<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 20, 1996
REGISTRATION NO. 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ETEC SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
NEVADA 94-3094580
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
26460 CORPORATE AVENUE
HAYWARD, CA 94545
(510) 783-9210
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEPHEN E. COOPER
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ETEC SYSTEMS, INC.
26460 CORPORATE AVENUE
HAYWARD, CA 94545
(510) 783-9210
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE OF PROCESS)
COPIES TO:
RICHARD S. GREY THOMAS W. KELLERMAN
KAREN A. DEMPSEY JACQUELINE E. COWDEN
CHRISTINA A. MCCORMICK BROBECK, PHLEGER & HARRISON LLP
PILLSBURY MADISON & SUTRO LLP TWO EMBARCADERO PLACE
P.O. BOX 7880 2200 GENG ROAD
SAN FRANCISCO, CA 94120-7880 PALO ALTO, CA 94303
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 5,060,000 shares $30.00 $151,800,000 $46,000
</TABLE>
================================================================================
(1) Includes 660,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based upon the average of the high and low prices
of the Company's Common Stock on the Nasdaq National Market on November
18, 1996.
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
===============================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of 4,048,000 shares of Common Stock (the "U.S. Offering"). The
second prospectus relates to a concurrent offering outside the United States
and Canada of an aggregate of 1,012,000 shares of Common Stock (the
"International Offering"). The prospectuses for the U.S. Offering and the
International Offering will be identical, with the exception of alternate
front cover and back cover pages for the International Offering. Such
alternate pages appear in the Registration Statement immediately following the
complete prospectus for the U.S. Offering.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated November 20, 1996
PROSPECTUS
4,400,000 SHARES
LOGO
[LOGO OF ETEC]
COMMON STOCK
-------------
Of the 4,400,000 shares of Common Stock offered hereby, 500,000 shares are
being issued and sold by Etec Systems, Inc. ("Etec" or the "Company") and
3,900,000 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." Of such shares, 3,520,000 are initially being offered in
the United States and Canada by the U.S. Underwriters (the "U.S. Offering") and
880,000 are initially being offered outside the United States and Canada by the
International Managers (the "International Offering" and, together with the
U.S. Offering, the "Offerings"). The offering price and underwriting discounts
and commissions for the U.S. Offering and the International Offering will be
identical. See "Underwriting." The Company will not receive any of the proceeds
from the sale of shares by the Selling Stockholders. On November 19, 1996 the
last sale price of the Common Stock, as reported on the Nasdaq National Market,
was $30.75 per share. See "Price Range of Common Stock." The Common Stock
trades on the Nasdaq National Market under the symbol "ETEC."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)...................... $ $ $ $
</TABLE>
================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $400,000.
(3) The Company has granted to the U.S. Underwriters a 30-day option to
purchase up to an additional 528,000 shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. The Company has granted to the International Managers a similar option
to purchase up to 132,000 additional shares solely to cover over-
allotments, if any. See "Underwriting." If such options are exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
-------------
The shares of Common Stock offered by this Prospectus are offered by the U.S.
Underwriters subject to prior sale, to withdrawal, cancellation or modification
of the offer without notice, to delivery to and acceptance by the U.S.
Underwriters and to certain further conditions. It is expected that delivery of
the shares will be made at the offices of Lehman Brothers Inc., New York, New
York on or about , 1996.
-------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
, 1996
<PAGE>
[Graphic: See Appendix]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements, and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy and information statements, and other information filed by
the Company can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C., as
well as the regional offices of the Commission located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois, and 7 World Trade Center,
Suite 1300, New York, New York. Copies of such material can be obtained from
the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a site on
the World Wide Web that contains reports, proxy and information statements and
other information that are filed through the Commission's Electronic Data
Gathering, Analysis and Retrieval System (EDGAR). The address for such site is
http://www.sec.gov/edgarhp.htm.
The Company has filed with the Commission a Registration Statement on Form S-
3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the Common Stock offered hereby. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is made
to the Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete and, in each instance, reference is
made to the copy of such contract or document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. Copies of the Registration Statement, including all exhibits
thereto, may be obtained from the Commission's principal office in Washington,
D.C. upon payment of the fees prescribed by the Commission, or may be examined
without charge at the offices of the Commission described above.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents previously filed with the Commission are hereby
incorporated by reference into this Prospectus: (i) the Company's Annual Report
on Form 10-K for the fiscal year ended July 31, 1996, and (ii) the description
of the Common Stock contained in the Company's Registration Statement on Form
8-A filed under the Exchange Act on October 13, 1995. All documents
subsequently filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act prior to the termination of the offering to which this
Prospectus relates shall be deemed to be incorporated by reference into this
Prospectus and to be part of this Prospectus from the date of filing thereof.
Any statement contained in a document incorporated by reference herein shall
be deemed to be modified or superseded for purposes of this Prospectus and the
Registration Statement of which it is a part to the extent that a statement
contained herein or in any other subsequently filed document which also is
incorporated herein modifies or replaces such statement. Any statement so
modified or superseded shall not be deemed, in its unmodified form, to
constitute a part of this Prospectus or such Registration Statement. The
Company will provide without charge to each person to whom a copy of the
Prospectus has been delivered, and who makes a written or oral request, a copy
of any and all of the foregoing documents incorporated by reference in the
Registration Statement (other than exhibits unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
submitted in writing or by telephone to the Company's executive offices, 26460
Corporate Avenue, Hayward, California 94545, telephone (510) 783-9210.
----------------
MEBES(R), CORE(R), Etec(R), the Etec logo, Polyscan, ATEQ(R) and ALTA(R) are
trademarks of the Company. This Prospectus also includes trademarks and trade
names of other companies.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the consolidated financial statements
and notes thereto, appearing elsewhere in this Prospectus or incorporated by
reference herein.
THE COMPANY
Etec Systems, Inc. ("Etec" or the "Company") is a world leader in the
production of mask pattern generation equipment for the worldwide semiconductor
and electronics industries. Etec designs, develops, manufactures and markets
equipment that produces high precision masks, which are used to print circuit
patterns onto semiconductor wafers. Etec sells its MEBES electron beam systems
and its CORE and ALTA laser beam systems at prices currently ranging from
approximately $3.2 million to $8.0 million each and upgrades at prices
currently ranging from approximately $1.4 million to $4.5 million each. The
Company also derives significant revenues from service and support of its
installed base of systems. The Company believes that over 250 commercial
electron beam and laser beam mask pattern generation systems are currently
installed outside the former Eastern Bloc, of which 167 have been produced by
Etec.
The Company believes that advanced masks and mask pattern generation tools
are strategically important to the advancement of semiconductor technology.
During the second half of the 1980s and the beginning of the 1990s, the
maskmaking equipment industry experienced an extended period of slow growth,
primarily as a result of several advances in semiconductor production methods
that sharply reduced the number of mask units required and the precision
requirements for masks. The effects of these advances in production methods
have largely run their course, which the Company believes has resulted in
increasing mask demand. In addition, as semiconductor devices have become more
complex, the semiconductor manufacturing process has become very sensitive to
mask errors, requiring more complex masks and, as a result, increasingly
sophisticated mask pattern generation tools.
The Company is the only maskmaking equipment manufacturer currently offering
both electron beam and laser beam systems. The Company believes that the
different performance and cost characteristics of electron beam and laser beam
systems satisfy the broad range of technical requirements and cost
sensitivities of its customers. The Company's systems are designed to provide a
low cost of ownership through high performance, reliability and ease of
maintenance.
The Company's goal is to maintain its leadership position in pattern
generation for the semiconductor market and leverage its expertise to pursue
other opportunities in high performance imaging. To maintain technology
leadership, the Company intends to continue to work closely with major
customers and seek strategic alliances with other semiconductor industry
participants to identify the leading-edge requirements for semiconductor
maskmaking. In addition, Etec plans to develop or acquire lithography-related
products that serve other markets having technology and market links with its
business, such as direct imaging and maskmaking for large-area applications.
The Company also intends to continue to emphasize the compatibility of its new
systems with its installed systems and to provide superior technical service
and support to its customers. In February 1996, Etec Polyscan, Inc., a wholly-
owned subsidiary of the Company ("Etec Polyscan"), acquired substantially all
of the assets of Polyscan, Inc., a developer of laser direct imaging systems
for large-area pattern generation applications. Etec Polyscan has received
orders for systems, but has not yet shipped a product and has had operating
losses since its inception.
The Company's customers include merchant maskmakers such as Dai Nippon
Printing Co. Ltd., DuPont Photomasks, Inc., Photronics, Inc. and Toppan
Printing Company, Ltd., and semiconductor manufacturers with captive mask
shops, such as International Business Machines Corporation, Intel Corporation,
Samsung Electronics Co., Ltd. and Sony Corporation. The Company markets and
distributes its products directly into North America, Japan, South Korea and
Europe through its sales offices in California, Japan, South Korea and France.
Customers in Southeast Asia, China and India are currently covered by sales
representatives with assistance by the Company's sales and marketing staff in
California.
4
<PAGE>
THE OFFERING
<TABLE>
<C> <S>
Common Stock initially offered in:
The U.S. Offering................................. 3,520,000 shares
The International Offering........................ 880,000 shares
----------
Total Common Stock offered...................... 4,400,000 shares
Common Stock offered by the Company................ 500,000 shares
Common Stock offered by the Selling Stockholders... 3,900,000 shares
Common Stock to be outstanding after the offerings. 20,460,968 shares(1)
Use of proceeds.................................... For capital expenditures
and for general corporate
purposes including working
capital.
Nasdaq National Market symbol...................... ETEC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------------
1996 1995 1994
STATEMENTS OF OPERATIONS DATA: -------- -------- -----------
<S> <C> <C> <C>
Revenue......................................... $145,645 $ 82,916 $ 68,710
Gross profit.................................... 65,603 35,297 25,481
Write-off of in-process technology acquired(2).. 6,269 -- --
Income from operations.......................... 20,663 11,403 9,576
Income before income tax (benefit) provision and
extraordinary items............................ 21,508 6,813 3,928
Net income(3)(4)................................ 36,861 9,936 1,612
Net income per share(5)......................... $ 2.02 $ 0.68 $ 0.12
Weighted average common shares(6)............... 18,296 14,594 14,008
<CAPTION>
JULY 31, 1996
---------------------
AS
ACTUAL ADJUSTED(7)
BALANCE SHEET DATA: -------- -----------
<S> <C> <C>
Cash and investments...................................... $ 68,625 $ 83,163
Working capital........................................... 111,199 125,737
Total assets.............................................. 208,871 223,409
Long-term debt, less current portion...................... 6,667 6,667
Total stockholders' equity................................ 115,877 130,415
</TABLE>
- --------
(1) Based on shares outstanding at October 31, 1996. Does not include 1,545,921
shares issuable upon exercise of stock options outstanding at October 31,
1996 and 151,313 shares issuable upon exercise of warrants outstanding. See
"Capitalization."
(2) In fiscal 1996, the Company wrote off $6.3 million of in-process technology
in conjunction with its acquisition of substantially all of the assets and
assumption of certain specified liabilities of Polyscan. See Note 14 of
Notes to Consolidated Financial Statements.
(3) Net income in fiscal 1996 reflects a $23.0 million tax benefit realized as
a result of reversing a portion of the Company's valuation allowance
associated with certain deferred tax assets. See Note 7 of Notes to
Consolidated Financial Statements.
(4) Net income in fiscal 1996 reflects the inclusion of an extraordinary loss
of $930,000 and an extraordinary gain of $5.4 million in fiscal 1995
recorded as a result of the early extinguishment of debt. See Note 3 of
Notes to Consolidated Financial Statements.
(5) Excluding the write-off of in-process technology acquired of $6.3 million,
the $23.0 million tax benefit realized as a result of reversing a portion
of the valuation allowance for deferred tax assets and the $930,000
extraordinary loss on early extinguishment of debt, pro forma net income
for fiscal 1996 was $21.1 million or $1.15 per share. Excluding the $5.4
million gain on the early extinguishment of debt, pro forma net income for
fiscal 1995 was $4.5 million or $0.31 per share. See Notes 3, 7 and 14 of
Notes to Consolidated Financial Statements.
(6) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(7) Adjusted to reflect the sale by the Company of the 500,000 shares of Common
Stock being offered hereby at an assumed public offering price of $30.75
per share, and the application of the estimated net proceeds therefrom as
set forth under "Use of Proceeds" and the issuance of 150,000 shares of
Common Stock issuable upon exercise of warrants by a Selling Stockholder.
----------------
Unless otherwise indicated, all information in this Prospectus assumes no
exercise of the Underwriters' over-allotment option. The Company prepares its
financial statements on the basis of a 52-53 week fiscal year. For purposes of
presentation, fiscal periods are indicated as ending at calendar month- and
year-ends.
5
<PAGE>
RECENT DEVELOPMENTS
The following table presents certain unaudited quarterly data for the
quarters ended October 31, 1996 and 1995. In the opinion of management, this
information has been presented on the same basis as the audited consolidated
financial statements appearing elsewhere in this Prospectus, and all necessary
adjustments have been included in the amounts stated below to present fairly
the unaudited quarterly results when read in conjunction with the audited
consolidated financial statements of the Company. Results of operations for
any quarter are not necessarily indicative of the results to be expected for
the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED OCTOBER 31,
-------------------------------------
1996 1995 1996 1995
---------- ---------- ------ ------
(IN THOUSANDS, EXCEPT (PERCENTAGE
PER SHARE AMOUNTS) OF REVENUE)
<S> <C> <C> <C> <C>
Revenue:
Products......................... $ 36,402 $ 17,103 81% 69%
Services......................... 8,485 7,605 19 31
---------- ---------- --- ---
Total revenues................. 44,887 24,708 100% 100%
---------- ---------- === ===
Gross profit....................... 20,783 10,956 46% 44%
---------- ---------- --- ---
Operating expenses:
Research, development and
engineering..................... 6,481 3,271 14 13
Selling, general and
administrative.................. 5,895 4,453 13 18
---------- ---------- --- ---
Total operating expenses....... 12,376 7,724 27 31
---------- ---------- --- ---
Income from operations............. 8,407 3,232 19 13
Interest expense................... (244) (612) (1) (2)
Other income (expense), net........ 794 929 2 4
---------- ---------- --- ---
Income before income tax provision. 8,957 3,549 20 15
Income tax provision............... 1,973 887 4 4
---------- ---------- --- ---
Net income......................... $ 6,984 $ 2,662 16% 11%
========== ========== === ===
Net income per share............... $ 0.33 $ 0.18
========== ==========
Weighted average common shares..... 21,118 14,850
========== ==========
</TABLE>
On November 20, 1996, the Company announced its results for the first fiscal
quarter of 1997. Revenues in the first quarter of fiscal 1997 were $44.9
million, an 82% increase over the $24.7 million reported in the first quarter
of 1996, and a 6% decrease from the $47.6 million reported for the fourth
quarter of 1996. One system that was originally scheduled to ship in the first
quarter was delayed due to additional calibration and testing. Income from
operations in the first quarter was $8.4 million, a 160% increase over the
$3.2 million reported in the first quarter of 1996. The increase in operating
income primarily reflects increased unit shipments, increased proportion of
higher margin leading edge products, partially offset by increased research,
development and engineering expenses. Net income in the first quarter of 1997
increased 162% to $7.0 million, or $0.33 per share on 21.1 million weighted
average shares outstanding compared with $2.7 million, or $0.18 per share on
14.9 million weighted average shares outstanding in the first quarter of 1996.
Net income in the first quarter of 1997 included a $1.2 million favorable
adjustment in a valuation allowance previously recorded against deferred tax
assets. Excluding the deferred tax benefit, net income for the first quarter
of 1997 was $5.8 million or $0.28 per share. Product backlog at October 31,
1996 was $155.9 million, a 74% increase from the $89.4 million at the end of
the first quarter of fiscal 1996 and a 6% increase over the $147.6 million at
July 31, 1996. See "Risk Factors--Fluctuations in Operating Results."
To maintain its leadership position in the pattern generation equipment
industry, the Company has made a strategic decision to increase its research,
development and engineering expenditures significantly during fiscal 1997.
These expenditures totaled $6.5 million in the first quarter of 1997 compared
to $5.4 million in the fourth quarter of fiscal 1996. The Company currently
expects research, development and engineering expenses, net of third-party
funding, to exceed $32.0 million in fiscal 1997.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus or incorporated by
reference herein, the following risk factors should be considered carefully in
evaluating the Company and its business before purchasing the shares of Common
Stock offered hereby. This Prospectus contains forward-looking statements that
involve risks and uncertainties. The Company's actual results may differ
significantly from the results discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below.
FLUCTUATIONS IN OPERATING RESULTS
The Company derives most of its revenues from the sale of a small number of
systems and upgrades at prices currently ranging from approximately $3.2
million to $8.0 million each for systems, and from approximately $1.4 million
to $4.5 million each for upgrades. As a result, any delay in the recognition
of revenue for a single system or upgrade could have a material adverse effect
on the Company's results of operations for a given accounting period. Some of
the Company's systems are scheduled to be shipped near the end of each
quarter. Accordingly, a delay in a shipment scheduled to occur near the end of
a particular quarter could materially adversely affect the Company's results
of operations for that quarter. For example, a system shipment planned for the
fourth quarter of fiscal 1995 was delayed due to the failure to complete
factory acceptance tests prior to the end of the quarter. The revenue from
that sale was not recognized in the fourth quarter of fiscal 1995 and was
delayed until shipment, which occurred during the first quarter of 1996. One
system originally scheduled to ship in the first quarter of fiscal 1997 was
also delayed as a result of additional calibration and customer testing
requirements, which adversely affected fiscal 1997 first quarter results.
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results will continue to fluctuate quarterly and annually due to a
variety of factors, including the cyclicality of the maskmaking and
semiconductor industries, patterns of capital spending by customers, the
timing of significant orders, order cancellations and shipment reschedulings,
completion of new facilities by customers, market acceptance of the Company's
products, fluctuations in the grant and funding of development contracts,
consolidation of mask shops, unanticipated delays in design, engineering or
production or in customer acceptance of product shipments, changes in pricing
by the Company or its competitors, the timing of product announcements or
introductions by the Company or its competitors, the mix of systems sold, the
relative proportions of product revenues and service revenues, the level of
sales commissions, the availability of components and subassemblies, changes
in product development costs, expenses associated with acquisitions and
exchange rate fluctuations. The Company's ability to ship systems included in
its reported backlog by the originally scheduled shipment dates may be
impacted by many of the foregoing factors. In any particular period, average
gross margin per system shipped may vary significantly depending on the types
of systems shipped, the specific configuration of each shipped system, and
potential differences in selling prices among systems ordered at different
times. Over the last eight quarters the Company's gross margin has fluctuated
from approximately 39% to 47% of revenues. The Company anticipates that its
gross margin will continue to fluctuate. The Company's net income and cash
flow will also be affected by its ability to apply its net operating loss
carryforwards ("NOLs"), which totaled approximately $23.9 million for federal
income tax purposes at July 31, 1996, against taxable income in future
periods. The Company's utilization of the NOLs are limited to approximately
$19.0 million per fiscal year. The Company cannot predict the impact of these
and other factors on its financial performance in any future period.
LIMITED MANUFACTURING CAPACITY
The Company's systems have a large number of components and are highly
complex. The Company is currently experiencing delays in manufacturing and
delivering its systems and upgrades. Any inability to manufacture and ship
systems or upgrades on schedule could adversely affect the Company's
relationships with its customers and thereby materially adversely affect the
Company's business, financial condition and results of operations. The Company
must also manage variability in cycle time due to the complexity of the
testing and calibration of its systems. Recently, extended testing and
calibration caused a delay of a system shipment to a customer. The Company is
currently investing in system test hardware and inventory as part of a program
to reduce this variability. The Company's ability to predict accurate shipment
dates depends on the
7
<PAGE>
success of this program. The Company's ability to reduce the variance in cycle
time is limited given the complexity of the manufacturing process, the lengthy
lead times necessary to obtain critical components and the need for highly
skilled personnel. The failure of the Company to keep pace with customer
demand could lead to extensions of delivery times, which could deter customers
from placing additional orders, and could adversely affect product quality. In
an effort to keep pace with customer demand and to shorten delivery times, the
Company is outsourcing significant subassemblies, partnering to reduce lead
times on critical components and attempting to standardize its bills of
materials. Additionally, the Company is attempting to attract additional
skilled personnel. There can be no assurance that these efforts will be
successful in increasing the Company's manufacturing capacity. In any event,
the Company's ability to manage its manufacturing cycle time and increase its
manufacturing capacity will continue to be subject to significant factors
outside of its control.
The Company conducts all of its manufacturing activities at its leased
facilities in Hayward, California, Beaverton, Oregon and Tucson, Arizona. The
Company's Hayward campus is located in a seismically active area. Although the
Company maintains business interruption insurance, a major catastrophe (such
as an earthquake or other natural disaster) at the Hayward or Beaverton sites
could result in a prolonged interruption of the Company's business. All of the
Company's electron beam systems are produced in Hayward, and all of its CORE
and ALTA laser beam systems are produced in Beaverton. Neither facility is
equipped to produce the type of system produced by the other.
CYCLICALITY OF THE MASKMAKING AND SEMICONDUCTOR INDUSTRIES
The Company's operating results depend on capital expenditures by
maskmakers, which in turn depend on the current and anticipated demand for
masks, integrated circuits made from masks and products that use such
integrated circuits. Although the semiconductor industry has experienced
significant growth in recent years, there can be no assurance that such growth
will be sustained. The semiconductor industry is currently experiencing a
period of cyclical downturn, including excess manufacturing capacity in
certain product areas. The ratio of semiconductor orders to shipments (the
"book-to-bill" ratio) for U.S.-based semiconductor manufacturers, as reported
by the Semiconductor Industry Association, was less than one during the period
from January to September 1996 and returned to a ratio greater than one in
October 1996. Moreover, the overall semiconductor industry has been and is
likely to continue to be cyclical with periods of oversupply. A downturn in
the demand for semiconductors would likely reduce the demand for masks and
could reduce the demand for the Company's maskmaking equipment. The Company's
ability to reduce expenses in response to any such downturn is limited by its
need for continued investment in research and development and in customer
service and support. Previous downturns in capital investment by the
maskmaking industry have materially adversely affected the Company's business,
financial condition and results of operations in prior periods, and future
downturns may have similar material adverse effects. In addition, due to
changes in semiconductor manufacturing technology, at times the demand for
maskmaking equipment has been depressed while the demand for semiconductor
devices has remained strong. A downturn in demand for maskmaking equipment
would have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business--Industry Background."
IMPORTANCE OF NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE; DEPENDENCE ON PRODUCT
DEVELOPMENT
The semiconductor industry in general, and the maskmaking industry in
particular, are characterized by rapid technological change and evolving
industry standards. As a result, the Company must continue to enhance its
existing products and to develop, manufacture and successfully introduce new
products and upgrades with improved capabilities. This has required and will
continue to require substantial investments in research and development by the
Company to advance a number of state-of-the-art technologies. Continuous
investments in research and development will also be required to respond to
the emergence of new mask technologies, such as optical proximity correction
("OPC") and phase shift mask ("PSM") technologies. The failure to develop,
manufacture and market new products, or to enhance existing products, would
have a material adverse effect on the Company's business, financial condition
and results of operations. In addition, the Company's competitors can be
expected to continue to develop and introduce new and enhanced products, any
of which could cause a
8
<PAGE>
decline in market acceptance of the Company's products or a reduction in the
Company's margins as a result of intensified price competition.
Changes in mask or semiconductor manufacturing processes could also have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company anticipates continued changes in
semiconductor and pattern generation technologies and processes, which may
include the development of product or process technologies that extend the
useful lives of previously sold maskmaking tools. For example, the Company's
sales were materially adversely affected for several years from the mid-1980s
to the early 1990s due to the introduction of "5X" reduction steppers. See
"Business--Industry Background." There can be no assurance that the Company
will be able to develop, manufacture and sell products that respond adequately
to such changes.
The Company's success in developing and selling new and enhanced products
depends upon a variety of factors, including accurate prediction of future
customer requirements, introduction of new products on schedule, market
acceptance of new products and systems, cost-effective manufacturing and
product performance in the field. The Company's new product decisions and
development commitments must anticipate the equipment needed to satisfy the
requirements for lithography processes three or more years in advance of
sales. Any failure to predict accurately customer requirements and to develop
new generations of products to meet those requirements would have a sustained
material adverse effect on the Company's business, financial condition and
results of operations. New product transitions could adversely affect sales of
existing systems, and product introductions could contribute to quarterly
fluctuations in operating results as orders for new products commence and
orders for existing products decline. In addition, any technical or
manufacturing difficulties with these products or systems would have a
material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing and marketing new products
or systems or enhancements of existing products.
DEPENDENCE ON KEY SUPPLIERS; AVAILABILITY OF CRITICAL COMPONENTS
The Company does not maintain any long-term supply agreements with any of
its suppliers, and the majority of the critical components and subassemblies
included in the Company's products are obtained from sole source suppliers or
a limited group of suppliers. The manufacture of certain components and
subassemblies is very complex and requires long lead times. The Company's
systems cannot be produced without certain sole sourced, critical components.
Alternative suppliers for many of these components may not be readily
available, and no substantial increase in the number of alternative suppliers
is anticipated. In addition, the Company intends to rely to an increasing
degree on outside suppliers because of their specialized expertise in
component fabrication and subsystem assembly. However, some of the Company's
suppliers may be unwilling or unable to produce sufficient volumes of key
components to keep pace with the demand for the Company's systems and
upgrades, or to permit the Company to provide customers with an adequate
supply of spare parts.
The Company's reliance on a limited group of suppliers, and particularly on
sole source suppliers, involves several risks, including the potential
inability to obtain an adequate supply of components and reduced control over
pricing and delivery time. To date, the Company has generally been able to
obtain adequate, timely delivery of critical subassemblies and components,
although it has experienced occasional delays. Due to occasional shortfalls in
supply, the Company has from time to time attempted to develop and manufacture
critical parts and subassemblies. In addition, the Company is attempting to
modify product designs to avoid the use of currently obsolete electronic
components. For example, certain components in the Company's MEBES systems
were designed for the MEBES system architecture, which was developed over 20
years ago. In addition, the ALTA data path and portions of the CORE system
contain components that have been or are being discontinued due to
obsolescence. There can be no assurance that delays or shortages caused by
suppliers will not occur in the future or that the Company will be successful
in developing critical components internally or in modifying product designs
to avoid the use of obsolete components. Any inability to obtain adequate,
timely deliveries of subassemblies and components could prevent the Company
from meeting scheduled shipment dates, which would damage relationships with
current and prospective customers and materially adversely affect the
9
<PAGE>
Company's business, financial condition and results of operations. Future
shortages of components from these limited sources could also require the
Company to expend resources on internal parts development and production or to
alter product designs, which could have a material adverse effect on the
Company's business and results of operations. See "Business--Manufacturing."
CONCENTRATION OF CUSTOMERS; LIMITED CONCURRENT SELLING OPPORTUNITIES
Historically, the Company has sold a significant proportion of its systems
to a limited number of customers. Sales to the Company's ten largest customers
accounted for approximately 76%, 74% and 76% of total revenues in fiscal 1996,
fiscal 1995 and fiscal 1994, respectively. Sales to the largest customer
during those periods accounted for approximately 17%, 14% and 13% of total
revenues, respectively. Opportunities for new system sales are episodic,
because the number of captive and merchant mask shops worldwide is limited and
each mask shop has historically purchased at most one or two pattern
generation tools per year. As a particular customer completes a new or
expanded facility or production line, sales to that customer may decrease
sharply. The failure to replace such sales with sales to other customers in
succeeding periods would have a material adverse effect on the Company's
business, financial condition and results of operations. The Company expects
that sales to relatively few customers will continue to account for a high
percentage of the Company's revenues in any accounting period in the
foreseeable future. A reduction in orders from any such customer or the
cancellation of any significant order could have a material adverse effect on
the Company's business, financial condition and results of operations. None of
the Company's customers has entered into a long-term agreement requiring it to
purchase the Company's products. See "Business--Customers."
DEPENDENCE ON KEY EMPLOYEES; MANAGEMENT OF GROWTH
The Company's operating results will depend significantly upon the continued
contributions of its officers and key management, engineering, manufacturing,
marketing, customer support and sales personnel, many of whom would be
difficult to replace. The Company does not have an employment agreement with
any of its employees or maintain key person life insurance with respect to any
employee. The loss of any key employee could have a material adverse effect on
the Company's business, financial condition and results of operations.
Employees of the Company are currently required to enter into a
confidentiality agreement as a condition of their employment. However, these
agreements do not expressly prohibit the employees from competing with the
Company after leaving its employ, and certain of its former employees
currently provide services or technical support to the Company's customers or
for its competitors.
The Company's operating results will depend in significant part upon its
ability to attract and retain other qualified management, engineering,
manufacturing, marketing, customer support and sales personnel. Competition
for such personnel is intense, and there can be no assurance that the Company
will be successful in attracting and retaining such personnel. The failure to
attract and retain such personnel could have a material adverse effect on the
Company's business, financial condition and results of operations.
Certain of the Company's senior management have joined the Company in recent
years. The Company's ability to compete effectively and to execute its
strategies will depend in part upon its ability to integrate these and future
new managers into its operations. The Company continues to require additional
managerial and technical personnel due to its recent growth, and occasional
delays in filling key positions have placed additional burdens on existing
personnel. There can be no assurance that the Company will be successful in
attracting and retaining qualified managerial and technical personnel
sufficient to meet its requirements. See "Business--Employees" and
"Management."
The recent growth in the Company's sales and expansion of its operations has
placed a considerable strain on its management, financial, manufacturing and
other resources and has required the Company to implement and improve a
variety of operating, financial and other systems, procedures and controls.
The Company is currently implementing a new management information system
which will impact almost all phases of the Company's operations (i.e.,
planning, manufacturing, finance and accounting). This system is currently
scheduled
10
<PAGE>
to become operational in the third quarter of fiscal 1997. There can be no
assurance that the Company will not experience problems, delays or
unanticipated additional costs in implementing the new system or in the use of
its existing system which could have a material adverse effect on the
Company's business, financial condition and results of operations,
particularly in the quarter in which the new system is brought online.
Further, there can be no assurance that any existing or new systems,
procedures or controls will be adequate to support the Company's operations or
that its systems, procedures and controls will be designed, implemented or
improved in a cost-effective and timely manner. Any failure to implement,
improve and expand such systems, procedures and controls in an efficient
manner at a pace consistent with the Company's business could have a material
adverse effect on the Company's business, financial condition and results of
operations.
ACQUISITIONS; ETEC POLYSCAN
The Company's business strategy includes expanding its product lines and
markets through internal product development and acquisitions. See "Business--
Strategy." Any acquisition may result in potentially dilutive issuances of
equity securities, the incurrence of debt and contingent liabilities,
potential reductions in income due to losses incurred by the acquired
business, and amortization expense related to intangible assets acquired, any
of which could materially adversely affect the Company's financial condition
and results of operations. For example, in the third quarter of fiscal 1996,
the Company wrote off $6.3 million of in-process technology relating to the
acquisition of substantially all of the assets of Polyscan described below.
Any acquisition will involve numerous risks, including difficulties in the
assimilation of the acquired company's operations and products, uncertainties
associated with operating in new markets and working with new customers, and
the potential loss of the acquired company's key employees. To date, the
Company has had limited experience in integrating businesses operating in
markets other than semiconductor maskmaking equipment.
In February 1996, Etec Polyscan, Inc., a wholly-owned subsidiary of the
Company ("Etec Polyscan"), acquired substantially all of the assets and
assumed certain liabilities of Polyscan, a development-stage company based in
Tucson, Arizona that designs and develops laser direct imaging systems for
printed circuit board and multi-chip module applications, for 350,000 shares
of the Company's Common Stock. Etec Polyscan has received orders but has not
yet shipped a product and has had operating losses since its inception. The
Company expects that Etec Polyscan will continue to have operating losses. The
Company has never operated in the market segments targeted by Etec Polyscan.
The Company's failure to integrate Etec Polyscan's technology into the
Company's product development strategy, or Etec Polyscan's inability to
complete its obligations under development contracts and to manufacture and
market its products, may have a material adverse effect on the Company's
business. There can be no assurance that the Company will be able to integrate
Etec Polyscan into its current business operations or will be able to
integrate Etec Polyscan's technology into the Company's product development
strategy or to market and sell Etec Polyscan's products successfully, or that
the Etec Polyscan business will ever become profitable. There can be no
assurance of the effect of any future acquisition on the Company's business or
operating results.
COMPETITION
The maskmaking equipment industry is highly competitive. The Company
currently experiences competition worldwide from a number of foreign and
domestic manufacturers, including Hitachi, Ltd. ("Hitachi") and Japan Electron
Optical Laboratory ("JEOL"). Most of the Company's competitors have
substantially greater financial resources than the Company and extensive
engineering, manufacturing, marketing and customer service and support
capabilities. Some competitors have entered into strategic relationships or
alliances with leading semiconductor manufacturers. In particular, the Company
believes that Japanese competitors such as Hitachi and JEOL have long-standing
collaborative relationships with Japanese and other Asian semiconductor
manufacturers. Several industry consortia have been formed in Japan to promote
the development of maskmaking and direct write technology. Because of the
significant investment required to install and integrate maskmaking equipment,
the Company also believes that many customers rely upon a single maskmaking
equipment vendor for multiple generations of equipment, making it difficult to
achieve significant sales to a particular customer once a competitor's system
has been selected.
11
<PAGE>
The Company's competitors can be expected to continue to improve the design
and performance of their current products and processes and to introduce new
products and processes with improved price and performance characteristics.
Product introductions and enhancements by the Company's present or future
competitors could cause a significant decline in sales or loss of market
acceptance of the Company's systems, intensify price competition or otherwise
make the Company's systems or technology obsolete or noncompetitive. In
addition to competition from companies employing lithography technologies
currently in volume production, the Company believes that it may face
competition from companies employing new technologies, such as the cell
projection technology that is currently under development. In addition, the
Company's MEBES, CORE and ALTA systems all use a raster scanning writing
method. Currently, despite the throughput advantage of vector scanning for
some types of integrated circuit designs, the Company believes that raster
scanning has a competitive advantage over vector scanning due to its greater
accuracy. If changes in integrated circuit manufacturing or in customer
requirements were to make vector scanning systems more attractive, the
Company's raster scanning products could be subjected to more intense
competition from vector scanning systems. There can be no assurance that
competitive pressures will not have a material adverse effect on the Company's
business, financial condition or results of operations. See "Business--
Competition."
RISKS ASSOCIATED WITH INTERNATIONAL SALES AND OPERATIONS
Sales to customers in countries other than the United States accounted for
45%, 44% and 43% of revenues in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively, with an additional 21%, 16% and 10% of revenues, respectively,
attributable to sales in the United States for shipment abroad. In particular,
sales of systems delivered in Japan accounted for 29%, 14% and 16% of revenues
in fiscal 1996, fiscal 1995 and fiscal 1994, respectively. The Company
anticipates that international sales will continue to account for a
significant portion of revenues for the foreseeable future. Sales and
operations outside of the United States are subject to certain inherent risks,
including fluctuations in the value of the U.S. dollar relative to foreign
currencies, tariffs, quotas, taxes and other market barriers, political and
economic instability, restrictions on the export or import of technology,
potentially limited intellectual property protection, difficulties in staffing
and managing international operations and potentially adverse tax
consequences. There can be no assurance that any of these factors will not
have a material adverse effect on the Company's business, financial condition
or results of operations. In particular, although the Company's international
sales are primarily denominated in U.S. dollars, currency exchange
fluctuations in countries where the Company does business could materially
adversely affect the Company's business, financial condition and results of
operations, by rendering the Company less price-competitive than foreign
manufacturers. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business--Customers" and "Business--
Sales and Marketing."
HEALTH AND SAFETY REGULATIONS AND STANDARDS
The Company's products and worldwide operations are subject to numerous
governmental regulations designed to protect the health and safety of
operators of manufacturing equipment. In particular, recent European Union
("EU") regulations relating to electromagnetic fields, electrical power and
human exposure to laser radiation require Certificate Europa ("CE") mark
certification for shipments of laser beam and electron beam products into the
EU. Prior EU regulations in this area have required the Company to modify its
systems for shipment to Europe. The Company's CORE and ALTA systems currently
comply with the EU regulations which became effective in January 1996.
However, further EU regulations in this area are scheduled to become effective
in January 1997 and the Company's systems will not comply with such
regulations on that date. The Company is currently pursuing product design
activities to obtain CE mark certification for its CORE and ALTA laser beam
systems and for its next generation of MEBES products, but no such activities
are currently planned with respect to the MEBES 4500. No assurance can be
given that the Company will obtain such certification. If the Company is
unable to comply with these EU regulations, the Company may be barred from
selling its products to its customers in member countries of the EU. A
disruption in or loss of sales to the Company's European customers could
adversely affect the Company's customer relationships and results of
operations. In addition, numerous domestic semiconductor manufacturers and
independent mask shops, including certain of the Company's customers, have
subscribed to voluntary health and safety standards. The Company
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<PAGE>
believes that its products currently comply with all material governmental
health and safety regulations, except for the EU regulations described above,
and with the voluntary industry standards currently in effect. In part because
the future scope of these and other regulations and standards cannot be
predicted, there can be no assurance that the Company will be able to comply
with any future regulation or industry standard. Noncompliance could result in
governmental restrictions on sales or reductions in customer acceptance of the
Company's products. Compliance may also require significant product
modifications, potentially resulting in increased costs and impaired product
performance.
LENGTHY SALES CYCLE
Installing and integrating maskmaking equipment requires a substantial
investment by a customer. In addition, customers often require a significant
number of product presentations and demonstrations, as well as substantial
interaction with the Company's senior management, before reaching a sufficient
level of confidence in the system's performance characteristics and
compatibility with the customer's target applications. Accordingly, the
Company's systems typically have a lengthy sales cycle during which the
Company may expend substantial funds and management time and effort with no
assurance that a sale will result. See "Business--Sales and Marketing."
FUTURE CAPITAL NEEDS
The development, manufacture and marketing of pattern generation systems are
highly capital intensive. The Company has budgeted approximately $34.0 million
for capital expenditures in fiscal 1997, approximately $10.0 million of which
the Company intends to finance through operating leases. The Company expects
that the proceeds of this offering, together with anticipated cash flow from
operations, existing cash balances and availability under its revolving credit
facility, will satisfy its cash requirements for at least the next twelve
months. To the extent that such cash resources are insufficient to fund the
Company's activities, additional funds will be required. There can be no
assurance that additional financing will be available on reasonable terms or
at all. If additional capital is raised through the sale of additional equity
or convertible debt securities, dilution to the Company's stockholders could
occur. See "Use of Proceeds" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
REDUCED COOPERATIVE DEVELOPMENT FUNDING
The Company's research and development efforts have historically received
significant funding from governmental and quasi-governmental agencies, such as
the Advanced Research Projects Agency ("ARPA") and SEMATECH, Inc.
("SEMATECH"), a consortium of U.S. semiconductor manufacturers, and from the
private sector. Aggregate funding from all such sources amounted to
approximately $725,000, $7.3 million and $16.1 million in fiscal 1996, fiscal
1995 and fiscal 1994, respectively. Governmental funding of the Company's
development activities has declined precipitously in recent periods, and the
Company and SEMATECH ended their most recent cooperative development agreement
during the past year. Future funding from governmental, quasi-governmental and
private sources is uncertain, and there can be no assurance that any such
funding will be available to the Company. Accordingly, the Company anticipates
that its net research and development expenditures will continue to increase
over at least the next two years and is currently expected to exceed $32.0
million in fiscal 1997. See "Business--Product Development."
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company currently holds 47 United States patents expiring on various
dates from 1999 through 2012, and holds corresponding patents and applications
in several foreign countries for the more important of such patents. The
Company also has four pending U.S. patent applications and over 40 pending
foreign patent applications. There can be no assurance that any of the
Company's patent applications will be allowed or that any of the allowed
applications will be issued as patents. Certain important aspects of the
Company's systems depend upon licenses granted by third parties. In
particular, the basic technological architecture for MEBES, the
13
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Company's family of electron beam systems, was licensed to the Company by
AT&T. This license is non-exclusive, and similar licenses could be granted to
potential competitors. Although the Company believes that significant
development efforts would be necessary to generate a commercial production
tool from the basic technology covered by this license, there can be no
assurance that competitors will not be able to utilize this technology to
develop products that could reduce the Company's sales of MEBES systems,
accessories and upgrades. In addition, certain rights relating to laser beam
technology have been licensed from Patlex Corporation and SEMATECH. The
Company's electron beam and laser beam systems also incorporate software and
hardware licensed from other third parties. If the Company's licenses were
invalidated or terminated, or if their scope became subject to dispute, the
Company's business could be adversely affected. The Company also relies on
trade secrets and proprietary technology that it seeks to protect through
confidentiality agreements with employees, consultants and other parties.
There can be no assurance that these agreements will not be breached, that the
Company will have adequate remedies for any breach, or that the Company's
trade secrets or proprietary technology will not otherwise become known to or
independently developed by others. Overall, while the Company intends to
protect its intellectual property rights vigorously, there can be no assurance
that any patents or other rights held by or licensed to the Company will not
be challenged, invalidated or circumvented, or that protracted and costly
litigation will not be necessary to enforce the Company's patents and other
intellectual property rights.
Semiconductor-related industries have experienced substantial litigation
regarding patent and other intellectual property rights. As is typical in the
industry, the Company has from time to time received, and may in the future
receive, communications from third parties alleging infringements of patents
and other intellectual property rights. No assurance can be given that
additional infringement claims by third parties will not be asserted. In the
future, protracted litigation may be necessary to defend the Company against
alleged infringement of others' rights. Any such litigation, even if
ultimately successful in defense of the Company, could result in substantial
cost and diversion of time and effort by management, which by itself could
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, adverse determinations in such litigation
could result in the Company's loss of proprietary rights, subject the Company
to significant liabilities (including treble damages under certain
circumstances), require the Company to seek licenses from third parties or
prevent the Company from manufacturing or selling its systems, any of which
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business--Patents and Other
Proprietary Rights."
ENVIRONMENTAL REGULATIONS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances. The Company believes that it
is currently in compliance in all material respects with such regulations and
that it has obtained or is in the process of obtaining all material
environmental permits necessary to conduct its business. Nevertheless, the
failure to comply with current or future regulations could result in
substantial fines being imposed on the Company, suspension of production,
alteration of its manufacturing process or cessation of operations. Such
regulations could require the Company to acquire expensive remediation or
abatement equipment or to incur substantial expenses to comply with
environmental regulations. Any failure by the Company to control the use,
disposal or storage of, or adequately restrict the discharge of, hazardous or
toxic substances could subject the Company to significant liabilities.
In 1990, several monitoring wells were installed on the site of the
Company's headquarters in Hayward, California to monitor levels of Freon 113,
Dichloroethene (1, 1--DCE), Trichloroethene and Chloroform in groundwater
under the site. On June 1, 1995, an environmental consulting firm recommended
to the California Regional Water Quality Board (the "Water Quality Board")
that groundwater monitoring at the site be discontinued, and on July 19, 1995
the Water Quality Board agreed in writing with this recommendation. The
Company subsequently discontinued monitoring at the site. However, there can
be no assurance that the Water Quality Board or any other governmental agency
will not require additional monitoring or remediation at the Hayward site in
the future.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial numbers of shares of Common Stock in the public market
after this offering could adversely affect the market price of the Common
Stock. In addition to the 4,400,000 shares to be sold in this offering and the
9,832,500 shares sold in the Company's prior public offerings, approximately
2,467,000 shares are eligible for immediate sale in the public market.
Commencing January 20, 1997, upon the expiration of lock-up agreements,
approximately 2,611,000 additional shares will be eligible for immediate sale
in the public market pursuant to Rule 144 or Rule 701, subject in some cases
to compliance with certain volume limitations under Rule 144. Officers and
directors of the Company holding 383,730 shares (including shares issuable
upon exercise of options within 60 days of October 31, 1996) have agreed not
to sell, directly or indirectly, any shares owned by them for a period of 90
days from the date of this Prospectus. Holders of an aggregate of
approximately 3,078,000 shares of Common Stock and warrants to purchase 7,000
shares of Common Stock have rights under certain circumstances to request that
the Company register their shares for future sale. See "Shares Eligible for
Future Sale" and "Underwriting."
VOLATILITY OF STOCK PRICE
Since the Company's initial public offering in October 1995, the price of
the Company's Common Stock has fluctuated widely, with sales prices on the
Nasdaq National Market ranging from $7.75 to $39.50. The Company believes that
factors such as announcements of developments related to the Company's
business, such as delays in shipments, fluctuations in the Company's operating
results, failure to meet securities analysts' expectations, general conditions
in the maskmaking and semiconductor industries and the worldwide economy,
announcements of technological innovations, new systems or product
enhancements by the Company or its competitors, fluctuations in the level of
cooperative development funding, acquisitions, changes in governmental
regulations, developments in patents or other intellectual property rights and
changes in the Company's relationships with customers and suppliers could
cause the price of the Company's Common Stock to fluctuate, perhaps
substantially. In addition, in recent years the stock market in general, and
the market for small capitalization stocks in particular, has experienced
extreme price fluctuations which have often been unrelated to the operating
performance of affected companies. Such fluctuations could adversely affect
the market price of the Company's Common Stock.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 500,000 shares of
Common Stock being offered by the Company are estimated to be approximately
$14.3 million ($33.7 million if the Underwriters' over-allotment option is
exercised in full), based on an assumed public offering price of $30.75 per
share and after deducting estimated underwriting discounts and commissions and
offering expenses. The Company anticipates using a portion of the net proceeds
of this offering for capital expenditures, including the purchase of testing
equipment, upgrading manufacturing facilities and improvements to the
Company's management information systems, and for general corporate purposes,
including working capital and the funding of research and development efforts.
The Company may also use a portion of the net proceeds of this offering to
acquire businesses, technology or products that complement its business,
although it currently has no commitments or agreements with respect to any
such transaction. Pending such uses, the Company intends to invest the net
proceeds in short-term, investment grade, interest-bearing securities.
