competes with companies that are larger than our company and have
substantially greater financial, marketing and other resources than we do. We
believe that SDC's gas management and chemical delivery control systems are
among the most advanced available. We further believe that SDC is differentiated
from our competitors through our intimate understanding of how the systems in
which our products are incorporated are actually used in field applications. We
have gained this understanding as a result of having designed and built complex
process gas systems for CVD/First Nano as well as for a number of the world's
leading semiconductor manufacturers, research laboratories and universities.
Conceptronic/Research's proprietary reflow ovens and rework stations are used by
the printed circuit board assembly and semiconductor packaging industries.
Conceptronic/Research also offers customized products for complex applications
within the printed circuit board and other industries that use conveyor-type
ovens in heating and drying applications. Our in-house design and engineering
personnel develop leading edge technology for sale at competitive prices.
Conceptronic/Research competes with companies that are larger than our company
and have substantially greater financial, marketing and other resources than we
do. We believe that our reflow ovens and rework stations are among the most
advanced available having leveraged our experience in designing and building
customized products for our customers.
Sources of Supply
We do not manufacture many components used in producing our products. Most of
these components are purchased from unrelated suppliers. We do not have any
supply contracts covering these components, although we are not dependent on a
principal or major supplier and alternate suppliers are available. Subject to
lead times, the components and raw materials we use in manufacturing our
products are readily obtainable.
We have a fully equipped machine shop that we use to fabricate in-house most of
the metal components, including the most complex designed parts of our
equipment. Our investment in (CNC) machines for our machine shop has increased
our efficiencies while significantly reducing costs in production. Similarly,
our quartz fabrication capability is sufficient to meet our quartzware needs.
Materials procured from the outside and/or manufactured internally undergo a
rigorous quality control process to ensure that the parts meet or exceed our
requirements and those of our customers. Upon final assembly, all equipment
undergoes a final series of complete testing to ensure maximum product
performance.
5
Backlog
As of December 31, 2007 our order backlog was approximately $5,087,000 compared
to approximately $3,565,000 at December 31 2006, an increase of 42.7%. The
increase can primarily be attributed to our CVD Division. This division,
inclusive of its expanded product line of First Nano equipment, continues to
experience a strong demand for new equipment. The timing for completion of the
backlog varies depending on the product mix; however, there is generally a one
to six month lag in the completion and shipping of backlogged product. Included
in the backlog are all accepted purchase orders with the exception of those that
are included in our percentage-of-completion. Order backlog is usually a
reasonable management tool to indicate expected revenues and projected profits,
however it does not provide an assurance of future achievement or profits as
order cancellations or delays are possible.
Intellectual Property
Our success is dependent in part on our technology and other proprietary rights.
We have historically protected our proprietary information and intellectual
property such as design specifications, blueprints, technical processes and
employee know-how through the use of non-disclosure agreements. We also maintain
and/or assert rights in certain trademarks relating to certain of our products
and product lines, and claim copyright protection from certain proprietary
software and documentation.
While patent, copyright and trademark protection for our intellectual property
may be important, we believe our future success in highly dynamic markets is
most dependent upon the technical competence and creative skills of our
personnel. We attempt to protect our trade secrets and other proprietary
information through confidentiality agreements with our customers, suppliers,
employees and consultants through other security measures.
Research and Development
The university research community is at the forefront of nanotechnology
research, and we are focused on providing state-of-the-art systems to this
market that will help bridge the gap between pioneering research and marketable
products. Our research laboratory, together with a number of leading
universities with whom we partner, conducts cutting-edge research on the growth
of carbon nanotubes and nanowires. The results of this research could have far
reaching implications concerning the use and manufacture of carbon nanotubes and
nanowires for many markets. Our intention is that together we will leverage our
collective expertise in this field, which will allow us to capitalize on
commercial opportunities in the future. This relationship has thus far produced
leading edge results, including what we believe are the largest carbon nanotube
clusters yet developed. The amount spent on research and development was
$715,000 (5.3% of revenue) and $513,000 (3.8% of revenue) for the years ended
December 31, 2007 and December 31, 2006, respectively.
6
Government Regulation
We are subject to a variety of federal, state and local government regulations,
such as environmental, labor and export control. We believe that we have
obtained all necessary permits to operate our business and that we are in
material compliance with all laws and regulations applicable to us.
We are not aware of any government regulations or requirements necessary for the
sale of our products, other than certain approvals or permits which may be
required for us to export certain of our products to certain foreign countries
Insurance
Some of our products are used in connection with explosive, flammable, corrosive
and toxic gases. There are potential exposures to personal injury as well as
property damage, particularly if operated without regard to the design limits of
the systems and components. We believe that our insurance coverage is adequate.
We have the following types of insurance coverage:
o Product liability
o Property and contents
o General liability
o Directors and officers
o Transportation
o Business auto
o General Umbrella
o Workers compensation
o Employee benefits liability
Employees
At December 31, 2007, we had 115 employees, 113 of which were full time
personnel and 2 which were part time. We had 64 people in manufacturing, 27 in
engineering (including research and development and efforts related to product
improvement) 6 in field service, 4 in sales and marketing and 14 in general
management and administration.
Item 2. Description of Property.
We maintain our headquarters at 1860 Smithtown Avenue, Ronkonkoma, New York,
where we own a 50,000 square foot manufacturing facility which we purchased in
March, 2002. The purchase price for the Property was $2,161,875. In addition we
incurred $1,283,077 of renovations. We financed $2,700,000 of the total. The
financing consisted of a loan secured by a mortgage held by GE Capital Public
Finance Inc. subject to an installment sale agreement with the Town of Islip
Industrial Development Agency. Payments are based upon a 15 year amortization
schedule. Interest is fixed at a rate of 5.67%. Our CVD/First Nano and
Conceptronic/Research divisions operate out of this facility.
Our SDC division operates out of a 22,000 square foot manufacturing facility
situated on five acres of land which we purchased in December 1998 and is
located at 1117 Kings Highway, Saugerties, New York. The property was purchased
from Kidco Realty Corp. The purchase price for the Property was $1,400,000. We
financed $900,000 of the purchase price. The financing consisted of a loan
secured by a mortgage held by Kidco Realty Corp. Payments are based upon a
30-year amortization schedule, with a 10-year balloon. Interest is fixed at a
rate of 7% for 10 years.
7
On February 8, 2008 we closed on an acquisition of a 13,300 square foot facility
located at 979 Marconi Avenue, Ronkonkoma, NY 11779 through the Town of Islip
Industrial Development Agency. The Property was purchased from HPG Realty Co.,
LLC. The total purchase price for the Property was $2,015,000. We financed
approximately $1,500,000 of the purchase price. The financing consists of two
loans secured by mortgages, both of which are held by Capital One, N.A. Payments
upon each of the mortgages are based upon a 20-year amortization schedule, with
a 10-year balloon. Interest on the $1 million mortgage is fixed at a rate of
5.67% for 10 years. Interest on the $500,000 mortgage is fixed at a rate of
3.67% for the first four years and will be adjusted for the 6 year period
beginning March 1, 2012 to 200 basis points above the weekly average yield on
U.S. Treasury Securities adjusted to a constant maturity of 6 years, until
maturity on March 1, 2018. The facility is intended to be used for the expansion
of the Company's First Nano laboratory starting in the second quarter of 2008.
Item 3. Legal Proceedings.
In September 1999, we were named in a lawsuit filed by PrecisionFlow
Technologies, Inc., in the United States District for the Northern District of
New York relating to comments allegedly made by CVD's President, Leonard A.
Rosenbaum, concerning the intellectual property obtained in the purchase of
assets of Stainless Design Corporation. We promptly filed a counterclaim for
unauthorized use of our intellectual property. The plaintiff was seeking
monetary damages and injunctive relief. In our counter-claim, we sought monetary
damages and injunctive relief.
In May 2002, we commenced a new action against Precisionflow Technologies, Inc.,
in the United States District for the Northern District of New York seeking
injunctive relief and monetary damages based upon copyright violations.
On September 18, 2007 a settlement was reached between the Company and
PrecisionFlow Technologies, Inc. of the pending litigation. Under the terms of
the settlement, all claims and counterclaims asserted by the parties in
previously filed lawsuits were discontinued in consideration of which the
Company will receive payments totaling $541,600 to be paid over a specific
timetable as defined.
From time to time, we may become a party to litigation or other legal
proceedings that we consider to be a part of the ordinary course of our
business. We are not currently involved in legal proceedings that could
reasonably be expected to have a material adverse effect on our business,
prospects, financial condition or results of operations. We may become involved
in material legal proceedings in the future.
Item 4. Submission of Matters to a Vote of Security Holders.
At our annual meeting of stockholders, which was held on December 12, 2007, our
stockholders:
(1) Elected five nominees for directors to serve for a term ending in
2008;
(2) Approved the selection of Moore Stephens, P.C. as the Company's
independent registered public accounting firm for the year ending
December 31, 2007.
(3) Approved the 2007 Share Incentive Plan
The following tables show the common stock votes cast with respect to the
proposals identified above:
Election of Directors:
---------------------
Withheld
For Authority
--- ---------
Leonard A. Rosenbaum 4,237,633 16,714
Martin J Teitelbaum 3,909,807 344,540
Alan H. Temple Jr. 4,237,633 16,714
Conrad J. Gunther 4,237,323 17,024
Bruce T. Swan 4,237,623 16,724
Proposal 2: Ratification of Moore Stephens, P.C.
For Against Abstentions
--- ------- -----------
4,084,964 12,200 683
Proposal 3: Approval of 2007 Share Incentive Plan
For Against Broker Non-Vote Abstentions
--- ------- ---------------- -----------
2,255,994 390,104 1,602,403 5,846
8
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The principal market for our common stock which is traded under the symbol "CVV"
was the American Stock Exchange until September 20, 2007. On that date, we
transferred our listing to The NASDAQ Capital Market. The following table sets
forth, for the periods indicated, the high and low closing prices of our common
stock on the American Stock Exchange and The NASDAQ Capital Market.
High Low
---- ---
Year Ended December 31, 2007:
1st Quarter................................ $6.21 $4.90
2nd Quarter................................ 8.95 5.28
3rd Quarter................................ 6.20 4.55
4th Quarter................................ 4.91 3.65
High Low
---- ---
Year Ended December 31, 2006:
1st Quarter................................ $4.21 $2.80
2nd Quarter................................ 4.22 2.80
3rd Quarter................................ 3.69 2.25
4th Quarter................................ 7.13 3.09
As of March 18, 2008, there were approximately 76 holders of record and
approximately 782 beneficial owners of our common stock, and the closing sales
price of our common stock as reported on the NASDAQ Capital Market was $3.20.
Dividend Policy
We have never paid dividends on our common stock and we do not anticipate paying
dividends on common stock at the present time. We currently intend to retain
earnings, if any, for use in our business. There can be no assurance that we
will ever pay dividends on our common stock. Our dividend policy with respect to
our common stock is within the discretion of the Board of Directors and its
policy with respect to dividends in the future will depend on numerous factors,
including earnings, financial requirements and general business conditions.
Under applicable New York law, we would not be permitted to declare and pay
dividends if we were insolvent, or would become insolvent by payment of
dividends, or if our net assets remaining after payment of dividends would be
less than our stated capital.
9
Equity Compensation Plan Information
The following table provides information about shares of our common stock that
may be issued upon the exercise of options under all of our existing
compensation plans as of December 31, 2007.
Number of securities to be Weighted-average exercise
issued upon exercise of price of outstanding Number of securities
outstanding options, options, warrants and remaining available for
warrants and rights rights future issuance
Plan Category
Equity compensation plans
approved by security holders(1) 465,000 $ 3.09 865,250
Total 465,000 $3.09 865,250
-------------------------
(1) Reflects aggregate options and restricted stock awards outstanding under
our Non-Qualified Stock Option Plans and 2007 Share Incentive Plan.
Recent Sales Of Unregistered Securities
None.
Issuer Purchases Of Equity Securities
None.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Except for historical information contained herein, this "Management's
Discussion and Analysis or Plan of Operation" contains forward-looking
statements within the meaning of the U.S. Private Securities Litigation Reform
Act of 1995, as amended. These statements involve known and unknown risks and
uncertainties that may cause our actual results or outcomes to be materially
different from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous important
assumptions and other important factors that could cause actual results to
differ materially from those in the forward-looking statements. Important
assumptions and other factors that could cause actual results to differ
materially from those in the forward-looking statements, include, but are not
limited to: competition in our existing and potential future product lines of
business; our ability to obtain financing on acceptable terms if and when
needed; uncertainty as to our future profitability, uncertainty as to the future
profitability of acquired businesses or product lines, uncertainty as to any
future expansion of the Company. Other factors and assumptions not identified
above were also involved in the derivation of these forward-looking statements
and the failure of such assumptions to be realized as well as other factors may
also cause actual results to differ materially from those projected. We assume
no obligation to update these forward-looking statements to reflect actual
results, changes in assumptions, or changes in other factors affecting such
forward-looking statements.
10
We design and manufacture standard and custom state-of-the-art equipment used in
the development, design and manufacture of advanced electronic components,
materials and coatings for research and industrial applications. We offer a
broad range of chemical vapor deposition, gas control and other equipment that
is used by our customers to research, design and manufacture semi-conductors,
solar cells, carbon nanotubes, nanowires, LEDs and MEMS, and industrial
coatings, as well as equipment for surface mounting of components onto printed
circuit boards. Our proprietary products are generally customized to meet the
particular specifications of individual customers. We also offer a number of
standardized products that are based on the expertise and know how we have
developed in designing and manufacturing our customized products.
Based on more than 25 years of industry experience, we provide leading-edge
design and manufacturing solutions to our customers. We use our engineering,
design and manufacturing expertise to provide technologically advanced equipment
that enables laboratory and research scientists to develop the precise processes
for the manufacture of next generation semiconductors and other electronic
components. We also develop and manufacture production equipment based on our
designs. We have built a significant library of design expertise, know-how and
innovative solutions to assist our customers in developing these intricate
processes. This library of solutions, along with our vertically integrated
manufacturing facilities, allows us to provide superior design and manufacturing
solutions to our customers on a cost effective basis.
Results of Operations
Revenue
Revenue for the year ended December 31, 2007 was approximately $13,578,000
compared to approximately $13,356,000 for the year ended December 31, 2006,
representing an increase of 1.7%. Annual revenue from the CVD division increased
by approximately $1,218,000 to $8,081,000 which represents 59.5% of our total
revenue during the year ended December 31, 2007, compared to $6,863,000, or
51.4% of our total revenue for the prior fiscal year. The increase in demand for
our custom Chemical Vapor Deposition equipment and our First Nano, EasyTube
product line has fueled this increase. Annual revenue from the SDC division
decreased by approximately $540,000 to $2,589,000 which represents 19.1% of our
total revenue during the year ended December 31, 2007, compared to $3,129,000,
or 23.4% of our total revenue for the prior fiscal year. This decrease is
primarily a result of certain SDC orders being delayed until the first quarter
of 2008. Annual revenue from the Conceptronic division decreased by
approximately $456,000 to $2,908,000 which represents 21.4% of our total revenue
during the year ended December 31, 2007, compared to $3,364,000 or 25.2% for the
prior fiscal year. The Conceptronic division continues to make improvements and
reduce costs in their product offering at the same time it is focusing efforts
towards a more solutions oriented approach and customized products.
11
Gross Profit
As a result of the increased revenues for the current year, cost of revenues
increased to approximately $8,907,000 from approximately $8,672,000 for the last
fiscal year, an increase of approximately $235,000. The gross profit for the
current fiscal year decreased slightly to approximately $4,671,000 from last
year's $4,684,000, a decrease of approximately $13,000 with a decrease in gross
profit margin to 34.4% from the 35.1% experienced during the prior year. These
overall decreases are due to the lower gross profit margins experienced by the
SDC and Conceptronic divisions as a result of increased material costs and
reduced revenues. The gross profit margin of the CVD division increased to 43.5%
for the year ended December 31, 2007 compared to 42.9% for the year ended
December 31, 2006 after the inclusion of $715,000 of research and development
costs in the current year, a 39.4% increase, compared to $513,000 in the prior
year. The SDC division's gross profit margin decreased to 18.8% for the year
ended December 31, 2007 from 25.6% for the year ended December 31, 2006 as
result of higher material intensive sales during 2007 as well as the effect of
fixed costs on reduced revenues. The Conceptronic division's gross profit margin
decreased to 19.8% for the year ended December 31, 2007 from 23.3% for the year
ended December 31, 2006 as result of the division's fixed costs having a greater
impact on the reduced revenues.
Selling, General and Administrative Expenses
Selling and shipping expenses were approximately $755,000 in the year ended
December 31, 2007 compared to $756,000 in the year ended December 31, 2006.
General and administrative expenses were approximately $3,426,000 during the
year ended December 31, 2007. This was an increase of approximately $502,000 or
17.2% compared to approximately $2,925,000 during the year ended December 31,
2006. This increase can be attributed to a combination of increased payroll and
benefit costs, stock-based compensation, Sarbanes Oxley costs and other
professional fees in addition to increased general insurance.
Operating Income
As a result of the foregoing factors, operating income for the year ended
December 31, 2007 was approximately $489,000 compared to approximately
$1,003,000 for the year ended December 31, 2006.
Interest Expense. Net
In October, 2007, we concluded the sale of 1,380,000 shares of common stock
under a registration statement filed with the Securities and Exchange
Commission. As a result, we earned interest of approximately $51,000 from the
temporary investment of certain net capital raising proceeds (approximately 5.0
million) for the year ending December 31, 2007 compared to minimal interest
earned for 2006.
12
We incurred approximately $217,000 of interest expense in the year ended
December 31, 2007, which was approximately $7,000 or 3.1% less than the $224,000
incurred in the year ended December 31, 2006. The primary source of this
interest expense, approximately $170,000 in the current year and approximately
$179,000 in the year ended December 31, 2006, was the interest expense on the
mortgages for the two buildings we own. As a result of the proceeds received
from the sale of the Company's common stock discussed earlier, the average
outstanding debt was lower in the current year resulting in less interest
expense than in the year ended December 31, 2006.
Other Income
Other income for the current year increased to approximately $563,000, an
increase of $447,000 or 385% compared to $116,000 of other income generated
during the year end December 31, 2006. This increase was the result of a
settlement of litigation between the Company and PrecisionFlow Technologies,
Inc. Under the terms of the settlement, all claims and counterclaims asserted by
the parties were discontinued in consideration of which we will receive payments
totaling $541,600 to be paid over a specific timetable.
Income Tax Provision
For the twelve months ended December 31, 2007, we recorded income tax expense of
approximately $110,000 which related to various federal, state and local taxes.
The current income tax provision was reduced by approximately $77,000 as a
result of the use of available net operating losses. In 2006, we had a change in
the tax accounting method of recognizing contract revenue from the completed
contract method to the percentage of completion method. Contracts in progress as
of December 31, 2006 are being recognized ratably over a four year period, thus
increasing the current income tax provision and conversely decreasing the
deferred tax provision as we recognize 25% of the tax provision annually.
Net Income
As a result of the foregoing factors, for the year ended December 31, 2007, our
pre-tax income amounted to approximately $887,000, as compared to $897,000 for
the same period in 2006. Net income for the year ended December 31, 2007 was
approximately $777,000 as compared to $604,000 in 2006 or $.21 per basic and
$.20 per diluted share as compared to $.19 per basic and diluted share for the
years ended December 31, 2007 and 2006 respectively.
Liquidity and Capital Resources
In October 2007, we completed the sale of 1,380,000 shares of common stock in a
public offering at $4.75 per share. The net proceeds of the sale after offering
expenses and underwriting fees was approximately $5.7 million. We intend to use
the net proceeds from the offering for working capital and other general
corporate purposes, including possible product or business acquisitions in
connection with the planned expansion of our business.
13
As of December 31, 2007, we had aggregate working capital of approximately
$10,314,000 compared to aggregate working capital of $4,151,000 at December 31,
2006 and had available cash and cash equivalents of approximately $5,110,000
compared to approximately $257,000 in cash and cash equivalents at December 31,
2006. The increase in working capital was primarily attributable to the
approximately $5.7 net cash proceeds received from our equity raise and the
settlement of the PrecisionFlow litigation.
Accounts receivable, net of allowance for doubtful accounts decreased by
approximately $608,000 or 25.6% at December 31, 2007 to $1,769,000 compared to
$2,377,000 at December 31, 2006. This decrease is principally due to the timing
of shipments and customer payments.
Inventory as of December 31, 2007 was approximately $3,016,000 representing an
increase of approximately $311,000 or 11.5% over the inventory balance of
$2,705,000 as of December 31, 2006. The increase in inventory was comprised of
an increase in raw materials of approximately $218,000, an increase in work in
process of approximately $218,000 which was partially offset by a decrease in
finished goods of approximately $125,000. The build-up in work in process is
primarily due to an increase in orders that we are experiencing in customized
CVD products and our First Nano, EasyTube standardized product line. Accounts
payable and accrued expenses at December 31, 2007 of approximately $1,880,000
was approximately $518,000 higher than it was at December 31, 2006.
As of December 31, 2007, our backlog was approximately $5,087,000, an increase
of $1,522,000 or 42.7% compared to $3,565,000 at December 31, 2006. Timing for
completion of the backlog varies depending on the product mix, however, there is
generally a one to six month lag in the completion and shipping of backlog.
Backlog from quarter to quarter can vary based on the timing of order placements
and shipments. Demand for CVD and First Nano EasyTube systems continues to
remain strong.
On June 1, 2007, we entered into a three year Revolving Credit Agreement with a
bank permitting us to borrow on a revolving basis amounts up to $2,000,000 until
June 1, 2010, at which time it will be subject to renewal. The loan will bear
interest on any unpaid principal balance at a rate to be elected by us, which
shall be equal to either (1) the LIBOR Rate plus 2.50% or (2) the bank's prime
rate plus 1/4 of 1%. This agreement contains certain financial and other
covenants, with which we were in compliance at December 31, 2007.
We had an equipment line of credit of $250,000 with that same bank. This line of
credit was discontinued as of June 1, 2007 with the inception of the new three
year Revolving Credit Agreement previously discussed.
In March, 2002, we received from General Electric Capital Corporation a
$2,700,000 mortgage loan, secured by the real property and building and
improvements to finance and improve our facility in Ronkonkoma, New York. The
mortgage loan, which has an outstanding balance as of December 31, 2007 of
$1,921,439, is payable in equal monthly installments of $22,285 including
interest at 5.67% per annum; pursuant to an industrial development bond purchase
agreement with the town of Islip Industrial Development Agency. The final
payment is due March 2017.
14
In April, 1999 we received from Kidco Realty Corporation a $900,000 purchase
money mortgage loan, secured by the real property, building and improvements in
Saugerties, New York. The mortgage loan has an outstanding balance at December
31, 2007 of $794,897 and is payable in equal monthly installments of $5,988
including interest at 7% per annum. The entire principal balance is due May
2009.