The Company will not receive any proceeds from the sale of the shares of
Common Stock by the Selling Stockholders.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market
under the symbol "ETEC" since October 24, 1995. The following table sets forth
the range of quarterly high and low closing sale prices of the Common Stock as
reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ------ ------
<S> <C> <C>
First Quarter (from October 24, 1995)...................... $11.00 $10.00
Second Quarter............................................. 13.75 8.00
Third Quarter.............................................. 24.75 10.75
Fourth Quarter............................................. 37.00 17.25
<CAPTION>
FISCAL 1997
-----------
<S> <C> <C>
First Quarter.............................................. $38.25 $23.13
Second Quarter (through November 19, 1996)................. 31.25 25.41
</TABLE>
On November 19, 1996, the closing price for the Company's Common Stock as
reported on the Nasdaq National Market was $30.75. As of October 21, 1996,
there were approximately 390 holders of record of the Company's outstanding
Common Stock.
DIVIDEND POLICY
The Company has never declared or paid dividends on its capital stock and
does not anticipate paying any dividends in the foreseeable future. The
Company currently intends to retain its earnings, if any, for the development
of its business. Currently, the Company and its subsidiaries are prohibited
from paying dividends under the terms of the Company's $30.0 million financing
facility. In addition, the lease of the Company's Hayward, California property
restricts the Company from paying cash dividends under certain conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
16
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
October 31, 1996, and as adjusted to reflect the sale by the Company of the
500,000 shares of Common Stock offered hereby based on an assumed public
offering price of $30.75 per share and after deducting estimated underwriting
discounts and commissions and offering expenses payable by the Company, and
the application of the estimated net proceeds therefrom as set forth under
"Use of Proceeds."
<TABLE>
<CAPTION>
OCTOBER 31, 1996
---------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1).................. $ 3,333 $ 3,333
======== ========
Long-term debt, less current portion(1).................. $ 5,833 $ 5,833
-------- --------
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 10,000,000
shares authorized; no shares issued and outstanding... -- --
Common Stock, par value $0.01 per share; 30,000,000
shares authorized; 19,810,968 shares issued and
outstanding, actual; 20,460,968 shares issued and
outstanding, as adjusted(2)........................... 198 205
Warrants............................................... 1,031 631
Additional paid-in capital............................. 150,722 165,653
Cumulative translation adjustment........................ (112) (112)
Accumulated deficit...................................... (28,500) (28,500)
-------- --------
Total stockholders' equity........................... 123,339 137,877
-------- --------
Total capitalization............................... $129,172 $143,710
======== ========
</TABLE>
- --------
(1) See Note 3 of Notes to Consolidated Financial Statements for a description
of the Company's term note payable.
(2) Excludes 839,915 shares of Common Stock reserved for issuance and
available for grant or sale under the Company's 1990 Executive Stock Plan,
1990 Employee Stock Option Plan, 1994 Employee Stock Option Plan, 1995
Omnibus Incentive Plan, 1995 Employee Stock Purchase Plan and 1995
Directors' Stock Option Plan and certain nonstatutory stock option
agreements, under which there were options outstanding to purchase an
aggregate of 1,545,921 shares of Common Stock as of October 31, 1996. Also
excludes warrants outstanding to purchase 301,313 shares of Common Stock
at October 31, 1996. As adjusted excludes the same except includes 150,000
shares of Common Stock issuable upon the exercise of warrants by a Selling
Stockholder in connection with this offering.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Consolidated Financial Statements and related notes
thereto appearing elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The selected
consolidated financial data as of and for each of the years in the two-year
period ended July 31, 1996 and the statement of operations data for the year
ended July 31, 1994 are derived from financial statements of the Company
included herein that have been audited by Price Waterhouse LLP, independent
accountants. The balance sheet data for the year ended July 31, 1994 and the
selected consolidated financial data for the fiscal years ended July 31, 1993
and 1992 are derived from financial statements not included herein. The data
set forth below are qualified in their entirety by, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------
1996 1995 1994 1993 1992
-------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Products..................... $112,940 $51,395 $40,731 $ 31,650 $ 41,819
Services..................... 32,705 31,521 27,979 26,932 26,769
-------- ------- ------- -------- --------
145,645 82,916 68,710 58,582 68,588
-------- ------- ------- -------- --------
Cost of revenue:
Cost of products............. 56,632 27,015 25,559 25,450 32,682
Cost of services............. 23,410 20,604 17,670 16,488 17,655
-------- ------- ------- -------- --------
80,042 47,619 43,229 41,938 50,337
-------- ------- ------- -------- --------
Gross profit................... 65,603 35,297 25,481 16,644 18,251
-------- ------- ------- -------- --------
Operating expenses:
Research, development and
engineering................. 17,402 10,497 5,102 11,034 9,472
Selling, general and
administrative (1).......... 21,269 13,397 10,803 10,049 25,331
Write-off of in-process
technology acquired (1)(2).. 6,269 -- -- -- 10,600
-------- ------- ------- -------- --------
44,940 23,894 15,905 21,083 45,403
-------- ------- ------- -------- --------
Income (loss) from operations.. 20,663 11,403 9,576 (4,439) (27,152)
Interest expense............... (1,824) (4,238) (5,115) (5,880) (5,277)
Other income (expense), net.... 2,669 (352) (533) 410 (1,116)
-------- ------- ------- -------- --------
Income (loss) before income tax
(benefit) provision and
extraordinary items........... 21,508 6,813 3,928 (9,909) (33,545)
Income tax (benefit) provision. (16,283) 2,289 2,316 1,500 1,296
-------- ------- ------- -------- --------
Income (loss) before
extraordinary items........... 37,791 4,524 1,612 (11,409) (34,841)
Extraordinary (loss) gain on
early extinguishment of debt.. (930) 5,412 -- -- --
-------- ------- ------- -------- --------
Net income (loss) (3)(4)....... 36,861 9,936 1,612 (11,409) (34,841)
Accretion of mandatorily
redeemable convertible
preferred stock............... 1,078 3,092 2,946 2,740 2,541
-------- ------- ------- -------- --------
Net income (loss) attributable
to Common Stockholders........ $ 35,783 $ 6,844 $(1,334) $(14,149) $(37,382)
======== ======= ======= ======== ========
Per share data:
Income (loss) before
extraordinary items......... $ 2.07 $ 0.31 $ 0.12 $ (0.94) $ (2.86)
Extraordinary items.......... (0.05) 0.37 -- -- --
-------- ------- ------- -------- --------
Net income (loss) (5)........ $ 2.02 $ 0.68 $ 0.12 $ (0.94) $ (2.86)
======== ======= ======= ======== ========
Weighted average common shares
(6)........................... 18,296 14,594 14,008 12,168 12,167
======== ======= ======= ======== ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
JULY 31,
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments......... $ 68,625 $ 23,638 $ 6,571 $ 7,234 $ 1,919
Working capital.............. 111,199 23,215 6,184 9,942 18,764
Total assets................. 208,871 85,984 62,782 66,151 76,793
Long-term debt, less current
portion..................... 6,667 16,866 31,251 46,573 49,377
Minority interest............ -- -- 7,711 7,093 5,632
Mandatorily redeemable
convertible preferred stock. -- 76,397 54,362 44,317 41,577
Accumulated deficit.......... (35,484) (71,267) (78,111) (76,777) (62,628)
Total stockholders' equity
(deficit) .................. 115,877 (67,415) (76,341) (75,575) (61,700)
</TABLE>
- --------
(1) In fiscal 1992, the Company wrote off $10.6 million of in-process
technology in conjunction with its purchase of ATEQ and recorded a $10.2
million charge related to the write-off of certain inventory and assets.
(2) In fiscal 1996, the Company wrote off $6.3 million of in-process
technology in conjunction with its acquisition of substantially all of the
assets and certain specified liabilities of Polyscan. See Note 14 of Notes
to Consolidated Financial Statements.
(3) Net income in fiscal 1996 reflects a $23.0 million tax benefit realized as
a result of reversing a portion of the Company's valuation allowance
associated with certain deferred tax assets. See Note 7 of Notes to
Consolidated Financial Statements.
(4) Net income in fiscal 1996 reflects the inclusion of an extraordinary loss
of $930,000 and an extraordinary gain of $5.4 million in fiscal 1995
recorded as a result of the early extinguishment of debt. See Note 3 of
Notes to Consolidated Financial Statements.
(5) Excluding the write-off of in-process technology acquired of $6.3 million,
the $23.0 million tax benefit realized as a result of reversing a portion
of the valuation allowance for deferred assets and the $930,000
extraordinary loss for the early extinguishment of debt, pro forma net
income for fiscal year 1996 was $21.1 million or $1.15 per share.
Excluding the $5.4 million gain on the early extinguishment of debt, pro
forma net income for fiscal 1995 was $4.5 million or $0.31 per share. See
Notes 3, 7 and 14 of Notes to Consolidated Financial Statements.
(6) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" and elsewhere in this Prospectus or incorporated
by reference herein.
OVERVIEW
Etec designs, develops, manufactures, markets and services electron beam and
laser beam mask pattern generation equipment for the semiconductor industry.
Etec was incorporated in 1989 to effect a leveraged buyout (the "LBO") in 1990
of the former Electron Beam Technology Division of Perkin-Elmer, which was
itself the continuation of a business commenced in 1970. In November 1991, the
Company purchased ATEQ Corporation, a supplier of laser beam maskmaking
systems. In February 1996, the Company acquired substantially all of the
assets and assumed certain specified liabilities of Polyscan, Inc., a
developer of laser direct imaging systems for large-area pattern generation
applications.
During calendar 1993, the Company hired its current Chief Executive Officer
and other members of senior management. Thereafter, the new management team
focused on reducing overhead, achieving manufacturing efficiencies and
improving the Company's operating and capital structure, while continuing to
develop and market its electron beam and laser beam systems. Through
management's efforts, the Company improved its margins and restructured its
capitalization, thereby reducing debt and interest expense. Revenues increased
in fiscal 1996, 1995 and 1994, reflecting an upturn in the maskmaking industry
and the Company's introduction of new products.
The Company completed its initial public offering of Common Stock (the
"IPO") in October 1995 and another offering in June 1996. Proceeds to the
Company after deducting underwriting discounts and commissions (before
deducting offering expenses) from the combined issuances totaled approximately
$58.7 million. Concurrent with the offering in June 1996, the Company
completed a private placement of Common Stock with Intel Corporation. The
proceeds of this private placement amounted to $10.0 million.
The Company derives most of its revenues from the sale of a relatively small
number of systems at prices currently ranging from approximately $3.2 million
to $8.0 million. As a result, any delay in the recognition of revenue for a
single system or upgrade could have a material adverse effect on the Company's
results of operations for a given accounting period. For example, a system
shipment planned for the fourth quarter of fiscal 1995 was delayed due to the
failure to complete factory acceptance tests prior to the end of the quarter.
The revenue from that sale was not recognized in the fourth quarter of fiscal
1995 and was delayed until completion of factory acceptance tests, which
occurred during the first quarter of fiscal 1996. More recently, one system
originally scheduled to ship in the first quarter of fiscal 1997 was also
delayed as a result of additional calibration and testing requested by the
customer. The Company generally recognizes product revenue upon shipment. A
provision for installation costs and estimated future warranty costs is
recorded at the time revenue is recognized. Systems typically carry a one-year
warranty. The Company's service contracts typically have a stated duration of
one year, subject to renewal at the customer's option. Service revenue is
deferred and recognized on a straight-line basis over the period of service.
Sales to customers in countries other than the United States accounted for
45%, 44% and 43% of total revenues in fiscal 1996, 1995 and 1994,
respectively, with an additional 21%, 16% and 10% of total revenues,
respectively, attributable to sales in the United States for shipment abroad.
The Company's international sales are primarily denominated in U.S. dollars.
To date, transactions conducted in currencies other than U.S. dollars, and net
monetary assets and liabilities denominated in currencies other than U.S.
dollars, have not presented significant currency exchange exposure except as
discussed in Note 1 to Notes to Consolidated Financial Statements.
Accordingly, the Company has not entered into hedging transactions. The
Company actively
20
<PAGE>
monitors its foreign exchange exposure and plans to take appropriate action to
reduce its foreign exchange risk, if such risk becomes significant.
At July 31, 1996, the Company had remaining net operating loss carryforwards
("NOLs") of approximately $23.9 million for federal tax purposes. These
carryforwards, if not utilized to offset future taxable income, expire at
various dates through the year 2009. Additionally, under the Tax Reform Act of
1986, the amount of the benefit from NOLs may be impaired or limited in
certain circumstances, including a cumulative stock ownership change of more
than 50% over a three-year period. The completion of the Company's public
offering in June 1996 resulted in a cumulative change in ownership of the
Company in excess of 50% and, as a consequence, the utilization of NOLs is
limited to approximately $19.0 million per fiscal year.
During fiscal 1995, management undertook actions to reduce a substantial
portion of the Company's long-term indebtedness, including the sale and
leaseback of its campus in Hayward, California and the repayment of $6.0
million in respect of senior notes, the exchange of $19.7 million of senior
subordinated debt and accrued interest for preferred stock and convertible
subordinated debt, the acquisition of the minority interest in its Japanese
subsidiary in exchange for Series E Preferred Stock and cash, and the
elimination of ATEQ's minority stockholders through a short-form merger. The
conversion of the senior subordinated debt into preferred stock and
convertible debt resulted in an extraordinary gain of approximately $5.4
million, which was recorded in the fourth quarter of fiscal 1995. All
outstanding series of preferred stock were converted into Common Stock upon
the consummation of the IPO.
The following table sets forth certain consolidated statement of operations
data as a percentage of total revenue and the gross margin data as a
percentage of product revenue and service revenue for products and services
for the years ended July 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenue:
Products................................................ 78% 62% 59%
Services................................................ 22 38 41
--- --- ---
Total revenues....................................... 100% 100% 100%
=== === ===
Gross margin.............................................. 45% 43% 37%
--- --- ---
Operating expenses:
Research, development and engineering................... 12 13 7
Selling, general and administrative..................... 15 16 16
Write-off of in-process technology acquired............. 4 -- --
--- --- ---
Total operating expenses............................. 31 29 23
--- --- ---
Income from operations.................................... 14 14 14
Interest expense.......................................... (1) (5) (7)
Other income (expense), net............................... 2 (1) (1)
--- --- ---
Income before income tax (benefit) provision, and
extraordinary items...................................... 15 8 6
Income tax (benefit) provision............................ (11) 3 3
--- --- ---
Income before extraordinary items......................... 26% 5% 3%
=== === ===
Gross margin data:
Products................................................ 50% 47% 37%
=== === ===
Services................................................ 28% 35% 37%
=== === ===
</TABLE>
See "Recent Developments" for a brief description of the Company's first
quarter fiscal 1997 results.
21
<PAGE>
YEARS ENDED JULY 31, 1996 AND JULY 31, 1995
Revenue. Revenues are primarily comprised of sales of MEBES, CORE and ALTA
systems, accessories and upgrades, and sales of technical support, maintenance
and other services. Product revenue increased 120% to $112.9 million from
$51.4 million for the years ended July 31, 1996 and 1995, respectively. This
increase reflects the sale of eleven additional systems, higher average
selling prices, changes in product mix toward a higher-priced product (the
MEBES 4500) introduced in the fourth quarter of fiscal 1995, offset by a
reduction in the sales of upgrades and accessories of approximately $8.3
million.
Service revenue increased 4% to $32.7 million from $31.5 million for the
years ended July 31, 1996 and 1995, respectively, due primarily to price
increases on service contracts and an increase in the number of systems
serviced.
Gross Profit. The Company's gross profit on product revenue increased 131%
to $56.3 million from $24.4 million for the years ended July 31, 1996 and
1995, respectively. Product gross margins increased to 50% at July 31, 1996
from 47% for the year ended at July 31, 1995. Increased gross profit and the
accompanying increased gross margin percentages were due to an increase in
volume, which includes a shift towards shipments with generally higher selling
prices as well as efficiencies from improvements in manufacturing.
The Company's gross profit on service revenue decreased 15% to $9.3 million
from $10.9 million for the years ended July 31, 1996 and 1995, respectively.
Gross margin on service revenue was 29% and 35% for the years ended July 31,
1996 and 1995, respectively. The decreases in gross profit and gross margins
reflect an investment in service personnel and training to support the growing
installed base. The Company expects that such costs will continue to increase
with the result being further erosion of service margins.
Research, Development and Engineering. Research, development and engineering
expenses, net of third-party funding under cooperative development agreements,
increased to $17.4 million, representing 12% of revenue, from $10.5 million,
representing 13% of revenue, for the years ended July 31, 1996 and 1995,
respectively. This increase primarily reflects a reduction in third-party
funding. For the years ended July 31, 1996 and 1995, $725,000 and $6.1
million, respectively, of funds received under the cooperative development
agreements were applied against research, development and engineering
expenses. Excluding these cost reimbursements, gross research, development and
engineering spending was $18.1 million and $16.6 million in each of the years
ended July 31, 1996 and 1995, respectively. The increase in gross spending is
primarily attributable to the advanced procurement of materials for the
Company's current development projects. Due to the Company's commitment to
product development, net research, development and engineering expenses, net
of third-party funding, are expected to increase in future periods. Research,
development and engineering expenses, net of third-party funding are currently
expected to be in excess of $32.0 million in fiscal 1997.
The Company's success in developing and selling new and enhanced products
depends upon a variety of factors, including accurate prediction of future
customer requirements three or more years in advance of sales, introduction of
new products on schedule, cost-effective manufacturing and product performance
in the field. There can be no assurance that the Company will be successful in
selecting, developing, manufacturing and marketing new products or
enhancements of existing products.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $21.3 million, representing 15% of revenue, from $13.4
million, representing 16% of revenue, for the years ended July 31, 1996 and
1995, respectively. The increase in selling, general and administrative
expenses was partially due to rent associated with the leaseback of facilities
previously owned, market development fees on certain laser beam systems sold
in Asia, additional costs associated with becoming a public company, increased
profit sharing, and costs associated with an increase in hiring.
The Company was party to certain cooperative development agreements that
provided partial funding of general and administrative costs associated with
research and development projects. For the year ended July 31, 1995,
$1.2 million of the funding received under these agreements was offset against
selling, general and administrative expenses. Excluding these cost
reimbursements, gross selling, general and administrative spending was $14.6
million for the year ended July 31, 1995. No such funding was offset against
selling, general and administrative expenses for the year ended July 31, 1996.
22
<PAGE>
Write-Off of In-Process Technology Acquired. In the third quarter of fiscal
1996, the Company acquired substantially all of the assets and assumed certain
specified liabilities of Polyscan, Inc. in exchange for 350,000 shares of the
Company's Common Stock. The excess of the purchase price over the fair value
of the net assets of $6.3 million was allocated to in-process technology
acquired that, because of the uncertainty as to realization, the Company wrote
off in the third quarter of fiscal 1996.
Interest Expense. Interest expense for the years ended July 31, 1996 and
1995 was $1.8 million and $4.2 million, respectively. This decrease in
interest expense reflects the following: (i) the repayment during the second
half of fiscal 1995 of approximately $6.0 million of senior secured debt in
conjunction with the February 1995 sale and leaseback of the Company's Hayward
campus; (ii) the exchange in July 1995 of approximately $19.7 million of
senior subordinated notes and accrued interest for 105,641 shares of
mandatorily redeemable convertible preferred stock (which were converted into
Common Stock on completion of the IPO), plus approximately $3.6 million of
senior subordinated convertible notes (which were repaid in the first quarter
of fiscal 1996); (iii) the repayment of approximately $9.3 million of senior
secured notes during the first half of fiscal 1996; and (iv) the repayment of
the remaining senior secured notes during the fourth quarter of fiscal 1996
and the refinancing of such debt at a lower interest rate.
Other Income (Expense), Net. Other income was $2.7 million of income for the
year ended July 31, 1996. Included in other income is approximately $1.8
million of interest earned on the investment of the proceeds from the IPO, as
well as $846,000 of transaction gains on the redemption of the minority
interest in Etec Japan (which was denominated in yen), in the first quarter of
fiscal 1996.
Income Tax (Benefit) Provision. During the year ended July 31, 1996, the
Company recognized a $23.0 million income tax benefit as a result of releasing
a portion of the valuation allowance previously recorded against its deferred
tax assets. Management's evaluation of the recoverability of the Company's
deferred tax assets is based in part upon the current product backlog and the
Company's proven ability to increase manufacturing capacity. Management has
fully reserved deferred tax assets that would be realized, if at all, more
than one year in the future. Because of the uncertainty of realization,
management will continue to evaluate the recoverability of the Company's
deferred tax assets. The Company recorded a benefit for income taxes for the
year ended July 31, 1996 of $16.3 million and a provision for income taxes for
the year ended July 31, 1995 of $2.3 million, primarily reflecting taxes
payable by the Company's foreign subsidiaries and the $23.0 million income tax
benefit in fiscal 1996.
Extraordinary Loss on Early Extinguishment of Debt. During the year ended
July 31, 1996, the Company paid $18.7 million of its 10.65% senior secured
notes before their due dates. As a result of this repayment, which repaid the
senior secured notes in full, the Company recorded an extraordinary loss of
approximately $930,000 related to unamortized debt issuance costs.
23
<PAGE>
YEARS ENDED JULY 31, 1995 AND JULY 31, 1994
Revenue. Product revenue increased 26% to $51.4 million from $40.7 million
for the years ended July 31, 1995 and 1994, respectively. This increase
reflected generally higher selling prices, a change in product mix towards
higher-priced MEBES IV systems and sales of upgrades and accessories, which
grew as a percentage of total revenue.
Service revenue increased 13% to $31.5 million from $28.0 million for the
years ended July 31, 1995 and 1994, respectively, due primarily to favorable
exchange rates on foreign service contracts and generally higher service
activity.
Gross Profit. The Company's gross profit on product revenue increased 61% to
$24.4 million from $15.2 million for the years ended July 31, 1995 and 1994,
respectively. The increase in gross profit on product revenue was due to an
increase in product revenue and a higher gross margin on product revenue,
which increased to 47% from 37% for the year ended July 31, 1995 compared to
the year ended July 31, 1994. This increase is primarily attributable to
higher margins earned on MEBES IV, MEBES 4000 and MEBES 4500 systems,
generally higher selling prices for the Company's products, increased
manufacturing efficiencies and increased sales of upgrades and accessories
that generally have higher gross margins than new systems. Additionally, gross
margin was favorably impacted for the year ended July 31, 1994 by the sale of
two systems that the Company had previously capitalized as demonstration and
test equipment and fully amortized in prior fiscal years. Excluding the sale
of these systems, gross margin for the year ended July 31, 1994 was
approximately 32%.
The Company's gross profit on service revenue increased 6% to $10.9 million
from $10.3 million for the years ended July 31, 1995 and 1994, respectively.
Gross margin on service revenue was 35% and 37% for the years ended July 31,
1995 and 1994, respectively. The decrease in margin reflects an increase in
maintenance costs for MEBES III tools.
Research, Development and Engineering. Research, development and engineering
expenses, net of third-party funding, increased to $10.5 million, representing
13% of revenue, from $5.1 million, representing 7% of revenue, for the years
ended July 31, 1995 and 1994, respectively. This increase primarily reflects
an increase in the proportion of such expenses not funded by third parties.
For the years ended July 31, 1995 and 1994, $6.1 million and $13.9 million,
respectively, of funds received under cooperative development agreements were
applied against research, development and engineering expenses. Excluding
these cost reimbursements, gross research, development and engineering
spending was $16.6 million and $19.0 million for the years ended July 31, 1995
and 1994, respectively. The decrease in gross spending of $2.4 million
primarily reflects engineering personnel being reallocated to manufacturing
activities in the year ended July 31, 1995 due primarily to the winding down
of a cooperative development program and manufacturing activities associated
with new product introductions.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $13.4 million, representing 16% of revenue, from $10.8
million, representing 16% of revenue, for the years ended July 31, 1995 and
1994, respectively. The increase in selling, general and administrative
expenses was partially due to rent and professional fees resulting from the
consummation of the sale and leaseback transaction in February 1995. In
addition, bonuses, sales commissions and other sales expenses were greater in
the year ended July 31, 1995, due to increased sales volume and profitability.
For the years ended July 31, 1995 and 1994, respectively, $1.2 million and
$2.2 million of the funding received under cooperative development agreements
was offset against selling, general and administrative expenses. Excluding
these cost reimbursements, gross selling, general and administrative spending
was $14.6 million and $13.0 million for the years ended July 31, 1995 and
1994, respectively.
Interest Expense. Interest expense for the years ended July 31, 1995 and
1994 was $4.2 million and $5.1 million, respectively, and resulted from the
substantial debt incurred to finance the LBO. Interest expense decreased as a
result of the repayment of approximately $6.0 million of senior secured debt
in conjunction with the 1995 sale and leaseback transaction.
24
<PAGE>
Other Income (Expense), Net. Other income (expense), net, was $352,000 and
$533,000 for the years ended July 31, 1995 and 1994, respectively. Included in
other income (expense), net, for the years ended July 31, 1995 and 1994 is
$527,000 and $462,000, respectively, of minority interest in earnings of a
subsidiary.
Income Tax Provision. The Company recorded provisions for income taxes for
each of the years ended July 31, 1995 and 1994 of $2.3 million, respectively.
These provisions primarily reflect taxes payable by the Company's foreign
subsidiaries. Taxes otherwise due in the United States have been almost
completely offset by net operating loss carryforward benefits.
Extraordinary Gain on Early Extinguishment of Debt. During the year ended
July 31, 1995, the Company recorded an extraordinary gain of approximately
$5.4 million when the holders of the Company's senior subordinated notes
payable and mandatorily redeemable convertible preferred stock exchanged
approximately $7.1 million and $12.6 million of their senior subordinated
notes and accrued interest for 40,251 and 65,390 shares, respectively, of
Series B mandatorily redeemable convertible preferred stock and approximately
$1.6 million and $2.0 million, respectively, of senior subordinated notes
payable.
25
<PAGE>
The following table presents certain unaudited quarterly data for the eight
quarters ended July 31, 1996, and such data expressed as a percentage of total
revenue and the gross margin data as a percentage of product revenue and
service revenue for products and services for such quarters. In the opinion of
management, this information has been presented on the same basis as the
audited consolidated financial statements appearing elsewhere in this
Prospectus, and all necessary adjustments have been included in the amounts
stated below to present fairly the unaudited quarterly results when read in
conjunction with the audited consolidated financial statements of the Company.
Results of operations for any quarter are not necessarily indicative of the
results to be expected for the entire fiscal year or for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------------------
JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31,
1996 1996 1996 1995 1995 1995 1995 1994
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products.............. $38,957 $ 33,358 $23,522 $17,103 $13,252 $12,910 $12,630 $12,603
Services.............. 8,653 8,364 8,083 7,605 8,619 8,767 7,194 6,941
------- -------- ------- ------- ------- ------- ------- -------
47,610 41,722 31,605 24,708 21,871 21,677 19,824 19,544
------- -------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Products.............. 19,026 16,399 12,826 8,381 6,259 6,987 7,063 6,706
Services.............. 6,616 5,875 5,548 5,371 5,938 5,222 4,968 4,476
------- -------- ------- ------- ------- ------- ------- -------
25,642 22,274 18,374 13,752 12,197 12,209 12,031 11,182
------- -------- ------- ------- ------- ------- ------- -------
Gross profit:
Products.............. 19,931 16,959 10,696 8,722 6,993 5,923 5,567 5,897
Services.............. 2,037 2,489 2,535 2,234 2,681 3,545 2,226 2,465
------- -------- ------- ------- ------- ------- ------- -------
21,968 19,448 13,231 10,956 9,674 9,468 7,793 8,362
------- -------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research, development
and engineering...... 5,411 5,152 3,568 3,271 3,545 2,551 2,124 2,277
Selling, general and
administrative....... 6,296 5,749 4,771 4,453 4,203 3,543 2,736 2,915
Write-off of in-
process technology
acquired............. -- 6,269 -- -- -- -- -- --
------- -------- ------- ------- ------- ------- ------- -------
11,707 17,170 8,339 7,724 7,748 6,094 4,860 5,192
------- -------- ------- ------- ------- ------- ------- -------
Income from operations.. 10,261 2,278 4,892 3,232 1,926 3,374 2,933 3,170
Interest expense........ (362) (338) (512) (612) (869) (1,028) (1,146) (1,195)
Other income (expense),
net.................... 526 543 671 929 138 (188) (19) (283)
------- -------- ------- ------- ------- ------- ------- -------
Income before income tax
(benefit) provision and
extraordinary items.... 10,425 2,483 5,051 3,549 1,195 2,158 1,768 1,692
Income tax (benefit)
provision.............. (5,220) (13,213) 1,263 887 689 620 500 480
------- -------- ------- ------- ------- ------- ------- -------
Income before extraordi-
nary items............. 15,645 15,696 3,788 2,662 506 1,538 1,268 1,212
Extraordinary (loss)
gain on early
extinguishment of debt. (630) -- (300) -- 5,412 -- -- --
------- -------- ------- ------- ------- ------- ------- -------
Net income.............. $15,015 $ 15,696 $ 3,488 $ 2,662 $ 5,918 $ 1,538 $ 1,268 $ 1,212
======= ======== ======= ======= ======= ======= ======= =======
PERCENTAGE OF REVENUE:
Revenue:
Products.............. 82% 80% 74% 69% 61% 60% 64% 64%
Services.............. 18 20 26 31 39 40 36 36
------- -------- ------- ------- ------- ------- ------- -------
100% 100% 100% 100% 100% 100% 100% 100%
======= ======== ======= ======= ======= ======= ======= =======
Gross margin............ 46% 47% 42% 44% 44% 44% 39% 43%
------- -------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research, development
and engineering...... 11 12 11 13 16 12 10 12
Selling, general and
administrative....... 13 14 15 18 19 16 14 15
Write-off of in-
process technology
acquired............. -- 15 -- -- -- -- -- --
------- -------- ------- ------- ------- ------- ------- -------
24 41 26 31 35 28 24 27
------- -------- ------- ------- ------- ------- ------- -------
Income from operations.. 22 6 16 13 9 16 15 16
Interest expense........ (1) (1) (2) (3) (4) (5) (6) (6)
Other income (expense),
net.................... 1 1 2 4 -- (1) -- (1)
------- -------- ------- ------- ------- ------- ------- -------
Income before income tax
(benefit) provision and
extraordinary items.... 22 6 16 14 5 10 9 9
Income tax (benefit)
provision.............. (11) (32) 4 4 3 3 3 3
------- -------- ------- ------- ------- ------- ------- -------
Income before extraordi-
nary items............. 33 38 12 10 2 7 6 6
Extraordinary (loss)
gain on early
extinguishment of debt. (1) -- (1) -- 25 -- -- --
------- -------- ------- ------- ------- ------- ------- -------
Net income.............. 32% 38% 11% 10% 27% 7% 6% 6%
======= ======== ======= ======= ======= ======= ======= =======
Gross margin data:
Products.............. 51% 51% 45% 51% 53% 46% 44% 47%
======= ======== ======= ======= ======= ======= ======= =======
Services.............. 24% 30% 31% 29% 31% 40% 31% 36%
======= ======== ======= ======= ======= ======= ======= =======
</TABLE>
26
<PAGE>
The Company's operating results have historically been subject to
significant quarterly and annual fluctuations. The Company believes that its
operating results will continue to fluctuate on a quarterly and annual basis
due to a variety of factors, including the cyclicality of the maskmaking and
semiconductor industries, the timing of significant orders, order
cancellations, shipment reschedulings, completion of new facilities by
customers, market acceptance of the Company's products, fluctuations in the
grant and funding of development contracts, consolidation of mask shops,
unanticipated delays in design, engineering or production or in customer
acceptance of product shipments, changes in pricing by the Company or its
competitors, the timing of product announcements or introductions by the
Company or its competitors, the mix of systems sold, the relative proportions
of product revenues and service revenues, the level of sales commissions,
changes in product development costs, expenses associated with acquisitions
and exchange rate fluctuations. The Company's ability to ship systems included
in its reported backlog by the originally scheduled shipment dates may be
impacted by many of the foregoing factors. The Company's net income and cash
flow will also be affected by its ability to apply its NOLs, which totaled
approximately $23.9 million for federal income tax purposes at July 31, 1996,
against taxable income in future periods. As a result of a change in ownership
of more than 50% following the Company's offering in June 1996, the Company's
NOLs are limited to approximately $19.0 million per fiscal year. The Company
cannot predict the impact of these and other factors on its financial
performance in any future period. See "Risk Factors--Fluctuations in Operating
Results."
Over the last eight quarters, the Company's product revenues have fluctuated
primarily as a result of the timing of shipments and the number and mix of
systems sold in a particular quarter. The Company expects that such
fluctuations will continue in the future. For example, the Company had
expected to ship a system in the fourth quarter of fiscal 1995, which, as a
result of delays in factory acceptance, did not ship until the first quarter
of fiscal 1996. In addition, one system originally scheduled for shipment in
the first quarter of 1997 was also delayed due to additional calibration and
testing. Product revenues increased significantly from the fourth quarter of
fiscal 1995 to the fourth quarter of fiscal 1996, due primarily to increases
in shipments and average selling prices and changes in the product mix.
Included in cost of products in the fourth quarter of fiscal 1995 is the
reversal of a $500,000 reserve taken in a prior period related to the
installation of a machine. In the fourth quarter of fiscal 1995, the Company
satisfied all of its outstanding obligations pertaining to this installation
and reversed the excess reserve.
Service revenues and margins have fluctuated primarily due to changes in
exchange rates, growth in the installed base of systems, occasional
relocations of systems and other non-recurring service events and changes in
service contract rates. Service margins declined in the fourth quarter of
1996, in part due to the write-off of $400,000 in developmental customer
support software. Service revenues and gross margin on services increased
significantly in the third and fourth quarter of fiscal 1995 primarily as a
result of favorable exchange rates on foreign service contracts and the
relocation of two customers' systems to different facilities. As the Company
continues to invest in service personnel and training to support the growing
installed base of systems, it anticipates that service margins will decline.
Research, development and engineering expenses increased significantly in
the third and fourth quarters of fiscal 1996 due to a reduction in the amount
of activities funded by third parties, an increase in procurement of materials
for the Company's development programs and research and development expenses
incurred at Etec Polyscan, Inc. Due to the Company's commitment to product
development, net research, development and engineering expenses are expected
to increase in future periods. In addition, research and development expenses
may fluctuate as a result of the timing of the receipt of materials used in
development activities. The Company's contribution to net research,
development and engineering increased commencing in the fourth quarter of
fiscal 1995 due to reductions in cooperative development funding from third
parties.
Selling, general and administrative expenses increased significantly in the
third and fourth quarters of fiscal 1996 due to increased expenses for market
development fees for laser beam system sales in Asia, increased profit-sharing
and the costs associated with being a public company. Selling, general and
administrative expenses
27
<PAGE>
increased significantly in the third and fourth quarters of fiscal 1995,
primarily as a result of increased bonuses and sales commissions as well as
increased professional fees.
In the third and fourth quarters of fiscal 1996, the Company evaluated the
recoverability of its deferred tax assets and recognized $15.4 million and
$7.6 million of income tax benefits as a result of releasing a portion of the
valuation allowance previously recorded against its deferred tax assets.
Management's evaluation of the recoverability of the Company's deferred tax
assets is based upon the current product backlog and its ability to increase
manufacturing capacity. Management has fully reserved deferred tax assets that
may be realized beyond one year, because of the uncertainty of realization,
and management will continue to evaluate the recoverability of the Company's
deferred tax assets.
Included in the fourth quarter of fiscal 1996 is an extraordinary loss of
$630,000 recorded as a result of the early extinguishment of the remaining
balance of senior secured debt. Included in the second quarter of fiscal 1996
is an extraordinary loss of $300,000 recorded as a result of the early
extinguishment of $5.0 million of senior secured debt. Included in the fourth
quarter of fiscal 1995 is an extraordinary gain of $5.4 million recorded as a
result of the early extinguishment of $19.7 million of subordinated notes
payable and accrued interest. See Note 3 of Notes to Consolidated Financial
Statements.
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of fiscal 1994, the Company has financed its cash needs
primarily with cash from operations, approximately $11.0 million in net
receipts from the sale and leaseback of the Company's Hayward, California
campus in fiscal 1995, $58.7 million from the Company's IPO and an additional
offering in fiscal 1996, and $10.0 million from a private placement with Intel
Corporation.
The Company spent approximately $11.7 million for net capital expenditures
in fiscal 1996 primarily to purchase testing and other equipment, upgrade its
manufacturing facilities and implement an enterprise-wide business software
system and has budgeted approximately $34.0 million for capital expenditures
in fiscal 1997, approximately $10.0 million of which the Company intends to
finance through operating leases.
In April 1996, the Company commenced construction of a 60,000 square foot
administrative building at its Hayward, California campus, and is financing
the construction with available cash. As of July 31, 1996, the Company had
expended $1.4 million related to the new facility. Estimated costs at
completion are $5.0 million. The Company intends to sell the new facility upon
completion in the second quarter of fiscal 1997 to the landlord of its current
facility and enter into a leasing arrangement for a period of fifteen years.
As of July 31, 1996, the Company had cash and cash equivalents and
marketable securities of $68.6 million. The Company believes that the net
proceeds from this offering, together with existing sources of liquidity
including cash flow from operations and its $20.0 million revolving credit
facility, will provide adequate cash to fund its operations for at least the
next twelve months.
Cash Flows from Operations
Net cash provided by operations for the fiscal years ended July 31, 1996,
1995 and 1994 was $3.5 million, $9.1 million and $3.6 million, respectively.
Cash flows from operations in fiscal 1996 primarily reflected net income of
$36.9 million, decreased by noncash items (which include $23.6 million of
deferred taxes, partially offset by an extraordinary loss on early
extinguishment of debt of $930,000, the write-off of in-process technology
acquired of $6.3 million, and depreciation and amortization of $1.6 million),
increases in accounts receivable of $15.7 million and inventory of $25.4
million, increases in other assets of $579,000 and increases in accounts
payable and accrued and other liabilities of $23.1 million.
28
<PAGE>
Cash flows from operations in fiscal 1995 primarily reflected net income of
$9.9 million, decreased by noncash items (which include an extraordinary gain
of $5.4 million, partially offset by depreciation and amortization of $3.0
million), increases in accounts receivable, inventory, other assets and
accrued and other liabilities of $14.7 million and decreases in accounts
payable of $1.2 million.
Cash flows from operations in fiscal 1994 primarily reflected net income of
$1.6 million, increased by noncash items (which include depreciation and
amortization of $3.8 million), decreases in inventory of $7.9 million,
increases in accounts receivable of $4.7 million and decreases in accounts
payable and accrued and other liabilities of $4.1 million.
Fluctuations in accounts receivable, inventory and current liabilities for
all of the above periods were caused primarily by the timing of system orders,
the timing of shipments, customer requested delivery dates and the timing of
payments to vendors. The significant increase in inventory during fiscal 1996
was due primarily to increases in material purchases and work-in-process to
meet scheduled production.
Prior to the shipment of a system, the Company receives payment for a
significant portion of the system sales price. Such payments are generally
received when the Company receives an order and at various agreed upon times
when the system is being manufactured. Therefore, the amount of customer
advances received fluctuates based on the number of systems that are on order
and depends on the status of each system within the manufacturing cycle.
Advances from customers increased significantly to $24.1 million at July 31,
1996 from $12.9 million at July 31, 1995 because the Company's backlog for
products increased to $147.6 million from $65.2 million. See "Business--
Backlog."
Financing and Investing Activities
During fiscal 1995, the Company sold its headquarters campus located in
Hayward, California for approximately $11.0 million. The Company leased back
the property for an initial term of fifteen years and has options to renew the
lease for four five-year periods. In August 1996, the Company restructured the
existing sale and leaseback arrangement and refunded $2.6 million of the
original purchase price to its landlord and received a reduction in its annual
rent from $1.4 million to $1.0 million and certain other consideration. See
Note 15 of Notes to Consolidated Financial Statements.
Net cash provided by financing activities for fiscal 1996 and fiscal 1995
was $56.2 million and $162,000, respectively, and net cash used in financing
activities for fiscal 1994 was $2.3 million. During fiscal 1996, the Company
raised approximately $58.7 million before offering expenses in connection with
its IPO and an additional public offering and $10.0 million in a private
placement with Intel Corporation.
During fiscal 1996, the Company repaid $18.7 million of its senior secured
indebtedness, $8.8 million of which was extinguished with $10.0 million of
unsecured replacement financing from another lender, and repaid $3.6 million
of senior subordinated notes out of the proceeds of the IPO. During fiscal
1995 and fiscal 1994, the Company repaid $6.0 million and $600,000,
respectively, of its senior secured notes. During fiscal 1994, the Company
repaid $8.0 million of a bank loan and other notes payable. During fiscal
1996, fiscal 1995 and fiscal 1994, the Company received interim financing on
foreign sales of $159,000, $6.2 million and $507,000, respectively.
On May 24, 1996, the Company entered into a $30.0 million financing facility
with a major financial institution, which includes a $20.0 million two-year
revolving credit facility and a $10.0 million three-year term note.
Indebtedness under the revolving credit facility and term note is unsecured
and bears interest at the London Interbank Offered Rate (5.91% on July 31,
1996) plus 1.25%. The terms of the financing facility require the Company to
comply with certain financial and restrictive covenants, including maintenance
of certain financial ratios and minimum net worth criteria, restrictions on
the incurrence of indebtedness and certain dividend restrictions. On May 31,
1996, the Company drew down the $10.0 million term note to repay in full its
senior secured notes. No amounts have been drawn to date under the revolving
credit facility.
29
<PAGE>
In June 1995, the Company entered into a loan agreement with Polyscan,
whereby the Company provided financing to Polyscan. The loan bore interest at
prime plus 3% and the balance of $1.8 million was due on January 31, 1996.
During February 1996, Polyscan repaid $600,000 to the Company, and Etec
Polyscan acquired substantially all of the assets and assumed certain
specified liabilities of Polyscan in exchange for 350,000 shares of the
Company's Common Stock. Etec Polyscan also assumed Polyscan's obligation to
repay the outstanding loan in the amount of approximately $1.2 million.
30
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that could cause
or contribute to such differences include, but are not limited to, those
discussed in "Risk Factors" and elsewhere in this Prospectus or incorporated
by reference herein.
INTRODUCTION
Etec Systems, Inc. ("Etec" or the "Company") is a world leader in the
production of mask pattern generation equipment for the worldwide
semiconductor and electronics industries. Etec designs, develops, manufactures
and markets equipment that produces high precision masks, which are used to
print circuit patterns onto semiconductor wafers. Etec sells its MEBES
electron beam systems and its CORE and ALTA laser beam systems at prices
currently ranging from approximately $3.2 million to $8.0 million each and
upgrades at prices currently ranging from approximately $1.4 million to $4.5
million each. The Company also derives significant revenues from service and
support of its installed base of systems. The Company believes that over
250 commercial electron beam and laser beam mask pattern generation systems
are currently installed outside the former Eastern Bloc, of which 167 have
been produced by Etec.
The Company is the only maskmaking equipment manufacturer currently offering
both electron beam and laser beam systems. The Company believes that the
different performance and cost characteristics of electron beam and laser beam
systems satisfy the broad range of technical requirements and cost
sensitivities of its customers. The Company's systems are designed to provide
a low cost of ownership through high performance, reliability and ease of
maintenance.
The Company's goal is to maintain its leadership position in pattern
generation for the semiconductor market and leverage its expertise to pursue
other opportunities in high performance imaging. To maintain technology
leadership, the Company intends to continue to work closely with major
customers and seek strategic alliances with other semiconductor industry
participants to identify the leading-edge requirements for semiconductor
maskmaking. In addition, Etec plans to develop or acquire lithography-related
products that serve other markets having technology and market links with its
business, such as direct imaging and maskmaking for large-area applications.
The Company also intends to continue to emphasize the compatibility of its new
systems with its installed systems and to provide superior technical service
and support to its customers. In February 1996, Etec Polyscan, Inc., a wholly-
owned subsidiary of the Company ("Etec Polyscan"), acquired substantially all
of the assets of Polyscan, a developer of laser direct imaging systems for
large-area pattern generation applications. Etec Polyscan has received orders
for systems, but has not yet shipped a product and has had operating losses
since its inception.
The Company's customers include merchant maskmakers such as Dai Nippon
Printing Co. Ltd., DuPont Photomasks, Inc., Photronics, Inc. and Toppan
Printing Company, Ltd., and semiconductor manufacturers with captive mask
shops, such as International Business Machines Corporation, Intel Corporation,
Samsung Electronics Co., Ltd. and Sony Corporation. The Company markets and
distributes its products directly into North America, Japan, South Korea and
Europe through its sales offices in California, Japan, South Korea and France.
Customers in Southeast Asia, China and India are currently covered by sales
representatives with assistance by the Company's sales and marketing staff in
California.
INDUSTRY BACKGROUND
MASKMAKING IN THE SEMICONDUCTOR INDUSTRY
According to industry analysts' estimates, worldwide semiconductor sales
increased from approximately $77 billion in 1993 to $102 billion in 1994 and
to $144 billion in 1995. The semiconductor industry is currently experiencing
a cyclical downturn and industry analysts expect that worldwide semiconductor
sales will decrease in 1996, although unit shipments are expected to continue
to increase. The increase in demand is driven by growth in
31
<PAGE>
traditional markets for semiconductors such as computers, networking,
telecommunications and other advanced electronics applications, as well as the
proliferation of semiconductor devices into new products and markets such as
cellular telephones, pagers, automobiles, medical products, household
appliances and other consumer products.
Masked wafer lithography is the predominant method for high-volume
semiconductor device manufacturing. Masked wafer lithography utilizes a
"mask," which is a physical master image of the circuit pattern written by a
pattern generating tool onto a chrome layer on a quartz substrate with
extremely high precision and resolution. In the mask writing process, the
circuit design data are converted to pattern data and used to control an
electron or laser beam, which exposes the circuit pattern onto a resist
covering the opaque chrome layer of the mask. After developing the mask
resist, the chrome layer is permanently etched into the pattern of the mask.