In the fourth quarter of 2006, an internal decision was made to significantly
broaden the First Nano product line and pursue a significantly larger share of
the R & D market with additional equipment platforms under the First Nano brand
name. In 2007, we began marketing, manufacturing and selling these products. We
feel comfortable we will continue to be successful with these multiple new
products as well as the additional new products to be offered as their design is
based on building blocks we have used in previous systems over the years.
To support the increase in our existing product sales and the development and
sales of the new First Nano products, we have begun to increase our
manufacturing capacity, hired additional personnel and expanded our advertising,
trade shows and marketing capabilities. Additionally, on February 8, 2008 we
purchased a 13,300 square foot stand-alone building to house our First Nano
laboratory. We are now in the process of hiring additional personnel and
purchasing additional laboratory test equipment so that we can develop new First
Nano and CVD products so we can continue to stay in the forefront of Carbon
Nanotube, Nanowire, Nano Material and other technology related applications.
We believe that our cash and cash equivalent positions, cash flow from
operations and ability to expand our credit facilities as of December 31, 2007
and for the year then ended will be sufficient to meet our working capital and
capital expenditure requirements for the next twelve months.
Should we determine to grow our business more aggressively, which may include
making acquisitions; we may need to raise additional funding. For this reason,
as well as other reasons that arise from time to time, we may consider raising
capital through equity or debt financings. Any decision to raise additional
capital, as well as the determination of the appropriate vehicle for doing so,
will depend on market conditions, order levels, opportunities presented to us
and other factors.
Critical Accounting Policies
Revenue Recognition
We continue to recognize revenues and income using the percentage-of-completion
method for custom production-type contracts while revenues from other products
are recorded when such products are accepted and shipped. Profits on custom
production-type contracts are recorded on the basis of our total estimated costs
over the percentage of total costs incurred on individual contracts, commencing,
when progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Under this method, revenues are recognized
based on costs incurred to date compared with total estimated costs.
15
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Estimates are used when accounting for certain items such as revenues on
long-term contracts recognized on the percentage-of-completion method,
allowances for doubtful accounts, depreciation and amortization, tax provisions
and product warranties.
Stock-Based Compensation
On January 1, 2006, the Company adopted the provisions of SFAS No. 123-R
"Share-Based Payment" using the modified prospective method. SFAS No. 123-R
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the grant date fair value
of those awards. Under the modified prospective method of adopting SFAS No.
123-R, the Company recognized compensation cost for all share-based payments
granted after January 1, 2006, plus any awards granted to employees prior to
January 1, 2006 that remain unvested at that time. Under this method of
adoption, no restatement of prior periods is made.
Long-Lived Assets
Long-lived assets consist primarily of property, plant and equipment. Long-lived
assets are reviewed annually for impairment or whenever events or circumstances
indicate their carrying value may not be recoverable. When such events or
circumstances arise, an estimate of the future undiscounted cash flows produced
by the asset, or the appropriate grouping of assets, is compared to the asset's
carrying value to determine if impairment exists pursuant to the requirements of
Statement of Financial Accounting Standards (SFAS") No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets." If the asset is determined to be
impaired, the impairment loss is measured on the excess of its carrying value
over its fair value. Assets to be disposed of are reported at the lower of their
carrying value or net realizable value. The Company had no recorded impairment
charges in the statement of operations during each of the years ended December
31, 2007 and 2006.
Off-Balance Sheet Arrangements
None
Item 7. Financial Statements.
The consolidated financial statements and supplementary data required by this
item are included in this annual report beginning on page F-1.
16
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None
Item 8A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Company maintains a system
of disclosure controls and procedures that is designed to ensure that
information required to be disclosed by the Company in this Annual Report on
Form 10-KSB, and in other reports required to be filed under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
of the Securities and Exchange Commission for such filings. As required by Rule
13a-15(b) under the Exchange Act, management of the Company, under the direction
of the Company's Chief Executive Officer and Chief Financial Officer, reviewed
and performed an evaluation of the effectiveness of the Company's disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as
of December 31, 2007. Based on that review and evaluation, the Chief Executive
Officer and Chief Financial Officer, along with the management of the Company,
have determined that as of December 31, 2007, the disclosure controls and
procedures were and are effective as designed to ensure that information
relating to the Company and its consolidated subsidiary would be accumulated and
communicated to them, as appropriate, to allow timely disclosures regarding
required disclosures.
Changes in Internal Control Over Financial Reporting. There were no changes in
our internal control over financial reporting, identified in connection with the
evaluation of such internal control that occurred during our last fiscal
quarter, that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Item 8B. Other Information.
None
17
PART III
Item 9. Directors, Executive Officers, Promoters, Control Persons and Corporate
Governance; Compliance with Section 16(a) of the Exchange Act.
Board of Directors and Executive Officers
Our Certificate of Incorporation and Bylaws provide for our Company to be
managed by or under the direction of the Board of Directors. Under our
Certificate of Incorporation and Bylaws, the number of directors is fixed from
time to time by the Board of Directors. The Board of Directors currently
consists of five members. Directors are elected for a period of one year and
thereafter serve, subject to the Bylaws, until the next annual meeting at which
their successors are duly elected by the stockholders.
The following table sets for the names, ages and positions with the Company of
each of our directors and executive officers.
Name Age Position(s) with the Company
---- --- ----------------------------
Leonard A. Rosenbaum 62 Director, Chief Executive Officer, President
Alan H. Temple Jr. 74 Director, Chairman-Compensation Committee
Martin J. Teitelbaum 58 Director, Assistant Secretary
Conrad Gunther 61 Director, Chairman-Audit Committee
Bruce T. Swan 75 Director, Chairman-Nominating, Governance
and Compliance Committee
Glen R. Charles 54 Chief Financial Officer, Secretary
Leonard A. Rosenbaum
--------------------
Leonard A. Rosenbaum founded the Company in 1982 and has been our President,
Chief Executive Officer and has served as Chairman of the Board of Directors
since that time. From 1971 until 1982, Mr. Rosenbaum was President, director and
a principal stockholder of Nav-Tec Industries, a manufacturer of semiconductor
processing equipment similar to the type of some of the equipment we currently
manufacture. From 1966 to 1971, Mr. Rosenbaum was employed by a division of
General Instrument, a manufacturer of semiconductor materials and equipment.
Alan H. Temple Jr.
------------------
Alan H. Temple Jr. has served as a member of our Board of Directors since 1987.
Mr. Temple earned an MBA at Harvard University and has been President of
Harrison Homes Inc., a building and consulting firm located in Pittsford, New
York since 1977.
Martin J. Teitelbaum
--------------------
Martin J. Teitelbaum has served as a member of our Board of Directors since
1985. Mr. Teitelbaum is an attorney, who since 1988, has conducted his own
private practice. From 1977 to 1987, Mr. Teitelbaum was a partner in the law
firm of Guberman and Teitelbaum. Mr. Teitelbaum currently acts as our Assistant
Secretary. Mr. Teitelbaum earned a B.A. in Political Science from the State
University of New York at Buffalo and a Juris Doctor from Brooklyn Law School.
18
Conrad Gunther
--------------
Conrad Gunther has served as a member of our Board of Directors since 2000. Mr.
Gunther has extensive experience in mergers and acquisitions and in raising
capital through both public and private means. He also has extensive experience
in executive management in the banking industry. He also serves on the Board of
Directors of Reliance Bancorp, Childrobics and GVC Venture Corp, all public
companies. For the past five years, Mr. Gunther has been the President of
E-Billsolutions, a company that provides credit card processing to Internet,
mail order and telephone order merchants.
Bruce T. Swan
-------------
Bruce T. Swan has served as a member of our Board of Directors since September
2003. Mr. Swan has extensive banking, export and international credit experience
and has been retired for more than five years. He previously has held the
positions of Deputy Manager at Brown Brothers Harriman and Co., Assistant
Treasurer at Standard Brands Incorporated, Assistant Treasurer at Monsanto
Corporation, Vice President and Treasurer at AM International Inc. and President
and Founder of Export Acceptance Company. Mr. Swan, earned his MBA from Harvard
University and is a former adjunct faculty member of New York University's Stern
School of Business Administration.
Glen R. Charles
---------------
Glen R. Charles has been the Chief Financial Officer and Secretary of the
Company since January, 2004. From 2002 until he joined the Company, he was the
Director of Financial Reporting for Jennifer Convertibles, Inc., the owner and
licensor of the largest group of sofabed specialty retail stores in the United
States. From 1994 to 2002, he was the Chief Financial Officer of Trans Global
Services, Inc., a provider of temporary technical services to the aerospace,
aircraft, electronics and telecommunications markets. Mr. Charles has also had
his own business in the private practice of accounting. Mr. Charles earned his
B.S. in Accounting from the State University of New York at Buffalo.
Code Of Ethics
The Company adopted a Corporate Code of Conduct and Ethics that applies to its
employees, senior management and Board of Directors, including the Chief
Executive Officer and Chief Financial Officer. The Corporate Code of Conduct and
Ethics is available on our web site, http://www.cvdequipment.com, by clicking on
"About Us" and then clicking on "Corporate Overview."
19
Audit Committee
Our Board of Directors has an Audit Committee that consists of Conrad Gunther,
Alan H. Temple Jr. and Bruce T. Swan. During the fiscal year ended December 31,
2007, the Audit Committee held four meetings. Pursuant to the Audit Committee
Charter, the Audit Committee is directly responsible for the appointment,
compensation, retention and oversight of the work of any independent registered
public accounting firm engaged for the purpose of preparing or issuing an audit
report or performing other audit, review or attest services for us, and each
such independent auditor shall report directly to the Committee. The Audit
Committee also reviews with management and the independent auditors, our annual
audited financial statements, the scope and results of annual audits and the
audit and non-audit fees of the independent registered public accounting firm.
Furthermore, the Audit Committee reviews the adequacy of our internal control
procedures, the structure of our financial organization and the implementation
of our financial and accounting policies. Messrs. Gunther, Temple and Swan are
"independent" under the requirements of the NASDAQ Stock Market.
The Board of Directors has determined that Conrad Gunther is an "audit committee
financial expert" as that term is defined in the rules and regulations of the
Securities and Exchange Commission.
Section 16(a) Beneficial Ownership Reporting Compliance
The rules of the Securities and Exchange Commission require us to disclose late
filings of reports of stock ownership and changes in stock ownership by our
directors, officers and ten percent stockholders. To our knowledge, based solely
on our review of (a) the copies of such reports and amendments thereto furnished
to us and (b) written representations that no other reports were required,
during our fiscal year ended December 31, 2007, all of the filings for our
officers, directors and ten percent stockholders were made on a timely basis.
Item 10. Executive Compensation.
Summary Compensation TableThe following table sets forth the compensation of our
chief executive officer and chief financial officer, our "named executive
officers," for the year ended December 31, 2007. The Company has no executive
officers other than the "named executive officers."
Option
Name and Awards ($)
principal position Year Salary ($) (1) Total ($)
------------------ ---- ---------- --- ---------
Leonard A. Rosenbaum 2007 162,742 42,099 204,041
President and Chief Executive
Officer
Glen R. Charles 2007 117,500 5,063 122,563
Secretary and Chief Financial
Officer
20
For the year ended December 31, 2007 Mr. Rosenbaum and Mr. Charles were paid
base salaries of $162,742 and $117,500 respectively. (1) Amounts shown do not
reflect compensation actually received by the named executive officer. Instead,
the amounts shown are the compensation costs recognized by CVD in fiscal 2007
for option awards as determined pursuant to FAS 123R. These compensation costs
reflect option awards granted during and prior to fiscal 2007. The assumptions
used to calculate the value of option awards are set forth under Note 13 of the
Notes to Consolidated Financial Statements.
Outstanding Equity Awards at December 31, 2007
OPTION AWARDS
-----------------------------------------------------------------
Number of Number of
Securities Securities
Underlying Underlying
Unexercised Unexercised Option
Options Options Exercise Option
Exercisable Unexercisable Price Expiration
(#) (#) ($) Date
Name --- --- --- ----
Leonard A. 15,000 - 1.40 9/23/2010
Rosenbaum 14,000 7,000 4.10 9/13/2012
8,000 16,000 3.65 12/13/2017
Glen R. Charles 7,500 7,500 2.26 6/16/2012
2007 Director Compensation
Name Option Awards (1) Total
---- ----------------- -----
Alan H. Temple Jr. $42,099 $42,099
Martin J. Teitelbaum 42,099 42,099
Conrad Gunther 42,099 42,099
Bruce T. Swan 42,099 42,099
(1) Amounts shown do not reflect compensation actually received by the named
director. Instead, the amounts shown are the compensation costs recognized by
CVD in fiscal 2007 for option awards as determined pursuant to FAS 123R. These
compensation costs reflect option awards granted during and prior to fiscal
2007. The assumptions used to calculate the value of option awards are set forth
under Note 13 of the Notes to Consolidated Financial Statements.
Directors of the Company are not regularly compensated for being on the Board of
Directors. However, the Stock Option Committee which is comprised of all of the
members of the Board of Directors with the exception of Leonard A. Rosenbaum has
the authority to grant stock options to members from time to time. In December,
2007 the Stock Option Committee granted non-qualified stock options to purchase
24,000 shares of the Company's common stock to each member of the board of
directors. These options were issued at a grant price equal to the then current
market price of $3.65. These options became exercisable as to 33.3% of the
underlying shares on December 12, 2007. The options become exercisable with
respect to the remaining 16,000 underlying shares with options to purchase 2,000
shares becoming exercisable every 3 months beginning January 12, 2008. These
options expire on December 12, 2017.
21
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stock Holder Matters.
The following table sets forth, as of March 10, 2008, information regarding the
beneficial ownership of our common stock by (a) each person who is known to us
to be the owner of more than five percent of our common stock, (b) each of our
directors, (c) each of the named executive officers, and (d) all directors and
executive officers and executive employees as a group. For purposes of the
table, a person or group of persons is deemed to have beneficial ownership of
any shares that such person has the right to acquire within 60 days of March 10,
2008.
Amounts and Nature of Percent of Class
Name and Address of Beneficial Owner(1) Beneficial Ownership (2) (%)
--------------------------------------- ------------------------ ---
Leonard A. Rosenbaum 1,371,350 (3) 29.0
Alan H. Temple Jr. 192,500 (4) 4.1
Martin J. Teitelbaum 80,500 (5) 1.7
Conrad Gunther 54,500 (6) 1.2
Bruce T. Swan 43,500 (7) *
Glen R. Charles 7,500 (8) *
Michael A. Roth 400,000 (9) 8.5
Brian J. Stark 400,000 (9) 8.5
Robert E. Kern Jr. 250,000 (10) 5.3
David G. Kern 250,000 (10) 5.3
All directors and executive officers and executive
employees as a group (six (6) persons) 1,749,850 37.0
----------------------------
*Less than 1% of the outstanding common stock or less than 1% of the voting power
(1) The address of Messrs.Rosenbaum, Temple, Teitelbaum, Gunther, Swan and
Charles is c/o CVD Equipment Corporation, 1860 Smithtown Avenue,
Ronkonkoma, New York, 11779.
The address of Messrs. Roth and Stark is 3600 South Lake Drive, St.
Francis, Wisconsin 53235.
The address of Messrs. Kern Jr. and Kern is 114 West 47th Street, New York,
NY 10036
(2) All of such shares are owned directly with sole voting and investment
power, unless otherwise noted below.
(3) Includes options to purchase 29,500 shares of our common stock. Does not
include options to purchase 15,500 shares of common stock
22
(4) Includes options to purchase 33,000 shares of our common stock. Does not
include options to purchase 15,500 shares of common stock.
(5) Includes 2,000 shares held by Mr. Teitelbaum's wife as to which beneficial
ownership thereof is disclaimed by Mr. Teitelbaum and options to purchase
44,500 shares of our common stock. Does not include options to purchase
15,500 shares of common stock.
(6) Includes options to purchase 44,500 shares of our common stock. Does not
include options to purchase 15,500 shares of common stock.
(7) Includes options to purchase 29,500 shares of our common stock. Does not
include options to purchase 15,500 shares of common stock.
(8) Includes options to purchase 7,500 shares of our common stock. Does not
include options to purchase 7,500 shares of common stock.
(9) Mr. Roth and Mr. Stark share voting and investment power and beneficially
own a total of 400,000 shares of common stock. Mr. Roth and Mr. Stark are
the managing members of Stark Offshore Management LLC, which acts as
investment manager and has sole power to direct the management of Stark
Master Fund Ltd. which directly owns 400,000 shares of common stock. The
address of Stark Master Fund Ltd. Is 3600 South Lake Drive, St. Francis,
Wisconsin 53235.
(10) R. Kern and D. Kern as controlling members of Kern Capital Management
("KCM") may be deemed the beneficial owners of the securities of the
company owned by KCM in that they might be deemed to share the power to
direct the voting or disposition of the securities. R. Kern and D. Kern are
the Managing Members of Innovation, which serves as the General Partner of
Redpoint, and may be deemed the beneficial owner of securities of the
company owned by Redpoint.
See Item 5, Market for Registrant's Common Equity and Related Stockholder
Matters, under the heading "Equity Compensation Plan Information" for
information regarding our securities authorized for issuance under equity
compensation plans.
Item 12. Certain Relationships and Related Transactions, and Director
Independence.
Related Person Transactions
Martin J. Teitelbaum, a director of the Company, is also our general legal
counsel. Fees paid to Mr. Teitelbaum for the three years ended December 31, 2007
were approximately $133,000, $34,000 and $35,000.
23
Director Independence
The current members of our Board of Directors are Leonard A. Rosenbaum, Alan H.
Temple Jr., Martin J. Teitelbaum, Conrad Gunther and Bruce T. Swan. Messrs.
Gunther, Temple, and Swan are "independent" as defined under Rule 4200 of the
Nasdaq Stock Market.
Item 13. Exhibits.
3.1 Certificate of Incorporation dated October 12, 1982 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our Form S-1
filed on July 3, 2007.
3.2 Certificate of Amendment dated April 25, 1985 of Certificate of Corporation
incorporated herein by reference to Exhibit 3.1 to our Form S-1 filed on
July 3, 2007.
3.3 Certificate of Amendment dated August 12, 1985 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our Form S-1
filed on July 3, 2007.
3.4 Bylaws of CVD Equipment Corporation, incorporated herein by reference to
Exhibit 3.2 to our Form S-1 filed on July 3, 2007.
10.1 Form of Non-Qualified Stock Option Agreement with certain directors,
officers and employees of CVD Equipment Corporation incorporated herein by
reference to our Registration Statement on Form S-8 No. 33-30501, filed
August 15, 1989.*
10.2 Purchase a 22,000 square foot facility from Kidco Realty incorporated
herein by reference to our Form 8-K filed on December 31, 1998.
10.3 CVD Equipment Corporation 2001 Stock Option Plan incorporated herein by
reference to Exhibit 3.1 to our Form S-1 filed on July 3, 2007.*
10.4 Form of Non-Qualified Stock Option Agreement incorporated herein by
reference to Exhibit 3.1 to our Form 10KSB filed on March 26, 2007.*
10.5 Revolving Credit Agreement between CVD Equipment Corporation and North Fork
Bank dated June 1, 2007 incorporated herein by reference to our Form 8-K
filed on June 6, 2007.
10.6 1989 Key Employee Stock Option Plan incorporated herein by reference to
Amendment No. 1 to our Form S-1 filed on August 7, 2007.
10.7 CVD Equipment Corporation 2007 Share Incentive Plan incorporated herein by
reference to our Schedule 14A filed November 5, 2007.
10.8 Contract of sale between CVD Equipment Corporation and HPG Realty Co., LLC
for the purchase of a 13,300 square foot facility located at 979 Marconi
Avenue, Ronkonkoma, NY 11779.
10.9 Assignment, Assumption and Amendment Agreement by and among Town of Islip
Industrial Development Agency, North Fork Bank, HPG Realty Co., LLC,
Tri-Start Electronics, Inc., and CVD Equipment Corporation dated February
8, 2008.
10.10 Lease Agreement between Town of Islip Industrial Development Agency and
HPG Realty Co., LLC dated February 1, 2004.
24
10.11 Payment-In-Lieu-Of-Tax Agreement dated February 1, 2004 between Town of
Islip Industrial Development Agency, HPG Realty Co., LLC, and Tri-Start
Electronics, Inc.
10.12 Mortgage Note between North Fork Bank dated February 8, 2008 in the
principal amount of $1,000,000.
10.13 Mortgage Note between North Fork Bank dated February 8, 2008 in the
principal amount of $500,000.
21.1 Subsidiaries.
23.1 Consent of Moore Stephens, P.C. (S-1)
23.2 Consent of Moore Stephens, P.C. (S-8)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Principal Executive Officer.
32.2 Section 1350 Certification of Principal Financial Officer.
-------------------
* Management contract or compensatory plan or arrangement required.
Item 14. Principal Accountant Fees and Services.
The following presents fees for professional audit services rendered by Moore
Stephens, P.C. for the audit of our financial statements for the years ended
December 31, 2007 and December 31, 2006.
Audit Fees
The aggregate fees billed by Moore Stephens, P.C,. for the annual audit of the
Company, unaudited quarterly reviews of financial statements including the
Company's reports on Form 10-Q and services normally provided by them in
connection with statutory and regulatory filings, including the Company's
registration statement related to our 2007 public offering, for fiscal years
2007 and 2006, were $114,328 and $76,750, respectively.
Audit- Related Fees
We did not incur any audit-related fees in 2007 or 2006.
Tax Fees
Tax fees consisted primarily of tax preparation of the 2006 and 2005 annual tax
returns. The aggregate fees billed by Moore Stephens P.C. for such services were
$8,575 in 2007 and $8,500 in 2006.
25
All Other Fees
Other fees consisted of advisory services provided by Moore Stephens relating to
the Company's Share Incentive Plan and Sarbanes Oxley requirements. The
aggregate fees billed by Moore Stephens for such services were $3,835 in 2007
and $0 in 2006.
Audit Committee Approval
The engagement of the Company's independent registered public accounting firm is
pre-approved by the Company's Audit Committee. The Audit Committee pre-approves
all fees billed and all services rendered by the Company's independent
registered public accounting firm.
26
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CVD EQUIPMENT CORPORATION
By: /s/ Leonard A. Rosenbaum
----------------------------
Name: Leonard A. Rosenbaum
Title: President and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated below.
NAME POSITION DATE
---- -------- ----
/s/ Leonard A Rosenbaum President, Chief Executive Officer and Director March 31, 2008
------------------------
Leonard A. Rosenbaum (Principal Executive Officer)
/s/ Alan H. Temple Jr. Director March 31, 2008
-----------------------
Alan H. Temple Jr.
/s/ Martin J. Teitelbaum Director and Assistant Secretary March 31, 2008
-------------------------
Martin J. Teitelbaum
/s/ Conrad Gunther Director March 31, 2008
-------------------
Conrad Gunther
/s/ Bruce T. Swan Director March 31, 2008
------------------
Bruce T. Swan
/s/ Glen R. Charles Chief Financial Officer and Secretary March 31, 2008
-------------------- (Principal Financial and Accounting Officer)
Glen R. Charles
27
EXHIBIT INDEX
3.1 Certificate of Incorporation dated October 12, 1982 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our Form S-1
filed on July 3, 2007.