The mask, which is conceptually similar to a negative in photography, is
used in photolithography tools (called "steppers" or "aligners") to make
numerous copies of the pattern image on semiconductor wafers. This
reproduction is typically accomplished by transferring light through the mask
onto a thin, photosensitive polymer or "photoresist" that is spread over the
surface of the wafer. Those areas of the photoresist that have been exposed to
light are then dissolved by chemical developers, and the exposed areas are
etched. Successive steps of deposition, lithography and etch create the
multiple pattern layers of conductive, semiconductor and insulating material
that make up the millions of transistors designed into a single semiconductor.
See diagram below. The pattern reproduction process performed by a stepper or
aligner can be automated for very high rates of wafer processing, which allows
the device manufacturer to reduce its wafer printing costs.
[Graphic: See Appendix]
An alternative to masked semiconductor lithography, direct write
lithography, prints the circuit pattern directly onto a semiconductor wafer
without using a mask. The wafer direct write method has historically suffered
from throughput limitations that have severely reduced its usefulness for
high-volume, commercial device manufacturing.
THE MASKMAKING MARKET
The maskmaking industry is comprised of "merchant" suppliers selling to a
variety of semiconductor manufacturers, and "captive" mask shops of
semiconductor manufacturers producing almost exclusively for their own
requirements. The demand for mask pattern generation tools is primarily driven
by advances in technology requiring more precise and more complex masks and by
increases in mask unit volumes. Mask average selling prices ("ASPs") and unit
sales began to grow in 1994. Accordingly, maskmakers' sales and profitability
began to rise significantly in 1994. This contributed to stronger demand for
mask pattern generation
32
<PAGE>
equipment. According to VLSI Research, worldwide mask pattern generation
equipment revenues increased by 28% from 1994 to 1995, and are projected to
increase by 65% from 1995 to 1996, and by 36% from 1996 to 1997.
Currently, the Company believes that maskmakers are substantially increasing
their investment in new mask pattern generation tools to meet increased
capacity requirements and to create more complex, higher resolution masks
required for next generation integrated circuits. However, from 1984 to 1993,
several advances in semiconductor production methods sharply reduced the
number of mask units required and the precision requirements for masks. These
changes caused slow mask unit growth and low mask prices throughout that
period.
The Maskmaking Market From 1984 to 1993
The market for masks and maskmaking equipment experienced an extended period
of slow growth during the second half of the 1980s and the beginning of the
1990s. Rose Associates, a market research firm, estimates that from 1984 to
1993, worldwide mask revenues grew by approximately 50%, from $740 million to
$1.1 billion, while sales of semiconductors nearly tripled, from approximately
$26 billion to approximately $77 billion. Thus, the estimated size of the mask
market declined from 3.5% of the semiconductor market in 1984 to 1.4% in 1993.
Over the same period, sales of maskmaking equipment were relatively flat. The
Company believes that this period of limited growth in the market for masks
and maskmaking equipment resulted from several factors, including the
following:
Introduction of Reduction Steppers. During the late 1970s and early
1980s, the predominant semiconductor lithography technology was projection
aligners that used masks with features the same size as the features
printed on the wafer ("1X" masks). In the mid-1980s, the semiconductor
industry made the transition to reduction steppers that used masks with
features five times larger than the features printed on the wafer ("5X"
masks). This resulted in a significant relaxation of mask specifications
because mask errors were reduced by the 5X demagnification of the mask
pattern.
The relaxation of mask specifications extended the life of the existing
mask pattern generation systems, which were developed for 1X masks for the
pilot production of 1.2 micron devices beginning in the mid-1980s. The less
rigorous specifications allowed these mask pattern generators to be used
through the production of 0.8 micron devices, well into 1994, when the
production of 0.5 micron devices began to accelerate. No significant
technical requirement existed during that period to increase the demand for
new pattern generation equipment.
Adoption of Software Design Tools. The introduction of computer-aided
design ("CAD") and other software tools for design automation and
simulation in the mid-1980s reduced the number of mask iterations required
to create a working integrated circuit. Before the advent of design
automation and simulation, the creation of a production-worthy device
design would typically require several mask iterations. This trial-and-
error process supported mask demand. Design automation and simulation
reduced the number of iterations required to produce a commercially usable
mask, typically to no more than two. This reduced the demand for masks,
which contributed to a depressed level of investment in maskmaking
equipment.
Introduction of Pellicles. A "pellicle" is a thin, transparent membrane
suspended over the mask surface on a frame mounted to the mask. The
pellicle increases semiconductor manufacturing yields by preventing
airborne particles from falling onto the surface of the mask and printing
as defects on the wafer. Since their introduction in the early 1980s,
pellicles have significantly reduced the need to clean the masks used in
production, thus substantially extending the life of a mask. Accordingly,
the introduction of pellicles significantly reduced the number of masks
required in high-volume semiconductor device manufacturing. This reduction
in mask demand adversely affected investment in maskmaking equipment.
The Maskmaking Market After 1993
The Company believes that the factors restraining the maskmaking industry's
growth from the mid-1980s through the early 1990s have dissipated in recent
years. The reduction in semiconductor linewidths to 0.5 micron
33
<PAGE>
and below has exceeded the capabilities of pattern generation systems designed
in the early 1980s, even with the demagnification provided by 5X reduction
steppers. In addition, the impact of CAD tools and pellicles on mask demand
should not be as great as when they were first introduced in the 1980s. The
Company believes that, because these historical factors have largely run their
course, the demand for masks and maskmaking equipment will tend to be more
closely correlated with semiconductor demand.
In addition, the Company believes that increased complexity in semiconductor
devices has recently contributed to higher demand for complex masks and for
increased sophistication in maskmaking equipment. Future device generations
are expected to require feature sizes beyond the optical resolution limit of
existing photolithography equipment. In order to print these patterns with
conventional masks, integrated circuit manufacturers would have to incur
significant capital expenses to retool their facilities with new steppers with
shorter wavelength illumination sources and new resist and other processes.
New mask technologies such as phase shift masks and optical proximity
correction are expected to extend the optical resolution of existing
photolithography equipment, delaying the investment required for new steppers
and the associated process equipment.
Although device complexity was also increasing during the 1980s, the
relaxation of mask specifications permitted by 5X steppers and the other
factors described above had a largely offsetting effect on maskmaking
equipment demand. For example, due to the increasing complexity of
semiconductor devices, the number of masked lithography layers required to
produce a typical device has increased from approximately ten in the mid-1980s
to between 20 and 25 today. From the mid-1980s to the early 1990s, this growth
factor was offset by the factors described above. By contrast, in the last two
or three years, increasing device complexity has led to several developments
that the Company believes have contributed to recent growth in the maskmaking
market. These developments include the following:
Advances in Phase Shift Masks and Optical Proximity Correction. As
semiconductor line widths have become as small as the wavelength of the
illumination sources used in optical lithography, the semiconductor
manufacturing process has become very sensitive to mask errors and requires
much more sophisticated masks. Two new technologies are being applied to a
pattern image on a mask that can extend the resolution of optical
lithographic technology--phase shift masks ("PSM") and optical proximity
correction ("OPC"). PSM requires one or more additional exposure steps on
each mask, making masks more difficult and slower to produce and thereby
reducing the capacity of mask pattern generators. OPC significantly
increases the resolution required on a mask, which significantly reduces
mask tolerances and thus requires new mask pattern generation technology.
The Company believes that PSM and OPC are leading to additional demand for
mask pattern generators. See"New Mask Technologies: Phase Shift Masks and
Optical Proximity Correction."
Trend to Lower Reduction Ratio Steppers. The increasing complexity of
integrated circuit devices has led to an increase in their physical size.
For example, Intel Pentium(R) chips are approximately three times larger
than the 80286 chips that were in commercial production in the mid-1980s.
In order to produce larger chips, most stepper manufacturers have moved
from 5X to 4X reduction ratios in their designs for the next generation of
photolithography equipment. A decrease in stepper reduction ratios
exacerbates the effect of mask errors, driving masks to tighter tolerances
and accelerating the demand for more advanced mask pattern generators.
Further decreases in stepper reduction ratios may be required in the
future.
Acceptance of Mix-and-Match Production. Many of the layers of a typical
semiconductor device do not require the small feature sizes that advanced
steppers can reproduce. Some device manufacturers have therefore integrated
less expensive, lower performance steppers into their production, in a
"mix-and-match" mode that reduces the overall cost of the photolithography
process. Today, lower performance steppers are being designed with a lower
reduction ratio (between 1X and 2.5X), in an effort to place more
information on the mask, increasing the throughput of the stepper. This
increases the productivity per unit cost of the photolithography process.
Lower mask magnification requires tighter mask tolerances, which
accelerates the demand for new mask pattern generation technology.
34
<PAGE>
STRATEGIC IMPORTANCE OF MASKS
Advanced masks and mask pattern generation tools have become strategically
important to the advancement of semiconductor technology and to cost
containment in the manufacture of future generations of semiconductors. The
Company believes that advanced mask technology is viewed as critical to the
cost-effective extension of optical lithography through the next three or four
device generations and that the trade-off between the cost of shorter
wavelength lithography tools and the cost of advanced masks will favor
investment in advanced masks. In addition, as semiconductor linewidths become
as small as the wavelength of the illumination sources in optical lithography
and stepper magnifications decline, the semiconductor manufacturing process
becomes very sensitive to mask errors and requires masks with much tighter
tolerances. These advanced masks must be produced by increasingly
sophisticated mask pattern generation tools.
STRATEGY
The Company's goal is to maintain its leadership position in pattern
generation for the semiconductor market and leverage its expertise to pursue
other opportunities in high performance imaging. The Company intends to
achieve this goal through the implementation of the following strategies:
Maintain Technology Leadership. Since its formation, the Company's
objective has been to extend its leadership position in pattern generation
technology. To maintain technology leadership, the Company intends to
continue to work closely with major customers and pursue strategic
alliances with other semiconductor industry participants to identify the
leading-edge requirements for semiconductor maskmaking and to support
product and process development.
Provide Broad Range of Mask Pattern Generation Solutions. The Company's
product strategy is to cover a broad range of technical requirements and
cost sensitivities. The Company believes that its ability to offer both
electron beam and laser beam systems, which have different performance and
cost characteristics, is a significant competitive advantage. The Company's
MEBES, ALTA and CORE product lines serve the diverse needs of commercial
mask manufacturers, which must supply a range of mask types to their
different customers. The MEBES 4500 delivers the accuracy, resolution and
flexibility necessary to meet the demanding mask requirements of the
prototyping and pilot production of 0.25 micron devices. The ALTA 3000,
CORE 2564 and CORE 2100 are well suited for high-volume production of masks
for semiconductor devices with feature sizes from 0.35 micron to more than
one micron.
Broaden Product Offerings. Etec plans to develop or acquire pattern
generation and lithography-related products that serve additional markets
and market segments. The Company intends to target opportunities that have
technology and market links with its existing business, such as direct
imaging and maskmaking for large area applications, including multichip
modules, flat panel displays, fine pitch printed circuit boards and
precision etched parts. In furtherance of this strategy, the Company
acquired substantially all of the assets of Polyscan in February 1996.
Through a subsidiary, Etec Polyscan, the Company intends to continue
Polyscan's efforts to develop laser direct imaging systems for industries
requiring large-area pattern generation, such as printed circuit boards and
multi-chip modules. The Company is also exploring potential synergies
between Polyscan's technology and Etec's laser beam maskmaking systems.
Leverage Installed Base. In marketing new products to existing customers,
Etec plans to continue to emphasize the compatibility of its new systems
with its installed systems. Software and hardware enhancements to existing
systems have historically provided a significant source of higher margin
revenues. Etec intends to continue to pursue additional revenues where new
system sales are otherwise unobtainable, by developing and marketing a wide
variety of retrofit "suites" and other product accessories and upgrades.
For example, both of Etec's most advanced systems, the MEBES 4500 and the
ALTA 3000, have modular designs to facilitate future enhancements.
Deliver Superior Customer Support. Etec has made customer support one of
its foremost corporate priorities. Accordingly, the Company treats customer
support as an integral part of its business rather than
35
<PAGE>
as a stand-alone unit. To achieve customer satisfaction, the Company seeks
to provide superior technical service and responsiveness, products that
meet or exceed specifications and parts that are rapidly delivered and
defect free.
PRODUCTS AND SERVICES
Etec's products consist of electron beam and laser beam maskmaking systems.
The Company's systems are designed to provide a low cost of ownership through
high performance, reliability and ease of maintenance. In addition, the
Company's systems have modular designs to facilitate retrofitting. The Company
is the only maskmaking equipment manufacturer currently offering both electron
beam and laser beam systems. The Company believes that this represents an
important competitive advantage, as the different performance and cost
characteristics of electron beam and laser beam systems permit it to cover a
broad range of technical requirements and cost sensitivities for its
customers.
The different characteristics of electron beam and laser beam systems suit
them to different segments of the mask pattern generation market. Electron
beam systems have a much smaller beam spot size than laser beam systems and
are best suited for leading-edge market segments that require the highest
resolution and accuracy. The Company's MEBES electron beam systems also have
an open control and software architecture, which offer maximum flexibility to
the maskmaker. The primary advantage of laser beam systems is their relative
simplicity and lower cost of ownership compared to electron beam systems.
Another advantage of laser beam systems is the use of optical resists for the
maskmaking process, which are easier to use than electron beam resists.
MEBES Electron Beam Systems. The MEBES family of mask pattern generation
tools began with Etec's licensed manufacture of a Bell Laboratories design in
1976, and has been continuously upgraded due to the ever-increasing demands of
semiconductor production. Etec believes that more mask shops use its MEBES
systems than any other maskmaking tool. Over 150 MEBES systems have been
produced, of which at least 115 remain in service. MEBES systems currently
sell for approximately $5.6 million to $8.0 million.
36
<PAGE>
MEBES systems comprise three interconnected modules: the electronics console,
the worktable and the utility console. The electronics console contains
computerized controls for the electron source, for the vacuum chamber and other
aspects of the system, the pattern file management system through which the
customer inputs the pattern design data and the operator's console. The
worktable contains the electron beam column, the mask blank loading chamber, a
high precision stage to position the mask during writing, extensive real-time
measurement and feedback controls to maintain high accuracy and resolution and
a vacuum system. Finally, the utility console provides temperature, air and
other controls through pumps and chilling systems. The system is illustrated
below:
[Graphic: See Appendix]
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<PAGE>
The MEBES I system was one of the first commercially available electron beam
lithography systems. In 1983, Etec introduced the MEBES III system. The advent
of 5X reduction steppers prolonged the useful life of the MEBES III through
three-and-one-half generations of semiconductor devices, from 256-Kbit dynamic
random access memory ("DRAM") through 4-Mbit DRAM. Etec's latest electron beam
system, the MEBES 4500, was first shipped in June 1995. To date the Company
has shipped 11 MEBES 4500 systems, of which two are upgrades from older
configurations. The evolution of the MEBES product line is shown below.
<TABLE>
<CAPTION>
FIRST FEATURE SIZE*
SYSTEM SHIPMENT (MICRONS)
------ -------- -------------
<S> <C> <C>
MEBES I**............ 1977 >1.5
MEBES II**........... 1981 >1.2
MEBES III**.......... 1983 0.5-1.2
MEBES IV**........... 1991 0.35-0.5
MEBES 4000***........ 1993 0.35-0.5
MEBES 4500........... 1995 0.25-0.35
</TABLE>
- --------
* Represents semiconductor device feature size, in microns, for typical
commercial production applications. For MEBES 4500, represents feature
size for target applications.
** No longer in production.
*** Improved throughput by using a Flash High Throughput Memory.
The MEBES 4500 is designed for 0.35 micron production requirements and pilot
production of 0.25 micron devices. The MEBES 4500 significantly reduces write
times compared to the Company's earlier systems. The MEBES 4500 incorporates
several proprietary techniques, for adjusting the electron beam during
patterning, for improving throughput and accuracy and for detecting height
variations in mask blanks before patterning. The MEBES 4500 also permits a
customer to tailor the writing method to the customer's application by
selecting the appropriate combination of throughput, accuracy and resolution.
The MEBES 4500 hardware and software remain compatible with existing MEBES
installations, and its hardware and software innovations can be retrofitted to
prior generations of MEBES systems.
CORE and ALTA Laser Beam Systems. Etec currently offers a family of scanned
laser beam maskmaking systems. While MEBES electron beam products target the
most technically demanding, leading-edge requirements, the Company's CORE
laser beam systems, which were initially acquired from ATEQ Corporation in
1991, offer lower costs for the higher production volume of masks with less
technically demanding specifications. The CORE 2564, an eight-beam system, is
targeted at cost-sensitive production devices, while the CORE 2100 serves
trailing-edge applications. Over 40 CORE systems have been delivered to date,
all of which are in service. CORE systems currently sell for approximately
$3.2 million to $4.3 million. The evolution of the Company's laser beam
product line is shown below.
<TABLE>
<CAPTION>
FIRST FEATURE SIZE*
SYSTEM SHIPMENT (MICRONS)
------ -------- -------------
<S> <C> <C>
CORE 2000**.......... 1987 >1.5
CORE 2100............ 1990 >1.2
CORE 2564............ 1991 0.5-1.2
ALTA 3000............ 1994 0.35-0.5
</TABLE>
- --------
* Represents semiconductor device feature size, in microns, for typical
commercial production applications. For ALTA 3000, represents feature size
for target applications.
** No longer in production.
The ALTA 3000 offers a 32-beam architecture and is designed for the
production of masks for the 0.35 micron generation of semiconductor devices.
It is capable of writing PSM and OPC masks, as well as large-
38
<PAGE>
format masks, and currently sells for approximately $6.7 million to $7.3
million. To date the Company has shipped 10 ALTA 3000 systems.
The ALTA system comprises a single environmentally controlled enclosure. The
enclosure is divided into two sections as shown in the illustration below. One
section contains the control electronics, the environmental control system and
utility distribution systems. The other section contains the vibration
isolated granite table, which supports the ultraviolet laser illumination
source; the robotic loading module for automatically loading and unloading
mask blanks into the air bearing stage; the air bearing stage, which moves the
mask blank under the objective lens during writing; and the optical bridge.
The optical bridge includes beam splitters, lenses and the scanner that focus
and scan the laser beams onto the mask blank during writing. It also contains
the modulator that controls the intensities of the laser beams and the
alignment system necessary for writing multi-layer masks.
[Graphic: See Appendix]
Accessories and Upgrades. The Company sells a variety of hardware and
software packages, which are designed to enhance the performance of previously
installed MEBES and CORE systems. For example, the Company markets retrofit
"suites" that upgrade MEBES III and IV systems to higher performance systems,
such as MEBES 4000 or MEBES 4500 systems. In addition, the Company sells
accessories to enhance the performance of the MEBES 4500 system itself, such
as a robotic loading module to automate mask loading and a two-cassette load
chamber to permit faster evacuation of the finished mask from the load
chamber. Accessories are currently priced at less than $400,000, and upgrades
currently range in price from approximately $1.4 million to $4.5 million. From
time to time, the Company also repurchases, refurbishes and resells a limited
number of systems.
Customer Support. The Company believes that system performance and
reliability are essential competitive factors and that the field reliability
of its systems has typically met or exceeded customer expectations. The
Company estimates that its systems generally provide over 95% uptime, even
though the average utilization of MEBES, ALTA and CORE systems under service
contracts with Etec usually exceeds 120
39
<PAGE>
hours per week. The Company establishes a standard warranty reserve at
shipment for each of its systems. Historically, warranty expenses have been
consistent with established allowances. Standard allowances are adjusted to
reflect product life cycle stages.
Etec believes that it is critical to supplement the mechanical reliability
of its systems with superior customer service and technical support worldwide.
Customers in North America are supported by a 64-person organization. Other
regions of the world are covered by 95 field engineers and service
administrators located in Japan, Taiwan, South Korea, Singapore, China and
Europe. In addition to providing technical support, the Company's service and
support personnel advise customers about product applications, provide
customer training, coordinate upgrades, manage the Company's inventory of
spare parts and provide preventive maintenance. For several years, the Company
has also conducted regular user group meetings in major markets, which provide
a forum for executive-level interaction with customers, product presentations
and customer input. The Company maintains a 24-hour, toll-free customer
support hotline and asks customers for critical assessments of its performance
in customer surveys in an effort to improve customer satisfaction.
The Company's warranty obligations for its systems generally cover a 12-
month period beginning upon final customer acceptance. However, most customers
have requested service and support beyond the warranty period, and Etec has
historically derived significant revenues from annual service and maintenance
for its installed base of systems. Approximately 124 of the Company's systems
are currently serviced under one-year contracts with Etec. Most customers
request a comprehensive package of service and support that includes a variety
of spare parts (excluding electron guns, laser sources and other more
expensive parts) and support from an on-site Etec field engineer. Service
revenues were approximately $32.7 million, $31.5 million and $28.0 million in
fiscal 1996, fiscal 1995 and fiscal 1994, respectively.
MASK PATTERN GENERATION TECHNOLOGY
Pattern generators are very complex and require the integration of a wide
range of advanced technologies encompassing design data conversion at very
high rates, electron and laser beam sources, electron and laser beam optical
systems, high-frequency electron beam and laser beam controls and high-
precision mechanical motion control. In addition, the mechanical components of
electron beam systems must function in an ultra-low vacuum and with materials
free of electromagnetic properties. Integrating these diverse, sophisticated
subsystem technologies into reliable industrial tools requires broad
experience and design capability in system engineering and real-time machine
control software.
Design Data Conversion. High-speed data processing hardware and software are
required to convert the design information for an integrated circuit from the
CAD database to the pattern generator's exposure format. For leading-edge
integrated circuits, the file sizes of design data can be larger than one
gigabyte. Within the last decade, such file sizes have doubled every two to
four years as integrated circuits have become increasingly complex. During
mask exposure, these large databases must be converted in near real-time,
requiring data processing speed comparable to that required by advanced three-
dimensional animation and simulation.
Etec has developed specialized processors and software to perform these data
processing and conversion tasks. In MEBES systems, the High Throughput Memory
("HTM") converts pattern data and delivers it to the electron beam column at
160 MHz. The HTM subsystem has rapidly evolved to keep pace with the
increasing complexity of the design data. A DRAM mask that would have taken
five hours to produce on the original MEBES IV can now be processed in less
than one hour on the MEBES 4500, using the newest version of the processor,
the Super Flash HTM. This version of the processor can bypass the system
control computer and convert design data obtained from a network, processing
the data simultaneously with the mask exposure. This capability effectively
removes any constraint on pattern file size. In the ALTA 3000, a new data path
architecture was developed to handle large design data. This architecture
features high-speed geometry engines to accelerate design data conversion to
digital grey pixels. The implementation of grey pixels is well suited for
small data address designs by combining fine edge placement resolution with a
high printing rate. Each of the 32 laser beams in the ALTA 3000 is modulated
at 50 MHz, for a peak bandwidth of 1.6 gigapixels per second independent of
input data address size.
40
<PAGE>
Exposure Technologies. Both electron beam and laser beam systems combine a
series of state-of-the-art, high-resolution lens systems with complex scanning
and beam blanking (on and off switching) mechanisms.
There are two basic exposure methods: raster scanning with a fixed-size beam
and vector scanning with a variable shaped beam. In raster scanning, which all
of Etec's systems employ, a very small beam of fixed diameter corresponding to
a single pixel of the pattern is moved in a repetitive scan to cover the
entire area of the circuit. The beam is turned on and off at very high rates
to delineate the pattern features. In vector scanning, the beam can be changed
in shape and size to correspond to multiple pixels that can be exposed in a
single "flash." The beam is moved or "vectored" only to those areas of the
pattern requiring exposure. The multiple pixel flash and vectoring motion
permits vector scanned, shaped beam systems to have higher theoretical
throughput than raster scanning systems. Because raster scanning systems use
fixed beam sizes and move the beam repetitively, the Company believes that
they are simpler, more stable and more precise and accurate than vector
scanning systems for maskmaking applications.
Electron Beam Systems. In an electron beam maskmaking system, an electron
source fires electrons through a series of centering coils and condensing
lenses onto the mask substrate. Because electrons are easily deflected by air
and other molecules, exposure must occur in a vacuum chamber. The following
diagram illustrates the structure of a typical electron beam column. The
electron beam is generated in a thermal field emission gun and passes through
a series of electromagnetic lenses that adjust the beam's size and current and
focus the beam on the mask substrate. An electromagnetic three-stage beam
deflection system scans the beam over the mask and dynamically corrects for
any positional error in the mask stage. Because electrons have a much shorter
equivalent wavelength than light optical radiation, electron beam systems
permit mask manufacturers to achieve smaller pattern sizes than with laser
beam and other optical radiation patterning technologies, together with
precise pattern size and placement tolerances. Etec's electron beam systems
use beam spot sizes as small as 0.08 micron.
[Graphic: See Appendix]
41
<PAGE>
Laser Beam Systems. In a laser beam maskmaking system, multiple laser
beams, operating at light optical wavelengths, make up a "brush" that is
scanned over the mask substrate. The optical system of the Company's ALTA 3000
laser beam pattern generator is shown in the following diagram. From a single
ultraviolet laser, 32 parallel beams are formed by a beamsplitter. The
intensity of each beam is individually varied by an acousto-optic modulator. A
20X reduction lens projects the beams onto the substrate. The diameter of each
beam is approximately 0.35 micron. A rotating polygonal scanning mirror and a
lens scan the brush of beams over the substrate, using a repetitive raster
method as in an electron beam system. However, the scans of the brush are
partially overlapped. At any one point in the pattern, the final image is
formed by multiple partial exposures that have occurred during different scans
of the brush. This is an important benefit of a multiple beam brush because it
allows the positional errors of the individual scans to be averaged,
significantly improving the final positional accuracy.
[Graphic: See Appendix]
The wavelength of laser illumination does not allow laser beam systems to
achieve the resolution possible with electron beam exposure, and laser beam
systems currently in production have a resolution of about 0.6 micron.
However, the chemical processes used to develop the mask image for laser beam
systems are the same as those used in mass production wafer printing and are
significantly simpler and less expensive than those used in electron beam
exposure. This is of particular benefit in the production of PSMs where two
complete exposures of the mask may be required. In addition, a vacuum chamber
is unnecessary, resulting in a simpler system design than can be achieved in
an electron beam system. These characteristics of laser beam systems result in
lower overall cost of ownership for the maskmaker.
Control and Motion Systems. For leading-edge maskmaking applications, the
mask must be positioned with an accuracy of approximately 0.01 micron. Analog
electronic control systems must control beam size and position to these
extreme requirements. Furthermore, these tolerances must be maintained over
hours or days with essentially no measurable change, requiring sophisticated
self-monitoring and compensating mechanisms.
42
<PAGE>
The MEBES 4500 incorporates techniques for monitoring errors and adjusting
calibration dynamically during exposure. Because the length of the raster scan
can have significant impact on the size of the smallest features, the MEBES
4500 permits automatic adjustments of the scan length between exposures, as
well as self-monitoring and dynamic adjustments during exposure. Furthermore,
the height variations of the mask substrate itself can produce scan length
errors. Therefore, the MEBES 4500 can map these height variations prior to
exposure and compensate for the unique profile of each substrate. The
substrate can be rejected prior to exposure if its variations are out of
tolerance, thereby avoiding the time and expense of exposing a mask that would
likely fail to meet its specification.
During exposure, the mask substrate is moved continuously on a mechanical
stage with a position accuracy of better than one micron, requiring very
precise, ultra-clean mechanical motion systems. For example, the ALTA 3000
utilizes an advanced linear motor and air bearing transport technology, which
eliminates frictional surfaces for low contamination and high reliability. The
substrate stage control utilizes laser interferometry at l/512 (0.0012 micron)
resolution. At these levels of precision, temperature changes on the order of
0.01 degree centigrade can produce unacceptable errors. For this reason the
ALTA 3000 stage uses specialized ceramic materials that have a low thermal
expansion coefficient.
NEW MASK TECHNOLOGIES: PHASE SHIFT MASKS AND OPTICAL PROXIMITY CORRECTION
Two new mask technologies, PSM and OPC, are being applied to the pattern
image on the mask to extend the resolution of photolithography. These advanced
masks are "optically active"; that is, the original circuit design data is
altered for the pattern generator to create a mask that will compensate for
the optical distortions that occur when feature sizes approach the stepper's
resolution limit or wavelength. It is possible to print circuit patterns on
the wafer that are actually smaller than the wavelength of the stepper using
these new mask technologies. As a result, PSM and OPC offer the promise of
extending the life of existing wafer steppers and their current process
technology.
Phase shift masks involve the printing of two different pattern layers on
one mask. The two patterns optically interfere, producing a higher resolution
image on the wafer than would be possible with only one pattern on the mask.
PSM requires essentially two complete mask patterning steps, one for the base
layer and another for the phase shifting layer, and therefore demands
additional pattern generation capacity.
In OPC, the circuit pattern is modified by the addition of numerous, very
small features around each edge of the intended pattern which, although they
are too small to be printed on the wafer, have the effect of compensating for
the loss of resolution in the wafer image caused when image features are
similar in size to the wavelength of the illumination source. OPC dramatically
increases the resolution and accuracy required in the maskmaking equipment and
substantially increases mask write times.
ETEC POLYSCAN
In February 1996, in furtherance of its strategy to develop or acquire
pattern generation and lithography-related products that serve additional
markets, the Company acquired substantially all of the assets of Polyscan, a
development-stage company based in Tucson, Arizona. Etec Polyscan, a wholly-
owned subsidiary of the Company formed to operate the acquired business,
designs and develops ultraviolet ("UV") laser direct imaging systems that the
Company intends to manufacture and market for applications that require large
area pattern generation, including printed circuit boards ("PCBs"), multi-chip
modules ("MCMs") and flat panel displays ("FPDs").
Traditional methods of large area pattern generation for such applications
as PCBs and MCMs employ conventional photographic methods to make phototools
which are used to print images of circuitry on substrates. These conventional
processes require multiple steps that increase turnaround time and capital and
materials expenses. These processes also introduce inaccuracies that reduce
yield and increase scrap. As the pattern density of many large area
applications continues to rise, the Company believes that manufacturers will
find it increasingly difficult to achieve acceptable accuracy using
traditional phototool processes. The Company believes
43
<PAGE>
that laser direct imaging of large area substrates offers a number of
advantages over traditional processes. In particular, laser direct imaging
eliminates up to 75% of the steps in the primary imaging process as well as
the errors inherent in each of those steps. The Company believes that the
resulting process simplification improves productivity, raises yields and
reduces scrap costs. However, the Company believes that direct imaging without
phototools has historically lacked sufficient throughput to be commercially
viable for these applications.
The Company believes that Etec Polyscan's direct imaging technology could
provide a major advance in throughput for large area direct imaging
applications by achieving highly optical efficiencies and image transfer
speeds. In addition, the Company intends to exploit technology synergies
between Etec Polyscan and its laser-based semiconductor mask pattern
generation systems to seek to achieve performance and cost advances in both
product lines and to extend its maskmaking technology to include systems for
large area mask pattern generation.
The Company has never operated in the market segments targeted by Etec
Polyscan, and there can be no assurance that Etec Polyscan will be able to
develop, manufacture and market its products successfully. There also can be
no assurance that any technology synergies will be realized between Etec
Polyscan and the Company's laser beam mask pattern generation business or that
Etec Polyscan's technology can be integrated into the Company's product
development strategy. Etec Polyscan has received orders for systems, but has
not yet shipped a product and has had operating losses since its inception.
The Company expects that Etec Polyscan will continue to experience operating
losses.
CUSTOMERS
The Company's customers include both captive and commercial (or "merchant")
mask shops. Semiconductor manufacturers employ their captive capabilities
largely to supply their own requirements for masks, while merchant mask shops
sell masks to a variety of semiconductor device manufacturers. Repeat sales to
existing customers represent a significant portion of the Company's product
revenues, and the Company believes that its installed base of over 165 systems
represents a significant competitive advantage. The following semiconductor
manufacturers and merchant mask shops have ordered or installed at least $2.0
million of systems, accessories or upgrades from the Company since the
beginning of fiscal 1994:
<TABLE>
<S> <C>
Align-Rite International Inc. Photronics, Inc.
Compugraphics International Ltd. P.K. Ltd. (formerly Anam S&T Co. Ltd.)
Dai Nippon Printing Co. Ltd. Raytheon Company
DuPont Photomasks, Inc. Rockwell International Corp.
Hewlett-Packard Company Samsung Electronics Co., Ltd.
Hoya Corporation Sharp Corporation
Hyundai Electronics Industries Co., Ltd. Siemens AG
Intel Corporation Sony Corporation
International Business Machines Taiwan Mask Corp.
Corporation Toppan Printing Company, Ltd.
Motorola, Inc. Toshiba Corporation
NEC Corporation
Oki Electric Industries Co. Ltd.
</TABLE>
Historically, a significant portion of the Company's revenues in any
particular period has been attributable to sales to a limited number of
customers. In fiscal 1996, fiscal 1995 and fiscal 1994, sales to the Company's
ten largest customers accounted for approximately 76%, 74% and 76% of total
revenues, respectively. Photronics and Dai Nippon Printing accounted for
approximately 17% and 13%, respectively, of total revenues in fiscal 1996.
DuPont, Dai Nippon Printing and Photronics accounted for approximately 14%,
14% and 12%, respectively, of total revenues in fiscal 1995. IBM and Toppan
Printing accounted for approximately 13% and 12%, respectively, of total
revenues in fiscal 1994. No other customer accounted for more than 10% of
total revenues during those periods. Sales are generally made on a purchase
order basis, and none of the Company's customers has entered into a long-term
agreement requiring it to purchase the Company's products. The loss of
44
<PAGE>
any significant customer or any reductions or delays in orders by a
significant customer could have a materially adverse effect on the Company.
See "Risk Factors--Concentration of Customers; Limited Concurrent Selling
Opportunities."
SALES AND MARKETING
Etec markets and distributes its products directly into its primary markets,
which consist of North America, Japan, South Korea and Europe. The Company
maintains sales offices in California, Japan, France and South Korea.
Customers in Southeast Asia, China and India are currently covered by sales
representatives, with assistance from the sales and marketing staff in
California. The Company's agreements with its sales representatives are
terminable upon 90 days' notice by either party.
Because of the significant investment required to purchase Etec's systems
and their highly technical nature, the sales process is complex, requiring
interaction with several levels of the customer's organization and extensive
technical exchanges, product demonstrations and commercial negotiations. As a
result, the sales cycle can be as long as 12 to 18 months. Purchase decisions
are generally made at a high level within the customer's organization, and the
sales process involves broad participation across the Etec organization, from
the Chief Executive Officer to the engineers who designed the product.
The first step in the sales process is to establish clearly the customer's
requirements and to identify the best product to meet such requirements. The
marketing department works closely with members of the engineering,
manufacturing and customer support departments in this process. Once the
customer's needs are identified and the sales objective is established, a
cross-functional sales team is formed under the coordination of the sales
department that may include members from sales, marketing, customer support,
engineering and manufacturing to establish a sales strategy. Execution of the
sales strategy often involves detailed customer demonstrations of the system's
performance in order to match the system to the customer's requirements. The
marketing staff also develops the Company's promotional and pricing strategy.
Sales to customers in countries outside of the United States have accounted
for a significant portion of the Company's revenues. Sales to customers in
countries other than the United States accounted for 45%, 44% and 43% of
revenues in fiscal 1996, fiscal 1995 and fiscal 1994, respectively, with an
additional 21%, 16% and 10% of revenues, respectively, attributable to sales
in the United States for shipment abroad. See Note 13 of Notes to Consolidated
Financial Statements for segment information. The Company anticipates that
international sales will continue to account for a significant portion of
revenues for the foreseeable future. Sales and operations outside of the
United States are subject to certain inherent risks. See "Risk Factors--Risks
Associated with International Sales and Operations."
The Company effects sales in Japan through its wholly-owned subsidiary, Etec
Japan. Customer orders received by Etec Japan are placed through Kanematsu
Corporation ("KG Japan") and its United States affiliate ("KG USA"), which in
turn orders the equipment from Etec. KG Japan receives a commission and
provides interim financing to Etec Japan covering the period between KG USA's
payments to Etec and the customer's payments to Etec Japan. The Company's
laser products were sold in Japan and the Far East by a distributor until
April 1995, when the Company began direct sales and marketing of laser beam
systems in that region. As part of that transition, the Company agreed to pay
the distributor a flat fee for each CORE and ALTA system sold in the defined
sales territory for at most the next four years. See Note 12 of Notes to
Consolidated Financial Statements.
As a result of the Company's worldwide distribution and service activities,
the Company from time to time has engaged in the distribution of third
parties' products to gain insight into new markets. For example, the Company
distributes Micrion Corporation's mask repair products in South Korea. In
December 1994, the Company entered into an exclusive distribution agreement
with QC Optics, Inc. ("QC Optics") to distribute and sell QC Optics' laser-
based inspection products in Japan, South Korea, Taiwan and Singapore. QC
Optics' inspection products are used to detect defects in masks, flat panel
displays and magnetic media.
45
<PAGE>
BACKLOG
The Company's backlog for products was $155.9 million, $147.6 million, $65.2
million and $30.1 million at October 31, 1996, July 31, 1996, July 31, 1995
and July 31, 1994, respectively. Etec defines backlog to include only those
systems, accessories and upgrades with respect to which a written purchase
order or agreement has been received and a delivery schedule has been
specified for product shipment over the succeeding 12 months. Cancellations of
product purchase orders require that the customer make compensatory payments,
depending upon the time of cancellation. Cancellations prior to 30 days before
estimated shipment generally require payments of up to 50% of the purchase
price. Cancellations within the 30 days prior to the estimated shipment date
are generally prohibited. However, orders have occasionally been rescheduled
by the customer without compensatory payments. Accordingly, backlog is not
necessarily representative of future sales. The Company's ability to ship
systems included in its reported backlog by the originally scheduled shipment
dates may be impacted by many factors, see "Risk Factors--Fluctuations in
Operating Results."
PRODUCT DEVELOPMENT
Etec invests heavily in research and development, primarily in electron beam
and laser beam imaging, high-speed data retrieval, processing and delivery
electronics, measurement and positioning systems and software development.
Research and development expenses, net of funding under cooperative
development agreements, were $17.4 million, $10.5 million and $5.1 million in
fiscal 1996, fiscal 1995 and fiscal 1994, respectively, representing 12%, 13%
and 7% of revenues, respectively.
The Company has recently adopted a formal product development methodology,
employing a product life cycle process. By requiring a common set of
specifications, schedules, objectives and terminology throughout the phases of
a development project, this process is intended to provide consistency with
corporate strategic plans and to facilitate coordination among marketing,
engineering, manufacturing and customer support personnel. The development of
a product is mapped through four phases: concept and feasibility; development;
commercialization; and obsolescence. Each of these four phases can only be
initiated by a formal decision by senior management, and the transition from
each phase to the next can only occur if key issues have been satisfactorily
addressed, such as consistency with the corporate strategy, market and
financial analyses, risk assessment, opportunity costs, scheduling and
technical specifications.
Current research and development programs include the development of next-
generation pattern generators. Although Etec does not sell direct write
systems, it developed direct write, electron beam technology with Department
of Defense funding in the 1980s and early 1990s and is utilizing certain
aspects of that technology in its efforts to develop tools to support next-
generation maskmaking.
Historically, governmental and private sources have funded a significant
portion of Etec's product development efforts. Governmental and quasi-
governmental agencies such as the Department of Defense, ARPA and SEMATECH
have supported Etec as a primary supplier of pattern-generation technologies
to the U.S. semiconductor industry, although such funding declined
significantly from fiscal 1994 to fiscal 1996. The aggregate funding from
ARPA, SEMATECH and other sources amounted to approximately $725,000, $7.3
million and $16.1 million in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively. The Company cannot predict whether any such funding will be
available to it in future periods.
SEMATECH provided partial funding for the Company's development of
enhancements to its existing electron beam and laser beam products pursuant to
cooperative development agreements. Funding pursuant to these agreements
amounted to approximately $280,000, $1.3 million and $5.5 million in fiscal
1996, fiscal 1995 and fiscal 1994, respectively. SEMATECH and its members have
the right to obtain a nonexclusive royalty-bearing license from the Company to
use the technology developed under the agreements.
MANUFACTURING
Etec leases a 150,000 square foot design and manufacturing campus for the
production of electron beam systems at its headquarters in Hayward,
California, and a 60,000 square foot design and manufacturing facility for the
production of laser beam systems in Beaverton, Oregon. Management believes
that these facilities will be
46
<PAGE>
sufficient to satisfy the Company's manufacturing needs for the foreseeable
future. The Company manufactures all of its electron beam systems in Hayward
and all of its CORE and ALTA laser beam systems in Beaverton. Neither facility
is equipped to produce the type of system produced by the other. The Company's
subsidiary, Etec Polyscan, also leases an approximately 39,000 square foot
facility in Tucson, Arizona. The Company's Hayward campus is located in a
seismically active area. Although the Company maintains business interruption
and other types of insurance, a major catastrophe (such as an earthquake or
other natural disaster) at its Hayward or Beaverton sites could result in a
prolonged interruption of the Company's business.
The Company's manufacturing activities consist of fabricating and assembling
components and subassemblies, which are then integrated into finished systems
and tested for compliance with customer requirements. The Company believes
that production lead time, product quality and customer responsiveness are key
elements to its success. Accordingly, the Company has implemented a cycle time
reduction program that has reduced time to build and improved product quality.
Historically, the average time required to manufacture a system has been in
excess of 52 weeks. The Company has recently reduced its average manufacturing
cycle time to less than 30 weeks. However, there can be no assurance that
future shipments can be manufactured on similar schedules or that the Company
will be able to maintain or further reduce its manufacturing cycle time over a
sustained period. The Company is currently experiencing delays in
manufacturing and delivering its systems and upgrades. Any inability to
manufacture and ship systems or upgrades on schedule could adversely affect
the Company's business, financial condition and results of operations. The
Company must also manage variability in cycle time due to the complexity of
the testing and calibration of its systems. Recently, extended testing and
calibration caused a delay of a system shipment to a customer. The Company is
currently investing in system test hardware and inventory as part of a program
to reduce this variability. The Company's ability to predict accurate shipment
dates depends on the success of this program. The Company's ability to reduce
the variance in cycle time is limited given the complexity of the
manufacturing process, the lengthy lead times necessary to obtain critical
components and the need for highly skilled personnel. See "Risk Factors--
Limited Manufacturing Capacity."
Although the Company manufactures some of the components and subassemblies
used in its systems, many are purchased from unaffiliated subcontractors,
typically to the Company's specifications. None of the Company's suppliers is
obligated to provide the Company with any specific quantity of components or
subassemblies over any specific period. Most of the components and
subassemblies included in the Company's products are obtained from a single
supplier or a limited group of suppliers. In particular, the Company relies on
sole-source suppliers for its MEBES systems' electron beam sources, high-
voltage power supplies, certain lasers, lenses and other critical components,
each of which is required for the production of the Company's systems. In
addition, because the Company believes that subsystem vendors have increased
their manufacturing expertise, the Company intends to obtain an increasing
percentage of components and subassemblies from third parties, in order to
devote its resources toward systems design, software development and systems
integration, its primary areas of competence. To date, the Company has
generally been able to obtain adequate, timely delivery of critical
subassemblies and components, although it has experienced occasional delays.
However, some of the Company's suppliers may be unwilling or unable to produce
sufficient volumes of key components to keep pace with the demand for the
Company's systems and upgrades, or to permit the Company to provide customers
with an adequate supply of spare parts. Due to occasional shortfalls in
supply, the Company has from time to time attempted to develop and manufacture
critical parts and subassemblies. In addition, the Company is attempting to
modify product designs to avoid the use of currently obsolete electronic
components. For example, certain components in the Company's MEBES systems
were designed for the MEBES system architecture, which was developed over 20
years ago. There can be no assurance that delays or shortages caused by
suppliers will not occur in the future or that the Company will be successful
in developing critical components internally or in modifying product designs
to avoid the use of obsolete components. In addition, the ALTA data path and
portions of the CORE system contain components that have been or are being
discontinued due to obsolescence. Because the manufacture of these components
and subassemblies is very complex and requires long lead times, and because
alternative sources may not be readily available, there can be no assurance
that delays or shortages caused by suppliers will not occur in
47
<PAGE>
the future. Any disruption of the Company's supply of critical components and
subassemblies could prevent the Company from meeting its manufacturing
schedules, which would damage relationships with customers and would have a
materially adverse effect on the Company's business, financial condition and
results of operations. See "Risk Factors--Dependence on Key Suppliers;
Availability of Critical Components."
COMPETITION
The maskmaking equipment industry is highly competitive. The Company
believes that the principal competitive factors in this industry are product
performance, service, technical support and overall cost of ownership,
including system price, reliability and ease of upgrade. The Company believes
that it presently competes favorably with respect to each of these factors.
Management also believes that the size of Etec's installed base and the
compatibility of its various products provide a significant competitive
advantage due to customers' desire for compatible mask layers and data
formats. However, the Company believes that to remain competitive, it will
require significant financial resources in order to invest in new product
development, to introduce next-generation systems on a timely basis and to
maintain customer service and support centers worldwide.
Management believes that its primary competitors are Hitachi and JEOL. These
competitors have substantially greater financial resources than the Company
and extensive engineering, manufacturing, marketing and customer service and
support capabilities. Some competitors have entered into strategic
relationships or alliances with leading semiconductor manufacturers. In
particular, the Company believes that Japanese competitors such as Hitachi and
JEOL may have longstanding collaborative relationships with Japanese and other
Asian semiconductor manufacturers. In the past year, several industry
consortia have been formed in Japan to promote the development of maskmaking
and direct write technology. Etec expects its present and future competitors
to continue to improve the performance of their current systems and to
introduce new systems with improved price and performance characteristics.
These new systems may compete directly with the Company's systems, which could
reduce their market acceptance. Competitive pressures could also result in
lower prices and margins, which could materially adversely affect the
Company's financial condition and operating results.