3.2 Certificate of Amendment dated April 25, 1985 of Certificate of Corporation
incorporated herein by reference to Exhibit 3.1 to our Form S-1 filed on
July 3, 2007.
3.3 Certificate of Amendment dated August 12, 1985 of Certificate of
Corporation incorporated herein by reference to Exhibit 3.1 to our Form S-1
filed on July 3, 2007.
3.4 Bylaws of CVD Equipment Corporation, incorporated herein by reference to
Exhibit 3.2 to our Form S-1 filed on July 3, 2007.
10.1 Form of Non-Qualified Stock Option Agreement with certain directors,
officers and employees of CVD Equipment Corporation incorporated herein by
reference to our Registration Statement on Form S-8 No. 33-30501, filed
August 15, 1989.*
10.2 Purchase a 22,000 square foot facility from Kidco Realty incorporated
herein by reference to our Form 8-K filed on December 31, 1998.
10.3 CVD Equipment Corporation 2001 Stock Option Plan incorporated herein by
reference to Exhibit 3.1 to our Form S-1 filed on July 3, 2007.*
10.4 Form of Non-Qualified Stock Option Agreement incorporated herein by
reference to Exhibit 3.1 to our Form 10KSB filed on March 26, 2007.*
10.5 Revolving Credit Agreement between CVD Equipment Corporation and North Fork
Bank dated June 1, 2007 incorporated herein by reference to our Form 8-K
filed on June 6, 2007.
10.6 1989 Key Employee Stock Option Plan incorporated herein by reference to
Amendment No. 1 to our Form S-1 filed on August 7, 2007.
10.7 CVD Equipment Corporation 2007 Share Incentive Plan incorporated herein by
reference to our Schedule 14A filed November 5, 2007.
10.8 Contract of sale between CVD Equipment Corporation and HPG Realty Co., LLC
for the purchase of a 13,300 square foot facility located at 979 Marconi
Avenue, Ronkonkoma, NY 11779.
10.9 Assignment, Assumption and Amendment Agreement by and among Town of Islip
Industrial Development Agency, North Fork Bank, HPG Realty Co., LLC,
Tri-Start Electronics, Inc., and CVD Equipment Corporation dated February
8, 2008.
10.10 Lease Agreement between Town of Islip Industrial Development Agency and
HPG Realty Co., LLC dated February 1, 2004.
24
10.11 Payment-In-Lieu-Of-Tax Agreement dated February 1, 2004 between Town of
Islip Industrial Development Agency, HPG Realty Co., LLC, and Tri-Start
Electronics, Inc.
10.12 Mortgage Note between North Fork Bank dated February 8, 2008 in the
principal amount of $1,000,000.
10.13 Mortgage Note between North Fork Bank dated February 8, 2008 in the
principal amount of $500,000.
21.1 Subsidiaries.
23.1 Consent of Moore Stephens, P.C. (S-1)
23.2 Consent of Moore Stephens, P.C. (S-8)
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.1 Section 1350 Certification of Principal Executive Officer.
32.2 Section 1350 Certification of Principal Financial Officer.
-------------------
* Management contract or compensatory plan or arrangement required.
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page No.
-------
Report of Independent Registered Public Accounting Firm F1
Financial Statements:
Consolidated Balance Sheets as of December 31, 2007 and 2006 F2
Consolidated Statements of Operations for the years ended December 31, 2007 and
2006 F3
Consolidated Statements of Stockholders' Equity for the years ended December 31,
2007 and 2006 F4
Consolidated Statements of Cash Flows for the years ended December 31, 2007 and
2006 F5
Notes to Consolidated Financial Statements F6
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
CVD Equipment Corporation
Ronkonkoma, New York
We have audited the accompanying consolidated balance sheets of CVD Equipment
Corporation and Subsidiary as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the two years in the period ended December 31, 2007. These consolidated
financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated 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 consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of CVD
Equipment Corporation and Subsidiary as of December 31, 2007 and 2006, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31 2007, in conformity with accounting
principles generally accepted in the United States of America.
We are not engaged to examine management's assertion about the effectiveness of
CVD Equipment Corporations internal controls over financial reporting as of
December 31, 2007 and, accordingly, we do not express an opinion thereon.
/s/ Moore Stephens, P.C.
------------------------------
MOORE STEPHENS, P.C.
Certified Public Accountants.
Cranford, New Jersey
March 24, 2008
F-2
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
2007 2006
------------------------ -----------------------
ASSETS
Current Assets
Cash and cash equivalents $ 5,110,447 $ 257,341
Accounts receivable, net 1,769,265 2,377,069
Investments 251,130 251,130
Cost and estimated earnings in excess
of billings on uncompleted contracts 1,847,288 716,663
Inventories 3,015,635 2,704,506
Deferred income taxes - current 90,774 -
Other current assets 379,360 118,300
------------------------ -----------------------
Total Current Assets 12,463,899 6,425,009
Property, plant and equipment, net 5,055,727 4,778,807
Deferred income taxes - non-current 266,077 232,956
Other assets 1,114,637 708,114
Intangible assets, net 106,566 105,775
------------------------ -----------------------
Total Assets $ 19,006,906 $ 12,250,661
======================== =======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 222,193 $ 223,653
Short-term notes payable - 210,000
Short-term debt - 2,109
Accounts payable 517,934 640,771
Accrued expenses 1,245,819 686,771
Accrued professional fees - related party 116,165 35,000
Deferred revenue 47,444 212,250
Deferred tax liability-current - 263,396
------------------------ -----------------------
Total Current Liabilities 2,149,555 2,273,950
Long-term Debt, net of current portion 2,678,421 2,776,801
------------------------ -----------------------
Total Liabilities 4,827,976 5,050,751
------------------------ -----------------------
Commitments and Contingencies - -
Stockholders' Equity:
Common stock - $0.01 par value -10,000,000 shares
authorized; issued &
outstanding, 4,718,500 shares at December 31, 2007
and 3,250,500 shares at December 31, 2006 47,185 32,505
Additional paid-in capital 9,592,728 3,405,474
Retained earnings 4,539,017 3,761,931
------------------------ -----------------------
Total Stockholders' Equity 14,178,930 7,199,910
------------------------ -----------------------
Total Liabilities and Stockholders' Equity $ 19,006,906 $ 12,250,661
======================== =======================
The accompanying notes are an integral part of the consolidated financial statements
F-3
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
2007 2006
----------------------- ------------------------
Revenue $ 13,577,772 $ 13,355,778
Costs of revenue 8,906,785 8,671,839
----------------------- ------------------------
Gross profit 4,670,987 4,683,939
----------------------- ------------------------
Operating expenses
Selling and shipping 755,324 756,122
General and administrative 3,370,914 2,899,702
Related party - professional fees 55,489 25,000
----------------------- ------------------------
Total operating expenses 4,181,727 3,680,824
Operating income 489,260 1,003,115
----------------------- ------------------------
Other income (expense):
Interest income 51,166 866
Interest expense (216,655) (223,509)
Other income 562,974 116,441
----------------------- ------------------------
Total other (expense), net 397,485 (106,202)
----------------------- ------------------------
Income before income tax 886,745 896,913
Income tax (expense) (109,659) (292,587)
----------------------- ------------------------
Net income $ 777,086 $ 604,326
======================= ========================
Basic earnings per common share $ 0.21 $ 0.19
Diluted earnings per common share $ 0.20 $ 0.19
Weighted average common shares outstanding
basic earnings per share 3,667,833 3,169,177
Weighted average common shares outstanding
diluted earnings per share 3,825,271 3,263,533
The accompanying notes are an integral part of the consolidated financial statements
F-4
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Additional Total
Common Stock Paid -In Retained Stockholders'
Shares Amount Capital Earnings Equity
------ ------ ------- -------- ------
Balance - December 31, 2005 3,127,800 $ 31,278 $3,049,362 $ 3,157,605 $ 6,238,245
Exercise of stock options 122,700 1,227 186,848 188,075
Stock based compensation 169,264 169,264
Net Income 604,326 604,326
--------------------------------- ------------------- -------------------- --------------------
Balance - December 31, 2006 3,250,500 $ 32,505 $3,405,474 $ 3,761,931 $ 7,199,910
Exercise of stock options 88,000 880 163,595 164,475
Stock based compensation 254,157 254,157
Issuance of common stock
under public offering 1,380,000 13,800 5,769,502 5,783,302
Net Income 777,086 777,086
--------------------------------- ------------------- -------------------- --------------------
Balance - December 31, 2007 4,718,500 $ 47,185 $9,592,728 $ 4,539,017 $ 14,178,930
================ ============ =================== ==================== ====================
The accompanying notes are an integral part of the consolidated financial statements
F-5
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
2007 2006
----------------------- ------------------------
Cash flows from operating activities:
Net income $ 777,086 $ 604,326
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 436,171 358,050
Stock - based compensation 254,157 169,264
Deferred taxes (296,517) 272,428
Bad debt provision 5,371 (1,380)
Changes in operating assets and liabilities
Accounts receivable 602,433 (482,024)
Investments - (251,130)
Cost in excess of billings on uncompleted contracts (1,130,625) (121,596)
Inventories (311,129) (552,354)
Other current assets (351,834) (68,703)
Other assets (133,300) -
Accounts payable (122,837) 11,152
Accrued expenses 640,213 132,508
Deferred revenue (164,806) -
----------------------- ------------------------
Net cash provided by operating activities 204,383 70,541
----------------------- ------------------------
Cash flows from investing activities:
Capital expenditures (575,558) (224,903)
Deposits (411,546) (13,762)
----------------------- ------------------------
Net cash used in investing activities (987,104) (238,665)
----------------------- ------------------------
Cash flows from financing activities
Repayments on bank line of credit - net (210,000) 112,110
Proceeds from long-term debt 139,510 90,000
Payments of long-term debt (241,460) (230,174)
Net proceeds from issuance of common stock 5,783,302 -
Net proceeds from stock options exercised 164,475 188,075
----------------------- ------------------------
Net cash provided by financing activities 5,635,827 160,011
----------------------- ------------------------
Net increase (decrease) in cash and cash equivalents 4,853,106 (8,113)
Cash and cash equivalents at beginning of year 257,341 265,454
----------------------- ------------------------
Cash and cash equivalents at end of year $ 5,110,447 $ 257,341
======================= ========================
The accompanying notes are an integral part of the consolidated financial statements
F-6
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 1 - Business Description
CVD Equipment Corporation and Subsidiary (the "Company"), a New York
corporation, was organized and commenced operations in October 1982. Its
principal business activities include the manufacturing of chemical vapor
deposition equipment, customized gas control systems, the manufacturing of
process equipment suitable for the synthesis of a variety of one-dimensional
nanostructures and nanomaterials and a line of furnaces all of which are used
primarily to produce semiconductors and other electronic components. The Company
engages in business throughout the United States and internationally.
Note 2 - Summary of Significant Accounting Policies
Principles of Consolidation
---------------------------
The consolidated financial statements include the accounts of CVD Equipment
Corporation and its wholly owned subsidiary. In December 1998 , a subsidiary,
Stainless Design Concepts, Ltd., was formed as a New York Corporation. In April
1999, this subsidiary was merged into CVD Equipment Corporation. The Company has
one inactive subsidiary, CVD Materials Corporation as of December 31, 2007 and
2006. All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates
----------------
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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.
Estimates are used when accounting for certain items such as revenues on
long-term contracts recognized on the percentage-of-completion method,
allowances for doubtful accounts, depreciation and amortization, tax provisions
and product warranties.