PATENTS AND OTHER PROPRIETARY RIGHTS
Etec holds 47 United States patents expiring on various dates from 1999
through 2012, with corresponding patents and patent applications claiming
prior right from U.S. patent applications for the more important of such
patents in Japan, South Korea, the European Community and Canada. In the field
of electron beam lithography, Etec owns patents and/or patent applications
directed to electron guns, ion pumps, particle beam systems, deflection
assemblies, calibration and measure processes, and addressing and writing
schemes. In the field of laser beam lithography, Etec owns patents and/or
patent applications directed to scanning optics, laser pattern generation and
rasterization schemes. Etec also has four pending U.S. patent applications and
over 40 pending patent applications in other countries. There can be no
assurance that any of these applications will be allowed or that any of the
allowed applications will be issued as patents.
Etec has six registered U.S. trademarks. In addition to patent and trademark
protection, the Company relies on the laws of unfair competition, copyright
and trade secrets to protect its proprietary rights. The Company has entered
into confidentiality and invention assignment agreements with its employees
and consultants that are designed to limit access to, and disclosure or use
of, the Company's proprietary information.
Certain important aspects of the Company's systems depend upon licenses
granted by third parties. In particular, the Company has licensed the basic
technological architecture for MEBES, the Company's family of electron beam
systems, as well as certain rights relating to laser beam technology, from
AT&T, Patlex Corporation and SEMATECH, respectively. The Company's electron
beam and laser beam systems incorporate software and hardware licensed from
other third parties. The Company also relies on trade secrets and proprietary
technology that it seeks to protect through confidentiality agreements with
employees, consultants and other parties.
As is typical in the industry, the Company has from time to time received,
and may in the future receive, communications from third parties alleging
infringements of patents and other intellectual property rights. No
48
<PAGE>
assurance can be given that additional infringement claims by third parties
will not be asserted. In the future, litigation may be necessary to defend the
Company against alleged infringement of others' rights. Any such litigation
could result in substantial cost and diversion of effort by the Company, which
by itself could have a material adverse effect on the Company. Further,
adverse determinations in such litigation could result in the Company's loss
of proprietary rights, subject the Company to significant liabilities, require
the Company to seek licenses from third parties or prevent the Company from
manufacturing or selling its systems, any of which could have a material
adverse effect on the Company's business, financial condition or results of
operations. In addition, there can be no assurance that, in the future,
litigation will not be necessary to enforce the Company's patents or other
intellectual property rights.
GOVERNMENTAL REGULATIONS AND INDUSTRY STANDARDS
The Company is subject to a variety of governmental regulations relating to
the use, storage, discharge, handling, emission, generation, manufacture and
disposal of toxic or other hazardous substances. The Company believes that it
is currently in compliance in all material respects with such regulations and
that it has obtained or is in the process of obtaining all material
environmental permits necessary to conduct its business. For several years,
the Company monitored groundwater on its Hayward, California property. The
Company discontinued monitoring subsequent to the concurrence of the
California Regional Water Quality Board in the Company's proposal to cease
groundwater monitoring at the site. See "Risk Factors--Environmental
Regulations."
The Company's products and worldwide operations are subject to numerous
governmental regulations designed to protect the health and safety of
operators of manufacturing equipment. In particular, recent European Union
("EU") regulations relating to electromagnetic fields, electrical power and
human exposure to laser radiation require Certificate Europa ("CE") mark
certification for shipments of laser beam and electron beam products into the
EU. Prior EU regulations in this area have required the Company to modify its
systems for shipment to Europe. The Company's CORE and ALTA systems currently
comply with the EU regulations which became effective in January 1996.
However, further EU regulations in this area are scheduled to become effective
in January 1997 and the Company's systems will not comply with such
regulations on that date. The Company is currently pursuing product design
activities to obtain CE mark certification for its CORE and ALTA laser beam
systems and for its next generation of MEBES products, but no such activities
are planned with respect to the MEBES 4500. No assurance can be given that the
Company will obtain such certification. If the Company is unable to comply
with these EU regulations, the Company may be barred from selling its products
to its customers in member countries of the EU. In addition, numerous domestic
semiconductor manufacturers and independent mask shops, including certain of
the Company's customers, have subscribed to voluntary health and safety
standards and decline to purchase equipment not meeting such standards. The
Company believes that its products currently comply with all material
governmental health and safety regulations, except for the EU regulations
described above, and with the voluntary industry standards currently in
effect. In part because the scope of future regulations and standards cannot
be predicted, however, there can be no assurance that the Company will be able
to comply with any future regulation or industry standard. Noncompliance could
result in governmental restrictions on sales or reductions in customer
acceptance of the Company's products. Compliance may also require significant
product modifications, potentially resulting in increased costs and impaired
product performance. In addition, the composition of the Company's workforce
and other aspects of its operations have been subject to extensive
governmental regulation due to the Company's provision of services to federal
agencies such as ARPA.
Certain of the Company's products may not be sold outside of the United
States except pursuant to an export license from the United States Department
of Commerce. While the Company has not experienced significant delays in
obtaining such licenses for major markets, there can be no assurance that
future sales will not be subject to delay due to export license or other
regulatory requirements.
49
<PAGE>
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
EMPLOYEES
As of July 31, 1996, Etec had 686 employees, including 137 in research,
development and engineering-related functions, 214 in manufacturing and
production, 127 in administration, 162 in field service, and 46 in marketing
and sales. Etec's foreign offices employed 122 employees, all foreign
nationals, as of such date. None of Etec's employees is governed by a
collective bargaining agreement, and the Company believes that its relations
with its employees are good.
The Company's financial performance will depend significantly upon the
continued contributions of its officers and key management, technical, sales
and support personnel, many of whom would be difficult to replace. In
addition, the Company believes that certain of its former employees currently
provide services or technical support to the Company's customers or
competitors. There can be no assurance that the Company will be successful in
attracting or retaining qualified personnel.
FACILITIES
The Company maintains its electron beam system design, development and
manufacturing capability at its headquarters located in Hayward, California.
The Company leases the Hayward campus under a lease that expires in fiscal
2012 unless extended at the Company's option for up to four five-year renewal
periods. The Hayward campus consists of two buildings with a total area of
150,000 square feet. In April 1996, the Company commenced construction of a
60,000-square-foot administrative building in Hayward, which is expected to be
completed in early 1997. The manufacturing building, one of the two existing
buildings, has been custom modified for the production of electron beam
systems and includes an 18,500 square foot cleanroom facility, including 20
test cells, for precision assembly and final system testing. The Company also
leases general office space in Hayward.
CORE and ALTA laser systems are manufactured at a facility in Beaverton,
Oregon with approximately 60,000 square feet under a lease that expires on
June 30, 1999 unless extended at the Company's option for an additional three-
year period. The facility includes approximately 7,000 square feet of
cleanroom space, including ten test cells. The Company also leases sales and
service offices in France, Germany, Japan and South Korea. The Company
believes its facilities are adequate to support its current needs.
Etec Polyscan operates an approximately 39,000 square foot facility in
Tucson, Arizona under a lease that expires in 2000. In early fiscal 1997, Etec
Polyscan completed the addition of 4,500 square feet of cleanroom space.
50
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Stephen E. Cooper........ 50 Chairman of the Board, President and Chief
Executive Officer
Frank E. Abboud.......... 36 Vice President, Product Development
William D. Cole.......... 41 Vice President, Sales and Customer Support
Trisha A. Dohren......... 50 Vice President, Human Resources and Administration
Roy A. Earle............. 40 Vice President, Operations
Melissa A. Ellis......... 44 Vice President, Customer Support
Mark A. Gesley........... 41 Vice President, Technology Development
Philip J. Koen, Jr....... 44 Vice President and Chief Financial Officer
Takeshi (John) Suzuki.... 58 President, Etec Japan and Director
Paul A. Warkentin........ 43 Vice President, Marketing
Edward L. Gelbach........ 65 Director
Jack H. King(2).......... 63 Director
Catherine P. Lego(1)..... 40 Director
John McBennett(1)........ 58 Director
Thomas M. Trent(2)....... 51 Director
Robert L. Wehrli(2)...... 74 Director
</TABLE>
- --------
(1) Member of the Audit Committee of the Board of Directors.
(2)Member of the Compensation Committee of the Board of Directors.
Mr. Cooper joined Etec as President and Chief Operating Officer in January
1993 and was named Chief Executive Officer in July 1993. He was initially
appointed to the Board of Directors in March 1993 and became Chairman of the
Board in April 1995. Before joining Etec, Mr. Cooper served as President and
Chief Executive Officer of Bipolar Integrated Technology, a manufacturer of
bipolar emitter coupled logic semiconductors, from 1987 to 1990. From 1980 to
1987, Mr. Cooper held various positions, including President and Chief
Operating Officer, with Silicon Systems, Inc., a manufacturer of
analog/digital semiconductors. From 1973 to 1980, Mr. Cooper held various
engineering and management positions at Intel Corporation, including
Engineering Manager and Wafer Fabrication Manager. Mr. Cooper holds a B.S.E.E.
from the University of California at Santa Barbara. He is also a director of
Vivid Semiconductor.
Mr. Abboud joined Etec in 1985 and has been Vice President, Product
Development since August 1996. From June 1994 to July 1996, Mr. Abboud served
as Vice President, Customer Support. He served as manager of electron beam
raster scan programs from August 1991 to June 1994. During that time he led
several critical product development programs and contracts with SEMATECH for
the development of the MEBES IV and MEBES 4000 products. Mr. Abboud received
his B.S.E.E. from California State University at Sacramento and his M.S.E.E.
from Santa Clara University.
Mr. Cole joined Etec as Vice President, Sales and Customer Support in August
1996. Before joining Etec, Mr. Cole served as Vice President, Sales for Genus,
Inc. a manufacturer of ion implementation and chemical vapor deposition
systems, since 1993. Prior to Genus, Mr. Cole was National Sales Manager at
Teradyne, Inc., a world leader in automatic test equipment, telecommunications
test, and backplane connection systems, where he had responsibility for sales
and service for the Western United States. From 1981 to 1985, he was a Sales
Engineer for Recht Associates, a manufacturer of electronic components. He
holds a B.S. in Economics/Statistics from the University of California at
Berkeley.
51
<PAGE>
Ms. Dohren joined Etec as Vice President, Human Resources and Administration
in August 1993. Before joining Etec, Ms. Dohren was a human resources
executive with Wells Fargo Bank's Wells Electronic Banking Systems from May
1993 to August 1993. From 1991 to February 1993, she served as Regional Human
Resources Manager with Brooks Brothers. From 1983 to 1991, Ms. Dohren held
various managerial positions including Personnel Manager at Macy's of
California. Ms. Dohren attended San Jose State University.
Mr. Earle joined Etec as Vice President, Operations in October 1995. Before
joining Etec, Mr. Earle served as Chief Operating Officer and Plant Manager
for Temic Siliconix, a manufacturer of integrated circuits and bipolar
discretes, from 1994 to October 1995. He was Senior Director: Tactical
Marketing of Temic Siliconix from 1990 to 1994. Mr. Earle served Siliconix,
Inc., a semiconductor manufacturer, as Plant Manager from 1989 to 1990 and as
Operations Manager from 1988 to 1989. From 1980 to 1988, Mr. Earle held
various operations and engineering positions with GE Ceramics and GE
Semiconductor. He holds a B.Sc. from University College, Dublin (Ireland), and
a M.Sc.Tech. from the University of Sheffield (United Kingdom).
Ms. Ellis, Vice President, Customer Support, joined Etec in August 1996.
Before joining Etec, Ms. Ellis was with Credence Systems Corporation from 1991
to 1996 where she had worldwide responsibility in the same capacity. Between
1976 and 1991, she held various management positions at Tektronix, Inc.,
including Business Unit Manager and Materials Manager. She holds a B.A. degree
from Lewis and Clark College, Portland, Oregon.
Dr. Gesley, Vice President, Technology Development, joined Etec in 1988. He
served as Director of Engineering from January 1995 to April 1995 and as
Director of the Company's vector-scan development team from September 1994 to
January 1995. Dr. Gesley also served as Program Manager from June 1994 to
September 1994. Dr. Gesley was a member of the electron beam lithography group
at IBM's Thomas L. Watson Research Center from 1985 to 1988, first as a post-
doctoral fellow and then as an advisory engineer. He holds a B.A. in Physics
from Reed College and a Ph.D. in Applied Physics from the Oregon Graduate
Institute of Science and Technology.
Mr. Koen, Vice President, Chief Financial Officer, joined Etec in December
1993 as Chief Financial Officer and Treasurer. He served as Chief Financial
Officer and Vice President, Manufacturing of Levolor Corporation, a consumer
products manufacturer, from April 1989 to December 1993. From 1980 to 1989, he
held several management positions, the last being Director of Business
Development, at Baker Hughes, Inc., a manufacturer of oil field service
equipment. Mr. Koen holds a B.A. in Economics from Claremont McKenna College
and an M.B.A. from the University of Virginia. Mr. Koen is a Certified Public
Accountant (inactive status).
Mr. Suzuki has been a director of Etec since May 1994. Mr. Suzuki has been
President and a director of Etec Japan since May 1990. He founded Etec Japan
in 1977. Mr. Suzuki has worked in the electronics industry since 1962 and has
extensive international trade experience.
Dr. Warkentin has been Vice President, Marketing of Etec since July 1995,
and has served in various other positions, including Vice President, Corporate
Development and Beaverton Site Manager. Dr. Warkentin came to Etec through its
acquisition of ATEQ Corporation in November 1991, where his last position was
Director of Development. Dr. Warkentin led a number of product development
programs after joining ATEQ in January 1984. Dr. Warkentin holds a B.A. in
Physics and Chemistry from the University of California, Santa Cruz and a
Ph.D. in Physics from the University of California, San Diego.
Mr. Gelbach has been a director of Etec since June 1995. He has been a
private investor for more than the past five years and also serves as a
director of Richey Electronics Inc. and Bell Microproducts. Mr. Gelbach held
various positions at Intel Corporation, including Senior Vice President
Corporate Marketing, from 1971 to 1989. He held various positions at Texas
Instruments, including National Sales Manager, from 1965 through 1971.
Mr. King has been a director of Etec since April 1990. He has been President
and Chief Executive Officer of Zitel, a manufacturer of high performance
storage subsystems, since October 1986. Mr. King was named a director of Zitel
in January 1987. Prior to joining Zitel, Mr. King served as President and
Chief Executive Officer of Dynamic Disk, Inc., a manufacturer of thin film
media, from 1984 to 1986. From 1981 to 1984, he served as
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<PAGE>
President and Chief Operating Officer of Data Electronics, Inc., a cartridge
tape drive manufacturer. Mr. King also served as Group President of the
Computer Media Group of Memorex Corporation.
Ms. Lego has been a director of Etec since September 1991. From June 1992 to
the present, Ms. Lego has been self-employed as a financial consultant. From
July 1981 to May 1992, Ms. Lego held various positions with Oak Management
Corp., a venture capital firm. Ms. Lego was a general partner of the following
venture capital partnerships until May 1992: Oak Investment Partners V from
November 1991, Oak Investment Partners IV from November 1988, and Oak
Investment Partners III from January 1985. Ms. Lego is also a director of
Uniphase Corp., Zitel and SanDisk Corporation.
Mr. McBennett has been a director of Etec since December 1994. Mr. McBennett
has been the Corporate Controller of Perkin-Elmer, which manufactures
analytical instrumentation, since 1977. He has been a corporate officer of
Perkin-Elmer since 1993.
Mr. Trent has been a director of Etec since December 1994. From 1986 through
1996, Mr. Trent was a Vice President of Micron, a semiconductor manufacturer.
He joined Micron as an integrated circuit design engineer in 1980. Previously,
Mr. Trent worked in Motorola, Inc.'s semiconductor research and development
department.
Mr. Wehrli has been a director of Etec since April 1995. Since 1977, Mr.
Wehrli has been owner and Chief Executive Officer of Chronometry, Inc., a
consulting firm. Mr. Wehrli has been Chairman of the Board of Siliconix, Inc.,
a manufacturer of power semiconductors, since 1990, and a director of
Siliconix since 1981. He is also a director of PECO Controls Co.
53
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of October 31, 1996, and as
adjusted to reflect the sale by the Company and the Selling Stockholders of
the shares offered hereby (assuming no exercise of the Underwriters' over-
allotment option) by: (i) each person who is known by the Company to own
beneficially more than 5% of the Company's Common Stock, (ii) each of the
Company's directors, (iii) each of the Company's executive officers, (iv) all
the directors and executive officers of the Company as a group, and (v) the
other Selling Stockholders:
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR NUMBER OWNED AFTER
TO OFFERING(1) OF OFFERING(2)
----------------- SHARES -----------------
PRINCIPAL STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ---------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
International Business Machines
Corporation....................... 1,167,821 5.9% 500,000 667,821 3.3%
Old Orchard Road
Armonk, NY 10504
DuPont Photomasks, Inc. ........... 1,025,640 5.1% -- 1,025,640 5.0%
One Financial Center
Round Rock, TX 78664
The Perkin-Elmer Corporation....... 994,534 5.0% 994,534 -- --
761 Main Avenue
Norwalk, CT 06859
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Frank E. Abboud(3)................. 26,012 * -- 26,012 *
William D. Cole.................... -- -- -- -- --
Stephen E. Cooper(3)............... 155,964 * -- 155,964 *
Trisha A. Dohren(3)................ 28,500 * -- 28,500 *
Roy A. Earle(3).................... 20,500 * -- 20,500 *
Melissa A. Ellis................... -- -- -- -- --
Edward L. Gelbach(3)............... 18,000 * -- 18,000 *
Mark A. Gesley(3).................. 4,154 * -- 4,154 *
Jack H. King(3)(4)................. 9,000 * -- 9,000 *
Philip J. Koen, Jr.(3)............. 39,634 * -- 39,634 *
Catherine P. Lego(3)............... 18,000 * -- 18,000 *
John McBennett(5).................. -- -- -- -- --
Takeshi (John) Suzuki(3)........... 30,667 * -- 30,667 *
Thomas M. Trent(6)................. -- -- -- -- --
Paul A. Warkentin(3)............... 25,299 * -- 25,299 *
Robert L. Wehrli(3)................ 8,000 * -- 8,000 *
All directors and executive
officers as a group (16
persons)(3)....................... 383,730 2.0% -- 383,730 1.9%
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
SHARES SHARES
BENEFICIALLY BENEFICIALLY
OWNED PRIOR NUMBER OWNED AFTER
TO OFFERING(1) OF OFFERING(2)
--------------- SHARES --------------
OTHER SELLING STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------- ------- ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Japan Associates Finance Co. Ltd. (7).... 834,114 4.2% 834,114 -- --
Micron Technology, Inc. ................. 420,512 2.1% 420,512 -- --
Kanematsu Corporation.................... 361,451 1.8% 361,451 -- --
Grumman Aerospace Corporation............ 339,097 1.7% 339,097 -- --
CIGNA Mezzanine Partners II, L.P. ....... 129,469 1.0% 55,000 74,469 *
Hambrecht & Quist (8).................... 99,048 * 99,048 -- --
CH Partners III.......................... 89,052 * 89,052 -- --
Oak Investment Partners III.............. 45,126 * 40,126 5,000 *
Union Venture Corporation................ 37,332 * 37,332 -- --
Sequoia Capital IV (9)................... 29,557 * 24,147 5,455 *
Vista II L.P. ........................... 26,152 * 26,152 -- --
Keith Standiford (10).................... 45,250 * 10,000 35,250 *
Charles Minihan.......................... 25,274 * 25,274 -- --
John R. Thomas (11)...................... 34,476 * 10,000 24,476 *
Other Selling Stockholders (12).......... 91,761 * 34,161 57,600 *
</TABLE>
- --------
* Less than 1%.
(1) To the Company's knowledge, the persons named in the table have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them, subject to community property laws
where applicable and the information contained in the footnotes to this
table.
(2) For purposes of computing the percentage of outstanding shares held by
each person or group of persons named above on a given date, shares which
such person or group has the right to acquire within 60 days after such
date are deemed to be outstanding, but are not deemed to be outstanding
for the purposes of computing the percentage ownership of any other
person.
(3) Includes shares issuable upon exercise of options within 60 days of
October 31, 1996 as follows: Mr. Abboud, 23,512, Mr. Cooper, 23,500, Ms.
Dohren, 18,000, Mr. Earle, 20,000, Mr. Gelbach, 8,000, Mr. Gesley, 1,921,
Mr. King, 8,000, Mr. Koen, 33,334, Ms. Lego, 8,000, Mr. Suzuki, 17,334,
Mr. Warkentin, 23,284 shares, Mr. Wehrli, 8,000 shares and all executive
officers and directors as a group (16 persons), 192,885 shares.
(4) Excludes 70,063 shares held by Zitel Corporation, of which Mr. King is
President, Chief Executive Officer and a director and may be deemed to
share voting or dispositive power over such shares.
(5) Excludes 994,534 shares held by The Perkin-Elmer Corporation, of which Mr.
McBennett is an officer. Mr. McBennett has indicated to the Company that
he does not have or share voting or dispositive power over such shares.
(6) Excludes 420,512 shares held by Micron Technology, Inc., of which Mr.
Trent was formerly a Vice President. Mr. Trent has indicated to the
Company that he does not have or share voting or dispositive power over
such shares.
(7) Consists of 95,500 shares beneficially owned by Japan Associates Finance
Co., Ltd.; 30,775 shares beneficially owned by JAFCO No. 6 Investment
Enterprise Partnership; 77,554 shares beneficially owned by JAFCO G-3
Investment Enterprise Partnership; 56,011 shares beneficially owned by
JAFCO G-4 Investment Enterprise Partnership; 68,322 shares beneficially
owned by JAFCO G-5 Investment Enterprise Partnership; 27,697 shares
beneficially owned by JAFCO JS-1 Investment Enterprise Partnership; 30,775
shares beneficially owned by JAFCO R-1(A) Investment Enterprise
Partnership; 30,775 shares beneficially owned by JAFCO R-1(B) Investment
Enterprise Partnership; and 416,705 shares beneficially owned by U.S.
Information Technology Investment Enterprise Partnership.
(8) Consists of 34,207 shares beneficially owned by H&Q Ventures IV; 201
shares beneficially owned by Anglo-Continental Venture Investors S.A.; 46
shares beneficially owned by H&Q Alliance Fund; 246 shares beneficially
owned by H&Q Investors; 64,011 shares beneficially owned by H&Q Ventures
International C.V.; 56 shares beneficially owned by Hamco Capital Corp.;
261 shares beneficially owned by Hamquist; and 20 shares beneficially
owned by Hambrecht & Quist Group.
(9) Consists of 22,066 shares beneficially owned by Sequoia Capital IV, all of
which are being offered hereby; 2,081 shares beneficially owned by Sequoia
Technology Partners II, all of which are being offered hereby; 16 shares
beneficially owned by Sequoia XIV; 82 shares beneficially owned by Sequoia
XV; 41 shares beneficially owned by Sequoia XVI; 20 shares beneficially
owned by Sequoia XX; and 5,251 shares beneficially owned by Sequoia XXI.
(10) Includes 18,584 shares issuable upon exercise of options within 60 days
of October 31, 1996.
(11) Includes 14,476 shares issuable upon exercise of options within 60 days
of October 31, 1996.
(12) Consists of 15 individuals each of whom beneficially owns less than 0.20%
of the Company's outstanding Common Stock prior to the Offering.
Beneficial ownership prior to the Offering includes an aggregate of
13,119 shares issuable upon exercise of options within 60 days of October
31, 1996.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made regarding the effect, if any, that market sales of
shares of Common Stock or the availability of shares for sale will have on the
market price prevailing from time to time. As described below, the number of
shares available for sale shortly after this offering will be limited due to
certain contractual and legal restrictions on resale. Nevertheless, sales of
substantial amounts of Common Stock of the Company in the public market after
the restrictions lapse could adversely affect the prevailing market price.
Upon completion of this offering, the Company will have outstanding
20,461,926 shares of Common Stock (assuming no exercise of options and
warrants to purchase 1,696,558 shares). Of these, 16,786,072 shares of Common
Stock (including the 4,400,000 shares being sold hereby) will be freely
tradable (other than by an "affiliate" of the Company as such term is defined
in the Securities Act) without restriction or registration under the
Securities Act. The remaining 3,675,854 shares held by existing stockholders
(the "Restricted Shares") were issued and sold by the Company in reliance on
exemptions from the registration requirements of the Securities Act or are
shares subject to certain lock-up restrictions (as defined below). These
shares may be sold in the public market only if registered or pursuant to an
exemption from registration such as Rule 144 or Rule 701 under the Securities
Act and/or after such lock-up period has expired.
Of the Restricted Shares, approximately 2,957,000 shares are held by certain
stockholders that have agreed in connection with the Company's initial public
offering not to sell, directly or indirectly, any shares owned by them until
January 20, 1997 without the prior written consent of the Company and
Robertson, Stephens & Company LLC and approximately 190,845 shares (not
including options to purchase 192,885 shares, which are also subject to lock-
up restrictions) are held by officers and directors of the Company who have
agreed not to sell, directly or indirectly, any shares owned by them for a
period of 90 days from the date of this Prospectus (collectively, the "Lock-up
Restrictions") without prior written consent of the Company and Lehman
Brothers Inc. Commencing January 20, 1997, upon the expiration of Lock-up
Restrictions (or earlier upon the consent of the Company and Robertson
Stephens & Company LLC) approximately 2,311,000 Restricted Shares will become
eligible for sale without restriction in reliance on Rule 144(k) and Rule 701,
and approximately 300,000 Restricted Shares will become eligible for sale
subject to the restrictions of Rule 144. Approximately 49,000 Restricted
Shares are not subject to the Lock-up Restrictions, and are eligible for
immediate sale in the public market, subject to the restrictions of Rule 144
and Rule 701. Approximately 941,000 will become eligible for sale upon
satisfaction of certain requirements under Rule 144 including the holding
period requirements which will not be satisfied as to 675,000 of such shares
prior to February 1998.
In general, under Rule 144 as currently in effect, an affiliate of the
Company, or a holder of Restricted Shares who owns beneficially shares that
were not acquired from the Company or an affiliate of the Company within the
previous two years, would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of 1% of the then
outstanding shares of Common Stock (approximately 189,083 shares immediately
after this offering, assuming no exercise of the Underwriters' over-allotment
option) or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the sale is filed
with the Commission. Sales under Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. However, a person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who owns
beneficially Restricted Shares is entitled to sell such shares under Rule
144(k) without regard to the limitations described above, provided that at
least three years have elapsed since the later of the date the shares were
acquired from the Company or from an affiliate of the Company. The foregoing
is a summary of Rule 144 and is not intended to be a complete description of
it.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisers prior to the closing
of the Company's initial public offering, pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such
56
<PAGE>
persons. In addition, the Commission has indicated that Rule 701 will apply to
stock options granted by the Company before its initial public offering, along
with the shares acquired upon exercise of such options. Securities issued in
reliance on Rule 701 are deemed to be Restricted Shares and (unless subject to
the contractual restrictions described above), may be sold by persons other
than affiliates subject only to the manner of sale provisions of Rule 144 and
by affiliates under Rule 144 without compliance with its two-year minimum
holding period requirements.
The Company has filed Registration Statements on Form S-8 covering the
resale of 2,815,930 shares of Common Stock which are reserved for issuance
under the Company's 1995 Omnibus Incentive Plan, 1994 Employee Stock Option
Plan, 1995 Directors' Stock Option Plan, 1990 Executive Stock Plan, 1990
Employee Stock Plan, and 1995 Employee Stock Purchase Plan, including, in some
cases, shares for which an exemption under Rule 144 or Rule 701 would also be
available, thus permitting the resale of shares in the public market without
restriction under the Securities Act. As of October 31, 1996, options to
purchase 1,545,921 shares were outstanding under the Company's 1995 Omnibus
Incentive Plan, 1994 Employee Stock Option Plan, 1990 Executive Stock Plan,
1990 Employee Stock Plan, and 1995 Directors' Stock Option Plan, and as of
October 31, 1996, 39,189 shares had been purchased under the Company's
Employee Stock Purchase Plan. In addition, the Company has filed a
Registration Statement on Form S-8 covering the resale of 44,288 shares of
Common Stock which are reserved for issuance upon exercise of warrants to
purchase Common Stock. These warrants were originally issued in connection
with the Company's acquisition of ATEQ Corporation in 1991, and as of October
31, 1996, 37,412 shares of Common Stock have been issued upon exercise of such
warrants and are available for resale in the public market.
Holders of approximately 3,078,000 Restricted Shares have the right to cause
the company to register the sale of their shares under the Securities Act. The
registration of such shares under the Securities Act would result in such
shares becoming freely tradeable without restriction under the Securities Act
(except for shares purchased by affiliates of the Company) immediately upon
the effectiveness of such registration.
57
<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a general discussion of certain United States federal
income and estate tax consequences of the ownership and disposition of Common
Stock by a person that, for United States federal income tax purposes, is a
non-resident alien individual, a foreign corporation, a foreign partnership or
an estate or trust, in each case not subject to U.S. federal income tax on a
net income tax basis in respect of income or gain from Common Stock (a "non-
U.S. holder"). This discussion is based on the Internal Revenue Code of 1986,
as amended, Treasury regulations thereunder, and administrative and judicial
interpretations as of the date hereof, all of which may be changed. This
discussion does not address all the aspects of U.S. federal income and estate
taxation that may be relevant to non-U.S. holders in light of their particular
circumstances, or to certain types of holders subject to special treatment
under United States federal income tax laws (such as life insurance companies
and dealers in securities). Nor does it address tax consequences under the
laws of any state, municipality or other taxing jurisdiction or under the laws
of any country other than the United States.
Prospective holders should consult their own tax advisors about the
particular tax consequences to them of holding and disposing of Common Stock.
DIVIDENDS
Generally, dividends paid to a non-U.S. holder of Common Stock will be
subject to United States federal withholding tax at a 30% rate or such lower
rate as may be specified by an applicable income tax treaty, unless the
dividends are effectively connected with the conduct of a trade or business
within the United States (or alternatively are attributable to a United States
permanent establishment of such holder, if an applicable income tax treaty so
requires as a condition for the non-U.S. holder to be subject to United States
income tax on a net income basis in respect of such dividends). Such
"effectively connected" dividends, or dividends attributable to a permanent
establishment, are subject to tax at rates applicable to United States
citizens, resident aliens and domestic United States corporations, and are not
generally subject to withholding. Effectively connected dividends received by
a non-U.S. corporation may be subject to an additional "branch profits tax" at
a 30% rate (or a lower rate under an applicable income tax treaty) when such
dividends are deemed repatriated from the United States.
Under current U.S. Treasury regulations, dividends paid to an address
outside the United States in a foreign country are presumed to be paid to a
resident of such country for purposes of the withholding tax. Under current
interpretation of U.S. Treasury regulations, the same presumption applies to
determine the applicability of a reduced rate of withholding under a tax
treaty. Thus, non-U.S. holders receiving dividends at addresses outside the
United States are not currently required to file tax forms to obtain the
benefit of an applicable treaty rate. Under U.S. Treasury regulations that are
proposed to be effective for distributions after 1997 (the "Proposed
Regulations"), to claim the benefits of a tax treaty a non-U.S. holder of
Common Stock would need to satisfy applicable certification requirements. In
addition, under the Proposed Regulations, in the case of Common Stock held by
a foreign partnership, (i) the certification requirement would generally be
applied to the partners of the partnership and (ii) the partnership would be
required to provide certain information. The Proposed Regulations also provide
look-through rules for tiered partnerships. It is not certain whether, or in
what form, the Proposed Regulations will be adopted as final regulations.
If there is excess withholding on a person eligible for a treaty benefit,
the person can file a claim for a refund with the United States Internal
Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax in respect of gain recognized on a disposition of Common Stock
unless (i) the gain is effectively connected with a trade or business of the
non-U.S. holder in the United States, (ii) in the case of a non-U.S. holder
who is an individual and holds
58
<PAGE>
the Common Stock as a capital asset, such holder is present in the United
States for 183 or more days in the taxable year of the disposition and certain
other conditions are met, (iii) the non-U.S. holder is subject to tax pursuant
to the provisions of United States tax law applicable to certain United States
expatriates, or (iv) the Company is or has been a "United States real property
holding corporation" for federal income tax purposes and, if the Common Stock
is regularly traded on an established securities market, the non-U.S. holder
held, directly or indirectly, at any time during the 5-year period ending on
the date of disposition (or such shorter period that such shares were held)
more than 5% of the Common Stock. The Company has not been and does not
anticipate becoming a "United States real property holding corporation" for
United States federal income tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Generally, the Company must report to the U.S. Internal Revenue Service the
amount of dividends paid, the name and address of the recipient and the
amount, if any, of tax withheld. A similar report is sent to the holder.
Pursuant to tax treaties or other agreements, the U.S. Internal Revenue
Service may make its reports available to tax authorities in the recipient's
country of residence. Dividends not subject to withholding tax may be subject
to backup withholding at a 31% rate if the non-U.S. holder is not an "exempt
recipient" and fails to provide a tax identification number and other
information to the Company. Under the Proposed Regulations, dividend payments
generally will be subject to information reporting and backup withholding
unless applicable certification requirements are satisfied.
If the proceeds of a disposition of Common Stock are paid over by or through
a United States office of a broker, the payment is subject to information
reporting and possible backup withholding at a 31% rate unless the disposing
holder certifies under penalties of perjury as to his name, address, and non-
U.S. holder status or otherwise establishes an exemption. Generally, United
States information reporting and backup withholding requirements will not
apply to a payment of disposition proceeds if the payment is made outside the
United States through a non-United States office of a broker. However, United
States information reporting requirements (but not backup withholding) will
apply to a payment of disposition proceeds outside the United States if (A)
the payment is made through an office outside the United States of a broker
that either (i) is a U.S. person, (ii) derives 50% or more of its gross income
for certain periods from the conduct of a trade or business in the United
States or (iii) is a "controlled foreign corporation" for United States
federal income tax purposes and (B) the broker fails to maintain documentary
evidence that the holder is a non-U.S. holder or that the holder otherwise is
entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained.
FEDERAL ESTATE TAXES
Common Stock held by a non-U.S. holder at the time of death will be included
in such holder's gross estate for United States federal estate tax purposes
unless an applicable estate tax treaty provides otherwise.
59
<PAGE>
UNDERWRITING
Under the terms of, and subject to the conditions contained in, the U.S.
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which the Prospectus forms a part, each of the
underwriters named below (the "U.S. Underwriters"), for whom Lehman Brothers
Inc., Robertson, Stephens & Company LLC, Smith Barney Inc. and Needham &
Company, Inc. are acting as representatives (the "Representatives"), have
severally agreed to purchase from the Company and the Selling Stockholders,
and the Company and the Selling Stockholders have agreed to sell to each U.S.
Underwriter, the aggregate number of shares of Common Stock set forth opposite
the name of each such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
----------------- ---------
<S> <C>
Lehman Brothers Inc. ............................................
Robertson, Stephens & Company LLC................................
Smith Barney Inc. ...............................................
Needham & Company, Inc. .........................................
---------
Total.......................................................... 3,520,000
=========
</TABLE>
Under the terms of, and subject to the conditions contained in, the
International Underwriting Agreement, the form of which is filed as an exhibit
to the Registration Statement, the managers named below of the concurrent
offering of the Common Stock outside the United States and Canada (the
"International Managers" and together with the U.S. Underwriters, the
"Underwriters"), for whom Lehman Brothers International (Europe), Robertson,
Stephens & Company LLC, Smith Barney Inc. and Needham & Company, Inc. are
acting as lead managers (the "Lead Managers"), have severally agreed to
purchase from the Company and the Selling Stockholders, and the Company and
the Selling Stockholders have agreed to sell to each International Manager,
the aggregate number of shares of Common Stock set forth opposite the name of
each such International Manager below:
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
---------------------- ---------
<S> <C>
Lehman Brothers International (Europe) ..........................
Robertson, Stephens & Company LLC................................
Smith Barney Inc. ...............................................
Needham & Company, Inc. .........................................
-------
Total.......................................................... 880,000
=======
</TABLE>
The Company and the Selling Stockholders have been advised by the
Representatives and the Lead Managers that the U.S. Underwriters and the
International Managers, respectively, propose to offer shares of Common Stock
directly to the public initially at the public offering price set forth on the
cover page of this Prospectus and to certain selected dealers (who may include
the U.S. Underwriters and the International Managers) at such price less a
concession not in excess of $ per share. The selected dealers may reallow a
concession not in excess of $ per share to certain other dealers. After
commencement of the public offering, the offering price and other selling
terms may be changed by the Representatives and the Lead Managers.
The U.S. Underwriting Agreement and the International Underwriting Agreement
provide that the obligations of the several U.S. Underwriters and
International Managers to pay for and accept delivery of the shares of Common
Stock are subject to certain conditions precedent, including the conditions
that no stop order
60
<PAGE>
suspending the effectiveness of the Registration Statement is in effect and no
proceedings for such purpose are pending before or threatened by the
Commission, and that there has been no material adverse change in the
condition of the Company. The U.S. Underwriters will be obligated to purchase
3,520,000 shares of Common Stock and the International Managers will be
obligated to purchase 880,000 shares of Common Stock offered hereby if any are
purchased. The closing of the U.S. Offering is a condition to the closing of
the International Offering, and the closing of the International Offering is a
condition to the closing of the U.S. Offering.
The Company has granted the U.S. Underwriters and the International Managers
options to purchase up to an aggregate of 528,000 and 132,000 additional
shares of Common Stock, respectively, at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the U.S. Underwriters or International Managers
exercise such options, each of the U.S. Underwriters or International
Managers, as the case may be, will have a firm commitment subject to certain
conditions to purchase a number of the additional shares of Common Stock
proportionate to such U.S. Underwriters or International Manager's initial
commitment as indicated in the preceding tables. The Company will be
obligated, pursuant to such option, to sell such shares to the U.S.
Underwriters and the International Managers to the extent such options are
exercised. The U.S. Underwriters and the International Managers may exercise
such option only to cover over-allotments made in connection with the sale of
Common Stock offered hereby.
The U.S. Underwriters and the International Managers have entered into an
Agreement Between U.S. Underwriters and International Managers pursuant to
which each U.S. Underwriter has agreed that, as part of the distribution of
the shares (plus any of the shares to cover over-allotments) of Common Stock
offered in the U.S. Offering, (i) it is not purchasing any of such shares for
the account of anyone other than a U.S. Person (as defined below) and (ii) it
has not offered or sold, and will not offer, sell, resell or deliver, directly
or indirectly, any of such shares or distribute any Prospectus relating to the
U.S. Offering to anyone other than a U. S. Person. In addition, pursuant to
the same Agreement, each International Manager has agreed that, as part of the
distribution of the shares (plus any of the shares to cover over-allotments)
of Common Stock offered in the International Offering, (i) it is not
purchasing any of such shares for the account of a U.S. Person and (ii) it has
not offered or sold, and will not offer, sell, resell or deliver, directly or
indirectly, any of such shares or distribute any Prospectus relating to the
International Offering to any U.S. Person. Each International Manager has also
agreed that it will offer to sell shares only in compliance with all relevant
requirements of any applicable laws.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Underwriting Agreements and the
Agreement Between U.S. Underwriters and International Managers, including (i)
certain purchases and sales between the U.S. Underwriters and International
Managers, (ii) certain offers, sales, resales, deliveries or distributions to
or through investment advisors or other persons exercising investment
discretion, (iii) purchases, offers or sales by a U.S. Underwriter who is also
acting as an International Manager or by an International Manager who is also
acting as a U.S. Underwriter and (iv) other transactions specifically approved
by the Representatives and the Lead Managers. As used herein, "U.S. Person"
means any resident or citizen of the United States or Canada and its
provinces, any corporation or other entity created or organized in or under
the laws of the United States or Canada and its provinces or any estate or
trust the income of which is subject to United States or Canadian federal
income taxation regardless of the source of its income. The term "United
States" means the United States of America (including the District of
Columbia) and its territories, its possessions and other areas subject to its
jurisdiction.
Pursuant to the Agreement Between U.S. Underwriters and International
Mangers, sales may be made between the U.S. Underwriters and the International
Managers of such number of shares of Common Stock as may be mutually agreed
upon. The price of any shares so sold shall be the public offering price as
then in effect for Common Stock being sold by the U.S. Underwriters and the
International Managers, less an amount not greater than the selling concession
allocable to such Common Stock. To the extent there are sales between the U.S.
Underwriters and the International Managers pursuant to the Agreement Between
U.S. Underwriters and International Managers, the number of shares initially
available for sale by the U.S. Underwriters or by the International Mangers
may be more or less than the amount appearing on the cover page of this
Prospectus.
61
<PAGE>
Each International Manager has represented and agreed that (i) it has not
offered or sold, and prior to the date six months after the date of issue of
the Common Stock, will not offer or sell, in the United Kingdom, by means of
any document, any shares of the Common Stock other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
principal or agent (except under circumstances which do not constitute an
offer to the public within the meaning of the Companies Act 1985); (ii) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 with respect to anything done by it in relation to the
Common Stock in, from or otherwise involving the United Kingdom; and (iii) it
has only issued or passed on, and will only issue and pass on to any person in
the United Kingdom, any document received by it in connection with the issue
of the Common Stock if that person is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995 or is a person to whom the document may otherwise be lawfully issued or
passed on.
Purchasers of the shares offered pursuant to the Offerings may be required
to pay stamp taxes and other charges in accordance with the laws and practices
of the country of purchase in addition to the public offering price set forth
on the cover page hereof.
The Company and the Selling Stockholders have agreed to indemnify the U.S.
Underwriters and the International Managers against certain liabilities,
including liabilities under the Securities Act or to contribute to payments
that may be required to be made in respect thereof.
The Company has agreed not to offer, sell or dispose of any Common Stock or
any options, rights, warrants or any securities convertible into or
exchangeable or exercisable for Common Stock prior to the expiration of 90
days from the date of this Prospectus without the prior written consent of
Lehman Brothers Inc., other than the Common Stock to be sold in this offering
and Common Stock issuable upon the exercise of outstanding stock options
granted pursuant to the 1990 Executive Stock Plan, 1990 Employee Stock Option
Plan, 1995 Omnibus Incentive Plan, 1995 Directors' Stock Option Plan or Common
Stock issuable under the 1995 Employee Stock Purchase Plan. Officers and
directors of the Company have agreed not to sell or otherwise transfer or
dispose of any securities of the Company (other than to donees who agree to be
similarly bound) during the period of 90 days following the effective date of
the Registration Statement of which this Prospectus is a part, without the
prior written consent of Lehman Brothers Inc.
Certain of the Underwriting and selling group members (if any) that
currently act as market makers for the Common Stock may engage in "passive
market making" in the Common Stock on Nasdaq in accordance with Rule 10b-6A
under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
Rule 10b-6A prohibits underwriters and selling group members engaged in
passive market making generally from entering a bid or effecting a purchase at
a price that exceeds that highest bid for those securities displayed on Nasdaq
by a market maker that is not participating in the distribution. Under Rule
10b-6A, each underwriter or selling group member engaged in passive market
making is subject to a daily net purchase limitation equal to 30% of such
entity's average daily trading volume during the two full consecutive calendar
months immediately proceeding the date of the filing of the registration
statement under the Securities Act pertaining to the security to be
distributed.
62
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company and certain of the Selling
Stockholders by Pillsbury Madison & Sutro LLP, San Francisco, California, and
for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. A member of Pillsbury Madison & Sutro LLP is the Secretary of the
Company.
EXPERTS
The financial statements of Etec Systems, Inc. as of July 31, 1995 and July
31, 1996, and for each of the three years in the period ended July 31, 1996,
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
CHANGE IN ACCOUNTANTS
Effective April 10, 1995, Price Waterhouse LLP was engaged as the Company's
principal independent accountants. Prior to April 10, 1995, KPMG Peat Marwick
LLP ("KPMG") had been the Company's independent accountants. The decision to
change independent accountants was approved by the Company's Board of
Directors. In the period from August 1, 1993 through April 9, 1995 KPMG issued
no audit report which was qualified or modified as to uncertainty, audit scope
or accounting principles, no adverse opinions or disclaimers of opinion on any
of the Company's financial statements, and there were no disagreements with
KPMG on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures. KPMG has not audited or reported
on any of the Company's financial statements or information included in this
Prospectus. Prior to April 10, 1995 the Company had not consulted with Price
Waterhouse LLP on items which involved the Company's accounting principles or
the form of audit opinion to be issued on the Company's financial statements.
63
<PAGE>
ETEC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets at July 31, 1996 and 1995..................... F-3
Consolidated Statements of Operations for the years ended July 31, 1996,
1995 and 1994............................................................ F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended July 31, 1996, 1995 and 1994....................................... F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1996,
1995 and 1994............................................................ F-6
Notes to Consolidated Financial Statements................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Etec Systems, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of Etec
Systems, Inc. and its subsidiaries at July 31, 1996 and July 31, 1995, and the
results of their operations and their cash flows for each of the three years
in the period ended July 31, 1996 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
San Jose, California
August 27, 1996
F-2
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 44,472 $ 23,638
Marketable securities.................................... 24,153 --
Accounts receivable, less allowance for doubtful accounts
of $1,102 and $1,270.................................... 37,316 24,572
Inventory................................................ 52,135 24,238
Other current assets..................................... 3,042 1,972
Deferred tax assets...................................... 24,508 944
-------- --------
Total current assets................................... 185,626 75,364
Property, plant and equipment, net......................... 19,381 6,474
Other assets............................................... 3,864 4,146
-------- --------
$208,871 $ 85,984
======== ========
LIABILITIES, MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK, AND
STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current maturities of long-term debt..................... $ 3,333 $ 5,386
Accounts payable......................................... 14,184 6,575
Accrued and other liabilities............................ 51,084 38,671
Taxes payable............................................ 5,826 1,517
-------- --------
Total current liabilities.............................. 74,427 52,149
Long-term debt, less current portion....................... 6,667 16,866
Deferred gain on sale of asset............................. 5,571 6,015
Other liabilities.......................................... 6,329 1,972
-------- --------
Total liabilities.......................................... 92,994 77,002
-------- --------
Mandatorily redeemable convertible preferred stock......... -- 76,397
-------- --------
Commitments and Contingencies (Notes 5, 12, and 15)
Stockholders' equity (deficit):
Preferred Stock par value $0.01 per share; 10,000,000
shares authorized, none issued or outstanding........... -- --
Common Stock, par value $0.01 per share; 30,000,000 and
20,000,000 shares authorized, 19,610,964 and 910,402
shares issued and outstanding........................... 196 9
Warrants................................................. 1,096 562
Additional paid-in capital............................... 149,858 345
Cumulative translation adjustment........................ 211 2,936
Accumulated deficit...................................... (35,484) (71,267)
-------- --------
Total stockholders' equity (deficit)................... 115,877 (67,415)
-------- --------
$208,871 $ 85,984
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Revenue:
Products......................................... $112,940 $51,395 $40,731
Services......................................... 32,705 31,521 27,979
-------- ------- -------
145,645 82,916 68,710
-------- ------- -------
Cost of revenue:
Cost of products................................. 56,632 27,015 25,559
Cost of services................................. 23,410 20,604 17,670
-------- ------- -------
80,042 47,619 43,229
-------- ------- -------
Gross profit....................................... 65,603 35,297 25,481
-------- ------- -------
Operating expenses:
Research, development and engineering............ 17,402 10,497 5,102
Selling, general and administrative.............. 21,269 13,397 10,803
Write-off of in-process technology acquired...... 6,269 -- --
-------- ------- -------
44,940 23,894 15,905
-------- ------- -------
Income from operations............................. 20,663 11,403 9,576
Interest expense................................... (1,824) (4,238) (5,115)
Other income (expense), net........................ 2,669 (352) (533)
-------- ------- -------
Income before income tax (benefit) provision and
extraordinary items............................... 21,508 6,813 3,928
Income tax (benefit) provision..................... (16,283) 2,289 2,316
-------- ------- -------
Income before extraordinary items.................. 37,791 4,524 1,612
Extraordinary (loss) gain on early extinguishment
of debt........................................... (930) 5,412 --
-------- ------- -------
Net income......................................... 36,861 9,936 1,612
Accretion of mandatorily redeemable convertible
preferred stock................................... 1,078 3,092 2,946
-------- ------- -------
Net income (loss) attributable to Common
Stockholders...................................... $ 35,783 $ 6,844 $(1,334)
======== ======= =======
Per share data:
Income before extraordinary items................ $ 2.07 $ 0.31 $ 0.12
Extraordinary (loss) gain........................ (0.05) 0.37 --
-------- ------- -------
Net income....................................... $ 2.02 $ 0.68 $ 0.12
======== ======= =======
Weighted average common shares..................... 18,296 14,594 14,008
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN TRANSLATION ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL ADJUSTMENT DEFICIT TOTAL
---------- ------ -------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31,
1993................... 644,017 $ 6 $ -- $ 212 $ 984 $(76,777) $(75,575)
Issuance of Common
Stock.................. 67,154 1 -- 6 -- -- 7
Payments on notes
receivable............. -- -- -- 17 -- -- 17
Cumulative translation
adjustment............. -- -- -- -- 544 -- 544
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
redemption value....... -- -- -- -- -- (2,946) (2,946)
Net income.............. -- -- -- -- -- 1,612 1,612
---------- ---- ------- -------- ------- -------- --------
Balance at July 31,
1994................... 711,171 7 -- 235 1,528 (78,111) (76,341)
Issuance of Common
Stock.................. 199,231 2 -- 76 -- -- 78
Issuance of warrants.... -- -- 562 -- -- -- 562
Payments on notes
receivable............. -- -- -- 34 -- -- 34
Cumulative translation
adjustment............. -- -- -- -- 1,408 -- 1,408
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
redemption value....... -- -- -- -- -- (3,092) (3,092)
Net income.............. -- -- -- -- -- 9,936 9,936
---------- ---- ------- -------- ------- -------- --------
Balance at July 31,
1995................... 910,402 9 562 345 2,936 (71,267) (67,415)
Stock offerings......... 5,374,167 54 -- 56,903 -- -- 56,957
Shares and warrants
issued to equity
investor............... 500,000 5 600 9,895 -- -- 10,500
Shares issued in
connection with the
Polyscan acquisition... 350,000 4 -- 3,496 -- -- 3,500
Issuance of warrants.... -- -- 1,031 -- -- -- 1,031
Exchange of ATEQ stock
for Common Stock....... 66,915 -- -- -- -- -- --
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
redemption value....... -- -- -- -- -- (1,078) (1,078)
Conversion of
Mandatorily Redeemable
Convertible Preferred
Stock.................. 11,747,057 118 -- 77,357 -- -- 77,475
Payments on notes
receivable............. -- -- -- 38 -- -- 38
Cumulative translation
adjustment............. -- -- -- -- (2,725) -- (2,725)
Issuance under stock
plans.................. 227,415 2 -- 731 -- -- 733
Exercise of warrants.... 435,008 4 (1,097) 1,093 -- -- --
Net income.............. -- -- -- -- -- 36,861 36,861
---------- ---- ------- -------- ------- -------- --------
Balance at July 31,
1996................... 19,610,964 $196 $ 1,096 $149,858 $ 211 $(35,484) $115,877
========== ==== ======= ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
--------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 36,861 $ 9,936 $ 1,612
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss (gain) on early
extinguishment of debt........................ 930 (5,412) --
Write-off of in-process technology acquired.... 6,269 -- --
Depreciation and amortization.................. 1,629 2,951 3,790
Deferred taxes................................. (23,564) (442) (103)
Other noncash charges.......................... -- 527 536
Changes in assets and liabilities:
Accounts receivable.......................... (15,743) (2,745) (4,676)
Inventory.................................... (25,393) (3,217) 7,890
Other assets................................. (579) (18) (1,347)
Accounts payable............................. 7,724 (1,178) (2,703)
Accrued and other liabilities................ 15,348 8,697 (1,425)
-------- ------- -------
Net cash provided by operating activities.... 3,482 9,099 3,574
-------- ------- -------
Cash flows from investing activities:
Purchase of marketable securities, net.......... (24,153) -- --
Loan to Polyscan, Inc, net and other............ (637) (825) --
Proceeds from sale of plant..................... -- 10,969 --
Capital expenditures for property and equipment,
net............................................ (11,673) (2,915) (1,957)
New building construction costs................. (1,445) -- --
-------- ------- -------
Net cash (used in) provided by investing
activities.................................... (37,908) 7,229 (1,957)
-------- ------- -------
Cash flows from financing activities:
Repayment of debt............................... (21,631) (6,169) (2,850)
Issuance of long-term debt...................... 10,000 -- --
Financing from related party.................... 159 6,219 507
Proceeds from issuance of Common Stock.......... 67,628 112 24
-------- ------- -------
Net cash provided by financing activities...... 56,156 162 (2,319)
-------- ------- -------
Effect of exchange rate changes on cash......... (896) 577 39
-------- ------- -------
Net change in cash and cash equivalents......... 20,834 17,067 (663)
Cash and cash equivalents at beginning of the
period......................................... 23,638 6,571 7,234
-------- ------- -------
Cash and cash equivalents at the end of the
period......................................... $ 44,472 $23,638 $ 6,571
======== ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest........ $ 2,001 $ 3,342 $ 3,827
======== ======= =======
Cash paid during the period for income taxes.... $ 2,972 $ 2,831 $ 2,559
======== ======= =======
Supplemental schedule of noncash investing and
financing activities:
Conversion of Senior subordinated debt into
mandatorily redeemable convertible preferred
stock.......................................... $ -- $10,564 $ 7,099
======== ======= =======
Conversion of mandatorily redeemable convertible
preferred stock to Common Stock................ $ 77,475 $ -- $ --
======== ======= =======
Acquisition of machinery and equipment from
nonprofit research and development agency...... $ 4,296 $ -- $ --
======== ======= =======
Acquisition of substantially all assets and
certain liabilities of Polyscan, Inc. in
exchange for 350,000 shares of Common Stock.... $ 3,500 $ -- $ --
======== ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES:
Etec Systems, Inc. (the "Company") designs, develops, manufactures, markets
and services electron beam and laser beam pattern generation equipment for the
semiconductor industry. The Company has operations in the United States,
Japan, Korea, Germany and France. The Company operates in one industry
segment.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets
and liabilities of foreign operations are translated to U.S. dollars at
current rates of exchange and revenues and expenses are translated using
weighted average rates. Gains and losses from foreign currency translation are
included as a separate component of stockholders' equity (deficit). Foreign
currency transaction gains and losses are included as a component of other
income (expense), net. For the year ended July 31, 1996, the Company recorded
approximately $846,000 of transaction gains on the settlement accounts
denominated in yen related to the redemption of the minority interest in Etec
Japan (See Note 8-Minority Interest.). For all other periods, such gains and
losses have not been significant.
These financial statements have been prepared on the accrual basis of
accounting in accordance with generally accepted accounting principles. This
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
vary from those estimates.
Revenue Recognition
Product revenue is generally recognized upon shipment. A provision for
installation costs and estimated future warranty costs is recorded at the time
revenue is recognized. Revenue associated with retrofitting certain models is
recognized upon completion of the retrofit. Service revenue is deferred and is
recognized on a straight-line basis over the period of service.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
The Company has classified all investments as available for sale.
Investments classified as available for sale are recorded at fair value and
any temporary difference between an investment's cost and fair value is
recorded as a separate component of stockholders' equity. Temporary
differences between cost and fair value for the year ended July 31, 1996 were
not material.
At July 31, 1996, the fair value of the Company's investments approximated
cost. At July 31, 1996, $37.3 million of investments are classified as cash
and cash equivalents on the balance sheet. The investment portfolio at July
31, 1996 is comprised of commercial paper, money market funds, U.S. Government
obligations and corporate debentures. Maturities of the assets in the
portfolio are one year or less.
F-7
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company manages its cash equivalents and short-term investments in a
single portfolio of highly marketable securities, all of which are intended to
be available to meet the Company's current cash requirements.
Inventory
Inventory is stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
Depreciation and Amortization
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, which range from three to ten years
for machinery and equipment. Assets held under capital leases are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets of three to five years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the improvement.
Capitalization of Software
The Company capitalizes substantially all costs related to the purchase of
software and its implementation which include purchased software, consulting
fees, and use of certain specified Company resources. As of July 31, 1996,
$3.2 million in costs had been capitalized and are included in machinery and
equipment.
Research, Development and Engineering
Research, development and engineering costs are expensed as incurred. As
more fully described in Note 9, the Company is party to certain research and
development contracts which provide for partial funding of certain research,
development and engineering costs. Amounts funded under these contracts, which
are generally best efforts contracts, are recognized as costs are incurred.
Off-Balance Sheet Risk and Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of temporary cash
investments, marketable securities and accounts receivable. The Company places
its temporary cash investments and marketable securities with financial
institutions and other creditworthy issuers and limits the amount of credit
exposure to any one party.
The Company's accounts receivable are derived primarily from sales to
customers located in the U.S., Europe, and the Far East. The Company performs
ongoing credit evaluations of its customers. Additionally, prior to shipment
of systems, the Company receives payment of a portion of the system sales
price. Write-offs during the periods presented have been insignificant.
Sales to the Company's ten largest customers accounted for approximately
76%, 74% and 76% of revenues in fiscal 1996, fiscal 1995 and fiscal 1994,
respectively.
At July 31, 1996, outstanding receivables from four customers represented
16%, 14%, 11% and 10%, respectively, of the Company's accounts receivable. At
July 31, 1995, outstanding receivables from two customers represented 29% and
28%, respectively, of the Company's accounts receivable.
F-8
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net Income Per Share
Net income per share is computed using the weighted average number of common
and common equivalent shares outstanding during the period. Common equivalent
shares for the year ended July 31, 1996 consist of stock options and warrants
using the treasury stock method except when antidilutive. Common equivalent
shares for the years ended July 31, 1995 and 1994 consist of common stock
issuable upon the conversion of the Company's Series B, C, D and E mandatorily
redeemable convertible preferred stock using the as if converted method and
the exercise of stock options and warrants using the treasury stock method,
except when antidilutive. Pursuant to the requirements of the Securities and
Exchange Commission, common stock equivalent shares relating to stock options
and warrants using the treasury stock method, and the mandatorily redeemable
convertible preferred stock using the as if converted method, issued
subsequent to July 31, 1994 through the initial public offering ("IPO") date,
are included in the computation of net income per share for the years ended
July 31, 1995 and 1994 as if they were outstanding for the entire period.
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JULY 31,
-----------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Purchased parts............................................ $ 16,861 $ 5,703
Work-in-process............................................ 25,380 10,855
Spares..................................................... 9,894 7,680
-------- -------
$ 52,135 $24,238
======== =======
Property, plant and equipment:
Buildings.................................................. $ 2,339 $ 693
Machinery and equipment.................................... 27,375 14,938
-------- -------
29,714 15,631
Less accumulated depreciation.............................. (10,333) (9,157)
-------- -------
$ 19,381 $ 6,474
======== =======
Accrued and other liabilities:
Customer advances.......................................... $ 24,061 $12,898
Accrued employee costs..................................... 5,594 4,362
Accrued warranty and installation.......................... 6,405 2,960
Payable to related party................................... 1,286 8,936
Other accrued liabilities.................................. 13,738 9,515
-------- -------
$ 51,084 $38,671
======== =======
</TABLE>
Machinery and equipment at July 31, 1996 and 1995 includes approximately
$612,000 and $244,000, respectively, of assets under leases that have been
capitalized. Accumulated depreciation for such equipment approximated $167,000
and $184,000, respectively.
F-9
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--LONG-TERM DEBT:
<TABLE>
<CAPTION>
JULY 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
Unsecured term note payable................................. $10,000 $ --
Senior secured notes payable................................ -- 18,706
Senior subordinated notes payable to Perkin-Elmer........... -- 1,979
Senior subordinated note payable to IBM..................... -- 1,567
------- -------
Total debt................................................ 10,000 22,252
Less current maturities..................................... (3,333) (5,386)
------- -------
$ 6,667 $16,866
======= =======
</TABLE>
Unsecured Term Note Payable and Revolving Line of Credit
On May 24, 1996, the Company entered into a $30.0 million financing
commitment with ABN-AMRO Bank, N.V. This facility includes a $20.0 million
two-year revolving line of credit and a $10.0 million three-year term note.
The $10.0 million term note was used to refinance the senior secured notes
payable. As of July 31, 1996, the Company had not used the revolving line of
credit. Indebtedness under the revolving line of credit and term note is
unsecured and bears interest at the London Interbank Offered Rate (5.91% on
July 31, 1996) plus 1.25%. The terms of the financing facility require the
Company to comply with certain financial and restrictive covenants, including
maintenance of certain financial ratios and minimum net worth criteria,
restrictions on the incurrence of indebtedness and repurchase of Company
stock, and certain dividend restrictions. At July 31, 1996, the Company was in
compliance with all covenants.
Minimum annual repayments of the term note are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JULY 31:
---------------------------
<S> <C>
1997........................................................... $ 3,333
1998........................................................... 3,333
1999........................................................... 3,334
-------
$10,000
=======
</TABLE>
Senior Secured Notes Payable
During the year ended July 31, 1996, the Company repaid the remaining unpaid
principal balance of $18.7 million under its 10.65% senior secured notes. As a
result of this repayment, the Company recorded an extraordinary loss of
approximately $930,000 related to unamortized debt issuance costs.
Senior Subordinated Notes Payable
In July 1995, IBM and Perkin-Elmer, holders of the Company's senior
subordinated notes payable and mandatorily redeemable convertible preferred
stock, exchanged approximately $7.1 million and $12.6 million of their senior
subordinated notes and accrued interest for 40,251 and 65,390 shares,
respectively, of Series B mandatorily redeemable convertible preferred stock
and approximately $1.6 million and $2.0 million, respectively, of senior
subordinated notes payable. These notes bore interest at 12% and 10.3%,
respectively. As a result of this transaction, the Company recorded an
extraordinary gain, net of tax, of approximately $5.4 million. In computing
the gain, management estimated that the fair value of the senior subordinated
notes at
F-10
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the date of the exchange was approximately $14.2 million reflecting the
present value of future obligations discounted at approximately 15% to 16%.
The discount rate reflected management's estimate of fair market rates for
high yield, private debt issuances at the time. The fair value of the debt
resulted in an implied value of the Series B mandatorily redeemable
convertible preferred stock at the date of the exchange of approximately $4.88
per common share equivalent. Upon the closing of the IPO on October 24, 1995,
the Series B mandatorily redeemable convertible preferred stock held by IBM
and Perkin-Elmer was converted into 825,660 and 1,341,331 shares of Common
Stock, respectively. The senior subordinated notes payable totaling
approximately $3.6 million were repaid in October 1995.
NOTE 4--OTHER LIABILITIES:
Included in other liabilities is a $4.3 million payable to a nonprofit
research and development organization for machinery and equipment acquired.
The liability becomes due on December 1, 1997, or earlier subject to certain
other conditions under the contract.
NOTE 5--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
As of July 31, 1995, the Company had issued and outstanding a total of
572,672 shares of mandatorily redeemable convertible preferred stock, par
value $0.01 per share, as follows:
<TABLE>
<CAPTION>
JULY 31,
---------------
1995 1994
------- -------
<S> <C> <C>
Series B, 365,641 and 260,000 shares designated, issued
and outstanding at July 31, 1995 and 1994, respectively. $48,172 $35,465
Series C, 86,400 shares designated, 81,278 shares issued
and outstanding......................................... 12,190 11,593
Series D, 50,000 shares designated, issued and
outstanding............................................. 7,656 7,304
Series E, 75,753 shares designated, issued and
outstanding............................................. 8,379 --
------- -------
$76,397 $54,362
======= =======
</TABLE>
Upon completion of the Company's IPO on October 24, 1995, all series of the
Company's mandatorily redeemable convertible preferred stock series were
converted into 11,747,057 shares of Common Stock.
NOTE 6--STOCKHOLDERS' EQUITY:
Common Stock
In June 1996, the Company entered into an equity investment agreement
whereby, in exchange for $10.0 million, the Company issued 500,000 shares of
Common Stock plus the warrants described below.
Warrants
The Company issued warrants to the equity investor discussed above to
purchase an additional 75,000 shares at an exercise price equal to $20.00 per
share, which was the price of the 500,000 common shares purchased. Such
warrants only become exercisable if the investor purchases products and
services from the Company in amounts that exceed certain thresholds over the
succeeding four years, or upon the occurrence of certain other conditions. The
estimated fair value of the warrants, included in other assets, is
approximately $600,000 and will be amortized to cost of sales as product
purchases are made by the investor in future periods. The warrants expire in
fiscal 2001.
F-11
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In February 1995, in conjunction with entering into a sale and leaseback
agreement (Note 12), the Company issued the lessor a warrant to purchase
159,314 shares of the Company's Common Stock at $0.45 per share. Additionally,
the Company issued to the bank providing mortgage financing to the lessor a
warrant to purchase 53,104 shares of Common Stock at $0.45 per share. These
warrants expire on November 15, 2003. The value assigned to these warrants is
being amortized over the lease period, which is 15 years, and is not material.
The warrant agreement was amended in August 1996. (See Note 15-Subsequent
Event.)
In fiscal 1992, in conjunction with the acquisition of the assets and
liabilities of ATEQ Corporation, the Company issued warrants to purchase 67
and 2,159 shares of Series C mandatorily redeemable convertible preferred
stock at an exercise price of $100.00 and $0.01 per share, respectively. Upon
completion of the initial public offering these warrants were exchanged for
warrants to purchase common stock. At July 31, 1996, 52 and 659 of these
warrants are exercisable into 1,064 and 13,515 shares of Common Stock,
respectively. Warrants exercisable into 1,064 shares of Common Stock will
expire in early fiscal 1997. Warrants exercisable into 13,515 shares will
expire in fiscal 2001.
During fiscal 1992 and 1993, the Company issued warrants to Cigna to
purchase 307,341 and 21,873 shares of the Company's Common Stock at $0.70 per
share, respectively, in connection with its senior secured notes. In November,
Cigna received the right to acquire 105,794 additional shares of Common Stock
pursuant to the terms of the Warrant Agreement and the Company recorded debt
issuance costs in the amount of $1.1 million. Subsequently, in February 1996,
435,008 shares of Common Stock were issued upon exercise of such warrants for
an aggregate exercise price and proceeds to the Company of $230,000. In
January 1996, the Company prepaid a portion of its senior secured notes
payable, which resulted in the write-off of unamortized debt issuance costs
and recognition of an extraordinary loss in the amount of $300,000. In June
1996, the Company repaid the remaining balance of its senior secured notes
payable, which resulting in the write-off the remaining unamortized debt
issuance costs and recognition of an extraordinary loss in the amount of
$630,000.
In fiscal 1995, the Company also issued a warrant to purchase 150,000 shares
of the Company's Common Stock at an exercise price of $1.70 per share. This
warrant expires in fiscal 2005. (See Note 11--Related Party Transactions.)
NOTE 7--INCOME TAXES:
The components of income before income tax (benefit) provision and
extraordinary items are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
---------------------
1996 1995 1994
------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.............................................. $15,870 $3,401 $ (353)
Foreign............................................... 5,638 3,412 4,281
------- ------ ------
$21,508 $6,813 $3,928
======= ====== ======
</TABLE>
F-12
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the income tax (benefit) provision are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------
1996 1995 1994
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S.............................................. $ 2,179 $ 200 $ 5
Foreign.......................................... 3,915 2,481 2,359
State............................................ 1,187 50 55
-------- ------ ------
7,281 2,731 2,419
Deferred:
U.S.............................................. (22,980) -- --
Foreign.......................................... (584) (442) (103)
-------- ------ ------
Income tax (benefit) provision..................... $(16,283) $2,289 $2,316
======== ====== ======
</TABLE>
The income tax (benefit) provision differs from the amount computed by
applying the statutory U.S. federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------
1996 1995 1994
-------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax (benefit) provision at U.S. statutory
rate............................................. $ 7,563 $2,496 $1,493
State income taxes, net of federal income tax
benefit.......................................... 1,187 33 36
Purchase accounting non-taxable write-offs........ 2,194 -- --
Foreign earnings taxed at higher rates............ 2,103 700 644
Alternative minimum tax and other................. 810 242 143
Realized deferred tax assets previously reserved.. (7,160) -- --
Change in the valuation allowance................. (22,980) (1,182) --
-------- ------ ------
Total........................................... $(16,283) $2,289 $2,316
======== ====== ======
</TABLE>
The Company recorded a tax benefit of approximately $23.0 million for the
year ended July 31, 1996. The benefit reflects the release in the second half
of fiscal 1996 of approximately $23.0 million of valuation allowances
previously recorded against the Company's deferred tax assets. Management's
evaluation of the recoverability of the Company's deferred tax assets is based
in part upon the current product backlog and its ability to increase
manufacturing capacity. Management has fully reserved deferred tax assets
which may be realized beyond the ensuing twelve-month period because of the
uncertainty regarding their realization.
F-13
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
JULY 31,
----------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current:
Nondeductible accruals and reserves........................ $15,624 $11,229
Uniform capitalization adjustment to inventory............. 1,996 1,536
Revenue recognized for tax return purposes and deferred for
financial statements 366 2,031
Net operating loss carryforward............................ 6,650 --
Other...................................................... 977 --
Valuation allowance........................................ (1,105) (13,852)
------- -------
Net current deferred tax asset............................. 24,508 944
------- -------
Noncurrent:
Book depreciation in excess of tax depreciation............ 2,294 4,609
Net operating loss carryforwards........................... 1,735 14,743
Other...................................................... 555 1,110
Valuation allowance........................................ (4,029) (19,907)
------- -------
Net noncurrent deferred tax asset.......................... 555 555
------- -------
Net deferred tax asset..................................... $25,063 $ 1,499
======= =======
</TABLE>
At July 31, 1996, the Company had NOL carryforwards (NOLs) for federal
income tax purposes of approximately $23.9 million. These carryforwards, if
not utilized to offset future taxable income and income taxes payable, will
expire at various dates through the year 2009. Additionally, under the Tax
Reform Act of 1986, the amount of the benefit from NOL carryforwards may be
impaired or limited in certain circumstances, including a cumulative stock
ownership change of more than 50% over a three-year period. The completion of
the Company's public offering in June, 1996 resulted in a cumulative change in
ownership of the Company in excess of 50% and as a consequence, the
utilization of NOLs is be subject to a limitation of approximately
$19.0 million per year.
NOTE 8--MINORITY INTEREST:
In July 1991, the Company sold 225 newly-issued shares of common stock of
its Japanese subsidiary (Etec Japan) for approximately $4.8 million and a note
for $188,000. The minority holding represented approximately 18% of the
outstanding shares of Etec Japan. Pursuant to the sale agreement, on July 31,
1995, minority stockholders were entitled to elect to have the Company
repurchase their shares at the original purchase price plus interest. which
was defined in the agreement as being the Japanese bank long-term interest
rate plus one percent.
On July 31, 1995, the minority interest investors exchanged their minority
interest in Etec Japan for 75,753 shares of Series E mandatorily redeemable
convertible preferred stock and a final cash payment to one of the holders,
who is a director of the Company, of approximately $400,000, which was paid in
the first quarter of fiscal 1996. This transaction was accounted for under the
purchase method of accounting resulting in the elimination of the minority
liability and the creation of $350,000 of goodwill which is being amortized
over seven years. There were no other significant effects from this
transaction. Upon completion of the IPO, all shares of the Series E
mandatorily redeemable convertible preferred stock were converted to 1,553,898
shares of Common Stock.
F-14
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--RESEARCH, DEVELOPMENT AND ENGINEERING CONTRACTS:
The Company has received funding for research, development and engineering
contracts of approximately $725,000, $7.3 million and $16.1 million during the
years ended July 31, 1996, 1995 and 1994, respectively. The Company has
recorded approximately $725,000, $6.1 million and $13.9 million of this
funding as an offset to research, development and engineering expenses during
the years ended July 31, 1996, 1995 and 1994, respectively. The Company has
recorded approximately $1.2 million and $2.2 million, respectively, as an
offset to selling, general and administrative expenses during the years ended
July 31, 1995 and 1994. No such funding was offset against selling, general
and administrative expenses during the year ended July 31, 1996.
In November 1992, the Company entered into a cost reimbursement research and
development contract with the Advanced Research Projects Agency/Naval Air
Systems Command ("ARPA/NAVAIR") under which the Company was entitled to
receive approximately $22.0 million. In connection with this contract, no
funding was received during the year ended July 31, 1996. Funding in the
amount of approximately $5.7 million and $10.3 million was recognized and
billed during the years ended July 31, 1995 and 1994, respectively. Costs
incurred during each of these periods approximated billings and are included
in research, development and engineering and selling, general and
administrative expenses.
During the years ended July 31, 1996, 1995 and 1994, the Company performed
research and development under several cooperative development agreements.
These agreements provide for payments upon the Company's achievement of
specified milestones. Funding for these contracts was $725,000, $1.6 million,
and $5.8 million during the years ended July 31, 1996, 1995 and 1994,
respectively. Costs of approximately $2.9 million, $3.8 million, and $7.5
million for these projects were included in research and development expense
during the years ended July 31, 1996, 1995 and 1994, respectively.
The Company has a cost-reimbursement research and development contract with
the United States Department of Defense, ARPA, pursuant to which the Company
is entitled to receive approximately $3.9 million. Funding is due in three
phases subject to achievement of certain milestones during each phase. As of
July 31, 1996, the Company was in the process of completing phase I and
approximately $1.2 million in funding had been received, which has been
deferred and is included in accrued and other liabilities. As of July 31,
1996, costs incurred related to this contract in the amount of $1.2 million
have been deferred and are included in inventory. In October 1996, $1.1
million in phase II funding was awarded.
In August 1996, the Company was awarded a $1.5 million research and
development contract with MCM-D Consortium. This contract allows for payments
subject to the achievement of certain milestones.
NOTE 10--BENEFIT PLANS:
Employee Stock Option Plan
Under the Company's 1990 Employee Stock Option Plan, options to purchase
600,000 shares of Common Stock may be granted. The plan provides that options
may be granted at a price not less than the fair value of a share at the date
of grant. Options generally vest annually over a four-year period and expire
over terms not exceeding ten years.
In fiscal 1994, the Company adopted the 1994 Employee Stock Option Plan.
Under this plan, options to purchase 448,374 shares of Common Stock may be
granted. This Plan provides that options may be granted at a price not less
than the fair value of a share at the date of grant except under certain
inapplicable circumstances. Options generally vest annually over a four-year
period and expire over terms not exceeding ten years.
F-15
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In fiscal 1995, the Company's Board of Directors approved the 1995 Omnibus
Incentive Plan. Under this plan options to purchase 1,000,000 shares of Common
Stock may be granted. Options vest annually over a period not to exceed five
years and expire over terms not exceeding ten years.
In addition, options to purchase 88,503 shares of Common Stock may be
granted under certain other option agreements. A total of 38,670 options were
outstanding under these agreements at July 31, 1996.
Executive Stock Plan
Under the Company's 1990 Executive Stock Plan, options to purchase 884,959
shares of Common Stock may be granted. The Plan provides that options may be
granted at a price not less than the fair value of a share at the date of
grant. Options generally vest annually over a three-year period and expire
over terms not exceeding ten years.
Directors' Stock Option Plan
In fiscal 1995, the Company adopted the 1995 Directors' Stock Option Plan.
Under this plan, options to purchase 150,000 shares of Common Stock may be
granted. The plan provides that options may be granted at a price equal to the
fair market value at the date of grant. Under this plan, each non-employee
director will receive a one-time grant upon joining the Board of Directors and
annual grants upon the anniversary of the initial grant. The initial grants
vest in two installments, with half of the shares vesting six months after the
grant date and the other half vesting on the first anniversary of the grant
date. Annual grants vest on the first anniversary of the respective grant
date.
A summary of activity for the Employee, Executive and Directors' Stock
Option Plans follows:
<TABLE>
<CAPTION>
OPTIONS
AVAILABLE OPTIONS EXERCISE
FOR GRANT OUTSTANDING PRICE
---------- ----------- ------------
<S> <C> <C> <C>
Outstanding, July 31, 1993.............. 583,624 794,195 $0.45
Granted............................... (1,011,527) 1,011,527 $0.45
Canceled.............................. 691,430 (691,430) $0.45
Repurchased........................... 89,446 -- $0.45
Exercised............................. -- (156,600) $0.45
---------- ---------
Outstanding, July 31, 1994.............. 352,973 957,692 $0.45
Additional options authorized......... 1,150,000 --
Granted............................... (565,406) 565,406 $0.45-$ 5.40
Canceled.............................. 71,520 (71,520) $0.45
Repurchased........................... 107,415 -- $0.45
Exercised............................. -- (306,646) $0.45
---------- ---------
Outstanding, July 31, 1995.............. 1,116,502 1,144,932 $0.45-$ 5.40
Granted............................... (760,382) 760,382 $7.20-$37.00
Canceled.............................. 19,409 (19,409) $0.45-$13.75
Exercised............................. -- (165,695) $0.45-$ 5.40
---------- ---------
Outstanding, July 31, 1996.............. 375,529 1,720,210 $0.45-$37.00
========== =========
</TABLE>
At July 31, 1996, 1995 and 1994, options exercisable totaled 508,376,
412,426 and 404,925, respectively.
F-16
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Employee Stock Purchase Plan
In July 1995, the Company's Board of Directors approved the 1995 Employee
Stock Purchase Plan. Under this plan, employees of the Company can purchase
common stock through payroll deductions. A total of 500,000 shares have been
reserved for issuance under this plan. As of July 31, 1996, 39,189 shares have
been purchased under the Employee Stock Purchase Plan.
401(k) Plan
On June 15, 1990, the Company adopted a 401(k) savings plan. The Plan covers
all eligible employees with more than three months of service. The Company
contributed $191,000, $173,000 and $151,000 to the Plan during the years ended
July 31, 1996, 1995 and 1994, respectively.
NOTE 11--RELATED PARTY TRANSACTIONS:
In March 1990, the Company entered into an inventory component purchasing
agreement with Grumman, one of the former holders of its Series B mandatorily
redeemable convertible preferred stock (which were converted into shares of
Common Stock in October 1995, pursuant to which the Company committed to
purchase specified quantities of components from Grumman upon achieving
certain sales levels. In fiscal 1992, Grumman billed the Company $1.4 million
under this agreement. The Company disputed the appropriateness of this
billing, but paid Grumman $1.0 million in fiscal 1993. Grumman continued to
maintain that the Company had not satisfied its obligations under the
agreement. In fiscal 1995, the Company and Grumman entered into an agreement
under which Grumman released the Company from all obligations under the 1990
inventory purchase agreement and the Company issued to Grumman a warrant to
purchase 150,000 shares of the Company's Common Stock at an exercise price of
$1.70 per share. (See Note 6--Stockholders' Equity.)
The Company paid approximately $800,000 and $1.8 million in fiscal 1995 and
1994, respectively, for services provided in conjunction with the research and
development contract with ARPA/NAVAIR to a party which held shares of the
Company's Series B and D mandatorily redeemable convertible preferred stock
until October 1995, at which time all such shares were converted into shares
of Common Stock. No such services were provided to the Company during the year
ended July 31, 1996.
In fiscal 1994, the Company purchased approximately $590,000 of pattern
memory boards, beam sequencers and other related materials from a party which
at that time held shares of the Company's Series B mandatorily redeemable
convertible preferred stock.
In fiscal 1994, a party which at that time held shares of the Company's
Series B and D mandatorily redeemable convertible preferred stock canceled an
order; the Company recognized approximately $500,000 in penalty cancellation
fees which is included in revenue for that period.
In fiscal 1996 and 1995, the Company purchased masks for use by the Company
in the development of new products for approximately $323,000 and $200,000,
respectively, from a party which held shares of the Company's Series B
mandatorily redeemable convertible preferred stock until October 1995, at
which time such shares were converted into Common Stock.
Sales to related parties included in product and service revenue in fiscal
1996, 1995 and 1994 are approximately $21.6 million $13.0 million, and $15.0
million, respectively.
At July 31, 1996 and 1995, included in accrued liabilities is approximately
$1.3 million and $8.9 million, respectively, due to a party which at that time
held shares of the Company's Series E mandatorily redeemable
F-17
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
convertible preferred stock. The amount is due under a financing arrangement,
whereby the holder provides interim financing of certain Japanese receivables
between the date of billing and the date of collection from the customers of
the Company. Amounts due bear interest at the Japanese prime rate (1.625% at
July 31, 1996) plus 1.25% per annum.
NOTE 12--COMMITMENTS AND CONTINGENCIES:
In February 1995, the Company entered into a sale and leaseback agreement,
pursuant to which the Company sold its office/manufacturing facilities (the
"Property") located in Hayward, California for approximately $11.8 million and
leased back the Property for an initial term of fifteen years, with options
for four five-year renewals. Initial annual rental payments to the lessor are
approximately $1.4 million for the first three years. At the end of the third,
sixth, ninth and twelfth years, respectively, the rent will be adjusted by an
amount based on any percentage increase in the Consumer Price Index for the
preceding three years, with a cap of 12%. Under the terms of the lease, the
Company is responsible for paying maintenance, insurance, taxes, and all other
expenses associated with operating and maintaining the Property. The Company
recorded the transaction as a sale and deferred the gain on the sale which was
approximately $7.0 million. This gain is being amortized over the 15-year
operating lease term. The agreement requires the Company to comply with
certain financial covenants and to maintain a fixed charge coverage ratio of
at least 1.5. At July 31, 1996, the Company was in compliance with these
covenants. In August 1996, the sale and leaseback agreement was amended. (See
Note 15--Subsequent Event.)
In addition, the Company leases certain other facilities and equipment under
operating lease agreements. Rent expense under all operating leases for the
years ended July 31, 1996, 1995 and 1994, was $3.5 million, $2.6 million and
$1.9 million, respectively. Future minimum lease commitments excluding
property taxes, maintenance and insurance under leases having initial or
remaining terms in excess of one year, are as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDING JULY 31:
<S> <C>
1997........................................................... $ 3,741
1998........................................................... 3,323
1999........................................................... 3,438
2000........................................................... 2,495
2001........................................................... 2,267
Thereafter..................................................... 17,492
-------
$32,756
=======
</TABLE>
In April 1996, the Company entered into an agreement with a contractor to
construct a new administrative facility in Hayward, California at a cost not
to exceed approximately $4.3 million. Total estimated costs at completion of
the facility are $5.0 million. As of July 31, 1996, the Company incurred $1.4
million in financing the construction of the new facility, which is included
in other current assets. The Company intends to sell the new facility to its
landlord in fiscal 1997 and enter into a leasing arrangement for a period of
15 years.
In April 1995, the Company signed an agreement with a distributor of the
Company, under which Etec Japan assumed responsibility for sales, direct
customer service and support for the Company's products in the Japanese
market. As part of this agreement, the Company agreed to pay the distributor a
flat fee for each CORE and ALTA system sold in the defined sales territory for
the next four years.
F-18
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--GEOGRAPHIC REPORTING AND CUSTOMER CONCENTRATION:
<TABLE>
<CAPTION>
JAPAN
UNITED AND
STATES FAR EAST EUROPE TOTAL
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues to third parties:
Year ended July 31, 1996
Domestic............................... $ 49,913 $ -- $ -- $ 49,913
Foreign................................ 30,360 59,788 5,584 95,732
-------- -------- -------- --------
$ 80,273 $ 59,788 $ 5,584 $145,645
======== ======== ======== ========
Year ended July 31, 1995
Domestic............................... $ 33,342 $ -- $ -- $ 33,342
Foreign................................ 13,353 31,057 5,164 49,574
-------- -------- -------- --------
$ 46,695 $ 31,057 $ 5,164 $ 82,916
======== ======== ======== ========
Year ended July 31, 1994
Domestic............................... $ 32,651 $ -- $ -- $ 32,651
Foreign................................ 6,721 24,305 5,033 36,059
-------- -------- -------- --------
$ 39,372 $ 24,305 $ 5,033 $ 68,710
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Operating income:
United States...................................... $ 15,340 $ 7,415 $ 4,377
Japan and Far East................................. 5,174 3,975 4,456
Europe............................................. 149 13 743
-------- -------- --------
Total............................................ $ 20,663 $ 11,403 $ 9,576
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Identifiable assets:
United States............................................... $174,015 $ 51,736
Japan and Far East.......................................... 31,878 30,577
Europe...................................................... 2,978 3,671
-------- --------
Total..................................................... $208,871 $ 85,984
======== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
JULY 31,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customers comprising 10% or more of the Company's total revenue
for the periods indicated:
A............................................................ 8% 14% 9%
B............................................................ 13% 14% 7%
C............................................................ 6% 4% 12%
D............................................................ 6% 2% 13%
E............................................................ 17% 12% 2%
</TABLE>
F-19
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 14--POLYSCAN ACQUISITION:
On June 27, 1995, the Company entered into a loan agreement with Polyscan,
Inc. ("Polyscan"), whereby the Company advanced $1.8 million to Polyscan. The
loan bore interest at prime plus 3% and the balance was due on January 31,
1996. During February 1996, Polyscan repaid $600,000 to the Company.
On February 5, 1996, Etec Polyscan, Inc. ("Etec Polyscan") acquired
substantially all of the assets and assumed certain specified liabilities of
Polyscan in exchange for 350,000 shares of the Company's Common Stock with an
agreed-upon market value of $3.5 million. Etec Polyscan has retained 175,000
of the Company's common shares issued until February 5, 1998 to provide
payment for any liability of Polyscan or the Polyscan shareholders (which was
not assumed by Etec Polyscan as part of the acquisition) or any adjustment of
the purchase price. One of the liabilities assumed by Etec Polyscan was
Polyscan's obligation to repay the outstanding loan in the amount of
approximately $1.2 million.
The purchase price for book purposes was allocated by the Company
approximately as follows (in thousands):
<TABLE>
<S> <C>
Inventory....................................................... $ 733
Other current assets............................................ 69
Other assets.................................................... 65
In-process technology........................................... 6,269
Accounts payable and accrued expenses (includes note payable to
the Company)................................................... (3,636)
-------
Total acquisition costs....................................... $ 3,500
=======
</TABLE>
The excess of the purchase price over the fair value of the net assets was
allocated to in-process technology purchase which, because of the uncertainty
as to realization, the Company wrote off in fiscal 1996.
The operating results of this acquisition are included in the Company's
consolidated results of operations from the date of acquisition. The following
unaudited pro forma summary presents the consolidated results of operations as
if the acquisition had occurred at August 1, 1994, after giving effect to
certain adjustments, including interest income on the Polyscan loan and the
increase in common equivalent shares outstanding. Additionally, the 1996 pro
forma information excludes a $6.3 million write-off of in-process technology
acquired. Polyscan's results included in the pro forma presentation for the
years ended July 31, 1996 and 1995, are for the period from July 1, 1995
through January 31, 1996 and the twelve months ended June 30, 1995,
respectively. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of what would have occurred
had the acquisition taken place at the beginning of the periods presented or
of the results which may occur in the future.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JULY 31, JULY 31,
1996 1995
---------- ----------
<S> <C> <C>
Net income (in thousands)........................... $42,207 $8,170
Net income per common share......................... $ 2.28 $ 0.54
</TABLE>
NOTE 15--SUBSEQUENT EVENT:
In August 1996, the Company obtained a financing commitment for the sale and
leaseback of its new headquarters consisting of 60,000 square feet of office
space. This building is currently under construction and is scheduled for
completion and occupancy in January 1997. Upon completion, the Company will
sell the building
F-20
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
to its existing landlord and will enter into a 15-year lease that will be
subject to rental adjustments every three years pursuant to an adjustment in
the Consumer Price Index. In addition, the Company has also obtained a
commitment from its landlord to provide financing of up to $4 million for
leasehold improvements to the existing office and manufacturing facilities.
Concurrent with this financing commitment, the Company also agreed to amend
the warrant agreement and to refund a portion of the purchase price of the
Property from the February 1995 sale leaseback transaction (See Note 12--
Commitments and Contingencies). The landlord surrendered its warrant to
acquire 159,314 shares of the Company stock in exchange for a new warrant to
acquire 68,768 shares of the Company stock at $0.45 per share. The bank
surrendered its warrant certificate to acquire 53,104 shares of Company stock
in exchange for 22,461 shares of Common Stock. The Company refunded to the
landlord $2.6 million of the purchase price, resulting in a reduction in the
Company's annual rent from $1.4 million to $1.0 million. The Company has
accounted for the $2.6 million refund payment as a reduction in the deferred
gain recorded as a result of the February 1995 sale and leaseback transaction.
The value of the warrants surrendered and cancelled was not material.
F-21
<PAGE>
[Graphics: See Appendix]
<PAGE>
===============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY
OF THE U.S. UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SO-
LICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH
OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPEC-
TUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IM-
PLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUB-
SEQUENT TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... 3
Documents Incorporated by Reference....................................... 3
Prospectus Summary........................................................ 4
Recent Developments....................................................... 6
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 31
Management................................................................ 51
Principal and Selling Stockholders........................................ 54
Shares Eligible for Future Sale........................................... 56
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................. 58
Underwriting.............................................................. 60
Legal Matters............................................................. 63
Experts................................................................... 63
Change in Accountants..................................................... 63
Index to Consolidated Financial Statements................................ F-1
</TABLE>
===============================================================================
===============================================================================
4,400,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
===============================================================================
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE INTERNATIONAL FRONT COVER PAGE]
Subject to Completion, dated November 20, 1996
PROSPECTUS
4,400,000 SHARES
LOGO
[LOGO OF ETEC]
COMMON STOCK
-------------
Of the 4,400,000 shares of Common Stock offered hereby, 500,000 shares are
being issued and sold by Etec Systems, Inc. ("Etec" or the "Company") and
3,900,000 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." Of such shares, 880,000 are initially being offered
outside the United States and Canada by the International Managers (the
"International Offering") and 3,520,000 are initially being offered in the
United States and Canada by the U.S. Underwriters (the "U.S. Offering" and,
together with the International Offering, the "Offerings"). The offering price
and underwriting discounts and commissions for the International Offering and
the U.S. Offering will be identical. See "Underwriting." The Company will not
receive any of the proceeds from the sale of shares by the Selling
Stockholders. On November 19, 1996 the last sale price of the Common Stock, as
reported on the Nasdaq National Market, was $30.75 per share. See "Price Range
of Common Stock." The Common Stock trades on the Nasdaq National Market under
the symbol "ETEC."
-------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AT PAGE 7.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions(1) Company(2) Stockholders
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share..................... $ $ $ $
- --------------------------------------------------------------------------------
Total(3)...................... $ $ $ $
</TABLE>
================================================================================
(1) The Company and the Selling Stockholders have agreed to indemnify the
International Managers and the U.S. Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company, estimated at $400,000.
(3) The Company has granted to the International Managers a 30-day option to
purchase up to an additional 132,000 shares of Common Stock on the same
terms and conditions as set forth above solely to cover over-allotments, if
any. The Company has granted to the U.S. Underwriters a similar option to
purchase up to 528,000 additional shares solely to cover over-allotments,
if any. See "Underwriting." If such options are exercised in full, the
total Price to Public, Underwriting Discounts and Commissions and Proceeds
to Company will be $ , $ and $ , respectively.
-------------
The shares of Common Stock offered by this Prospectus are offered by the
International Managers subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by the
International Managers and to certain further conditions. It is expected that
delivery of the shares will be made at the offices of Lehman Brothers Inc., New
York, New York on or about , 1996.
-------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
, 1996
<PAGE>
[ALTERNATE INTERNATIONAL BACK COVER PAGE]
===============================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING STOCKHOLDERS OR ANY OF
THE INTERNATIONAL MANAGERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY
SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SO-
LICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH OF-
FER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICA-
TION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Available Information..................................................... 3
Documents Incorporated by Reference....................................... 3
Prospectus Summary........................................................ 4
Recent Developments....................................................... 6
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 16
Price Range of Common Stock............................................... 16
Dividend Policy........................................................... 16
Capitalization............................................................ 17
Selected Consolidated Financial Data...................................... 18
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 20
Business.................................................................. 31
Management................................................................ 51
Principal and Selling Stockholders........................................ 54
Shares Eligible for Future Sale........................................... 56
Certain United States Federal Tax Considerations for Non-U.S. Holders of
Common Stock............................................................. 58
Underwriting.............................................................. 60
Legal Matters............................................................. 63
Experts................................................................... 63
Change in Accountants..................................................... 63
Index to Consolidated Financial Statements................................ F-1
</TABLE>
===============================================================================
===============================================================================
4,400,000 SHARES
LOGO
COMMON STOCK
-----------------
PROSPECTUS
, 1996
-----------------
LEHMAN BROTHERS
ROBERTSON, STEPHENS & COMPANY
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
===============================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses expected to be incurred
by the Registrant in connection with the sale and distribution of the
securities being registered hereby, other than underwriting discounts and
commissions. All amounts are estimated except the Securities and Exchange
Commission registration fee and the National Association of Securities
Dealers, Inc. filing fee.