Revenue and Income Recognition
------------------------------
The Company recognizes revenues and income using the percentage-of-completion
method for custom production-type contracts while revenues from other products
are recorded when such products are accepted and shipped. Profits on custom
production-type contracts are recorded on the basis of the Company's estimates
of the percentage-of-completion of individual contracts, commencing when
progress reaches a point where experience is sufficient to estimate final
results with reasonable accuracy. Under this method, revenues are recognized
based on costs incurred to date compared with total estimated costs. F-7
F-7
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The asset, "Costs and estimated earnings in excess of billings on uncompleted
contracts," represents revenues recognized in excess of amounts billed.
The liability, "Billings in excess of costs on uncompleted contracts,"
represents amounts billed in excess of revenues earned.
Investments
-----------
Investments in unconsolidated companies in which the Company owns less then a
20% interest or otherwise does not exercise a significant influence are carried
at cost.
Inventories
-----------
Inventories are valued at the lower of cost (determined on the first-in,
first-out method) or market.
Reclassifications
-----------------
Certain items have been reclassified in the 2006 financial statements to conform
to the 2007 presentation. These reclassifications have no effect on the net
income previously reported.
Income Taxes
------------
Deferred tax assets and liabilities are determined based on the estimated future
tax effects of temporary differences between the financial statements and tax
bases of assets and liabilities, as measured by the current enacted tax rates.
Deferred tax expense (benefit) is the result of changes in the deferred tax
assets and liabilities. A valuation allowance is not considered necessary by
management since it is more likely than not that the deferred tax asset will be
realized. An allowance may be necessary in the future based on changes in
economic conditions.
Long-Lived Assets
-----------------
Long-lived assets consist primarily of property, plant and equipment. Long-lived
assets are reviewed annually for impairment or whenever events or circumstances
indicate their carrying value may not be recoverable. When such events or
circumstances arise, an estimate of the future undiscounted cash flows produced
by the asset, or the appropriate grouping of assets, is compared to the asset's
carrying value to determine if impairment exists pursuant to the requirements of
Statement of Financial Accounting Standards (SFAS") No. 144, "Accounting for the
Impairment of Disposal of Long-Lived Assets." If the asset is determined to be
F-8
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
impaired, the impairment loss is measured on the excess of its carrying value
over its fair value. Assets to be disposed of are reported at the lower of their
carrying value or net realizable value. The Company had no recorded impairment
charges in the statement of operations during each of the years ended December
31, 2007 and 2006.
Computer Software
----------------
The Company follows Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use. This standard requires certain
direct development costs associated with internal-use software to be capitalized
including external direct costs of material and services and payroll costs for
employees devoting time to the software projects. These costs totaled $6,668 and
$123,115 for the years ended December 31, 2007 and 2006 respectively and are
included in Other Assets. All computer software is amortized using the
straight-line method over its useful life of three years. Amortization expense
related to computer software totaled $148,049 and $37,194 for the years ended
December 31, 2007 and 2006, respectively.
Intangible Assets
-----------------
The cost of intangible assets is being amortized on a straight-line basis over
their useful lives ranging from 5 to 20 years. Amortization expense recorded by
the Company in 2007 and 2006 totaled $27,322 and $18,027 respectively.
Research & Development
----------------------
Research and development costs are expensed as incurred.
Bad Debts
---------
Accounts receivables are presented net of an allowance for doubtful accounts of
$12,588 and $7,217 as of December 31, 2007 and 2006, respectively. The allowance
is based on historical experience and management's evaluation of the
collectibility of accounts receivable. Management believes the allowance is
adequate. However, future estimates may change based on changes in economic and
customer conditions.
Product Warranty
----------------
The Company records warranty costs as incurred and does not provide for possible
future costs. Management estimates such costs are immaterial based on historical
experience. However, it is reasonably possible that this estimate may change in
the future.
F-9
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Advertising Costs
-----------------
The Company expenses advertising and trade show costs which are not expected to
benefit future periods. These expenses which are included in selling and
shipping expenses were $144,059 and $57,508 in 2007 and 2006, respectively.
Earnings Per Share
------------------
Basic net earnings per common share is computed by dividing the net income by
the weighted average number of shares of common stock outstanding during each
period. Diluted earnings per share reflects the dilutive effect of the assumed
exercise of options.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid financial instruments purchased with an
original maturity of three months or less at the date of purchase to be cash
equivalents.
Concentration of Credit Risk
----------------------------
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash, cash equivalents, and accounts
receivable. The Company places its cash equivalents with high credit-quality
financial institutions and invests its excess cash primarily in money market
instruments. The Company has established guidelines relative to credit ratings
and maturities that seek to maintain stability and liquidity. The Company sells
products and services to various companies across several industries in the
ordinary course of business. The Company routinely assesses the financial
strength of its customers and maintains allowances for anticipated losses.
Generally, the Company does not require collateral or other security to support
trade receivables.
Fair value of Financial Instruments
-----------------------------------
The carrying amounts of financial instruments including cash and cash
equivalents, accounts receivable, accounts payable and accrued expenses,
approximate fair value due to the relatively short maturity of these
instruments. The carrying value of long-term debt approximates fair value based
on borrowing rates currently available for loans with similar terms and
maturities.
F-10
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Stock-Based Compensation
------------------------
On January 1, 2006, the Company adopted the provisions of SFAS No. 123-R
"Share-Based Payment" using the modified prospective method. SFAS No. 123-R
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the grant date fair value
of those awards. Under the modified prospective method of adopting SFAS No.
123-R, the Company recognized compensation cost for all share-based payments
granted after January 1, 2006, plus any awards granted to employees prior to
January 1, 2006 that remain unvested at that time. Under this method of
adoption, no restatement of prior periods is made.
Prior to January 1, 2006 the Company recognized the cost of employee services
received in exchange for equity instruments in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued Employees" (APB
25). APB 25 required the use of the intrinsic value method, which measures
compensation cost as the excess, if any, of the quoted market price of the stock
over the amount the employee must pay for the stock. Compensation expense was
measured under APB 25 on the date the shares were granted. Under APB 25, no
compensation expense was recognized for stock options.
Shipping and Handling
---------------------
It is the Company's policy to include freight in total sales. The amount
included in sales was $31,162 and $34,214 for the years ended December 31, 2007
and 2006, respectively. Included in selling and shipping is $116,062 and $98,138
for shipping and handling costs for 2007 and 2006, respectively.
Recently Issued Accounting Standards
------------------------------------
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115," which is effective for fiscal years beginning after November
15, 2007. This statement permits entities to choose to measure many financial
instruments and certain other items at fair value. This statement also
establishes presentation and disclosure requirements designed to facilitate
comparisons between entities that choose different measurement attributes for
similar types of assets and liabilities. Unrealized gains and losses on items
for which the fair value option is elected would be reported in earnings. We
have evaluated the new statement and have determined that it will not have a
significant impact on the determination or reporting of our financial results.
F-11
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business
Combinations" (SFAS 141(R)), which replaces SFAS No. 141, "Business
Combinations." SFAS 141(R) retains the underlying concepts of SFAS 141 in that
all business combinations are still required to be accounted for at fair value
under the acquisition method of accounting but SFAS 141(R) changed the method of
applying the acquisition method in a number of significant aspects. Acquisition
costs will generally be expensed as incurred; noncontrolling interests will be
valued at fair value at the acquisition date; in-process research and
development will be recorded at fair value as an indefinite-lived intangible
asset at the acquisition date; restructuring costs associated with a business
combination will generally be expensed subsequent to the acquisition date; and
changes in deferred tax asset valuation allowances and income tax uncertainties
after the acquisition date generally will affect income tax expense. SFAS 141(R)
is effective on a prospective basis for all business combinations for which the
acquisition date is on or after the beginning of the first annual period
subsequent to December 15, 2008, with the exception of the accounting for
valuation allowances on deferred taxes and acquired tax contingencies. SFAS
141(R) amends SFAS 109 such that adjustments made to valuation allowances on
deferred taxes and acquired tax contingencies associated with acquisitions that
closed prior to the effective date of SFAS 141(R) would also apply the
provisions of SFAS 141(R). Early adoption is not permitted. We are currently
evaluating the effects, if any, that SFAS 141(R) may have on our financial
statements and believe it could have a significant impact if business
combinations are consummated. However, the effect of which is indeterminable as
of December 31, 2007.
In December 2007, the FASB issued Financial Accounting Standards No. 160,
"Noncontrolling Interests in Consolidated Financial Statements--an amendment of
ARB No. 51." This statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008, with earlier
adoption prohibited. This statement requires the recognition of a noncontrolling
interest (minority interest) as equity in the consolidated financial statements
and separate from the parent's equity. The amount of net income attributable to
the noncontrolling interest will be included in consolidated net income on the
face of the income statement. It also amends certain of ARB No. 51's
consolidation procedures for consistency with the requirements of SFAS 141(R).
This statement also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. We are currently
evaluating this new statement and anticipate that the statement will not have a
significant impact on the reporting of our results of operations.
F-12
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
In March 2008, the Financial Accounting Standards Board (FASB) issued FASB
Statement No. 161, Disclosures about Derivative Instruments and Hedging
Activities. The new standard is intended to improve financial reporting about
derivative instruments and hedging activities by requiring enhanced disclosures
to enable investors to better understand their effects on an entity's financial
position, financial performance, and cash flows. It is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008, with early application encouraged. The company is currently evaluating
the impact of adopting SFAS. No. 161 on its financial statements.
Note 3 - Supplemental Cash Flow Information
During 2007, options to purchase 206,000 common shares were issued to certain
employees and members of the board of directors. The exercise price for all
options granted in 2007 was equal to or greater than the fair market value per
share on the date the option was granted and no compensation cost was
recognized. New equipment costing $180,196 was purchased during the year for
$156,481 in cash and traded in equipment with a carrying value of $23,715.
During 2006, certain assets in property, plant and equipment, with a net book
value of $84,897 were reclassified into inventory. Options to purchase 10,000
common shares were issued to an employee. The option price for all options
granted was equal to or greater than the fair market value per share on the date
the option was granted and no compensation cost was recognized.
2007 2006
---- ----
Cash paid during the year for:
Income taxes, net of refunds $ 39,446 $ 10,047
Interest 217,570 222,861
Note 4 - Investments
In 2006, the Company sold equipment at the selling price of $251,130 to a
Customer for a purchase price of one hundred four thousand, four hundred eighty
two (104,482) shares of a non-public company's common stock, par value $.001 per
share. Between July 19, 2007 and July 31, 2007, the Company has the option to
F-13
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
demand that the Customer make cash payment i.e.: two hundred fifty-one thousand,
one hundred thirty 00/100 U.S. dollars ($251,130) for the equipment, the amount
that would have been required had the Customer made cash payment for the
equipment on July 19, 2006 in exchange for the return of said stock.The
Customer's obligation to make such payment pursuant to the terms of the option
is secured by a perfected lien upon the subject equipment and the Company's
right to execute upon the aforesaid common stock. In the event the Customer does
not make full payment, the Company has also reserved the right to maintain
plenary proceedings against the Customer for the purpose of recovering such sums
as may be due as well as the right to obtain a deficiency judgment in the event
that the collateral in the equipment and stock is insufficient to discharge said
obligation.
The Company agreed to extend the option to demand cash payment to the period
between December 1, 2007 and March 12, 2008 in exchange for fifty thousand
(50,000) shares of the customer's common stock.
On February 19, 2008, the Company exercised its cash payment option demanding
the cash payment of $251,130.