<TABLE>
<CAPTION>
PAYABLE BY
REGISTRANT
----------
<S> <C>
SEC registration fee........................................... $ 46,000
National Association of Securities
Dealers, Inc. filing fee...................................... 15,680
Nasdaq Additional Listing fee.................................. 17,500
Blue Sky fees and expenses..................................... 7,000
Accounting fees and expenses................................... 75,000
Legal fees and expenses........................................ 100,000
Printing and engraving expenses................................ 100,000
Registrar and Transfer Agent's fees............................ 5,000
Miscellaneous fees and expenses................................ 33,820
--------
Total........................................................ $400,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 78.751 of the Nevada General Corporation Law provides for the
indemnification of officers, directors, and other corporate agents in terms
sufficiently broad to indemnify such persons under certain circumstances for
liabilities (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended (the "Act"). Article Eleventh of the
Registrant's Restated Articles of Incorporation and Article VII of the
Registrant's By-Laws provide for indemnification of the Registrant's
directors, officers, employees and other agents to the extent and under the
circumstances permitted by the Nevada General Corporation Law. The Registrant
has also entered into agreements with its directors and executive officers
that will require the Registrant, among other things, to indemnify them
against certain liabilities that may arise by reason of their status or
service as directors or executive officers to the fullest extent not
prohibited by law.
The Underwriting Agreements (Exhibit 1.1 and 1.2 hereto) provide for
indemnification by the Underwriters and International Managers of the
Registrant and its directors and officers, and by the Registrant of the
Underwriters and International Managers, for certain liabilities, including
liabilities arising under the Act, and affords certain rights of contribution
with respect thereto.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
2.1 Agreement and Plan of Reorganization among the Company, Etec Polyscan,
Inc. and the shareholders of Polyscan, Inc. dated January 30, 1996
(Incorporated herein by reference to Exhibit 2.1 to Company's Current
Report on Form 8-K dated February 5, 1996).
5.1 Opinion of Pillsbury Madison & Sutro LLP.
23.1 Consent of Price Waterhouse LLP (see Page II-5).
23.2 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see Page II-3).
</TABLE>
II-1
<PAGE>
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer
or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the Registrant's
annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act
that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Hayward, State of California, on the 20th day of
November, 1996.
Etec Systems, Inc.
By /s/ Stephen E. Cooper
_______________________________
STEPHEN E. COOPER
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Stephen E. Cooper and Philip J. Koen, Jr., and
each of them, his or her true and lawful attorneys-in-fact and agents, each
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments,
including post-effective amendments, to this Registration Statement, and any
registration statement relating to the offering covered by this Registration
Statement and filed pursuant to Rule 462(b) under the Securities Act of 1933,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that each of said attorneys-in-fact and agents or
their substitute or substitutes may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Stephen E. Cooper
- ------------------------------------ President, Chief Executive November 20, 1996
STEPHEN E. COOPER Officer (Principal
Executive Officer) and
Chairman of the Board
/s/ Philip J. Koen, Jr.
- ------------------------------------ Vice President, Chief November 20, 1996
PHILIP J. KOEN, JR. Financial Officer
(Principal Financial
Officer)
/s/ Edward Quigley
- ------------------------------------ Controller (Principal November 20, 1996
EDWARD QUIGLEY Accounting Officer)
/s/ Edward L. Gelbach
- ------------------------------------ Director November 20, 1996
EDWARD L. GELBACH
/s/ Catherine P. Lego
- ------------------------------------ Director November 20, 1996
CATHERINE P. LEGO
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Jack H. King
- ------------------------------------ Director November 20, 1996
JACK H. KING
/s/ John McBennett
- ------------------------------------ Director November 20, 1996
JOHN MCBENNETT
/s/ John Suzuki
- ------------------------------------ Director November 20, 1996
JOHN SUZUKI
/s/ Thomas Michael Trent
- ------------------------------------ Director November 20, 1996
THOMAS MICHAEL TRENT
/s/ Robert L. Wehrli
- ------------------------------------ Director November 20, 1996
ROBERT L. WEHRLI
</TABLE>
II-4
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of our report dated August 27, 1996
relating to the consolidated financial statements of Etec Systems, Inc., which
appears in such Prospectus. We also consent to the references to us under the
headings "Experts" and "Selected Consolidated Financial Data" in such
Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Consolidated Financial Data."
PRICE WATERHOUSE LLP
San Jose, California
November 20, 1996
II-5
<PAGE>
GRAPHICS APPENDIX LIST
ETEC REGISTRATION STATEMENT
PAGE REFERENCE DESCRIPTION OF OMITTED GRAPHICS
- -------------- -------------------------------
INSIDE COVER GRAPHIC 1: Header at top of page: "ETEC. Etec Systems is
OF PROSPECTUS the leader in electron beam and laser beam pattern generation
equipment for the semiconductor industry." Below, picture of
a photomask with caption to right, "High-precision masks
produced by Etec's mask pattern generation equipment are used
to image integrated circuit patterns onto semiconductor
wafers."
INSIDE COVER GRAPHIC 2: Picture of a MEBES 4500 from the above with a
OF PROSPECTUS caption on left, "The MEBES 4500's ultra-precision stage
moves and positions the mask under the electron beam as the
beam writes the pattern on the mask."
INSIDE FLAP GRAPHIC 3: Header at top of page: "ETEC. The Role of Masks
OF PROSPECTUS in Semiconductor Manufacturing." Below, picture of an ALTA
3000 from front with caption to left "Circuit layer design
data" and caption below "Etec Pattern generation tool.
Semiconductor manufacturing begins with the creation of a
mask. Circuit design data, up to one giga byte per layer, is
fed into Etec's MEBES, ALTA or CORE
<PAGE>
PAGE REFERENCE DESCRIPTION OF OMITTED GRAPHICS
- -------------- -------------------------------
tools, which write an image of one layer of the circuit onto
the mask."
INSIDE FLAP GRAPHIC 4: Picture of integrated circuit from side and
OF PROSPECTUS enlarged, caption below "Packaged integrated circuit," and
captions to the right "Testing, dicing and packaging" and
"The process is completed by testing, dicing and packaging
the individual integrated circuits."
INSIDE FLAP GRAPHIC 5: Picture of Semiconductor wafer, round and
OF PROSPECTUS enlarged from above with caption below, "Wafer with completed
circuits."
INSIDE FLAP GRAPHIC 6: Schematic picture of design writing process
OF PROSPECTUS with grid representing circuit design with caption below
"Circuit design written on mask."
INSIDE FLAP GRAPHIC 7: Picture of photo mask with caption below,
OF PROSPECTUS "Mask."
INSIDE FLAP GRAPHIC 8: Picture of photholitography stepper machine in
OF PROSPECTUS schematic with captions below" Wafer stepper photolithography
tool" and "The wafer stepper uses the mask like a
photographic negative to rapidly make numerous repetitive
images of the circuit pattern on the wafer. The stepper
transfers light through the mask onto photoresist that is
spread over the surface of the wafer. Those areas of the
photoresist that have been exposed to light are dissolved by
chemical developers, and the exposed areas of the layer under
the resist are then etched."
<PAGE>
PAGE REFERENCE DESCRIPTION OF OMITTED GRAPHICS
- -------------- -------------------------------
INSIDE FLAP GRAPHIC 9: Schematic picture of light bulb above a mask above
OF PROSPECTUS a wafer and flow chart with arrows from "Deposition" to
"Etch" with captions to left, "Lithography: Circuit layer
pattern exposed on wafer" and below "A different mask is
required for each layer of the integrated circuit. Successive
steps of deposition, lithography and etch build layers of
patterns that make up a single semiconductor."
32 GRAPHIC 10: Schematic diagram of boxes with arrows describing
the semiconductor manufacturing process.
37 GRAPHIC 11: Schematic drawing of MEBES system with inset
diagrams of electronics console and utility console.
39 GRAPHIC 12: Schematic drawing of ALTA system from above and
to the side.
41 GRAPHIC 13: Schematic drawing of electron-beam column.
42 GRAPHIC 14: Schematic drawing of laser beam system.
BACK INSIDE GRAPHIC 15: Photograph of MEBES 4500 with header on page,
COVER "Etec Pattern Generation Equipment" and below "The MEBES (R)
4500 is an electron beam tool designed for 0.35 micron
production requirements and pilot production of 0.25 micron
semiconductor devices. This tool operates at 160 megahertz
with a
<PAGE>
PAGE REFERENCE DESCRIPTION OF OMITTED GRAPHICS
- -------------- -------------------------------
beam spot size as small as 0.08 micron."
INSIDE BACK GRAPHIC 16: Photograph of CORE system
COVER
INSIDE BACK GRAPHIC 17: Photograph of ALTA 3000
<PAGE>
EXHIBIT 1.1
3,520,000 SHARES/1/
ETEC SYSTEMS, INC.
COMMON STOCK
-----------------------------
U.S. UNDERWRITING AGREEMENT
-----------------------------
December__, 1996
LEHMAN BROTHERS INC.
ROBERTSON, STEPHENS & COMPANY, LLC
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
As Representatives of the several U.S. Underwriters
c/o Lehman Brothers Inc.
Three World Financial Center
New York, New York 10285
Ladies/Gentlemen:
Etec Systems, Inc., a Nevada corporation (the "Company") and certain
stockholders of the Company named in Schedule B hereto (hereafter called the
"Selling Stockholders"), address you as the Representatives of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "U.S. Underwriters") and hereby confirm their respective agreements
with the several U.S. Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell 387,200
shares of its authorized and unissued Common Stock to the several U.S.
Underwriters. The Selling Stockholders, acting severally and not jointly,
propose to sell an aggregate of 3,132,800 shares of authorized and outstanding
shares of the Company's Common Stock to the several U.S. Underwriters. The
387,200 shares of Common Stock of the Company to be sold by the Company are
hereinafter called the "Company Shares" and the 3,132,800 shares of Common
Stock to be sold by the Selling Stockholders are hereinafter called the "Selling
Stockholder Shares." The Company Shares and the Selling Stockholder Shares are
hereinafter collectively referred to as the "Firm Shares." The Company also
proposes to grant to the U.S. Underwriters an option to purchase up to 528,000
additional shares of the Company's Common Stock (the "Option Shares"), as
provided in Section 7 hereof. As used in this Agreement, the term "Shares"
shall include the Firm Shares and the Option Shares. All shares of Common Stock
of the Company, including the Shares, are hereinafter referred to as "Common
Stock."
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date hereof
(the "International Underwriting Agreement") providing for the sale by the
Company and the Selling Stockholders of an aggregate of 1,012,000 shares of
Common Stock (including the over-allotment option thereunder) (the
"International Stock") through arrangements with certain underwriters outside
the United States (the "International Managers"), for whom Lehman Brothers
International (Europe) is acting as lead manager. The U.S. Underwriters and the
International Managers simultaneously are entering into an agreement between the
U.S. and International underwriting syndicates (the "Agreement Between U.S.
Underwriters and International Managers") which provides for, among other
things, the transfer of shares of Common Stock between
- -------------------------------
/1/ Plus an option to purchase up to 528,000 shares from the Company to cover
over-allotments.
1
<PAGE>
the two syndicates. Two forms of prospectus are to be used in connection with
the offering and sale of shares of Common Stock contemplated by the foregoing,
one relating to the Stock and the other relating to the International Stock.
The latter form of prospectus will be identical to the former except for certain
substitute pages as included in the registration statement and amendments
thereto referred to below. Except as the context may otherwise require,
references herein to the Stock shall include all the shares of the Common Stock
which may be sold pursuant to either this Agreement or the International
Underwriting Agreement, and references herein to any prospectus whether in
preliminary or final form, and whether as amended or supplemented, shall include
both the U.S. and the international versions thereof.
2. Representations, Warranties and Agreements of the Company.
I. The Company represents and warrants to and agrees with each U.S. Underwriter
that:
(a) A registration statement on Form S-3 (File No. ___-_____) with respect
to the Shares, including a prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the applicable Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement and such amended prospectuses subject
to completion, as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file such
additional amendments to such registration statement and such amended
prospectuses subject to completion, as may hereafter be required. Copies of such
registration statement and amendments and of each related prospectus subject to
completion (the "Preliminary Prospectuses") have been delivered to you.
If the registration statement has been declared effective under the Act by
the Commission, the Company will prepare and promptly file with the Commission
the information omitted from the registration statement pursuant to Rule 430A(a)
of the Rules and Regulations pursuant to subparagraph (1) or (4) of Rule 424(b)
of the Rules and Regulations or as part of a post-effective amendment to the
registration statement (including a final form of prospectus). If the
registration statement has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file a further amendment to
the registration statement, including a final form of prospectus. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including any documents incorporated by reference therein, financial
statements, schedules and exhibits in the form in which it became or becomes, as
the case may be, effective (including, if the Company omitted information from
the registration statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the registration statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations) and, in the event of any amendment thereto after the effective date
of such registration statement, shall also mean (from and after the
effectiveness of such amendment) such registration statement as so amended. The
term "Prospectus" as used in this Agreement shall mean the prospectus relating
to the Shares as included in such registration statement at the time it becomes
effective, except that if any revised prospectus shall be provided to the
Underwriters by the Company for use in connection with the offering of the
Shares that differs from the Prospectus on file with the Commission at the time
the registration statement became or becomes, as the case may be, effective
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the U.S. Underwriters for such use. Reference made herein
to any Preliminary Prospectus or to the Prospectus shall be deemed to refer to
and include any documents incorporated by reference therein pursuant to Item 12
of Form S-3 under the Act, as of the date of such Preliminary Prospectus or the
Prospectus, as the case may be, and any reference to any amendment or supplement
to any Preliminary Prospectus or the Prospectus shall be deemed to refer to and
include any document filed under the United States Securities Exchange Act of
1934, as amended (the "Exchange Act") after the date of such Preliminary
Prospectus or the Prospectus, as the case may be, and incorporated by reference
in such Preliminary Prospectus or the Prospectus, as the case may be; and any
reference to any amendment to the Registration Statement shall be deemed to
include any annual report of the Company filed with the Commission pursuant to
Section 13(a) or 15(d) of the Exchange Act after the date and time as of which
the registration statement has been declared effective under the Act by the
Commission.
2
<PAGE>
(b) The Commission has not issued any order preventing or suspending the use
of any Preliminary Prospectus, or instituted proceedings for that purpose, and
each such Preliminary Prospectus has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading; and at
the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date
(hereinafter defined) and on any later date on which Option Shares are to be
purchased, (i) the Registration Statement, Prospectus, and any documents
incorporated by reference in the Prospectus and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and (ii) neither the Registration Statement nor the Prospectus, or
any documents incorporated by reference in the Prospectus, nor any amendment or
supplement thereto, will include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein in light of the circumstances under which they were made
not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph shall apply to information contained
in or omitted from the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon, and in conformity with, written
information furnished to the Company by any U.S. Underwriter through you or by
any Selling Stockholder specifically for inclusion therein.
(c) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation with full corporate power and authority to own,
lease and operate its properties and conduct its business as described in the
Registration Statement; the Company owns all of the outstanding capital stock of
its subsidiaries free (except for qualifying shares required under local law)
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest; each of the Company and its subsidiaries is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the ownership or leasing of properties or the conduct of
its business requires such qualification except where the failure to be so
qualified would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; each of the Company
and its subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; each of the
Company and its subsidiaries is not in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any contract, indenture, mortgage,
loan agreement, joint venture or other agreement or instrument to which the
Company or its subsidiaries is a party or by which it or any of its properties
may be bound or in violation of any law, order, rule, regulation, writ,
injunction or decree of any government, government instrumentality or court,
domestic or foreign, except violations and defaults which individually or in the
aggregate would not be material to the Company and its subsidiaries considered
as one enterprise. The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than Etec Systems, a French
corporation ("Etec France"), Etec Systems (Korea) Incorporated ("Etec Korea"),
Etec Systems Japan Ltd., Etec GmbH, Etec Systems Limited, Etec Polyscan, Inc., a
Nevada corporation, and Etec Systems International, Inc., a Nevada corporation.
(d) The Company has full legal right, power and authority to enter into this
Agreement and perform the transactions contemplated hereby. This Agreement has
been duly authorized, executed and delivered by the Company and is a valid and
binding agreement on the part of the Company, enforceable in accordance with its
terms, except as rights to indemnity and contribution hereunder may be limited
by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally, or by general equitable principles;
the performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of the terms
and provisions of or constitute a default under, (i) any material indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any material lease, contract or other
agreement or instrument to which the Company or its subsidiaries is a party or
by which the property of the Company or any of its subsidiaries is bound, or
(ii) the charter or bylaws of the Company or any
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of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or over the
properties of the Company or any of its subsidiaries; and no consent, approval,
authorization or order of any court or governmental agency or body is required
for the consummation by the Company or any of its subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
National Association of Securities Dealers, Inc. or under state or other
securities or Blue Sky laws.
(e) Except as disclosed in the Registration Statement, there is not any
pending or, to the Company's knowledge, threatened action, suit, claim or
proceeding against the Company, any of its subsidiaries or any of their
respective officers or any of their properties, assets or rights before any
court or governmental agency or body or otherwise which (i) could reasonably be
expected to result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise or could reasonably be
expected to materially and adversely affect their properties, assets or rights,
or (ii) could reasonably be expected to prevent consummation of the transactions
contemplated hereby or (iii) is required to be disclosed in the Registration
Statement; and there are no contracts or documents of the Company or any of its
subsidiaries that are required to be described in the Prospectus or be filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations which have not been accurately described in all material respects in
the Prospectus and filed as exhibits to the Registration Statement. The
contracts so described in the Prospectus are in full force and effect on the
date hereof; and neither the Company nor any of its subsidiaries, nor to the
best of the Company's knowledge, any other party is in material breach of or
default under any of such contracts.
(f) All outstanding shares of capital stock of the Company (including the
Selling Stockholder Shares) have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, were not issued in violation of any preemptive rights
or other rights to subscribe for or purchase securities, and the authorized and
outstanding capital stock of the Company conforms in all respects to the
description thereof contained in the Registration Statement and the Prospectus
(except for issuances under the Company's employee benefit plans after the dates
stated therein); the Company Shares and the Option Shares to be purchased from
the Company hereunder have been duly authorized for issuance and sale to the
U.S. Underwriters pursuant to this Agreement and, when issued and delivered by
the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable; and
no preemptive right, co-sale right, registration right, right of first refusal
or other similar right of stockholders exists with respect to any of the Company
Shares or Option Shares or the issuance and sale thereof, other than those
registration rights that are being exercised in connection with the sale of
Selling Stockholder Shares pursuant to this Agreement or those that have been
expressly waived prior to the date hereof or those that will automatically
expire upon the consummation of the transactions contemplated on the Closing
Date. No further approval or authorization of any stockholder or the Board of
Directors, or to the knowledge of the Company any third party, is required for
the issuance and sale or transfer of the Shares except as may be required under
the Act, the Exchange Act or under state, foreign or other securities or Blue
Sky laws. All issued and outstanding shares of capital stock of each subsidiary
of the Company have been duly authorized and validly issued and are fully paid
and nonassessable. Except as disclosed in or contemplated by the Prospectus and
the financial statements of the Company, and the related notes thereto, included
in the Prospectus, and except as will terminate on or prior to the Closing Date,
neither the Company nor any subsidiary has outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) Price Waterhouse, LLP, who has examined the consolidated financial
statements, together with the related schedules and notes, of the Company filed
with the Commission as a part of the Registration Statement which are included
in the Prospectus, are to the best of the Company's knowledge, independent
accountants within the meaning
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of the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements, together with the related schedules and
notes, and the unaudited consolidated financial information, filed with the
Commission as part of the Registration Statement have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein
("GAAP"). The selected and summary financial and statistical data included in
the Registration Statement present fairly the information shown therein and have
been compiled on the basis stated therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (i) any material
adverse change in the business, properties or assets described or referred to in
the Registration Statement, or the results of operations, condition (financial
or otherwise) earnings, operations, business or business prospects, of the
Company and its subsidiaries considered as one enterprise, (ii) any transaction
that is material to the Company and its subsidiaries considered as one
enterprise, except transactions in the ordinary course of business or disclosed
or described in the Prospectus, (iii) any obligation that is material to the
Company and its subsidiaries considered as one enterprise, direct or contingent,
incurred by the Company or its subsidiaries, except obligations incurred in the
ordinary course of business, (iv) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries, which is material to the
Company and its subsidiaries considered as one enterprise, other than as
described in the Prospectus, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or its subsidiaries which has been sustained or will
have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise.
(i) Except as set forth in the Prospectus, (i) each of the Company and its
subsidiaries has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company and its subsidiaries considered
as one enterprise, (ii) the agreements to which the Company or any of its
subsidiaries is a party described in the Prospectus are valid agreements,
enforceable by the Company and such subsidiary (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally or by general equitable principles and, to their knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) the Company and its subsidiaries
have valid and enforceable leases for the properties described in the Prospectus
as leased by them except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles. The
Company owns or leases all such properties as are necessary to its operations as
now conducted.
(j) The Company and its subsidiaries have timely filed all necessary federal
and state income and franchise tax returns and have paid all taxes shown thereon
as due, and there is no tax deficiency that has been or, to the Company's
knowledge, might be asserted against the Company or any of its subsidiaries that
would reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), of the Company and its subsidiaries' earnings,
operations, business or business prospects considered as one enterprise. All
tax liabilities are properly provided for in accordance with GAAP on the books
of the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain insurance of the types and in
the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including but not limited to, insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; and the Company has no reason to believe
that the Company or
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<PAGE>
any of its subsidiaries will not be able to renew their existing insurance
coverage as and when such coverage expires or to obtain similar coverage as may
be necessary to continue their business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations or
business of the Company and its subsidiaries considered as one enterprise.
(l) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or to the Company's knowledge is imminent; and the Company
is not aware of any existing or imminent labor disturbance by the employees of
any of its principal suppliers, subassemblers, sales representatives or
international distributors that would reasonably be expected to result in any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise. No collective bargaining agreement exists with any
of the Company's employees and, to the Company's knowledge, no such agreement is
imminent.
(m) Each of the Company and its subsidiaries owns or possesses adequate
rights, including licenses, to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and copyrights
described or referred to in the Prospectus as owned or used by it or which are
necessary for the conduct of its businesses as described in the Prospectus;
neither the Company nor any of its subsidiaries has received any notice of, or
has knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, except as described in the
Prospectus.
(n) The Common Stock is registered pursuant to Section 12(g) of the Exchange
Act and is quoted on the National Association of Securities Dealers Automated
Quotation National Market (the "Nasdaq National Market") under the symbol
"ETEC", and the Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act or removing the Common Stock from quotation on the Nasdaq National Market,
nor has the Company received notification of any delisting proceedings, or that
the Commission or the National Association of Securities Dealers, Inc. ("NASD")
is contemplating terminating such registration or quotation.
(o) The Company has filed all documents that the Company was required to
file with the Commission under Section 13 or 14(a) of the Exchange Act since it
became subject to the reporting requirements of the Exchange Act. Such documents
conformed in all material respects to the requirements of the Exchange Act and
the rules and regulations thereunder. When such documents were filed with the
Commission, none of such documents included any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(p) The Company has been advised concerning the United States Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct
its affairs in such a manner as to ensure that it will not become, an
"investment company" within the meaning of the 1940 Act and such rules and
regulations.
(q) The Company has not distributed and will not distribute prior to the
Closing Date or prior to any date on which Option Shares are to be purchased, as
the case may be, any offering material in connection with the offering and sale
of the Shares other than the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(r) To the Company's knowledge, neither the Company nor any of its
subsidiaries has at any time during the last five years (i) made any unlawful
contribution to any candidate for foreign office, or failed to disclose fully
any contribution in violation of law, or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States of any jurisdiction thereof.
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<PAGE>
(s) The Company has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(t) Each officer and director of the Company has agreed that such person
will not, for a period of 90 days after the date of the Prospectus, directly or
indirectly sell, offer, contract to sell, grant any option to purchase, or
otherwise sell or dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for or any rights to purchase or
acquire Common Stock owned directly by the undersigned or with respect to which
the undersigned has the power disposition, other than (i) as a gift or gifts,
provided the doner or donees thereof agree to be bound by such restriction or
(ii) with the prior written consent of Lehman Brothers Inc. (the "Lock-Up
Agreements"). Furthermore, each such person has also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the securities held by such person except in compliance with
this restriction. The Company has provided to U.S. Underwriters' Counsel
accurate and complete copies of all of the Lock-Up Agreements that are presently
in effect. The Company hereby represents and warrants that it will not release
any of its officers or directors from any Lock-Up Agreements currently existing
or hereafter effected without the prior written consent of Lehman Brothers Inc.
(u) Except as set forth in the Prospectus, (i) each of the Company and its
subsidiaries is in compliance in all material respects with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its respective business, (ii) neither the Company nor
its subsidiaries has received any notice from any governmental authority or
third party of an asserted claim under Environmental Laws, (iii) to the
Company's knowledge, neither the Company nor its subsidiaries is required to
make future material capital expenditures to comply with Environmental Laws, and
(iv) no property which is owned, leased or occupied by the Company and its
subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
applicable state or local law.
(v) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Prospectus and except for promissory notes issued in
consideration of the Company's capital stock (none of which has an outstanding
balance of more than $40,000).
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(x) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each U.S. Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date will have good
title to such of the Shares as are deposited with the Custodian and such Shares
to be sold by such Selling Stockholder are free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest in each case,
created during the period title to such Shares is held by such Selling
Stockholders, other than pursuant to this Agreement; and such Selling
Stockholder has full right, power and authority to sell, assign, transfer and
deliver the Shares (except in the cases of share certificates held in escrow by
the Company pending payment of promissory notes issued in favor of the Company)
which are to be sold by such Selling Stockholder hereunder; and the Selling
Stockholder has no knowledge of any fact which would impair the validity or
genuineness of the certificates for Common Stock delivered on behalf of the
Selling Stockholder to the Custodian in connection with the sale of the Shares;
and assuming each underwriter is a bona fide purchaser without notice of defect
in the title of any of such Shares, upon delivery hereunder of the Shares and
payment of the purchase price as herein contemplated, each of the U.S.
Underwriters will obtain good title to the Shares purchased by it from such
Selling Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, including any liability for estate or
inheritance taxes, or any liability to or claims of any creditor, devisee,
legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable), executed
and delivered, a Power of Attorney (the "Power of Attorney") appointing Stephen
E. Cooper, Philip J. Koen, Jr. and Saul Arnold as attorneys-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a Letter of
Transmittal and Custody Agreement (the "Custody Agreement") with [Boston
Equiserve] as custodian (the "Custodian"); each of the Power of Attorney and the
Custody Agreement constitutes a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and each of such Selling Stockholder's Attorneys,
acting alone, is authorized to execute and deliver this Agreement and the
certificate referred to in Section 6(i) hereof on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the several U.S.
Underwriters to such Selling Stockholder as provided in Section 3 hereof, to
authorize the delivery of the Selling Stockholder Shares under this Agreement
and to duly endorse (in blank or otherwise) the certificate or certificates
representing such Shares or a stock power or powers with respect thereto, and to
accept payment therefor.
(c) All authorizations, approvals, consents and orders required to be
obtained by such Selling Stockholder in connection with the execution and
delivery by such Selling Stockholder of the Power of Attorney and the Custody
Agreement, the execution and delivery by or on behalf of such Selling
Stockholder of this Agreement and the sale and delivery of the Selling
Stockholder Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such authorizations,
approvals or consents as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Stockholder, if other than a natural person, has been duly organized and is
validly existing and in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Stockholder has full right, power and authority to enter into and perform its
obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder under this Agreement.
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(d) Certificates in negotiable form for all Shares to be sold by such
Selling Stockholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Stockholder, have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder.
(e) This Agreement, the Selling Stockholder's Power of Attorney and the
Custody Agreement have been duly authorized by such Selling Stockholder that is
not a natural person and have been duly executed and delivered by or on behalf
of such Selling Stockholder and are valid and binding agreements of such Selling
Stockholder, enforceable in accordance with their terms, except as the
indemnification and contribution provisions hereunder may be limited by
applicable law and except as the enforcement hereof and thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement, such Selling Stockholder's
Power of Attorney and the Custody Agreement and the consummation of the
transactions herein contemplated by such Selling Shareholder will not result in
a breach of or default under any material bond, debenture, note or other
evidence of indebtedness, or any material contract, indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or any
Selling Stockholder Shares hereunder may be bound (in each case, where such
breach or default would have any effect upon the ability of such Selling
Shareholder to perform its obligations under this Agreement, the Custody
Agreement or the Power of Attorney) or, result in any violation of any law,
order, rule, regulation, writ, injunction or decree of any court or governmental
agency or body or, if such Selling Stockholder is other than a natural person,
result in any violation of any provisions of the charter, bylaws or other
organizational documents of such Selling Stockholder.
(f) Such Selling Stockholder has not taken and will not take, directly or
indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(g) Such Selling Stockholder has not distributed and will not distribute in
connection with the offering and sale of the Shares any prospectus or other
offering material in connection with the offering and sale of the Shares, other
than internal distribution of the Preliminary Prospectus and the Prospectus in
compliance with the requirements of the Act.
(h) All information furnished by or on behalf of such Selling Stockholder
relating to such Selling Stockholder and the Selling Stockholder Shares that is
used in connection with the preparation of the Registration Statement including
any information furnished in connection with such Selling Stockholder's Power of
Attorney and all such information furnished by such Selling Stockholder
specifically for inclusion in the copy of the Registration Statement on Form S-
3, as filed with the Securities and Exchange Commission on [November __, 1996],
as delivered to the Selling Stockholders (with such modifications as approved by
the Selling Stockholders) is, and on the Closing Date will be, true, correct and
complete, and does not, and on the Closing Date, will not, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such statements not misleading insofar as it
relates to such Selling Stockholder.
(i) Such Selling Stockholder will review the Registration Statement and
Prospectus and will comply with all agreements and satisfy all conditions on its
part to be complied with or satisfied pursuant to this Agreement on or prior to
the Closing Date, and will advise one of its Attorneys prior to the Closing Date
if such Selling Stockholder's name and address, as may be set forth in the
Registration Statement is not set forth properly or if any
9
<PAGE>
statement to be made on behalf of such Selling Stockholder in the certificate
contemplated by Section 6(i) would be inaccurate if made as of the Closing Date.
(j) Such Selling Stockholder is not a party to any oral or written agreement
pursuant to which it has been granted or, if it is a party to any such
agreement, it has waived prior to the date hereof, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or any of the other Selling
Stockholders to the U.S. Underwriters pursuant to this Agreement; and such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the U.S. Underwriters, and each
U.S. Underwriter agrees, severally and not jointly, to purchase from the Company
and the Selling Stockholders, respectively, at a purchase price of [$____] per
share, the respective number of Company Shares as hereinafter set forth and
Selling Stockholder Shares set forth opposite the names of the Company and the
Selling Stockholders in Schedule B hereto. The obligation of each U.S.
Underwriter to the Company and to each Selling Stockholder shall be to purchase
from the Company or such Selling Stockholder that number of full Company Shares
or Selling Stockholder Shares, as the case may be, which (as nearly as
practicable) is in the same proportion to the number of Company Shares or
Selling Stockholder Shares, as the case may be, set forth opposite the name of
the Company or such Selling Stockholder in Schedule B hereto as the number of
Firm Shares which is set forth opposite the name of such U.S. Underwriter in
Schedule A hereto (subject to adjustment as provided in Section 10) is to the
total number of Firm Shares to be purchased by all the Underwriters under this
Agreement.
The certificates in negotiable form for the Selling Stockholder Shares have
been placed in custody (for delivery under this Agreement) under the Custody
Agreement. Each Selling Stockholder agrees that the certificates for the Selling
Stockholder Shares of such Selling Stockholder so held in custody are subject to
the interests of the Underwriters hereunder, that the arrangements made by such
Selling Stockholder for such custody, including the Power of Attorney, are to
that extent irrevocable and that the obligations of such Selling Stockholder
hereunder shall not be terminated by the act of such Selling Stockholder or by
operation of law, whether by the death or incapacity of such Selling Stockholder
or the occurrence of any other event, except as specifically provided herein or
in the Custody Agreement. If any Selling Stockholder should die or be
incapacitated, or if any other such event should occur, before the delivery of
the certificates for the Selling Stockholder Shares hereunder, the Selling
Stockholder Shares to be sold by such Selling Stockholder shall, except as
specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be purchased by
the U.S. Underwriters pursuant to this Section 3 shall be made against payment
of the purchase price therefor by the several U.S. Underwriters by wire transfer
or certified or official bank check in same-day funds as elected by the Company,
payable to the order of the Company with regard to the Shares being purchased
from the Company, and to the order of the Custodian for the respective accounts
of the Selling Stockholders with regard to the Shares being purchased from such
Selling Stockholders at the offices of Pillsbury Madison & Sutro LLP, 235
Montgomery Street, San Francisco, CA 94104 (or at such other place as may be
agreed upon among the Representatives, the Company and the Selling
Stockholders), at 7:00 A.M., San Francisco time on the third (or, if the Firm
Shares are priced, as contemplated by Rule 15c6-1(c) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") after 4:30 p.m. Washington D.C.
time, the fourth) full business day following the first day that Shares are
traded (or at such time and date to which payment and delivery shall have been
postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date." The certificates for the Firm
Shares to be so delivered will be made available to you at such office or at
such other location including, without limitation, in New York City, as you may
reasonably request for checking at least one full business day prior to the
Closing Date and
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will be in such names and denominations as you may request, such request to be
made at least two full business days prior to the Closing Date. If the
Representatives so elect, delivery of the Shares may be made by credit through
full fast transfer to the accounts at Depository Trust Company designated by the
Representatives.
It is understood that you, individually and not as the Representatives of
the several U.S. Underwriters, may (but shall not be obligated to) make payment
of the purchase price on behalf of any U.S. Underwriter or U.S. Underwriters
whose check or checks shall not have been received by you prior to the Closing
Date for the Firm Shares to be purchased by such U.S. Underwriter or U.S.
Underwriters. Any such payment by you shall not relieve any such U.S.
Underwriter or U.S. Underwriters of any of its or their obligations hereunder.
After the Registration Statement becomes effective, the several U.S.
Underwriters intend to offer the Firm Shares to the public as set forth in the
Prospectus.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the U.S. Underwriters), the legend
appearing on the inside front cover page and all information set forth under
"Underwriting" in any Preliminary Prospectus and in the Prospectus filed
pursuant to Rule 424(b) constitutes the only information furnished by the U.S.
Underwriters to the Company for inclusion in any Preliminary Prospectus, the
Prospectus or the Registration Statement, and you, on behalf of the respective
U.S. Underwriters, represent and warrant to the Company and the Selling
Stockholders that the statements made therein are true and correct and do not
fail to state any material fact required to be stated therein in order to make
such statements in light of the circumstances in which made not misleading.
4. Further Agreements of the Company. The Company agrees with the several
U.S. Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement and amendments thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will in
good faith consider and discuss with you the preparation and filing with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of Brobeck, Phleger & Harrison LLP, counsel for
the U.S. Underwriters ("U.S. Underwriters' Counsel"), may be necessary or
advisable in connection with the distribution of the Shares by the U.S.
Underwriters; it will promptly prepare and file with the Commission, and
promptly notify you of the filing of, any amendments or supplements to the
Registration Statement, Prospectus, or any documents incorporated by reference
in the Prospectus, which may be necessary to correct any statements or
omissions, if, at any time when a prospectus relating to the Shares is required
to be delivered under the Act, any event shall have occurred as a result of
which the Prospectus or any other prospectus relating to the Shares as then in
effect would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; in case any U.S.
Underwriter is required to deliver a prospectus nine months or more after the
effective date of the Registration Statement in connection with the sale of the
Shares, it will prepare promptly upon request, but at the expense of such U.S.
Underwriter, such amendment or amendments to the Registration Statement and such
prospectus or prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Act; and it will file no amendment or
supplement to the Registration Statement or Prospectus which shall not
previously have been
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submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations thereunder and the provisions of this
Agreement.
(b) The Company will advise you, promptly after it shall receive notice or
obtain knowledge thereof of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for offering
and sale under the securities laws of such jurisdictions as you may designate
and to continue such qualifications in effect for so long as may be required for
purposes of the distribution of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction or to make any undertaking with respect to the conduct of its
business. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, copies of the
Registration Statement (three of which will be signed and which will include all
exhibits), each Preliminary Prospectus, the Prospectus and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request for the purposes contemplated by the Act
(subject to paragraph (a) above regarding payment of expenses).
(e) The Company will make generally available to its shareholders as soon as
practicable, but in any event not later than the 45th day following the end of
the fiscal quarter first occurring after the first anniversary of the effective
date of the Registration Statement, an earnings statement (which will be in
reasonable detail but need not be audited) complying with the provisions of
Section 11(a) of the Act and covering a twelve-month period beginning after the
effective date of the Registration Statement.
(f) During a period of five years after the date hereof, the Company will
furnish to its shareholders, as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several U.S. Underwriters hereunder, upon your
reasonable request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three quarters in the form furnished to the Company's shareholders; (ii)
concurrently with furnishing to its shareholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flow of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants; (iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders generally; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"); (v) every material press
release and every material news item or article in respect of the Company or its
affairs which was released or prepared by the Company or any of its
subsidiaries; and (vi) any additional information of a public nature concerning
the Company or its subsidiaries, or its business. During such five-year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(g) Prior to issuing any press release regarding the Company's operating
results or financial condition with respect to any of the Company's first three
fiscal quarters in fiscal years 1997 and 1998, and prior to filing a Quarterly
Report on Form 10-Q relating to any such fiscal quarter, to retain Price
Waterhouse, LLP or other independent public accountants of recognized national
standing who shall review, in accordance with AICPA
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Statement on Auditing Standards No. 71, the Company's unaudited consolidated
financial statements at the end of each such fiscal quarter; provided, however,
that the Company's obligations under this covenant may terminate after the
second quarter of fiscal year 1997 at the discretion of the Company's Board of
Directors or Audit Committee.
(h) The Company will apply the net proceeds from the sale of the Shares
being sold by it substantially in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(i) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Common Stock.
(j) If the transactions contemplated hereby are not consummated by reason of
any failure, refusal or inability on the part of the Company or any Selling
Stockholder to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the U.S. Underwriters' obligations hereunder, or if the
Company shall terminate the Agreement under Section 11(a), the Company will
reimburse the several U.S. Underwriters for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel for the several U.S.
Underwriters) incurred by the U.S. Underwriters in investigating, preparing to
market or marketing the Shares.
(k) If at any time during the 90-day period after the Registration Statement
becomes effective, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith consult with you
concerning the advisability of disseminating, and the potential substance of, a
press release or other public statement responding to or commenting on such
rumor, publication or event.
(l) During a period of 90 days from the effective date of the Prospectus,
the Company will not, without your prior written consent, issue, sell, offer or
agree to sell, or otherwise dispose of, directly or indirectly, any Common
Stock, any options, rights or warrants with respect to any shares of Common
Stock or any securities convertible into, exercisable for or exchangeable for
Common Stock other than the sale of the Firm Shares and the Option Shares
hereunder, and the Company's issuance of options or Common Stock under the
Company's presently authorized 1990 Employee Stock Option Plan, 1990 Executive
Stock Plan, 1994 Employee Stock Option Plan, 1995 Omnibus Incentive Plan, 1995
Directors' Stock Option Plan and 1995 Employee Stock Purchase Plan and
nonstatutory option agreements to former holders of ATEQ securities (the
"Benefit Plans").
(m) Except as described in the Prospectus, during a period of 90 days from
the effective date of the Registration Statement, the Company will not file a
registration statement registering shares under any Benefit Plan or other
employee benefit plan.
(n) the Company will not release any of its officers, directors or
stockholders from any currently existing Lock-up Agreements if such release
would be effective earlier than 90 days after the effective date of the
Registration Statement, without the prior written consent of Lehman Brothers
Inc.
5. Expenses.
(a) The Company agrees with each U.S. Underwriter that:
(i) The Company will pay and bear all costs and expenses in connection
with the preparation by the Company, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto
(except as provided in Section 4(a) hereof); the printing of this Agreement, the
Agreement Among U.S. Underwriters, the Supplemental Agreement Among
Underwriters, the Master Dealers Agreement, the Agreement Between U.S.
Underwriters and International Managers, the Preliminary Blue Sky Survey and any
Supplemental Blue Sky Survey, the U.S. Underwriters' Questionnaire and Power of
Attorney, and any instruments related to any of the foregoing; the issuance and
delivery of the Shares hereunder to the several U.S. Underwriters, including
transfer taxes, if any, the cost of all certificates
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representing the Shares and Transfer Agents' and Registrars' fees; the fees and
disbursements of counsel for the Company; all fees and other charges of the
Company's independent public accountants; the cost of furnishing to the several
U.S. Underwriters copies of the Registration Statement (including appropriate
exhibits), Preliminary Prospectus and the Prospectus, and any amendments or
supplements to any of the foregoing (except as provided in Section 4(a) hereof);
NASD filing fees and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of U.S. Underwriters' Counsel in connection with such NASD filings
and Blue Sky qualifications); and all other expenses directly incurred by the
Company and the Selling Stockholders in connection with the performance of their
obligations hereunder. The provisions of this Section 5(a)(i) are intended to
relieve the U.S. Underwriters from the payment of the expenses and costs which
the Selling Stockholders and the Company hereby agree to pay, but shall not
affect any agreement which the Selling Stockholders and the Company may make, or
may have made, for the sharing of any of such expenses and costs. Such
agreements shall not impair the obligations of the Company and the Selling
Stockholders hereunder to the several U.S. Underwriters.
(ii) In addition to its other obligations under Section 8(a) hereof, the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
Section 8(a) hereof, it will reimburse the U.S. Underwriters on a monthly basis
for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
U.S. Underwriters for such expenses and the possibility that such payments might
later be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the U.S. Underwriters shall promptly return it to the Company together
with interest, compounded daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the highest credit standing)
listed from time to time in the Wall Street Journal which represents the base
rate on corporate loans posted by the substantial majority of the nation's 30
largest banks (the "Prime Rate"). Any such interim reimbursement payments which
are not made to the U.S. Underwriters within 30 days of a request for
reimbursement, shall bear interest at the Prime Rate from the date of such
request.
(iii) In addition to its obligations under Section 8(b) hereof, each
Selling Stockholder agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 8(b) hereof, it will reimburse the U.S. Underwriters on a
monthly basis for all reasonable legal or other expenses incurred in connection
with investigating or defending any such claim, action, investigation, inquiry
or other proceeding, notwithstanding the absence of a judicial determination as
to the propriety and enforceability of such Selling Stockholder's obligation to
reimburse the U.S. Underwriters for such expenses and the possibility that such
payments might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment is so
held to have been improper, the U.S. Underwriters shall promptly return such
payment to the Selling Stockholders together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such interim reimbursement
payments which are not made to the U.S. Underwriters within 30 days of a request
for reimbursement shall bear interest at the Prime Rate from the date of such
request.
(b) In addition to their other obligations under Section 8(c) hereof, the
U.S. Underwriters agree that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 8(c) hereof, it will reimburse the Company and each Selling
Stockholder on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the U.S.
Underwriters' obligation to reimburse the Company and each such Selling
Stockholder for such expenses and the possibility that such payments might later
be held to have been improper by a court of competent jurisdiction. To the
extent that any such interim reimbursement payment is so held to have been
improper, the Company and each such Selling Stockholder shall promptly refund it
to the U.S. Underwriters together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments which
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are not made to the Company and each such Selling Stockholder within 30 days of
a request for reimbursement shall bear interest at the Prime Rate from the date
of such request.
(c) In the event that any claim arises out of statements or omissions, or
alleged statements or omissions, described in more than one of Sections 8(a),
8(b), or 8(c), the interim reimbursement obligations described in Sections
5(a)(i), 5(a)(ii), and 5(b) shall be apportioned based upon the principals, and
subject to the limitations contained in Section 8 hereof. It is agreed that any
controversy arising out of the operation of the interim reimbursement
arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof,
including the amounts of any requested reimbursement payments, the method of
determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the National Association of Securities Dealers, Inc.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice, then the
party responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will
not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections 8(a), 8(b)
and 8(c) hereof.
6. Conditions of U.S. Underwriters' Obligations. The obligations of the
several U.S. Underwriters to purchase and pay for the Company Shares and the
Selling Stockholder Shares as provided herein, shall be subject to the accuracy,
as of the date hereof and the Closing Date and any later date on which Option
Shares are to be purchased, as the case may be, of the representations and
warranties of the Company and the Selling Stockholders herein, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
2:00 P.M., San Francisco Time, on the date following the date of this Agreement,
or such later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceeding
for that purpose shall have been initiated or, to the knowledge of the Company
or any U.S. Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of U.S. Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in connection with
this Agreement, the form of Registration Statement and the Prospectus, and the
registration, authorization, issue, sale and delivery of the Shares, shall have
been satisfactory to U.S. Underwriters' Counsel, and such counsel shall have
been furnished with such papers and information as they may reasonably have
requested to enable them to pass upon the matters referred to in this
subsection.
(c) You shall have received on the Closing Date and on any later date on
which Option Shares are purchased, as the case may be, the following opinion of
Pillsbury Madison & Sutro LLP, counsel for the Company, and with respect to
subparagraph (v) below, an opinion from Aoki, Christensen & Nomoto, each dated
the Closing Date or such later date addressed to the U.S. Underwriters and with
reproduced copies or signed counterparts thereof for each of the U.S.
Underwriters, to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Nevada;
(ii) The Company has the corporate power to own, lease and operate its
property and to conduct its business as described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its property or the conduct of its business requires
such
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qualification, except where the failure so to qualify would not have a material
adverse effect on the condition (financial or otherwise), earnings, operations,
business or business prospects of the Company and its subsidiaries considered as
one enterprise. To such counsel's knowledge, the Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than Etec Systems Japan, Ltd., Etec France, Etec GmbH and Etec Korea, Etec
Systems Limited, Etec Polyscan, Inc., a Nevada corporation, and Etec Systems
International, a Nevada corporation.
(iv) The Company owns all of the shares of capital stock of its
subsidiaries (except for qualifying shares required under local law) free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest;
(v) Etec Systems Japan, Ltd., a subsidiary of the Company, has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business and is duly qualified
to transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires, to the
best knowledge of such counsel, such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries considered as one enterprise;
(vi) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable, and have not been issued in violation of any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right;
(vii) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement will be, upon
issuance and delivery against payment therefor in accordance with the terms
hereof, and the shares to be sold by the Selling Stockholders are, duly
authorized and validly issued and fully paid and nonassessable, and have not
been issued in violation of any preemptive right, registration right, co-sale
right, right of first refusal or other similar right and the shareholders of the
Company have no preemptive or, to such counsel's knowledge, other rights to
purchase any of these Shares.
(viii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the U.S. Underwriters the Firm
Shares or the Option Shares, as the case may be, to be issued and sold by it
hereunder;
(ix) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company and, assuming due authorization, execution and delivery by you, is a
valid and binding agreement of the Company, except insofar as indemnification
and contribution provisions may be limited by applicable law or equitable
principles, and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles;
(x) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement have been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(xi) The Registration Statement, the Prospectus, and the documents
incorporated by reference in the Prospectus, and each amendment or supplement
thereto (other than the financial statements (including supporting schedules)
and financial data derived therefrom as to which such counsel need express no
opinion) as of the effective date of the Registration Statement, complied as to
form in all material respects with requirements of the Act and the applicable
Rules and Regulations, and any further amendment or supplement to any such
incorporated document made by the Company prior to such effective date (other
than the financial statements and related schedules therein,
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as to which such counsel need express no opinion), when they became effective or
were filed with the Commission, as the case may be, complied as to form in all
material respects with the requirements of the Exchange Act, and the rules and
regulations of the Commission thereunder;
(xii) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof contained in the
Registration Statement and Prospectus;
(xiii) The information in the Prospectus under the caption "Shares
Eligible for Future Sale" to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is correct in all
material respects, and the forms of certificates evidencing the Common Stock
comply with Nevada law;
(xiv) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes and contracts are
accurate in all material respects and fairly present the information required to
be presented by the Act or the Rules and Regulations;
(xv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents of a character required to be described or referred to in
the Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to therein and filed
as required;
(xvi) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification and contribution obligations hereunder, concerning which no
opinion need be expressed) will not, (a) result in any violation of the
Company's charter or bylaws, or (b) result in the material breach or violation
of any of the terms and provisions, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, lease, contract or other agreement
or instrument filed as an exhibit to the Registration Statement, or any
applicable statute, rule or regulation known to such counsel or any order, writ
or decree known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations; provided however, that no opinion need be
rendered concerning state securities or Blue Sky laws;
(xvii) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with the consummation of the
transactions herein contemplated except such as have been obtained under the Act
or such as may be required under state, foreign, or other securities or Blue Sky
laws or by the National Association of Securities Dealers, Inc. in connection
with the purchase and the distribution of the Shares by the U.S. Underwriters;
(xviii) There are no legal or governmental proceedings pending or, to
such counsel's knowledge, threatened against the Company or any of its
subsidiaries of a character which are required to be disclosed in the
Registration Statement or the Prospectus, by the Act or the applicable Rules and
Regulations, other than those described therein;
(xix) To such counsel's knowledge, except as set forth in the
Prospectus, neither the Company nor any of its subsidiaries is presently in
material breach of, or in default under, any bond, debenture, note or other
evidence of indebtedness or any contract, indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which any of its property is bound that
is material to the financial condition, earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise;
(xx) Except as set forth in the Registration Statement and Prospectus,
no holders of Common Stock or other securities of the Company have registration
rights with respect to securities of the Company and, except as set forth in the
Registration Statement and Prospectus, all holders of securities of the Company
or any of its
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subsidiaries having rights to registration of such shares of Common Stock, or
other securities, because of the filing of the Registration Statement by the
Company have, with respect to the offering contemplated thereby, waived such
rights or such rights have expired by reason of lapse of time following
notification of the Company's intent to file the Registration Statement, or have
included securities in the Registration Statement pursuant to the exercise of
such rights;
In addition, such counsel shall state that although they have not verified
the accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
which (i) caused them to believe that, at the time the Registration Statement
became effective, the Registration Statement (other than the financial
statements including supporting schedules and financial data derived therefrom,
as to which such counsel need express no comment) contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that at
the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement, the Prospectus, or
any document incorporated by reference in the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading or (ii)
caused them to believe that the Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion) as of the effective date of the
Registration Statement, failed to comply as to form in all material respects
with the requirements of the Act and the applicable Rules and Regulations.
Counsel rendering the foregoing opinions may rely as to questions of law not
involving the laws of the United States or the States of California and Nevada
upon opinions of local counsel satisfactory to U.S. Underwriters' Counsel (or
such local counsel may deliver separate opinions directly to the U.S.
Underwriters in lieu of inclusion of such matters in the foregoing opinion), and
as to questions of fact upon representations or certificates of officers of the
Company, the Selling Stockholders or officers of the Selling Stockholders (when
the Selling Stockholder is not a natural person), and of government officials,
in which case their opinion is to state that they are so relying and that they
have no knowledge of any material misstatement or inaccuracy in such opinions,
representations or certificate. Copies of any opinion, representation or
certificate so relied upon shall be delivered to you, as Representatives of the
U.S. Underwriters, and to U.S. Underwriters' Counsel.
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of Skjerven, Morrill, MacPherson, Franklin and Friel, patent counsel to
the Company, dated the Closing Date or such later date, to the effect that:
(i) The Company is listed in the records of the United States Patent and
Trademark Office ("PTO") as the holder of record of the patent applications
listed in Exhibit A to such opinion (the "Patent Applications"), and such
counsel shall state that number of such Patent Applications, listed on Exhibit B
to such opinion, which have been allowed or indicated as containing allowable
subject matters. To the best of such counsel's knowledge, written assignments to
the Company of all ownership interests in the Patent Applications have been duly
authorized, executed and delivered by all of the inventors in accordance with
their terms. To the best of such counsel's knowledge, there is no claim of any
party other than the Company to any ownership interest or lien with respect to
any of the Patent Applications;
(ii) to such counsel's knowledge, other than in connection with
assertions or inquiries made by patent office examiners in the ordinary course
of the prosecution of the Company's Patent Applications and except as set forth
on Exhibit C to such opinion, there is no pending or threatened in writing any
action, suit, proceeding or claim by others (A) challenging the validity or
scope of the Patent Applications held by or licensed to the Company, or (B)
asserting that any third party patent is infringed by the activities of the
Company described in the Prospectus or by the manufacture, use or sale of any of
the Company's products or other items made and used according to the Patent
Applications held by or licensed to the Company;
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(iii) to such counsel's knowledge and except as set forth on Exhibit D
to such opinion, there is not pending or threatened in writing any action, suit,
proceeding or claim by the Company asserting infringement on the part of any
third party of the Patent Applications; and
(iv) the statements in the Prospectus under the captions "Risk Factors
- --Patents and Other Intellectual Property" and "Business -- Patents and Other
Proprietary Rights", to the best of such counsel's knowledge, insofar as such
statements relate to the patents listed in Exhibit A or any legal matters,
documents and proceedings relating thereto, fairly present the information
called for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein.
(e) You shall have received on the Closing Date an opinion from counsel for
the respective Selling Stockholders, which counsel shall be reasonably
satisfactory to you, each dated the Closing Date addressed to the U.S.
Underwriters and with reproduced copies or signed counterparts thereof for each
of the U.S. Underwriters, to the effect that:
(i) If the Selling Stockholder is not a natural person, such Selling
Stockholder has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of such Selling Stockholder that is not
a natural person has been duly authorized by such Selling Stockholder; the Power
of Attorney and Custody Agreement of the Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of the Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(ii) The Selling Stockholder has full right, power and authority to
enter into and to perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Shares to be sold by such Selling Stockholder
hereunder;
(iii) This Agreement has been duly authorized by the Selling Stockholder
that is not a natural person and has been duly executed and delivered by or on
behalf of such Selling Stockholder and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except insofar as the
indemnification and contribution provisions hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and
(iv) Upon the delivery of and payment for the Shares as contemplated in
this Agreement, each of the Underwriters will receive good title to the Shares
purchased by it from such Selling Stockholder, free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest. In rendering
such opinion, such counsel may assume that the Underwriters are bona fide
purchasers without notice of any defect in the title of any of such Selling
Stockholders to the Shares being purchased from such Selling Stockholders.
Such opinion may be based upon the laws of the domicile of the Selling
Stockholder or, in the case of a corporate Selling Stockholder, the laws of the
jurisdiction of incorporation or the location of its principal executive
offices, and, for purposes of rendering opinions regarding the enforceability of
agreements which purport to be governed by the laws of a jurisdiction other than
California, such counsel may assume that the laws of the State of California are
the same as the laws of the jurisdiction upon which the opinion is based. Such
opinion may be based upon certificates as to factual matters of the Selling
Stockholder and may include reasonable and customary assumptions and
qualifications under the laws of the relevant jurisdiction.
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<PAGE>
(f) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, an opinion of
Brobeck, Phleger & Harrison LLP, counsel for the underwriters, in form and
substance satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a letter from Price
Waterhouse, LLP addressed to the Company and the U.S. Underwriters, dated the
Closing Date or such later date on which Option Shares are to be purchased, as
the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than three business days prior to the Closing Date or to
such later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company and its subsidiaries considered as one enterprise which, in your
sole judgment, makes it impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. Also you shall have
received an Original Letter from Price Waterhouse, LLP addressed to or for the
use of the U.S. Underwriters setting forth their opinion with respect to their
examination of the consolidated balance sheet of the Company as of October 31,
1996 and related consolidated statements of operations, shareholders' equity,
and cash flow for the three months ended October 31, 1996, as well as other
matters agreed upon by Price Waterhouse, LLP and you. In addition, you shall
have received from Price Waterhouse, LLP a copy of a letter addressed to the
Company and made available to you for the use of the Underwriters stating that
their review of the Company's system of internal accounting controls, to the
extent they deemed necessary in establishing the scope of their examination of
the Company's consolidated financial statements as of October 31, 1996, did not
disclose any weaknesses in internal controls that they considered to be material
weaknesses.
(h) You shall have received on the Closing Date and on any later date on
which Option Shares are purchased, as the case may be, a certificate of the
Company, dated the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, signed by the Chief Executive Officer and
Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that :
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the Closing Date or any later date
on which Option Shares are to be purchased, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus and any amendments or supplements thereto contained
all statements and information required to be included therein, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto included an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances in which made, not misleading, and, since
the effective date of the Registration Statement,
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<PAGE>
there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth;
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been (A) any
material adverse change in the properties or assets described or referred to in
the Registration Statement and the Prospectus or in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (B) any transaction which is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (C) any
obligation, direct or contingent, incurred by the Company or any of its
subsidiaries which is material to the Company and its subsidiaries considered as
one enterprise, except obligations incurred in the ordinary course of business,
(D) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries which is material to the Company and its subsidiaries
considered as one enterprise or (E) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries.
(i) You shall be satisfied that, and you shall have received a certificate,
dated the Closing Date from the Attorneys for each Selling Stockholder to the
effect that, as of the Closing Date, they have not been informed that:
(i) The representations and warranties made by such Selling Stockholder
herein are not true or correct in any material respect on the Closing Date; or
(ii) Such Selling Stockholder has not complied with any obligation or
satisfied any condition which is required to be performed or satisfied on his or
its part at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be.
(j) The Company and the Selling Stockholders shall have furnished to you
such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Stockholders or
officers of the Selling Stockholders (when the Selling Stockholder is not a
natural person)) as to the accuracy of the representations and warranties of the
Company and the Selling Stockholders herein, as to the performance by the
Company of its obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the U.S. Underwriters hereunder.
All such opinions, certificates, letters and documents will be in compliance
with the provisions hereof only if they are reasonably satisfactory to U.S.
Underwriters' Counsel. The Company and the Selling Stockholders will furnish you
with such number of conformed copies of such opinions, certificates, letters and
documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations and warranties herein contained, but
subject to the terms and conditions herein set forth, the Company hereby grants
to the several U.S. Underwriters, for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares only, a non-
transferable option to purchase up to an aggregate of 528,000 Option Shares at
the purchase price per share for the Firm Shares set forth in Section 3 hereof.
Such option may be exercised by the Representatives on behalf of the several
U.S. Underwriters on one occasion in whole or in part during the period of
thirty (30) days from and after the date on which the Firm Shares are initially
offered to the public, by giving written notice to the Company and the
Custodian. The number of Option Shares to be purchased by each U.S. Underwriter
upon the exercise of such option shall be the same proportion of the total
number of Option Shares to be purchased by the several U.S. Underwriters
pursuant to the
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exercise of such option as the number of Firm Shares purchased by such U.S.
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several U.S. Underwriters (set forth in Schedule A
hereto), adjusted by the Representatives in such manner as to avoid fractional
shares.
Delivery of definitive certificates for the Option Shares to be purchased by
the several U.S. Underwriters pursuant to the exercise of the option granted by
this Section 7 shall be made against payment of the purchase price therefor by
the several U.S. Underwriters by wire transfer or certified or official bank
check or checks drawn in same-day funds, as elected by the Company, payable to
the order of the Company. Such delivery and payment shall take place at the
offices of Pillsbury Madison & Sutro LLP, 235 Montgomery Street, San Francisco,
CA 94104 or at such other place as may be agreed upon among the Representatives
and the Company (i) on the Closing Date, if written notice of the exercise of
such option is received by the Company and the Custodian not later than two full
business days prior to the Closing Date or (ii) on a later date, not later than
the third full business day following the date the Company and the Custodian
receives written notice of the exercise of such option, if such notice is not
received by the Company and the Custodian at least three full business days
prior to the Closing Date.
The certificates for the Option Shares so to be delivered will be made
available to you at such office or other location including, without limitation,
in New York City, as you may reasonably request for checking at least one full
business day prior to the date of payment and delivery and will be in such names
and denominations as you may request, such request to be made at least two full
days prior to such date of payment and delivery. If the Representatives so
elect, delivery of the Shares may be made by credit through full fast transfer
to the accounts at Depository Trust Company of the Representatives.
It is understood that you, individually, and not as the Representatives of
the U.S. Underwriters, may (but shall not be obligated to) make payment of the
purchase price on behalf of any U.S. Underwriter or U.S. Underwriters whose
check or checks shall not have been received by you prior to the date of payment
and delivery for the Option Shares to be purchased by such U.S. Underwriter or
U.S. Underwriters. Any such payment by you shall not relieve any U.S.
Underwriter or U.S. Underwriters of any of its or their obligations hereunder.
The several U.S. Underwriters intend to make an initial public offering (as
such term is described in Section 11 hereof) of the Option Shares to be issued
upon exercise of such option as set forth in the Prospectus, but after the
initial public offering the several U.S. Underwriters may in their discretion
vary the public offering price.
(b) Upon exercise of any option provided for in Section 7(a) hereof the
obligations of the U.S. Underwriters to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment for such Option
Shares) to the accuracy of and compliance with the representations and
warranties of the Company herein, to the accuracy of the statements of the
Company and officers of the Company made pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to U.S. Underwriters' Counsel, and
you shall have been furnished with all such documents, certificates and opinions
as you may request in order to evidence the accuracy and completeness of any of
the representations, warranties or statements, the performance of any of the
covenants of the Company or the compliance with any of the conditions herein
contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each U.S. Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such U.S. Underwriter may become subject (including, without limitation, in its
capacity as an U.S. Underwriter or as a "qualified independent underwriter"
within the meaning of Schedule E of the Bylaws of the NASD), under the Act or
otherwise, specifically including but not limited to losses, claims, damages or
liabilities related to negligence on the part of any U.S. Underwriter, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any breach of any representation, warranty,
agreement or covenant of the Company herein contained or any untrue statement or
alleged
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untrue statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; and agrees to reimburse each U.S. Underwriter for any legal or
other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by any U.S. Underwriter, directly
or through you, or by any Selling Stockholder, specifically for use in the
preparation thereof and, provided further, that the indemnity agreement provided
in this Section 8(a) with respect to any Preliminary Prospectus shall not inure
to the benefit of any U.S. Underwriter from whom the person asserting any
losses, claims, charges, liabilities or litigation based upon any untrue
statement or alleged untrue statement of material fact or omission or alleged
omission to state therein a material fact purchased Shares, if a copy of the
Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected has not been sent or given to such
person within the time required by the Act and the Rules and Regulations
thereunder, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each officer and
employee of any U.S. Underwriter, and each person, if any, who controls any U.S.
Underwriter within the meaning of the Act. This indemnity agreement shall be in
addition to any liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees to indemnify
and hold harmless each U.S. Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such U.S. Underwriter may become
subject, under the Act or otherwise, only insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any breach of any representation, warranty, agreement or covenant of such
Selling Stockholder contained in Section 2.II. hereof or any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company or such U.S. Underwriter, directly
by such Selling Stockholder or through such Selling Stockholder's
representatives, specifically for inclusion therein, and, subject to Section
8(f), agrees to reimburse each U.S. Underwriter for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that such Selling
Stockholder shall not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by any Underwriter, through you,
specifically for use in the preparation thereof and, provided further, that the
indemnity agreement provided in this Section 8(b) with respect to any
Preliminary Prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any losses, claims, charges, liabilities or litigation
based upon any untrue statement or alleged untrue statement of a material fact
or omission or alleged omission to state therein a material fact purchased
Shares, if a copy of the Prospectus in which such untrue statement or alleged
untrue statement or omission or alleged omission was corrected has not been sent
or given to such person within the time required by the Act and the Rules and
Regulations thereunder, unless such failure is the result of noncompliance by
the Company with Section 4(d) hereof. The Company and the Underwriters
acknowledge that the only written information furnished to them by or on behalf
of the Selling Stockholders specifically for inclusion in the Registration
Statement, any Preliminary Prospectus, the Prospectus or any amendment or
supplement thereto
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are the representations, warranties, agreements and covenants in Section 2.II of
this Agreement and those contained in the Custody Agreement, the Power of
Attorney and the accompanying Information Statement.
The indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each officer and
employee of any U.S. Underwriter, and each person, if any, who controls any U.S.
Underwriter within the meaning of the Act. This indemnity agreement shall be in
addition to any liabilities which such Selling Stockholder may otherwise have.
(c) Each U.S. Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company and each Selling Stockholder against any losses,
claims, damages or liabilities, joint or several, to which the Company or such
Selling Stockholder may become subject under the Act or otherwise, specifically
including but not limited to losses, claims, damages or liabilities related to
negligence on the part of the Company or such Selling Stockholder, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any breach of any representation, warranty,
agreement or covenant of such U.S. Underwriter herein contained or any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or are based upon the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which made, not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such U.S. Underwriter, directly
or through you, specifically for inclusion therein, and will reimburse the
Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action. The indemnity agreement in this Section 8(c) shall extend
upon the same terms and conditions to, and shall inure to the benefit of each
officer and director of the Company, each Selling Stockholder and each officer
or director of each Selling Stockholder and each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act. This
indemnity agreement shall be in addition to any liabilities which each U.S.
Underwriter may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8 and without limiting the generality of the foregoing, shall not
relieve it from any liability which it may have to any indemnified party under
Section 8, except to the extent it has been prejudiced by such omission. In case
any such action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and to the extent that it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified parties and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties, at the expense of the indemnifying party. Upon receipt of notice from
the indemnifying party to such indemnified party of its election so to assume
the defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel approved by the indemnifying party, representing all the
indemnified parties under Section 8(a) or 8(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of
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commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided however that
such consent shall not be unreasonably withheld.
(e) In order to provide for just and equitable contribution in any action in
which a claim for indemnification is made pursuant to this Section 8 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 8 provides for indemnification in
such case, all the parties hereto shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that, except as set forth in Section 8(f)
hereof, the U.S. Underwriters are responsible pro rata for the portion
represented by the percentage that the underwriting discount bears to the
initial public offering price, and the Company and the Selling Stockholders are
severally responsible for the remaining portion, provided, however, that (i) no
U.S. Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such U.S.
Underwriter, and (ii) no person guilty of a fraudulent misrepresentation (within
the meaning of Section 11(f) of the Act) shall be entitled to a contribution
from any person who is not guilty of such fraudulent misrepresentation. This
subsection (e) shall not be operative (i) as to any U.S. Underwriter to the
extent that the Company or any Selling Stockholder has received indemnity under
this Section 8; or (ii) as to the Company or any Selling Stockholder to the
extent that any U.S. Underwriter has received indemnity under Section 8. The
contribution agreement in this Section 8(e) shall extend upon the same terms and
conditions to, and shall inure to the benefit of, each person, if any, who
controls any U.S. Underwriter, the Company or any Selling Stockholder within the
meaning of the Act or the Exchange Act.
(f) The liability of each Selling Stockholder under the representations and
warranties contained in Section 2.II hereof and under the indemnity,
reimbursement and contribution agreements contained in the provisions of this
Section 8 shall be limited to an amount equal to the initial public offering
price of the Selling Stockholder Shares sold by such Selling Stockholder to the
U.S. Underwriters minus the amount of the underwriting discount paid thereon to
the U.S. Underwriters by such Selling Stockholder. The Company and such Selling
Stockholders may agree, as among themselves and without limiting the rights of
the U.S. Underwriters under this Agreement, as to the respective amounts of such
liability for which they each shall be responsible. The provisions of this
Section 8 shall not limit the liability of the Company in respect of indemnity
of any Selling Stockholder pursuant to any other agreement.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including without limitation the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Securities
Exchange Act of 1934, as amended. The parties are advised that federal or state
public policy, as interpreted by the courts in certain jurisdictions, may be
contrary to certain of the provisions of this Section 8, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert such public
policy as a defense to a claim under this Section 8 and further agree not to
attempt to assert any such defense.
9. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements of the Company and the
Selling Stockholders herein or in certificates delivered pursuant hereto, and
the indemnity and contribution agreements contained in Section 8 hereof shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any U.S. Underwriter or any controlling person, or by or
on behalf of the Company or any Selling Stockholder, or any of their officers,
directors or controlling persons, and shall survive the delivery of the Shares
to the several U.S. Underwriters hereunder or termination of this Agreement.
25
<PAGE>
10. Substitution of U.S. Underwriters. If any U.S. Underwriter or U.S.
Underwriters shall fail to take up and pay for the number of Firm Shares agreed
by such U.S. Underwriter or U.S. Underwriters to be purchased hereunder upon
tender of such Firm Shares in accordance with the terms hereof, and if the
aggregate number of Firm Shares which such defaulting U.S. Underwriter or U.S.
Underwriters so agreed but failed to purchase does not exceed 10% of the Firm
Shares, the remaining U.S. Underwriters shall be obligated, severally in
proportion to their respective commitments hereunder, to take up and pay for the
Firm Shares of such defaulting U.S. Underwriter or U.S. Underwriters.
If any U.S. Underwriter or U.S. Underwriters so defaults and the aggregate
number of Firm Shares which such defaulting U.S. Underwriter or U.S.
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining U.S. Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting U.S. Underwriter or U.S.
Underwriters so agreed but failed to purchase. If such remaining U.S.
Underwriters do not, at the Closing Date, take up and pay for the Firm Shares
which the defaulting U.S. Underwriter or U.S. Underwriters so agreed but failed
to purchase, the Closing Date shall be postponed for twenty-four hours
(including non-business hours) to allow the several U.S. Underwriters the
privilege of substituting within twenty-four hours another underwriter or
underwriters (which may include any nondefaulting U.S. Underwriter) satisfactory
to the Company. If no such underwriter or underwriters shall have been
substituted as aforesaid by such postponed Closing Date, the Closing Date may,
at the option of the Company, be postponed for a further twenty-four hours, if
necessary, to allow the Company the privilege of finding another underwriter or
underwriters, satisfactory to you, to purchase the Firm Shares which the
defaulting U.S. Underwriter or U.S. Underwriters so agreed but failed to
purchase. If it shall be arranged for the remaining U.S. Underwriters or
substituted underwriters to take up the Firm Shares of the defaulting U.S.
Underwriter or U.S. Underwriters as provided in this Section, (i) the Company
shall have the right to postpone the time of delivery for a period of not more
than seven full business days, in order to effect whatever changes may thereby
be made necessary in the Registration Statement or the Prospectus, or in any
other documents or arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the Prospectus which
may thereby be made necessary, and (ii) the respective number of Firm Shares to
be purchased by the remaining U.S. Underwriters and substituted underwriters
shall be taken as the basis of their underwriting obligation. If the remaining
U.S. Underwriters shall not take up and pay for all such Firm Shares so agreed
to be purchased by the defaulting U.S. Underwriter or U.S. Underwriters or
substitute another underwriter or underwriters as aforesaid and the Company
shall not find or shall not elect to seek another underwriter or underwriters
for such Firm Shares as aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section, neither the Company nor any Selling Stockholder shall
be liable to any U.S. Underwriter (except to the extent provided in Sections
4(j), 5 and 8 hereof) nor shall any U.S. Underwriter (other than an U.S.
Underwriter who shall have failed, otherwise than for some reason permitted
under this Agreement, to purchase the number of Firm Shares agreed by such U.S.
Underwriter to be purchased hereunder, which U.S. Underwriter shall remain
liable to the Company, the Selling Stockholders and the other U.S. Underwriters
for damages, if any, resulting from such default) be liable to the Company or
any Selling Stockholder (except to the extent provided in Sections 5 and 8
hereof).
The term "U.S. Underwriter" in this Agreement shall include any person
substituted for an U.S. Underwriter under this Section.
11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of (i) 6:30 A.M.,
San Francisco Time, on the first full business day following the effective date
of the Registration Statement, or (ii) the time of the initial public offering
of any of the Shares by the U.S. Underwriters after the Registration Statement
becomes effective. The time of the initial public offering shall mean the time
of the release by you, for publication, of the first newspaper
26
<PAGE>
advertisement relating to the sale of the Shares, or the time at which the
Shares are first generally offered by the U.S. Underwriters to dealers by letter
or telegram or telecopy, whichever shall first occur. By giving notice as set
forth in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except that the Company and the Selling Stockholders shall remain
obligated to pay costs and expenses to the extent provided in Sections 4(j), 5
and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall have the
right to terminate this Agreement by giving notice as hereinafter specified at
any time at or prior to the Closing Date or on or prior to any later date on
which the Option Shares are to be purchased, as the case may be, (i) if the
Company or any Selling Stockholder shall have failed, refused or been unable, at
or prior to the Closing Date, or on or prior to any later date on which the
Option Shares are to be purchased, as the case may be, to perform any agreement
on its part to be performed, or because any other condition of the U.S.
Underwriters' obligations hereunder required to be fulfilled by the Company or
any Selling Stockholder is not fulfilled, or (ii) if trading on the New York
Stock Exchange shall have been suspended, or minimum or maximum prices for
trading shall have been fixed, or maximum ranges for prices for securities shall
have been required on the New York Stock Exchange, by the New York Stock
Exchange or by order of the Commission or any other governmental authority
having jurisdiction, or if a banking moratorium shall have been declared by
federal or New York or California authorities, or (iii) if on or prior to the
Closing Date, or on or prior to any later date on which Option Shares are to be
purchased, as the case may be, the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
to interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured, or (iv)
if there shall have been a material adverse change in the general political or
economic conditions or financial markets in the United States as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if on or prior to the Closing
Date, or on or prior to any later date on which Option Shares are to be
purchased, as the case may be, there shall have been an outbreak or escalation
of hostilities between the United States and any foreign power or of any other
insurrection or armed conflict involving the United States or the declaration by
the United States of a national emergency which, in the reasonable opinion of
the Representatives, makes it impracticable or inadvisable to offer or sell the
Shares. Any such termination shall be without liability of any party to any
other party except as provided in Sections 4(j), 5 and 8 hereof and except that
in the event of termination solely pursuant to Section 11(b)(i) hereof, the
Company shall remain obligated to pay costs and expenses pursuant to Sections
4(j) and 5 hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, telecopier number (212) 526-6588, Attention:
Syndicate Department, with a copy, in the case of any notice pursuant to Section
10(d), to the Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., Three World Financial Center, 10th Floor, New York, New York
10285; if sent to the Company, such notice shall be mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Etec Systems, Inc., 26460 Corporate Avenue, Hayward, CA 94545, telecopier number
(510) 732-1469, Attention: Stephen E. Cooper, President; if sent to one or more
of the Selling Stockholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Stephen E. Cooper, Philip J. Koen, Jr., or Saul Arnold, as Attorney-in-Fact for
the Selling Stockholders, at Etec Systems, Inc., 26460 Corporate Avenue,
Hayward, CA 94545, telecopier (510) 732-1469.
27
<PAGE>
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several U.S. Underwriters and the Company, the Selling Stockholders and
their respective executors, administrators, successors and assigns. Nothing
expressed or mentioned in this Agreement is intended or shall be construed to
give any person or corporation, other than the parties hereto and their
respective executors, administrators, successors and assigns, and the
controlling persons, officers and directors referred to in Section 8 hereof, any
legal or equitable right, remedy or claim or in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or corporation. No purchaser of any of the Shares
from any Underwriter shall be construed a successor or assign by reason merely
of such purchase.
In all dealings with the Company and the Selling Stockholders under this
Agreement, you shall act on behalf of each of the several U.S. Underwriters, and
the Company and the Selling Stockholders shall be entitled to act and rely upon
any statement, request, notice or agreement made or given by you jointly or by
Robertson, Stephens & Company on behalf of you.
14. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of New York.
15. Counterparts. This Agreement may be signed in several counterparts, each
of which will constitute an original.
28
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholders and the several U.S. Underwriters, please so indicate
in the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among the Company, the Selling Stockholders and
the several U.S. Underwriters.
Very truly yours,
ETEC SYSTEMS, INC.
By: ___________________________
SELLING STOCKHOLDERS
By: ___________________________
Attorney-in-Fact for the
Selling Stockholders named
in Schedule B hereto
Accepted as of the date first
above written:
LEHMAN BROTHERS INC.
ROBERTSON, STEPHENS & COMPANY, LLC
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
For themselves and as Representatives
of the several U.S. Underwriters
named in Schedule A hereto.
By Lehman Brothers Inc.
By: -------------------------------------------------------------------
Authorized Representative
-------------------------------------------------------------------
Please Print Name
29
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
<S> <C>
Number of Firm Shares
U.S. Underwriters
- --------------------------------------------------------------------------
To Be Purchased
- -------------------------
Lehman Brothers Inc. ..............................
Robertson, Stephens & Company, LLC ................
Smith Barney Inc. .................................
Needham & Company .................................
Total ......................................... 3,520,000
===============
</TABLE>
30
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
<S> <C>
Number of Company
Company Shares To Be Sold
- ------------------------- -------------------
......................................... 387,200
Total .........................................
Number of Selling
Name of Selling Stockholder Shares
Stockholder To Be Sold
- ------------------------- -------------------
Total Selling Stockholders ....................... 3,132,800
</TABLE>
31
<PAGE>
EXHIBIT 1.2
880,000 SHARES/1/
ETEC SYSTEMS, INC.
COMMON STOCK
-----------------------------
INTERNATIONAL UNDERWRITING AGREEMENT
-----------------------------
December , 1996
--
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
ROBERTSON, STEPHENS & COMPANY, LLC
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
As Lead Managers of the several International Managers
c/o Lehman Brothers International (Europe)
1 Broadgate London
EC2M 7HA England
Ladies/Gentlemen:
Etec Systems, Inc., a Nevada corporation (the "Company") and certain
stockholders of the Company named in Schedule B hereto (hereafter called the
"Selling Stockholders"), address you as the Lead Managers of each of the
persons, firms and corporations listed in Schedule A hereto (herein collectively
called the "International Managers") and hereby confirm their respective
agreements with the several International Managers as follows:
1. Description of Shares. The Company proposes to issue and sell 96,800
shares of its authorized and unissued Common Stock to the several International
Managers. The Selling Stockholders, acting severally and not jointly, propose to
sell an aggregate of 783,200 shares of authorized and outstanding shares of the
Company's Common Stock to the several International Managers. The 96,800 shares
of Common Stock of the Company to be sold by the Company are hereinafter called
the "Company Shares" and the 783,200 shares of Common Stock to be sold by the
Selling Stockholders are hereinafter called the "Selling Stockholder Shares."
The Company Shares and the Selling Stockholder Shares are hereinafter
collectively referred to as the "Firm Shares." The Company also proposes to
grant to the International Managers an option to purchase up to 132,000
additional shares of the Company's Common Stock (the "Option Shares"), as
provided in Section 7 hereof. As used in this Agreement, the term "Shares" shall
include the Firm Shares and the Option Shares. All shares of Common Stock of the
Company, including the Shares, are hereinafter referred to as "Common Stock."
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date hereof
(the "U.S. Underwriting Agreement") providing for the sale by the Company and
the Selling Stockholders of an aggregate of 4,048,000 shares of Common Stock
(including the over-allotment option thereunder) (the "U.S. Stock") through
arrangements with certain underwriters within the United States (the "U.S.
Underwriters"), for whom Lehman Brothers Inc. is acting as representative. The
U.S. and the International Managers simultaneously are entering into an
agreement between the U.S. and International underwriting syndicates (the
"Agreement Between U.S. Underwriters and International Managers") which provides
for, among other things, the transfer of shares of Common Stock between the two
syndicates. Two forms of prospectus are to be used in
- ---------------
/1/ Plus an option to purchase up to 132,000 shares from the Company to cover
over-allotments.
1
<PAGE>
connection with the offering and sale of shares of Common Stock contemplated by
the foregoing, one relating to the Stock and the other relating to the
International Stock. The latter form of prospectus will be identical to the
former except for certain substitute pages as included in the registration
statement and amendments thereto referred to below. Except as the context may
otherwise require, references herein to the Stock shall include all the shares
of the Common Stock which may be sold pursuant to either this Agreement or the
U.S. Underwriting Agreement, and references herein to any prospectus whether in
preliminary or final form, and whether as amended or supplemented, shall include
both the U.S. and the international versions thereof.
2. Representations, Warranties and Agreements of the Company.
I. The Company represents and warrants to and agrees with each International
Manager that:
(a) A registration statement on Form S-3 (File No. - ) with respect
--- -----
to the Shares, including a prospectus subject to completion, has been prepared
by the Company in conformity with the requirements of the Securities Act of
1933, as amended (the "Act"), and the applicable Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement and such amended prospectuses subject
to completion, as may have been required prior to the date hereof have been
similarly prepared and filed with the Commission; and the Company will file such
additional amendments to such registration statement and such amended
prospectuses subject to completion, as may hereafter be required. Copies of such
registration statement and amendments and of each related prospectus subject to
completion (the "Preliminary Prospectuses") have been delivered to you.
If the registration statement has been declared effective under the Act by
the Commission, the Company will prepare and promptly file with the Commission
the information omitted from the registration statement pursuant to Rule 430A(a)
of the Rules and Regulations pursuant to subparagraph (1) or (4) of Rule 424(b)
of the Rules and Regulations or as part of a post-effective amendment to the
registration statement (including a final form of prospectus). If the
registration statement has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file a further amendment to
the registration statement, including a final form of prospectus. The term
"Registration Statement" as used in this Agreement shall mean such registration
statement, including any documents incorporated by reference therein, financial
statements, schedules and exhibits in the form in which it became or becomes, as
the case may be, effective (including, if the Company omitted information from
the registration statement pursuant to Rule 430A(a) of the Rules and
Regulations, the information deemed to be a part of the registration statement
at the time it became effective pursuant to Rule 430A(b) of the Rules and
Regulations) and, in the event of any amendment thereto after the effective date
of such registration statement, shall also mean (from and after the
effectiveness of such amendment) such registration statement as so amended. The
term "Prospectus" as used in this Agreement shall mean the prospectus relating
to the Shares as included in such registration statement at the time it becomes
effective, except that if any revised prospectus shall be provided to the
International Managers by the Company for use in connection with the offering of
the Shares that differs from the Prospectus on file with the Commission at the
time the registration statement became or becomes, as the case may be, effective
(whether or not such revised prospectus is required to be filed with the
Commission pursuant to Rule 424(b)(3) of the Rules and Regulations), the term
"Prospectus" shall refer to such revised prospectus from and after the time it
is first provided to the International Managers for such use. Reference made
herein to any Preliminary Prospectus or to the Prospectus shall be deemed to
refer to and include any documents incorporated by reference therein pursuant to
Item 12 of Form S-3 under the Act, as of the date of such Preliminary Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to any Preliminary Prospectus or the Prospectus shall be deemed to
refer to and include any document filed under the United States Securities
Exchange Act of 1934, as amended (the "Exchange Act") after the date of such
Preliminary Prospectus or the Prospectus, as the case may be, and incorporated
by reference in such Preliminary Prospectus or the Prospectus, as the case may
be; and any reference to any amendment to the Registration Statement shall be
deemed to include any annual report of the Company filed with the Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act after the date and time
as of which the registration statement has been declared effective under the Act
by the Commission.
2
<PAGE>
(b) The Commission has not issued any order preventing or suspending the use
of any Preliminary Prospectus, or instituted proceedings for that purpose, and
each such Preliminary Prospectus has conformed in all material respects to the
requirements of the Act and the Rules and Regulations and, as of its date, has
not included any untrue statement of a material fact or omitted to state a
material fact necessary to make the statements therein not misleading; and at
the time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Closing Date
(hereinafter defined) and on any later date on which Option Shares are to be
purchased, (i) the Registration Statement, Prospectus, and any documents
incorporated by reference into the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, and (ii) neither the Registration Statement nor the Prospectus or
any documents incorporated by reference in the Prospectus, nor any amendment or
supplement thereto, will include any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein in light of the circumstances under which they were made
not misleading; provided, however, that none of the representations and
warranties contained in this subparagraph shall apply to information contained
in or omitted from the Registration Statement or the Prospectus or any such
amendment or supplement in reliance upon, and in conformity with, written
information furnished to the Company by any International Manager through you or
by any Selling Stockholder specifically for inclusion therein.
(c) Each of the Company and its subsidiaries has been duly incorporated and
is validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation with full corporate power and authority to own,
lease and operate its properties and conduct its business as described in the
Registration Statement; the Company owns all of the outstanding capital stock of
its subsidiaries free (except for qualifying shares required under local law)
and clear of any pledge, lien, security interest, encumbrance, claim or
equitable interest; each of the Company and its subsidiaries is duly qualified
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the ownership or leasing of properties or the conduct of
its business requires such qualification except where the failure to be so
qualified would not have a material adverse effect on the condition (financial
or otherwise), earnings, operations, business or business prospects of the
Company and its subsidiaries considered as one enterprise; each of the Company
and its subsidiaries is in possession of and operating in compliance with all
authorizations, licenses, certificates, consents, orders and permits from state,
federal and other regulatory authorities which are material to the conduct of
its business, all of which are valid and in full force and effect; each of the
Company and its subsidiaries is not in violation of its respective charter or
bylaws or in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any bond, debenture,
note or other evidence of indebtedness or in any contract, indenture, mortgage,
loan agreement, joint venture or other agreement or instrument to which the
Company or its subsidiaries is a party or by which it or any of its properties
may be bound or in violation of any law, order, rule, regulation, writ,
injunction or decree of any government, government instrumentality or court,
domestic or foreign, except violations and defaults which individually or in the
aggregate would not be material to the Company and its subsidiaries considered
as one enterprise. The Company does not own or control, directly or indirectly,
any corporation, association or other entity other than Etec Systems, a French
corporation ("Etec France"), Etec Systems (Korea) Incorporated ("Etec Korea"),
Etec Systems Japan Ltd., Etec GmbH, Etec Systems Limited, Etec Polyscan, Inc., a
Nevada corporation, and Etec Systems International, Inc., a Nevada corporation.
(d) The Company has full legal right, power and authority to enter into this
Agreement and perform the transactions contemplated hereby. This Agreement has
been duly authorized, executed and delivered by the Company and is a valid and
binding agreement on the part of the Company, enforceable in accordance with its
terms, except as rights to indemnity and contribution hereunder may be limited
by applicable law and except as the enforcement hereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws affecting creditors' rights generally, or by general equitable principles;
the performance of this Agreement and the consummation of the transactions
herein contemplated will not result in a breach or violation of any of the terms
and provisions of or constitute a default under, (i) any material indenture,
mortgage, deed of trust, loan agreement, bond, debenture, note agreement or
other evidence of indebtedness, or any material lease, contract or other
agreement or instrument to which the Company or its subsidiaries is a party or
by which the property of the Company or any of its subsidiaries is bound, or
(ii) the charter or bylaws of the Company or any
3
<PAGE>
of its subsidiaries, or (iii) any law, order, rule, regulation, writ,
injunction, judgment or decree of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries or over the
properties of the Company or any of its subsidiaries; and no consent, approval,
authorization or order of any court or governmental agency or body is required
for the consummation by the Company or any of its subsidiaries of the
transactions herein contemplated, except such as may be required under the Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the
National Association of Securities Dealers, Inc. or under state or other
securities or Blue Sky laws.
(e) Except as disclosed in the Registration Statement, there is not any
pending or, to the Company's knowledge, threatened action, suit, claim or
proceeding against the Company, any of its subsidiaries or any of their
respective officers or any of their properties, assets or rights before any
court or governmental agency or body or otherwise which (i) could reasonably be
expected to result in any material adverse change in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise or could reasonably be
expected to materially and adversely affect their properties, assets or rights,
or (ii) could reasonably be expected to prevent consummation of the transactions
contemplated hereby or (iii) is required to be disclosed in the Registration
Statement; and there are no contracts or documents of the Company or any of its
subsidiaries that are required to be described in the Prospectus or be filed as
exhibits to the Registration Statement by the Act or by the Rules and
Regulations which have not been accurately described in all material respects in
the Prospectus and filed as exhibits to the Registration Statement. The
contracts so described in the Prospectus are in full force and effect on the
date hereof; and neither the Company nor any of its subsidiaries, nor to the
best of the Company's knowledge, any other party is in material breach of or
default under any of such contracts.
(f) All outstanding shares of capital stock of the Company (including the
Selling Stockholder Shares) have been duly authorized and validly issued and are
fully paid and nonassessable, have been issued in compliance with all federal
and state securities laws, were not issued in violation of any preemptive rights
or other rights to subscribe for or purchase securities, and the authorized and
outstanding capital stock of the Company conforms in all respects to the
description thereof contained in the Registration Statement and the Prospectus
(except for issuances under the Company's employee benefit plans after the dates
stated therein); the Company Shares and the Option Shares to be purchased from
the Company hereunder have been duly authorized for issuance and sale to the
International Managers pursuant to this Agreement and, when issued and delivered
by the Company against payment therefor in accordance with the terms of this
Agreement, will be duly and validly issued and fully paid and nonassessable; and
no preemptive right, co-sale right, registration right, right of first refusal
or other similar right of stockholders exists with respect to any of the Company
Shares or Option Shares or the issuance and sale thereof, other than those
registration rights that are being exercised in connection with the sale of
Selling Stockholder Shares pursuant to this Agreement or those that have been
expressly waived prior to the date hereof or those that will automatically
expire upon the consummation of the transactions contemplated on the Closing
Date. No further approval or authorization of any stockholder or the Board of
Directors, or to the knowledge of the Company any third party, is required for
the issuance and sale or transfer of the Shares except as may be required under
the Act, the Exchange Act or under state, foreign or other securities or Blue
Sky laws. All issued and outstanding shares of capital stock of each subsidiary
of the Company have been duly authorized and validly issued and are fully paid
and nonassessable. Except as disclosed in or contemplated by the Prospectus and
the financial statements of the Company, and the related notes thereto, included
in the Prospectus, and except as will terminate on or prior to the Closing Date,
neither the Company nor any subsidiary has outstanding any options to purchase,
or any preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such options, rights,
convertible securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options or
other rights granted and exercised thereunder, set forth in the Prospectus
accurately and fairly presents the information required to be shown with respect
to such plans, arrangements, options and rights.
(g) Price Waterhouse, LLP, who has examined the consolidated financial
statements, together with the related schedules and notes, of the Company filed
with the Commission as a part of the Registration Statement which are included
in the Prospectus, are to the best of the Company's knowledge, independent
accountants within the meaning
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of the Act and the Rules and Regulations; the audited consolidated financial
statements of the Company, together with the related schedules and notes, and
the unaudited consolidated financial information, forming part of the
Registration Statement and Prospectus, fairly present the financial position and
the results of operations of the Company and its subsidiaries at the respective
dates and for the respective periods to which they apply; and all audited
consolidated financial statements, together with the related schedules and
notes, and the unaudited consolidated financial information, filed with the
Commission as part of the Registration Statement have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved except as may be otherwise stated therein
("GAAP"). The selected and summary financial and statistical data included in
the Registration Statement present fairly the information shown therein and have
been compiled on the basis stated therein. No other financial statements or
schedules are required to be included in the Registration Statement.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been (i) any material
adverse change in the business, properties or assets described or referred to in
the Registration Statement, or the results of operations, condition (financial
or otherwise) earnings, operations, business or business prospects, of the
Company and its subsidiaries considered as one enterprise, (ii) any transaction
that is material to the Company and its subsidiaries considered as one
enterprise, except transactions in the ordinary course of business or disclosed
or described in the Prospectus, (iii) any obligation that is material to the
Company and its subsidiaries considered as one enterprise, direct or contingent,
incurred by the Company or its subsidiaries, except obligations incurred in the
ordinary course of business, (iv) any change in the capital stock or outstanding
indebtedness of the Company or any of its subsidiaries, which is material to the
Company and its subsidiaries considered as one enterprise, other than as
described in the Prospectus, (v) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries, or (vi) any loss or damage (whether or not insured) to the
property of the Company or its subsidiaries which has been sustained or will
have been sustained which has a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise.