Note 5 - Uncompleted Contracts
Costs, estimated earnings, and billings on uncompleted contracts are summarized
as follows:
2007 2006
---- ----
Costs incurred on uncompleted contracts $ 1,887,022 $ 1,509,672
Estimated earnings 2,158,386 2,015,836
--------- ---------
4,045,408 3,525,508
Billings to date (2,198,120) (2,808,845)
----------- -----------
$ 1,847,288 $ 716,663
========= =======
2007 2006
---- ----
Included in accompanying balance sheets Under the following caption:
Costs and estimated earnings in excess
of billings on uncompleted contracts $ 1,847,288 $ 716,663
========= =======
F-14
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 6 - Inventories
Inventories consist of:
2007 2006
---- ----
Raw materials $ 1,077,756 $ 860,085
Work-in-process 1,733,738 1,515,460
Finished goods 204,141 328,961
------- -------
$ 3,015,635 $ 2,704,506
========= =========
Note 7 - Property, Plant and Equipment, Net
Major classes of property, plant and equipment, net consist of the following:
2007 2006
---- ----
Land $ 760,000 $ 760,000
Buildings 2,815,839 2,815,839
Building improvements 1,407,308 1,398,054
Machinery and equipment 1,765,606 1,379,656
Capitalized labor and overhead 216,602 216,602
Furniture and fixtures 289,741 236,419
Computer equipment 267,765 250,419
Transportation equipment 74,709 74,709
Lab equipment 42,445 -
Totals at cost 7,640,015 7,131,698
--------- ---------
Accumulated depreciation and amortization (2,584,288) (2,352,891)
----------- -----------
$ 5,055,727 $ 4,778,787
--------- ---------
Depreciation and amortization expense (1) $ 436,171 $ 358,050
======= =======
(1) Includes amortization expense of $179,714 and $57,126 for the years ending
December 31, 2007 and 2006 respectively. Such amortization expense relates
to other capitalized and intangible assets
During 2007, certain assets in property, plant and equipment were traded in
exchange for new assets with no resulting gain or loss.
During 2006, certain assets in property, plant and equipment, with a net book
value of $84,897 were reclassified into inventory.
F-15
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Note 8 - Intangible Assets, Net
Intangible assets, net are summarized as follows:
December 31, 2007
------------------
Weighted Average Net of
Amortization Accumulated Accumulated
Intangible Assets Period Cost Amortization Amortization
-------------------- ------------------------------------------------------
Licensing Agreement 5 $ 10,000 $ 10,000 $0
Patents & Copyrights 14 32,019 19,376 12,643
Intellectual Property 15 100,000 43,336 56,664
Certifications 3 55,775 18,516 37,259
Other 5 21,492 21,492 0
-------------------------------------------
Totals $219,286 $112,720 $106,566
======== ======== ========
December 31, 2006
-----------------
Weighted Average Net of
Amortization Accumulated Accumulated
Intangible Assets Period Cost Amortization Amortization
-------------------- ------------------------------------------------------
Licensing Agreement 5 $ 10,000 $ 10,000 $0
Patents & Copyrights 14 32,019 16,924 15,095
Intellectual Property 15 100,000 36,669 63,331
Certifications 3 27,661 4,610 23,051
Other 5 21,492 17,194 4,298
Totals $191,172 $85,397 $105,775
======== ======= ========
F-16
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The estimated amortization expense related to intangible assets for each of the
five succeeding fiscal years and thereafter as of December 31, 2007 is as
follows:
Year Ended
December 31,
2008 $ 27,710
2009 21,600
2010 12,304
2011 7,619
2012 7,619
Thereafter 29,714
-----------
Total $106,566
========
Note 9 - Financing Arrangements
The Company has a $2 million three-year revolving credit facility with a bank
permitting it to borrow on a revolving basis until June 1, 2010. Interest on the
unpaid principal balance on this facility accrues at either (i) the LIBOR rate
plus 2.50% or (ii) the bank's Prime Rate plus .25%. The amounts outstanding on
the facility as of December 31, 2007 and 2006 were $0 and $210,000,
respectively. The prime rate was 7.25% and 8.25% at December 31, 2007 and 2006
respectively. The weighted average interest rate on the Company's short-term
borrowings for 2007 and 2006 was 8.77% and 8.71% respectively.
Note 10 - Long-term Debt
Long-term debt consists of the following:
2007 2006
---- ----
KIDCO REALTY CORP.
$900,000 purchase money mortgage secured by
real property, building and improvements in
Saugerties, New York; payable in equal monthly
installments of $5,988 including interest at
7% per annum; entire principal comes due in
May 2009. $ 794,897 $ 810,508
F-17
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
2007 2006
---- ----
GENERAL ELECTRIC CAPITAL CORPORATION
$2,700,000 mortgage payable secured by real
monthly installments of $22,285, including
interest at 5.67% per annum; pursuant to an
installment sale agreement with the Town of
Islip Industrial Development Agency; final
payment due March 2017. 1,921,439 2,075,148
CAPITAL ONE BANK
Sixty month installment note; payable in
monthly installments of $4,922, including
interest at 7.74% per annum; final payment
due August 2007; collateralized by certain
equipment 0 37,768
CAPITAL ONE BANK
Sixty month installment note, payable
in monthly installments of $1,776,
including interest at 6.75% per annum;
final payment due January 2011,
collateralized by certain
equipment. 60,487 77,030
CAPITAL ONE BANK
Sixty month installment note, payable
in monthly installments of $2,770, including
interest at 7.01 per annum; final payment due
April 2012, collateralized by certain
equipment. 123,791 ---
------------ ---------
2,900,614 3,000,454
Less: Current maturities 222,193 223,653
---------- ---------
$ 2,678,421 $ 2,776,801
=============== ===============
F-18
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Future maturities of long-term debt are as follows:
Year ended December 31, 2008 $ 222,193
Year ended December 31, 2009 996,756
Year ended December 31, 2010 231,621
Year ended December 31, 2011 227,500
Year ended December 31, 2012 214,703
Thereafter 1,007,841
---------
$ 2,900,614
============
Note 11 - Earnings per Share
The calculation of basic and diluted weighted average common shares outstanding
is as follows:
2007 2006
---- ----
Weighted average common shares outstanding
basic earnings per share 3,667,833 3,169,177
Effect of potential common share issuance:
Stock options 157,438 94,356
--------- ----------
Weighted average common shares outstanding
Diluted earnings per share 3,825,271 3,263,533
============== =========
Outstanding options to purchase 10,000 and 117,500 shares at December 31, 2007
and December 31, 2006, respectively, were not included in the diluted earnings
per share calculation, because the exercise price was higher than the market
price. These options may dilute the earnings per share calculation in the future
periods.
Note 12 - Income Taxes
The provision (benefit) for income taxes includes the following:
2007 2006
---- ----
Current:
Federal $ 402,888 $ 18,437
State 94,029 1,722
--------- ----------
Total Current Provision 496,917 20,159
Deferred:
Federal (326,125) 223,888
State ( 61,133) 48,540
---------------- ----------------
Total Deferred Provision (387,258) 272,428
---------------- ----------------
$ 109,659 $ 292,587
=============== =================
F-19
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
In 2007, the Company was required to change its accounting method for tax
purposes from the completed contract to percentage of completion. Under the
provisions of the tax law, the company elected under Internal Revenue Code
Section 481(a) to report the additional deferred revenue for tax reporting
purposes of approximately $2,000,000, or approximately $500,000 per year,
ratably over the four year period ended December 31, 2010.
The Company has New York State investment tax credit carryforwards of
approximately $263,000 that may be offset against future state tax liabilities
through the year 2019 and other state tax credits totaling approximately
$323,000 which may be carried forward indefinitely. The Company accounts for
investment tax credits primarily by the flow-through method.
As of December 31, 2007, the Company had utilized all of its federal and state
net operating loss (NOL's) carryforwards. Federal and state income tax expenses
for the year ended December 31,
2007 are net of tax benefits from net operating loss carry forwards of
approximately $270,000 and $55,000 respectively.
The difference between the provision for income taxes at the Company's effective
federal and state income tax rate and the statutory rate of approximately 41% is
as follows:
2007 2006
Statutory rate-federal 34% 34%
State taxes, net of federal benefits 7% 7%
Net operating loss carryforwards utilized (15%) (2%)
Statutory change in tax accounting method
from completed contract to percentage
of completion (22%) -
Other 8% (6%)
--- ---
Totals 12% 33%
=== ===
F-20
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The tax effects of temporary differences giving rise to significant portions of
deferred taxes are as follows:
2007 2006
---- ----
Allowance for doubtful accounts $ 4,945 $ 2,834
Inventory capitalization 115,321 103,435
Deferred revenue (593,865) (791,821)
Net operating loss carryforwards 131 34,600
Depreciation and amortization ( 64,140) (173,123)
Investment and other tax credits 586,302 589,768
Compensation costs 166,320 66,487
Vacation Accrual 141,837 129,720
Other - 7,660
------------- ---------
Net deferred tax asset (liability) $ 356,851 $ (30,440)
============= ==========
Management believes the deferred tax asset will more likely than not be
realized. In assessing the likelihood of realization, management considers
estimates of future taxable income. However, it is at least reasonably possible
that management's estimate of future realization may change in future periods.
Effective January 1, 2007, the Company adopted Financial Accounting Standards
Board ("FASB") Interpretation Number 48, "Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109," ("FIN" No. 48), which
prescribes a single, comprehensive model for how a company should recognize,
measure, present and disclose in its financial statements uncertain tax
positions that the company has taken or expects to take on its tax returns.
There was no affect on the financial position of the Company upon the adoption
of FIN No. 48. The Company files income tax returns in the United States
(federal) and in various state jurisdictions. The Company is no longer subject
to federal and state income tax examinations by tax authorities for years prior
to 2003.
F-21
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
NOTE 13 - Stock Option Plans
1989 Non-Qualified Stock Option Plan
------------------------------------
On June 15, 1989 the Company instituted a non-qualified stock option plan
(the"Plan"). In connection therewith, 700,000 shares of the Company's common
stock were reserved for issuance pursuant to options that may be granted under
the Plan through June 30, 2009. all options granted vest over a four-year period
and expire between five to seven years after the date of grant.
On June 22, 2006 10,000 options which vest equally over a four-year period were
granted to an employee under the plan which expires on June 21, 2013. On
February 22, 2007 10,000 options which vest equally over a four-year period were
granted to an employee under the plan which expire on February 21, 2014. On
October 10, 2007, 35,250 options which vest as to 12,500 options each of October
10, 2008 and 2009 and 10,250 options which vest on October 10, 2010 were granted
to an employee under the plan which expire on October 10, 2022.
2001 Non-Qualified Stock Option Plan
------------------------------------
In November 2006, the Company registered a non-qualified stock option plan that
the shareholders had approved in July 2001, covering key employees, officers,
directors and other persons that may be considered as service providers to the
Company. Options will be awarded by the Board of Directors or by a committee
appointed by the board. Under the plan, an aggregate of 300,000 shares of
Company common stock, $.01 par value, are reserved for issuance or transfer upon
the exercise of options which are granted. Unless otherwise provided in the
option agreement, options granted under the plan shall vest over a four year
period commencing one year from the anniversary date of the grant. On October
10, 2007, 64,750 options were granted to an employee which vest as to 2,250
options on October 10, 2010 and as to 12,500 options on each October 10, 2012
through 2016. On December 12, 2007 120,000 options were granted to directors.
These options vest as to 40,000 immediately and as to 80,000 options which vest
equally over two years and expire on December 12, 2017. The stock option plan
shall terminate on July 22, 2011.
2007 Share Incentive Plan
-------------------------
On December 12, 2007 shareholders approved the Company's 2007 Share Incentive
Plan ("Incentive Plan"), in connection therewith, 750,000 shares of the
Company's common stock are reserved for issuance pursuant to options or
restricted stock that may be granted under the Incentive Plan through December
12, 2017. No options or restricted stock have been granted under the 2007 Share
Incentive Plan.
F-22
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The purchase price of the common stock under each option plan shall be
determined by the Committee, provided, however, that such purchase price shall
not be less than the Fair Market Value of the Shares on the date such option is
granted. The stock options generally expire seven to ten years after the date of
grant.
A summary of the stock option activity related to the 1989 and 2001 Stock Option
Plans for the period from January 1, 2006 through December 31, 2007 is as
follows:
1989 Non-Qualified Stock Option Plan
------------------------------------
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
----------- ------ ------ ------ ----------- -----------
Year ended December 31, 2006
Number of shares 443,200 10,000 122,700 7,500 323,000 196,875
Weighted average exercise price
per share $ 2.39 $ 3.00 $ 1.53 $ 2.26 $ 2.73 $ 2.30
Year ended December 31, 2007
Number of shares 323,000 45,250 88,000 -0- 280,250 161,750
Weighted average exercise price
per share $ 2.73 $ 4.90 $ 1.87 $ -0- $ 3.36 $ 2.95
2001 Non-Qualified Stock Option Plan
------------------------------------
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Period Period Period Outstanding Exercisable
----------- ------ ------ ------ ----------- -----------
Year ended December 31, 2006
Number of shares -0- -0- -0- -0- -0- -0-
Weighted average exercise price
per share $ 0 $ 0 $ 0 $ 0 $ 0 $ 0
Year ended December 31, 2007
Number of shares -0- 184,750 -0- -0- 184,750 40,000
Weighted average exercise price
per share $ 0 $ 3.99 $ 0 $ 0 $ 3.99 $ 3.99
The number of stock options that were in excess of the market value at December
31, 2007 was 215,000. The number of stock options that were below the market
value at December 31, 2007 was 250,000.
F-23
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The following table summarizes information about the options at December 31,
2007.
Otions Outstanding Options Exercisable
------------------ -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Intrinsic Number Exercise Intrinsic
Price Range Outstanding Life Price Value Exercisable Price Value
----------- ----------- ---------- --------- ------ ----------- -------- ------
$1.25-$1.99 48,500 2.73 years $1.40 $123,675 48,500 $1.40 $123,675
$2.00-$2.99 46,500 4.46 years $2.26 $78,585 23,250 $2.26 $39,293
$3.00-$3.50 25,000 4.94 years $3.05 $22,500 10,000 $3.06 $8,900
$3.51-$3.75 120,000 9.95 years $3.65 $36,000 40,000 $3.65 $12,000
$3.76-$4.00 10,000 0.25 years $3.88 $700 10,000 $3.88 $700
$4.01-$4.50 105,000 4.70 years $4.10 $0 70,000 $4.10 $0
$4.51-$5.00 100,000 9.78 years $4.62 $0 -0- $4.62 $0
$5.01-$6.00 10,000 6.08 years $5.90 $0 -0- $5.90 $0
On January 1, 2006, the Company adopted the provisions of SFAS No. 123-R
"Share-Based Payment" using the modified prospective method. SFAS No. 123-R
requires companies to recognize the cost of employee services received in
exchange for awards of equity instruments based upon the grant date fair value
of those awards. Under the modified prospective method of adopting SFAS No.
123-R, the Company recognized compensation cost for all share-based payments
granted after January 1, 2006, plus any awards granted to employees prior to
January 1, 2006 that remain unvested at that time. Under this method of
adoption, no restatement of prior periods is made.
Prior to January 1, 2006 the Company recognized the cost of employee services
received in exchange for equity instruments in accordance with Accounting
Principles Board Opinion No. 25 "Accounting for Stock Issued Employees" (APB
25). APB 25 required the use of the intrinsic value method, which measures
compensation cost as the excess, if any, of the quoted market price of the stock
over the amount the employee must pay for the stock. Compensation expense was
measured under APB 25 on the date the shares were granted. Under APB 25, no
compensation expense was recognized for stock options.
The intrinsic value of the 88,000 and 122,700 options exercised during the years
ended December 31, 2007 and 2006, was $304,240 and $229,635 respectively.
During the years ended December 31, 2007 and 2006, the Company recorded into
selling and general administrative expense approximately $254,000 and $169,000,
for the cost of employee services received in exchange for equity instruments
based on the grant-date fair value of those instruments in accordance with the
provisions of SFAS No. 123-R.
F-24
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The fair value was estimated by using the Black-Scholes option-pricing model
which took into account as of the grant date, the exercise price and the
expected life of the option, the current price of the underlying stock and its
expected volatility, expected dividends on the stock and the risk-free interest
rate for the expected term of the option. The following is the average of the
data used for the following items.
Risk-Free Expected Expected
Year Ended Interest Rate Expected Life Volatility Dividends
---------- ------------- ------------- ---------- ---------
December 31, 2007 3.9% 4.9 Years 56.49% None
December 31, 2006 2.5% 3.9 Years 126.54% None
Note 14 - Defined Contribution Plan
On August 1, 1998, the Company adopted a 401(k) Plan for the benefit of all
eligible employees. All employees as of the effective date of the 401(k) Plan
became eligible. An employee who became employed after August 1, 1998, would
become a participant after three months of continuous service.
Participants may elect to contribute from their compensation any amount up to
the maximum deferral allowed by the Internal Revenue Code. Employer
contributions are optional. During the years ended December 31, 2007 and 2006
the Company incurred administrative costs totaling $2,025 and $2,394
respectively. No employer contribution has been made for 2007 and 2006.
Note 15 - Concentration of Credit Risk
Cash and Cash Equivalents
-------------------------
The Company places most of its temporary cash investments with financial
institutions, which from time to time may exceed the Federal Deposit Insurance
Corporation limit. The amount at risk at December 31, 2007 and at December 31,
2006 was approximately $4,613,000 and $257,000 respectively.
F-25
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
Export Sales
------------
Export sales to unaffiliated customers represented approximately 21% and 31% of
sales for the years ended December 31, 2007 and 2006, respectively, Export sales
in both 2007 and 2006 were primarily to customers in Europe and Asia. All
contracts are denominated in U.S. dollars. The Company does not enter into any
foreign exchange contracts.
Note 16 - Related Party Transactions
The general counsel for the Company is also a director. The Company incurred
legal fees for his professional services of approximately $133,000 and $34,000
for the years ended December 31, 2007 and 2006, respectively. As of December 31,
2007 and 2006, the Company owed the general counsel approximately $116,000 and
$35,000 respectively.
Note 17 - Other Income
Other income for the year ended December 31, 2007 was approximately $562,000. As
a result of a settlement of litigation between the Company and PrecisionFlow
Technologies, Inc., the Company will receive payments totaling $541,600 to be
paid over a specific timetable as defined under the settlement agreement. Other
income in 2006 was approximately $116,000 primarily as a result of a
distribution from a liquidating trust of a former customer of the Company that
filed a voluntary petition for relief under Chapter 11 of Title 11 of the United
States Bankruptcy Code, in the United States Bankruptcy Court for the District
of Delaware. The Company had previously written off this customer account
balance. In 2006, the liquidating trust distributed $92,400 to the Company,
which represented 33% of the claim.
Note 18 - Segment Reporting
The Company adopted SFAS 131, "Disclosures about Segments of an Enterprise and
Related Information." The Company operates through (3) segments, CVD, SDC and
Conceptronic. The CVD division is utilized for silicon, silicon germanium,
silicon carbide and gallium arsenide processes. SDC is the Company's ultra-high
purity manufacturing division in Saugerties, New York. Conceptronic is a
manufacturer of Surface Mount Technology equipment. The accounting policies of
CVD, SDC and Conceptronic are the same as those described in the summary of
significant accounting policies (see Note 2). The Company evaluates performance
based on several factors, of which the primary financial measure is earnings
before taxes.
F-26
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
The following table presents certain information regarding the Company's
segments as of December 31, 2007 and for the year then ended:
CVD SDC Conceptronic Eliminations Consolidated
---------------- ------------------ ------------------ ------------------ -----------------
Assets $ 19,155,538 $ 2,238,349 $ 2,207,647 $ (4,594,628) $ 19,006,906
================ ================== ================== ================== ================
Revenue $ 8,114,700 $ 3,007,235 $ 2,907,747 $ (451,910) $ 13,577,772
Interest Income 50,978 188 -0- 51,166
Interest Expense 69,433 67,536 79,686 216,655
Depreciation and
amortization 354,342 59,797 22,032 436,171
Capital
expenditures 547,539 50,829 905 599,273
Pretax (loss) earnings 1,816,735 (422,825) (507,165) 886,745
The following table presents certain information regarding the Company's
segments as of December 31, 2006 and for the year then ended:
CVD SDC Conceptronic Eliminations Consolidated
---------------- ------------------ ------------------ ------------------ -----------------
Assets $ 11,946,392 $ 2,400,732 $ 2,757,989 $ (4,187,504) $ 12,917,609
================ ================== ================== ================== ================
Revenue $ 6,902,521 $ 3,650,190 $ 3,386,998 $ (583,931) $ 13,355,778
Interest Income 231 635 -0- 866
Interest Expense 77,934 68,002 77,573 223,509
Depreciation and
amortization 214,254 119,574 24,222 358,050
Capital
expenditures 205,294 19,609 -0- 224,903
Pretax (loss) earnings 1,233,982 148,627 (485,696) 896,913
Note 19 - Commitments and Contingencies
Legal Proceedings
-----------------
On September 24, 1999 the Company was named in a lawsuit. The nature of this
legal proceeding focused on the intellectual property obtained during the
purchase of assets of Stainless Design Corporation. On November 10, 1999, the
Company responded with a counterclaim. It is the Company's legal counsels'
belief that the lawsuit against the Company is without merit. The Company
considers its potential exposure to be negligible and/or covered by insurance.
F-27
CVD EQUIPMENT CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2007 and 2006
In May 2002, the Company instituted a new action against PrecisionFlow
Technologies, Inc., in the United States District for the Northern District of
New York also seeking injunctive relief and monetary damages based upon
additional copyright violations. A motion by Precisionflow Technologies, Inc. to
dismiss this action has been pending since June 2002.
On September 18, 2007 a settlement was reached between the Company and
PrecisionFlow Technologies, Inc. of the pending litigation. Under the terms of
the settlement, all claims and counterclaims asserted by the parties in
previously filed lawsuits were discontinued in consideration of which the
Company will receive payments totaling $541,600 to be paid over a specific
timetable as defined.
Note 20 - Subsequent Event
On February 8, 2008, the Company closed on its acquisition of a 13,300 square
foot facility located at 979 Marconi Avenue, Ronkonkoma, NY 11779 (the
"Property") through the Town of Islip Industrial Development Agency (the "Islip
IDA"). The property was purchased from HPG Realty Co., LLC (the "Seller"). The
total purchase price for the Property was $2,015,000. The Company financed
approximately $1,500,000 of the purchase price and the financing consists of two
loans secured by mortgages, both of which are held by Capital One, N.A. (the
"Lender"). Payments upon each of the mortgages are based upon a 20-year
amortization schedule, with a 10-year balloon. Interest on the $1 million
mortgage is fixed at a rate of 5.67% for 10 years. Interest on the $500,000
mortgage is fixed at a rate of 3.67% for the first four years and will be
adjusted for the 6 year period beginning March 1, 2012 to 200 basis points above
the weekly average yield on U.S. Treasury Securities adjusted to a constant
maturity of 6 years, until maturity on March 1, 2018. The facility is intended
to be used for the expansion of the Company's First Nano laboratory starting in
the second quarter of 2008.