(i) Except as set forth in the Prospectus, (i) each of the Company and its
subsidiaries has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest other than such as
are not material to the business of the Company and its subsidiaries considered
as one enterprise, (ii) the agreements to which the Company or any of its
subsidiaries is a party described in the Prospectus are valid agreements,
enforceable by the Company and such subsidiary (as applicable), except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting creditors' rights
generally or by general equitable principles and, to their knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements, and (iii) the Company and its subsidiaries
have valid and enforceable leases for the properties described in the Prospectus
as leased by them except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles. The
Company owns or leases all such properties as are necessary to its operations as
now conducted.
(j) The Company and its subsidiaries have timely filed all necessary federal
and state income and franchise tax returns and have paid all taxes shown thereon
as due, and there is no tax deficiency that has been or, to the Company's
knowledge, might be asserted against the Company or any of its subsidiaries that
would reasonably be expected to have a material adverse effect on the condition
(financial or otherwise), of the Company and its subsidiaries' earnings,
operations, business or business prospects considered as one enterprise. All
tax liabilities are properly provided for in accordance with GAAP on the books
of the Company and its subsidiaries.
(k) The Company and its subsidiaries maintain insurance of the types and in
the amounts generally deemed adequate for their respective businesses and
consistent with insurance coverage maintained by similar companies in similar
businesses, including but not limited to, insurance covering real and personal
property owned or leased by the Company against theft, damage, destruction, acts
of vandalism and all other risks customarily insured against, all of which
insurance is in full force and effect; and the Company has no reason to believe
that the Company or
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any of its subsidiaries will not be able to renew their existing insurance
coverage as and when such coverage expires or to obtain similar coverage as may
be necessary to continue their business at a cost that would not materially and
adversely affect the condition (financial or otherwise), earnings, operations or
business of the Company and its subsidiaries considered as one enterprise.
(l) No labor disturbance by the employees of the Company or any of its
subsidiaries exists or to the Company's knowledge is imminent; and the Company
is not aware of any existing or imminent labor disturbance by the employees of
any of its principal suppliers, subassemblers, sales representatives or
international distributors that would reasonably be expected to result in any
material adverse change in the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise. No collective bargaining agreement exists with any
of the Company's employees and, to the Company's knowledge, no such agreement is
imminent.
(m) Each of the Company and its subsidiaries owns or possesses adequate
rights, including licenses, to use all patents, patent rights, inventions, trade
secrets, know-how, trademarks, service marks, trade names and copyrights
described or referred to in the Prospectus as owned or used by it or which are
necessary for the conduct of its businesses as described in the Prospectus;
neither the Company nor any of its subsidiaries has received any notice of, or
has knowledge of, any infringement of or conflict with asserted rights of others
with respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights which, singly or in the
aggregate, if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the condition (financial or otherwise),
earnings, operations, business or business prospects of the Company and its
subsidiaries considered as one enterprise, except as described in the
Prospectus.
(n) The Common Stock is registered pursuant to Section 12(g) of the Exchange
Act and is quoted on the National Association of Securities Dealers Automated
Quotation National Market (the "Nasdaq National Market") under the symbol
"ETEC", and the Company has taken no action designed to, or likely to have the
effect of, terminating the registration of the Common Stock under the Exchange
Act or removing the Common Stock from quotation on the Nasdaq National Market,
nor has the Company received notification of any delisting proceedings, or that
the Commission or the National Association of Securities Dealers, Inc. ("NASD")
is contemplating terminating such registration or quotation.
(o) The Company has filed all documents that the Company was required to
file with the Commission under Section 13 or 14(a) of the Exchange Act since it
became subject to the reporting requirements of the Exchange Act. Such documents
conformed in all material respects to the requirements of the Exchange Act and
the rules and regulations thereunder. When such documents were filed with the
Commission, none of such documents included any untrue statement of a material
fact or omitted to state any material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
(p) The Company has been advised concerning the United States Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct
its affairs in such a manner as to ensure that it will not become, an
"investment company" within the meaning of the 1940 Act and such rules and
regulations.
(q) The Company has not distributed and will not distribute prior to the
Closing Date or prior to any date on which Option Shares are to be purchased, as
the case may be, any offering material in connection with the offering and sale
of the Shares other than the Prospectus, the Registration Statement and the
other materials permitted by the Act.
(r) To the Company's knowledge, neither the Company nor any of its
subsidiaries has at any time during the last five years (i) made any unlawful
contribution to any candidate for foreign office, or failed to disclose fully
any contribution in violation of law, or (ii) made any payment to any federal or
state governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments required or permitted by the
laws of the United States of any jurisdiction thereof.
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(s) The Company has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate the
sale or resale of the Shares.
(t) Each officer and director of the Company has agreed that such person
will not, for a period of 90 days after the date of the Prospectus, directly or
indirectly sell, offer, contract to sell, grant any option to purchase, or
otherwise sell or dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for or any rights to purchase or
acquire Common Stock owned directly by the undersigned or with respect to which
the undersigned has the power disposition, other than (i) as a gift or gifts,
provided the doner or donees thereof agree to be bound by such restriction or
(ii) with the prior written consent of Lehman Brothers Inc. (the "Lock-Up
Agreements"). Furthermore, each such person has also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the securities held by such person except in compliance with
this restriction. The Company has provided to U.S. Underwriters' Counsel
accurate and complete copies of all of the Lock-Up Agreements that are presently
in effect. The Company hereby represents and warrants that it will not release
any of its officers or directors from any Lock-Up Agreements currently existing
or hereafter effected without the prior written consent of Lehman Brothers Inc.
(u) Except as set forth in the Prospectus, (i) each of the Company and its
subsidiaries is in compliance in all material respects with all rules, laws and
regulations relating to the use, treatment, storage and disposal of toxic
substances and protection of health or the environment ("Environmental Laws")
which are applicable to its respective business, (ii) neither the Company nor
its subsidiaries has received any notice from any governmental authority or
third party of an asserted claim under Environmental Laws, (iii) to the
Company's knowledge, neither the Company nor its subsidiaries is required to
make future material capital expenditures to comply with Environmental Laws, and
(iv) no property which is owned, leased or occupied by the Company and its
subsidiaries has been designated as a Superfund site pursuant to the
Comprehensive Response, Compensation, and Liability Act of 1980, as amended (42
U.S.C. (S) 9601, et seq.), or otherwise designated as a contaminated site under
applicable state or local law.
(v) The Company and its subsidiaries maintain a system of internal
accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or specific
authorizations, (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain accountability for assets, (iii) access to
assets is permitted only in accordance with management's general or specific
authorization, and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken with
respect to any differences.
(w) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Prospectus and except for promissory notes issued in
consideration of the Company's capital stock (none of which has an outstanding
balance of more than $40,000).
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(x) The conditions for use of Form S-3, as set forth in the General
Instructions thereto, have been satisfied.
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each International Manager and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date will have good
title to such of the Shares as are deposited with the Custodian and such Shares
to be sold by such Selling Stockholder are free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest in each case,
created during the period title to such Shares is held by such Selling
Stockholders, other than pursuant to this Agreement; and such Selling
Stockholder has full right, power and authority to sell, assign, transfer and
deliver the Shares (except in the cases of share certificates held in escrow by
the Company pending payment of promissory notes issued in favor of the Company)
which are to be sold by such Selling Stockholder hereunder; and the Selling
Stockholder has no knowledge of any fact which would impair the validity or
genuineness of the certificates for Common Stock delivered on behalf of the
Selling Stockholder to the Custodian in connection with the sale of the Shares;
and assuming each International Manager is a bona fide purchaser without notice
of defect in the title of any of such Shares, upon delivery hereunder of the
Shares and payment of the purchase price as herein contemplated, each of the
International Managers will obtain good title to the Shares purchased by it from
such Selling Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest, including any liability for estate or
inheritance taxes, or any liability to or claims of any creditor, devisee,
legatee or beneficiary of such Selling Stockholder.
(b) Such Selling Stockholder has duly authorized (if applicable), executed
and delivered, a Power of Attorney (the "Power of Attorney") appointing Stephen
E. Cooper, Philip J. Koen, Jr. and Saul Arnold as attorneys-in-fact
(collectively, the "Attorneys" and individually, an "Attorney") and a Letter of
Transmittal and Custody Agreement (the "Custody Agreement") with [Boston
Equiserve] as custodian (the "Custodian"); each of the Power of Attorney and the
Custody Agreement constitutes a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium or
other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and each of such Selling Stockholder's Attorneys,
acting alone, is authorized to execute and deliver this Agreement and the
certificate referred to in Section 6(i) hereof on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the several
International Managers to such Selling Stockholder as provided in Section 3
hereof, to authorize the delivery of the Selling Stockholder Shares under this
Agreement and to duly endorse (in blank or otherwise) the certificate or
certificates representing such Shares or a stock power or powers with respect
thereto, and to accept payment therefor.
(c) All authorizations, approvals, consents and orders required to be
obtained by such Selling Stockholder in connection with the execution and
delivery by such Selling Stockholder of the Power of Attorney and the Custody
Agreement, the execution and delivery by or on behalf of such Selling
Stockholder of this Agreement and the sale and delivery of the Selling
Stockholder Shares under this Agreement (other than, at the time of the
execution hereof (if the Registration Statement has not yet been declared
effective by the Commission), the issuance of the order of the Commission
declaring the Registration Statement effective and such authorizations,
approvals or consents as may be necessary under state or other securities or
Blue Sky laws) have been obtained and are in full force and effect; such Selling
Stockholder, if other than a natural person, has been duly organized and is
validly existing and in good standing under the laws of the jurisdiction of its
organization as the type of entity that it purports to be; and such Selling
Stockholder has full right, power and authority to enter into and perform its
obligations under this Agreement and such Power of Attorney and Custody
Agreement, and to sell, assign, transfer and deliver the Shares to be sold by
such Selling Stockholder under this Agreement.
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(d) Certificates in negotiable form for all Shares to be sold by such
Selling Stockholder under this Agreement, together with a stock power or powers
duly endorsed in blank by such Selling Stockholder, have been placed in custody
with the Custodian for the purpose of effecting delivery hereunder.
(e) This Agreement, the Selling Stockholder's Power of Attorney and the
Custody Agreement have been duly authorized by such Selling Stockholder that is
not a natural person and have been duly executed and delivered by or on behalf
of such Selling Stockholder and are valid and binding agreements of such Selling
Stockholder, enforceable in accordance with their terms, except as the
indemnification and contribution provisions hereunder may be limited by
applicable law and except as the enforcement hereof and thereof may be limited
by bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and the performance of this Agreement, such Selling Stockholder's
Power of Attorney and the Custody Agreement and the consummation of the
transactions herein contemplated by such Selling Shareholder will not result in
a breach of or default under any material bond, debenture, note or other
evidence of indebtedness, or any material contract, indenture, mortgage, deed of
trust, loan agreement, lease or other agreement or instrument to which such
Selling Stockholder is a party or by which such Selling Stockholder or any
Selling Stockholder Shares hereunder may be bound (in each case, where such
breach or default would have any effect upon the ability of such Selling
Shareholder to perform its obligations under this Agreement, the Custody
Agreement or the Power of Attorney) or, result in any violation of any law,
order, rule, regulation, writ, injunction or decree of any court or governmental
agency or body or, if such Selling Stockholder is other than a natural person,
result in any violation of any provisions of the charter, bylaws or other
organizational documents of such Selling Stockholder.
(f) Such Selling Stockholder has not taken and will not take, directly or
indirectly, any action designed to, or which might reasonably be expected to,
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(g) Such Selling Stockholder has not distributed and will not distribute in
connection with the offering and sale of the Shares any prospectus or other
offering material in connection with the offering and sale of the Shares, other
than internal distribution of the Preliminary Prospectus and the Prospectus in
compliance with the requirements of the Act.
(h) All information furnished by or on behalf of such Selling Stockholder
relating to such Selling Stockholder and the Selling Stockholder Shares that is
used in connection with the preparation of the Registration Statement including
any information furnished in connection with such Selling Stockholder's Power of
Attorney and all such information furnished by such Selling Stockholder
specifically for inclusion in the copy of the Registration Statement on Form S-
3, as filed with the Securities and Exchange Commission on [November 20, 1996],
as delivered to the Selling Stockholders (with such modifications as approved by
the Selling Stockholders) is, and on the Closing Date will be, true, correct and
complete, and does not, and on the Closing Date, will not, contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make such statements not misleading insofar as it
relates to such Selling Stockholder.
(i) Such Selling Stockholder will review the Registration Statement and
Prospectus and will comply with all agreements and satisfy all conditions on its
part to be complied with or satisfied pursuant to this Agreement on or prior to
the Closing Date, and will advise one of its Attorneys prior to the Closing Date
if such Selling Stockholder's name and address, as may be set forth in the
Registration Statement is not set forth properly or if any
9
<PAGE>
statement to be made on behalf of such Selling Stockholder in the certificate
contemplated by Section 6(i) would be inaccurate if made as of the Closing Date.
(j) Such Selling Stockholder is not a party to any oral or written agreement
pursuant to which it has been granted or, if it is a party to any such
agreement, it has waived prior to the date hereof, any preemptive right, co-sale
right or right of first refusal or other similar right to purchase any of the
Shares that are to be sold by the Company or any of the other Selling
Stockholders to the International Managers pursuant to this Agreement; and such
Selling Stockholder does not own any warrants, options or similar rights to
acquire, and does not have any right or arrangement to acquire, any capital
stock, rights, warrants, options or other securities from the Company, other
than those described in the Registration Statement and the Prospectus.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company and the Selling Stockholders
agree, severally and not jointly, to sell to the International Managers, and
each International Manager agrees, severally and not jointly, to purchase from
the Company and the Selling Stockholders, respectively, at a purchase price of
[$ ] per share, the respective number of Company Shares as hereinafter set
----
forth and Selling Stockholder Shares set forth opposite the names of the Company
and the Selling Stockholders in Schedule B hereto. The obligation of each
International Manager to the Company and to each Selling Stockholder shall be to
purchase from the Company or such Selling Stockholder that number of full
Company Shares or Selling Stockholder Shares, as the case may be, which (as
nearly as practicable) is in the same proportion to the number of Company Shares
or Selling Stockholder Shares, as the case may be, set forth opposite the name
of the Company or such Selling Stockholder in Schedule B hereto as the number of
Firm Shares which is set forth opposite the name of such International Manager
in Schedule A hereto (subject to adjustment as provided in Section 10) is to the
total number of Firm Shares to be purchased by all the International Managers
under this Agreement.
The certificates in negotiable form for the Selling Stockholder Shares have
been placed in custody (for delivery under this Agreement) under the Custody
Agreement. Each Selling Stockholder agrees that the certificates for the Selling
Stockholder Shares of such Selling Stockholder so held in custody are subject to
the interests of the International Managers hereunder, that the arrangements
made by such Selling Stockholder for such custody, including the Power of
Attorney, are to that extent irrevocable and that the obligations of such
Selling Stockholder hereunder shall not be terminated by the act of such Selling
Stockholder or by operation of law, whether by the death or incapacity of such
Selling Stockholder or the occurrence of any other event, except as specifically
provided herein or in the Custody Agreement. If any Selling Stockholder should
die or be incapacitated, or if any other such event should occur, before the
delivery of the certificates for the Selling Stockholder Shares hereunder, the
Selling Stockholder Shares to be sold by such Selling Stockholder shall, except
as specifically provided herein or in the Custody Agreement, be delivered by the
Custodian in accordance with the terms and conditions of this Agreement as if
such death, incapacity or other event had not occurred, regardless of whether
the Custodian shall have received notice of such death or other event.
Delivery of definitive certificates for the Firm Shares to be purchased by
the International Managers pursuant to this Section 3 shall be made against
payment of the purchase price therefor by the several International Managers by
wire transfer or certified or official bank check in same-day funds as elected
by the Company, payable to the order of the Company with regard to the Shares
being purchased from the Company, and to the order of the Custodian for the
respective accounts of the Selling Stockholders with regard to the Shares being
purchased from such Selling Stockholders at the offices of Pillsbury Madison &
Sutro LLP, 235 Montgomery Street, San Francisco, CA 94104 (or at such other
place as may be agreed upon among the Lead Managers, the Company and the Selling
Stockholders), at 7:00 A.M., San Francisco time on the third (or, if the Firm
Shares are priced, as contemplated by Rule 15c6-1(c) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") after 4:30 p.m. Washington D.C.
time, the fourth) full business day following the first day that Shares are
traded (or at such time and date to which payment and delivery shall have been
postponed pursuant to Section 10 hereof), such time and date of payment and
delivery being herein called the "Closing Date." The certificates for the Firm
Shares to be so delivered will be made available to you at such office or at
such other location including, without limitation, in New York City, as you may
reasonably request for checking at least one full business day prior to the
Closing Date and
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will be in such names and denominations as you may request, such request to be
made at least two full business days prior to the Closing Date. If the Lead
Managers so elect, delivery of the Shares may be made by credit through full
fast transfer to the accounts at Depository Trust Company designated by the Lead
Managers.
It is understood that you, individually and not as the Lead Managers of the
several International Managers, may (but shall not be obligated to) make payment
of the purchase price on behalf of any International Manager or International
Managers whose check or checks shall not have been received by you prior to the
Closing Date for the Firm Shares to be purchased by such International Manager
or International Managers. Any such payment by you shall not relieve any such
International Manager or International Managers of any of its or their
obligations hereunder.
After the Registration Statement becomes effective, the several
International Managers intend to offer the Firm Shares to the public as set
forth in the Prospectus.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the International Managers), the legend
appearing on the inside front cover page and all information set forth under
"Underwriting" in any Preliminary Prospectus and in the Prospectus filed
pursuant to Rule 424(b) constitutes the only information furnished by the
International Managers to the Company for inclusion in any Preliminary
Prospectus, the Prospectus or the Registration Statement, and you, on behalf of
the respective International Managers, represent and warrant to the Company and
the Selling Stockholders that the statements made therein are true and correct
and do not fail to state any material fact required to be stated therein in
order to make such statements in light of the circumstances in which made not
misleading.
4. Further Agreements of the Company. The Company agrees with the several
International Managers that:
(a) The Company will use its best efforts to cause the Registration
Statement and amendments thereof, if not effective at the time and date that
this Agreement is executed and delivered by the parties hereto, to become
effective as promptly as possible; it will notify you, promptly after it shall
receive notice thereof, of the time when the Registration Statement or any
subsequent amendment to the Registration Statement has become effective or any
supplement to the Prospectus has been filed; if the Company omitted information
from the Registration Statement at the time it was originally declared effective
in reliance upon Rule 430A(a), the Company will provide evidence satisfactory to
you that the Prospectus contains such information and has been filed, within the
time period prescribed, with the Commission pursuant to subparagraph (1) or (4)
of Rule 424(b) of the Rules and Regulations or as part of a post-effective
amendment to such Registration Statement as originally declared effective which
is declared effective by the Commission; if for any reason the filing of the
final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will in
good faith consider and discuss with you the preparation and filing with the
Commission any amendments or supplements to the Registration Statement or
Prospectus which, in the opinion of Brobeck, Phleger & Harrison LLP, counsel for
the International Managers ("International Managers' Counsel"), may be necessary
or advisable in connection with the distribution of the Shares by the
International Managers; it will promptly prepare and file with the Commission,
and promptly notify you of the filing of, any amendments or supplements to the
Registration Statement, Prospectus or any document incorporated by reference in
the Prospectus which may be necessary to correct any statements or omissions,
if, at any time when a prospectus relating to the Shares is required to be
delivered under the Act, any event shall have occurred as a result of which the
Prospectus or any other prospectus relating to the Shares as then in effect
would include an untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; in case any
International Manager is required to deliver a prospectus nine months or more
after the effective date of the Registration Statement in connection with the
sale of the Shares, it will prepare promptly upon request, but at the expense of
such International Manager, such amendment or amendments to the Registration
Statement and such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of
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the Act; and it will file no amendment or supplement to the Registration
Statement or Prospectus which shall not previously have been submitted to you a
reasonable time prior to the proposed filing thereof or to which you shall
reasonably object in writing, subject, however, to compliance with the Act and
the Rules and Regulations thereunder and the provisions of this Agreement.
(b) The Company will advise you, promptly after it shall receive notice or
obtain knowledge thereof of the issuance of any stop order by the Commission
suspending the effectiveness of the Registration Statement or of the initiation
or threat of any proceeding for that purpose; and it will promptly use its best
efforts to prevent the issuance of any stop order or to obtain its withdrawal at
the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the Shares for offering
and sale under the securities laws of such jurisdictions as you may designate
and to continue such qualifications in effect for so long as may be required for
purposes of the distribution of the Shares, except that the Company shall not be
required in connection therewith or as a condition thereof to qualify as a
foreign corporation or to execute a general consent to service of process in any
jurisdiction or to make any undertaking with respect to the conduct of its
business. In each jurisdiction in which the Shares shall have been qualified as
above provided, the Company will make and file such statements and reports in
each year as are or may be reasonably required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available, copies of the
Registration Statement (three of which will be signed and which will include all
exhibits), each Preliminary Prospectus, the Prospectus and any amendments or
supplements to such documents, including any prospectus prepared to permit
compliance with Section 10(a)(3) of the Act, all in such quantities as you may
from time to time reasonably request for the purposes contemplated by the Act
(subject to paragraph (a) above regarding payment of expenses).
(e) The Company will make generally available to its shareholders as soon as
practicable, but in any event not later than the 45th day following the end of
the fiscal quarter first occurring after the first anniversary of the effective
date of the Registration Statement, an earnings statement (which will be in
reasonable detail but need not be audited) complying with the provisions of
Section 11(a) of the Act and covering a twelve-month period beginning after the
effective date of the Registration Statement.
(f) During a period of five years after the date hereof, the Company will
furnish to its shareholders, as soon as practicable after the end of each
respective period, annual reports (including financial statements audited by
independent certified public accountants) and unaudited quarterly reports of
operations for each of the first three quarters of the fiscal year, and will
furnish to you and the other several International Managers hereunder, upon your
reasonable request (i) concurrently with furnishing such reports to its
shareholders, statements of operations of the Company for each of the first
three quarters in the form furnished to the Company's shareholders; (ii)
concurrently with furnishing to its shareholders, a balance sheet of the Company
as of the end of such fiscal year, together with statements of operations, of
shareholders' equity, and of cash flow of the Company for such fiscal year,
accompanied by a copy of the certificate or report thereon of independent
certified public accountants; (iii) as soon as they are available, copies of all
reports (financial or other) mailed to shareholders generally; (iv) as soon as
they are available, copies of all reports and financial statements furnished to
or filed with the Commission, any securities exchange or the National
Association of Securities Dealers, Inc. ("NASD"); (v) every material press
release and every material news item or article in respect of the Company or its
affairs which was released or prepared by the Company or any of its
subsidiaries; and (vi) any additional information of a public nature concerning
the Company or its subsidiaries, or its business. During such five-year period,
if the Company shall have active subsidiaries, the foregoing financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its subsidiaries are consolidated, and shall be accompanied by
similar financial statements for any significant subsidiary which is not so
consolidated.
(g) Prior to issuing any press release regarding the Company's operating
results or financial condition with respect to any of the Company's first three
fiscal quarters in fiscal years 1997 and 1998, and prior to filing a Quarterly
Report on Form 10-Q relating to any such fiscal quarter, to retain Price
Waterhouse, LLP or other
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independent public accountants of recognized national standing who shall review,
in accordance with AICPA Statement on Auditing Standards No. 71, the Company's
unaudited consolidated financial statements at the end of each such fiscal
quarter; provided, however, that the Company's obligations under this covenant
may terminate after the second quarter of fiscal year 1997 at the discretion of
the Company's Board of Directors or Audit Committee.
(h) The Company will apply the net proceeds from the sale of the Shares
being sold by it substantially in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(i) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Common Stock.
(j) If the transactions contemplated hereby are not consummated by reason of
any failure, refusal or inability on the part of the Company or any Selling
Stockholder to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the International Managers' obligations hereunder, or
if the Company shall terminate the Agreement under Section 11(a), the Company
will reimburse the several International Managers for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel for the several
International Managers) incurred by the International Managers in investigating,
preparing to market or marketing the Shares.
(k) If at any time during the 90-day period after the Registration Statement
becomes effective, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith consult with you
concerning the advisability of disseminating, and the potential substance of, a
press release or other public statement responding to or commenting on such
rumor, publication or event.
(l) During a period of 90 days from the effective date of the Prospectus,
the Company will not, without your prior written consent, issue, sell, offer or
agree to sell, or otherwise dispose of, directly or indirectly, any Common
Stock, any options, rights or warrants with respect to any shares of Common
Stock or any securities convertible into, exercisable for or exchangeable for
Common Stock other than the sale of the Firm Shares and the Option Shares
hereunder, and the Company's issuance of options or Common Stock under the
Company's presently authorized 1990 Employee Stock Option Plan, 1990 Executive
Stock Plan, 1994 Employee Stock Option Plan, 1995 Omnibus Incentive Plan, 1995
Directors' Stock Option Plan and 1995 Employee Stock Purchase Plan and
nonstatutory option agreements to former holders of ATEQ securities (the
"Benefit Plans").
(m) Except as described in the Prospectus, during a period of 90 days from
the effective date of the Registration Statement, the Company will not file a
registration statement registering shares under any Benefit Plan or other
employee benefit plan.
(n) the Company will not release any of its officers, directors or
stockholders from any currently existing Lock-up Agreements if such release
would be effective earlier than 90 days after the effective date of the
Registration Statement, without the prior written consent of Lehman Brothers
Inc.
5. Expenses.
(a) The Company agrees with each International Manager that:
(i) The Company will pay and bear all costs and expenses in connection
with the preparation by the Company, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus and any amendments or supplements thereto
(except as provided in Section 4(a) hereof); the printing of this Agreement, the
Agreement Among International Managers, the International Selling Agreement, the
Agreement Between U.S. Underwriters and International Managers, the Preliminary
Blue Sky Survey and any Supplemental Blue Sky Survey, the International
Managers' Questionnaire and Power of Attorney, and any instruments related to
any of the foregoing; the issuance
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and delivery of the Shares hereunder to the several International Managers,
including transfer taxes, if any, the cost of all certificates representing the
Shares and Transfer Agents' and Registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's independent
public accountants; the cost of furnishing to the several International Managers
copies of the Registration Statement (including appropriate exhibits),
Preliminary Prospectus and the Prospectus, and any amendments or supplements to
any of the foregoing (except as provided in Section 4(a) hereof); NASD filing
fees and the cost of qualifying the Shares under the laws of such jurisdictions
as you may designate (including filing fees and fees and disbursements of
International Managers' Counsel in connection with such NASD filings and Blue
Sky qualifications); and all other expenses directly incurred by the Company and
the Selling Stockholders in connection with the performance of their obligations
hereunder. The provisions of this Section 5(a)(i) are intended to relieve the
International Managers from the payment of the expenses and costs which the
Selling Stockholders and the Company hereby agree to pay, but shall not affect
any agreement which the Selling Stockholders and the Company may make, or may
have made, for the sharing of any of such expenses and costs. Such agreements
shall not impair the obligations of the Company and the Selling Stockholders
hereunder to the several International Managers.
(ii) In addition to its other obligations under Section 8(a) hereof, the
Company agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
Section 8(a) hereof, it will reimburse the International Managers on a monthly
basis for all reasonable legal or other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse the
International Managers for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the International Managers shall promptly return it to the
Company together with interest, compounded daily, determined on the basis of the
prime rate (or other commercial lending rate for borrowers of the highest credit
standing) listed from time to time in the Wall Street Journal which represents
the base rate on corporate loans posted by the substantial majority of the
nation's 30 largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the International Managers within 30 days of a
request for reimbursement, shall bear interest at the Prime Rate from the date
of such request.
(iii) In addition to its obligations under Section 8(b) hereof, each
Selling Stockholder agrees that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 8(b) hereof, it will reimburse the International Managers
on a monthly basis for all reasonable legal or other expenses incurred in
connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of such Selling
Stockholder's obligation to reimburse the International Managers for such
expenses and the possibility that such payments might later be held to have been
improper by a court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper, the
International Managers shall promptly return such payment to the Selling
Stockholders together with interest, compounded daily, determined on the basis
of the Prime Rate. Any such interim reimbursement payments which are not made to
the International Managers within 30 days of a request for reimbursement shall
bear interest at the Prime Rate from the date of such request.
(b) In addition to their other obligations under Section 8(c) hereof, the
International Managers agree that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in Section 8(c) hereof, it will reimburse the Company and each Selling
Stockholder on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
International Managers' obligation to reimburse the Company and each such
Selling Stockholder for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent jurisdiction.
To the extent that any such interim reimbursement payment is so held to have
been improper, the
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Company and each such Selling Stockholder shall promptly refund it to the
International Managers together with interest, compounded daily, determined on
the basis of the Prime Rate. Any such interim reimbursement payments which are
not made to the Company and each such Selling Stockholder within 30 days of a
request for reimbursement shall bear interest at the Prime Rate from the date of
such request.
(c) In the event that any claim arises out of statements or omissions, or
alleged statements or omissions, described in more than one of Sections 8(a),
8(b), or 8(c), the interim reimbursement obligations described in Sections
5(a)(i), 5(a)(ii), and 5(b) shall be apportioned based upon the principals, and
subject to the limitations contained in Section 8 hereof. It is agreed that any
controversy arising out of the operation of the interim reimbursement
arrangements set forth in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof,
including the amounts of any requested reimbursement payments, the method of
determining such amounts and the basis on which such amounts shall be
apportioned among the indemnifying parties, shall be settled by arbitration
conducted under the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to the Code of
Arbitration Procedure of the National Association of Securities Dealers, Inc.
Any such arbitration must be commenced by service of a written demand for
arbitration or a written notice of intention to arbitrate, therein electing the
arbitration tribunal. In the event the party demanding arbitration does not make
such designation of an arbitration tribunal in such demand or notice, then the
party responding to said demand or notice is authorized to do so. Any such
arbitration will be limited to the operation of the interim reimbursement
provisions contained in Sections 5(a)(ii), 5(a)(iii) and 5(b) hereof and will
not resolve the ultimate propriety or enforceability of the obligation to
indemnify for expenses which is created by the provisions of Sections 8(a), 8(b)
and 8(c) hereof.
6. Conditions of International Managers' Obligations. The obligations of the
several International Managers to purchase and pay for the Company Shares and
the Selling Stockholder Shares as provided herein, shall be subject to the
accuracy, as of the date hereof and the Closing Date and any later date on which
Option Shares are to be purchased, as the case may be, of the representations
and warranties of the Company and the Selling Stockholders herein, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and to the following additional conditions:
(a) The Registration Statement shall have become effective not later than
2:00 P.M., San Francisco Time, on the date following the date of this Agreement,
or such later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceeding
for that purpose shall have been initiated or, to the knowledge of the Company
or any International Manager, threatened by the Commission, and any request of
the Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
satisfaction of International Managers' Counsel.
(b) All corporate proceedings and other legal matters in connection with
this Agreement, the form of Registration Statement and the Prospectus, and the
registration, authorization, issue, sale and delivery of the Shares, shall have
been satisfactory to International Managers' Counsel, and such counsel shall
have been furnished with such papers and information as they may reasonably have
requested to enable them to pass upon the matters referred to in this
subsection.
(c) You shall have received on the Closing Date and on any later date on
which Option Shares are purchased, as the case may be, the following opinion of
Pillsbury Madison & Sutro LLP, counsel for the Company, and with respect to
subparagraph (v) below, an opinion from Aoki, Christensen & Nomoto, each dated
the Closing Date or such later date addressed to the International Managers and
with reproduced copies or signed counterparts thereof for each of the
International Managers, to the effect that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Nevada;
(ii) The Company has the corporate power to own, lease and operate its
property and to conduct its business as described in the Prospectus;
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(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in each jurisdiction, if any, in which the
ownership or leasing of its property or the conduct of its business requires
such qualification, except where the failure so to qualify would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations, business or business prospects of the Company and its subsidiaries
considered as one enterprise. To such counsel's knowledge, the Company does not
own or control, directly or indirectly, any corporation, association or other
entity other than Etec Systems Japan, Ltd., Etec France, Etec GmbH and Etec
Korea, Etec Systems Limited, Etec Polyscan, Inc., a Nevada corporation, and Etec
Systems International, a Nevada corporation.
(iv) The Company owns all of the shares of capital stock of its
subsidiaries (except for qualifying shares required under local law) free and
clear of any pledge, lien, security interest, encumbrance, claim or equitable
interest;
(v) Etec Systems Japan, Ltd., a subsidiary of the Company, has been duly
incorporated, is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business and is duly qualified
to transact business and is in good standing in each jurisdiction in which the
conduct of its business or its ownership or leasing of property requires, to the
best knowledge of such counsel, such qualification, except to the extent that
the failure to be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries considered as one enterprise;
(vi) The authorized, issued and outstanding capital stock of the Company
is as set forth in the Prospectus under the caption "Capitalization" as of the
dates stated therein; the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
nonassessable, and have not been issued in violation of any preemptive right,
co-sale right, registration right, right of first refusal or other similar
right;
(vii) The Firm Shares or the Option Shares, as the case may be, to be
issued by the Company pursuant to the terms of this Agreement will be, upon
issuance and delivery against payment therefor in accordance with the terms
hereof, and the shares to be sold by the Selling Stockholders are, duly
authorized and validly issued and fully paid and nonassessable, and have not
been issued in violation of any preemptive right, registration right, co-sale
right, right of first refusal or other similar right and the shareholders of the
Company have no preemptive or, to such counsel's knowledge, other rights to
purchase any of these Shares.
(viii) The Company has the corporate power and authority to enter into
this Agreement and to issue, sell and deliver to the International Managers the
Firm Shares or the Option Shares, as the case may be, to be issued and sold by
it hereunder;
(ix) This Agreement has been duly authorized by all necessary corporate
action on the part of the Company and has been duly executed and delivered by
the Company and, assuming due authorization, execution and delivery by you, is a
valid and binding agreement of the Company, except insofar as indemnification
and contribution provisions may be limited by applicable law or equitable
principles, and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting creditors'
rights generally or by general equitable principles;
(x) The Registration Statement has become effective under the Act and,
to such counsel's knowledge, no stop order suspending the effectiveness of the
Registration Statement have been issued and no proceedings for that purpose have
been instituted or are pending or threatened under the Act;
(xi) The Registration Statement, the Prospectus, and the documents
incorporated by reference in the Prospectus, and each amendment or supplement
thereto (other than the financial statements (including supporting schedules)
and financial data derived therefrom as to which such counsel need express no
opinion) as of the effective date of the Registration Statement, complied as to
form in all material respects with requirements of the Act and
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the applicable Rules and Regulations, and any further amendment or supplement to
any such incorporated document made by the Company prior to such effective date
(other than the financial statements and related schedules therein, as to which
such counsel need express no opinion), when they became effective or were filed
with the Commission, as the case may be, complied as to form in all material
respects with the requirements of the Exchange Act, and the rules and
regulations of the Commission thereunder;
(xii) The terms and provisions of the capital stock of the Company
conform in all material respects to the description thereof contained in the
Registration Statement and Prospectus;
(xiii) The information in the Prospectus under the caption "Shares
Eligible for Future Sale" to the extent that it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and is correct in all
material respects, and the forms of certificates evidencing the Common Stock
comply with Nevada law;
(xiv) The description in the Registration Statement and the Prospectus
of the charter and bylaws of the Company and of statutes and contracts are
accurate in all material respects and fairly present the information required to
be presented by the Act or the Rules and Regulations;
(xv) To such counsel's knowledge, there are no agreements, contracts,
leases or documents of a character required to be described or referred to in
the Registration Statement or Prospectus or to be filed as an exhibit to the
Registration Statement which are not described or referred to therein and filed
as required;
(xvi) The performance of this Agreement and the consummation of the
transactions herein contemplated (other than performance of the Company's
indemnification and contribution obligations hereunder, concerning which no
opinion need be expressed) will not, (a) result in any violation of the
Company's charter or bylaws, or (b) result in the material breach or violation
of any of the terms and provisions, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement, bond, debenture, note
agreement or other evidence of indebtedness, lease, contract or other agreement
or instrument filed as an exhibit to the Registration Statement, or any
applicable statute, rule or regulation known to such counsel or any order, writ
or decree known to such counsel of any court or governmental agency or body
having jurisdiction over the Company or any of its subsidiaries, or over any of
their properties or operations; provided however, that no opinion need be
rendered concerning state securities or Blue Sky laws;
(xvii) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with the consummation of the
transactions herein contemplated except such as have been obtained under the Act
or such as may be required under state, foreign, or other securities or Blue Sky
laws or by the National Association of Securities Dealers, Inc. in connection
with the purchase and the distribution of the Shares by the International
Managers;
(xviii) There are no legal or governmental proceedings pending or, to
such counsel's knowledge, threatened against the Company or any of its
subsidiaries of a character which are required to be disclosed in the
Registration Statement or the Prospectus, by the Act or the applicable Rules and
Regulations, other than those described therein;
(xix) To such counsel's knowledge, except as set forth in the
Prospectus, neither the Company nor any of its subsidiaries is presently in
material breach of, or in default under, any bond, debenture, note or other
evidence of indebtedness or any contract, indenture, mortgage, deed of trust,
loan agreement, lease or other agreement or instrument to which the Company or
any of its subsidiaries is a party or by which any of its property is bound that
is material to the financial condition, earnings, operations, business or
business prospects of the Company and its subsidiaries considered as one
enterprise;
(xx) Except as set forth in the Registration Statement and Prospectus,
no holders of Common Stock or other securities of the Company have registration
rights with respect to securities of the Company and, except as
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set forth in the Registration Statement and Prospectus, all holders of
securities of the Company or any of its subsidiaries having rights to
registration of such shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have, with respect to the
offering contemplated thereby, waived such rights or such rights have expired by
reason of lapse of time following notification of the Company's intent to file
the Registration Statement, or have included securities in the Registration
Statement pursuant to the exercise of such rights;
In addition, such counsel shall state that although they have not verified
the accuracy or completeness of the statements contained in the Registration
Statement or the Prospectus, nothing has come to the attention of such counsel
which (i) caused them to believe that, at the time the Registration Statement
became effective, the Registration Statement (other than the financial
statements including supporting schedules and financial data derived therefrom,
as to which such counsel need express no comment) contained any untrue statement
of a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading, or that at
the Closing Date or any later date on which the Option Shares are to be
purchased, as the case may be, the Registration Statement, the Prospectus, or
any document incorporated by reference into the Prospectus (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading or (ii)
caused them to believe that the Registration Statement and the Prospectus, and
each amendment or supplement thereto (other than the financial statements
(including supporting schedules) and financial data derived therefrom as to
which such counsel need express no opinion) as of the effective date of the
Registration Statement, failed to comply as to form in all material respects
with the requirements of the Act and the applicable Rules and Regulations.
Counsel rendering the foregoing opinions may rely as to questions of law not
involving the laws of the United States or the States of California and Nevada
upon opinions of local counsel satisfactory to International Managers' Counsel
(or such local counsel may deliver separate opinions directly to the
International Managers in lieu of inclusion of such matters in the foregoing
opinion), and as to questions of fact upon representations or certificates of
officers of the Company, the Selling Stockholders or officers of the Selling
Stockholders (when the Selling Stockholder is not a natural person), and of
government officials, in which case their opinion is to state that they are so
relying and that they have no knowledge of any material misstatement or
inaccuracy in such opinions, representations or certificate. Copies of any
opinion, representation or certificate so relied upon shall be delivered to you,
as Lead Managers of the International Managers, and to International Managers'
Counsel.
(d) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, the following
opinion of Skjerven, Morrill, MacPherson, Franklin and Friel, patent counsel to
the Company, dated the Closing Date or such later date, to the effect that:
(i) The Company is listed in the records of the United States Patent and
Trademark Office ("PTO") as the holder of record of the patent applications
listed in Exhibit A to such opinion (the "Patent Applications"), and such
counsel shall state that number of such Patent Applications, listed on Exhibit B
to such opinion, which have been allowed or indicated as containing allowable
subject matters. To the best of such counsel's knowledge, written assignments to
the Company of all ownership interests in the Patent Applications have been duly
authorized, executed and delivered by all of the inventors in accordance with
their terms. To the best of such counsel's knowledge, there is no claim of any
party other than the Company to any ownership interest or lien with respect to
any of the Patent Applications;
(ii) to such counsel's knowledge, other than in connection with
assertions or inquiries made by patent office examiners in the ordinary course
of the prosecution of the Company's Patent Applications and except as set forth
on Exhibit C to such opinion, there is no pending or threatened in writing any
action, suit, proceeding or claim by others (A) challenging the validity or
scope of the Patent Applications held by or licensed to the Company, or (B)
asserting that any third party patent is infringed by the activities of the
Company described in the Prospectus or by the manufacture, use or sale of any of
the Company's products or other items made and used according to the Patent
Applications held by or licensed to the Company;
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(iii) to such counsel's knowledge and except as set forth on Exhibit D
to such opinion, there is not pending or threatened in writing any action, suit,
proceeding or claim by the Company asserting infringement on the part of any
third party of the Patent Applications; and
(iv) the statements in the Prospectus under the captions "Risk
Factors --Patents and Other Intellectual Property" and "Business -- Patents and
Other Proprietary Rights", to the best of such counsel's knowledge, insofar as
such statements relate to the patents listed in Exhibit A or any legal matters,
documents and proceedings relating thereto, fairly present the information
called for with respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein.
(e) You shall have received on the Closing Date an opinion from counsel for
the respective Selling Stockholders, which counsel shall be reasonably
satisfactory to you, each dated the Closing Date addressed to the International
Managers and with reproduced copies or signed counterparts thereof for each of
the International Managers, to the effect that:
(i) If the Selling Stockholder is not a natural person, such Selling
Stockholder has full right, power and authority to enter into and to perform its
obligations under the Power of Attorney and Custody Agreement to be executed and
delivered by it in connection with the transactions contemplated herein; the
Power of Attorney and Custody Agreement of such Selling Stockholder that is not
a natural person has been duly authorized by such Selling Stockholder; the Power
of Attorney and Custody Agreement of the Selling Stockholder has been duly
executed and delivered by or on behalf of such Selling Stockholder; and the
Power of Attorney and Custody Agreement of the Selling Stockholder constitutes
the valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles;
(ii) The Selling Stockholder has full right, power and authority to
enter into and to perform its obligations under this Agreement and to sell,
transfer, assign and deliver the Shares to be sold by such Selling Stockholder
hereunder;
(iii) This Agreement has been duly authorized by the Selling Stockholder
that is not a natural person and has been duly executed and delivered by or on
behalf of such Selling Stockholder and, assuming due authorization, execution
and delivery by you, is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except insofar as the
indemnification and contribution provisions hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles; and
(iv) Upon the delivery of and payment for the Shares as contemplated in
this Agreement, each of the International Managers will receive good title to
the Shares purchased by it from such Selling Stockholder, free and clear of any
pledge, lien, security interest, encumbrance, claim or equitable interest. In
rendering such opinion, such counsel may assume that the International Managers
are bona fide purchasers without notice of any defect in the title of any of
such Selling Stockholders to the Shares being purchased from such Selling
Stockholders.
Such opinion may be based upon the laws of the domicile of the Selling
Stockholder or, in the case of a corporate Selling Stockholder, the laws of the
jurisdiction of incorporation or the location of its principal executive
offices, and, for purposes of rendering opinions regarding the enforceability of
agreements which purport to be governed by the laws of a jurisdiction other than
California, such counsel may assume that the laws of the State of California are
the same as the laws of the jurisdiction upon which the opinion is based. Such
opinion may be based upon certificates as to factual matters of the Selling
Stockholder and may include reasonable and customary assumptions and
qualifications under the laws of the relevant jurisdiction.
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(f) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, an opinion of
Brobeck, Phleger & Harrison LLP, counsel for the International Managers, in form
and substance satisfactory to you, with respect to the sufficiency of all such
corporate proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of enabling them to pass upon such matters.
(g) You shall have received on the Closing Date and on any later date on
which Option Shares are to be purchased, as the case may be, a letter from Price
Waterhouse, LLP addressed to the Company and the International Managers, dated
the Closing Date or such later date on which Option Shares are to be purchased,
as the case may be, confirming that they are independent certified public
accountants with respect to the Company within the meaning of the Act and the
applicable published Rules and Regulations thereunder and based upon the
procedures described in their letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than three business days prior to the Closing Date or to
such later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be; and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties of
the Company and its subsidiaries considered as one enterprise which, in your
sole judgment, makes it impracticable or inadvisable to proceed with the public
offering of the Shares as contemplated by the Prospectus. Also you shall have
received an Original Letter from Price Waterhouse, LLP addressed to or for the
use of the International Managers setting forth their opinion with respect to
their examination of the consolidated balance sheet of the Company as of October
31, 1996 and related consolidated statements of operations, shareholders'
equity, and cash flow for the three months ended October 31, 1996, as well as
other matters agreed upon by Price Waterhouse, LLP and you. In addition, you
shall have received from Price Waterhouse, LLP a copy of a letter addressed to
the Company and made available to you for the use of the International Managers
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of their
examination of the Company's consolidated financial statements as of October 31,
1996, did not disclose any weaknesses in internal controls that they considered
to be material weaknesses.
(h) You shall have received on the Closing Date and on any later date on
which Option Shares are purchased, as the case may be, a certificate of the
Company, dated the Closing Date or such later date on which Option Shares are to
be purchased, as the case may be, signed by the Chief Executive Officer and
Chief Financial Officer of the Company, to the effect that, and you shall be
satisfied that:
(i) The representations and warranties of the Company in this Agreement
are true and correct, as if made on and as of the Closing Date or any later date
on which Option Shares are to be purchased, and the Company has complied with
all the agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be;
(ii) No stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are pending or threatened under the
Act;
(iii) When the Registration Statement became effective and at all times
subsequent thereto up to the delivery of such certificate, the Registration
Statement and the Prospectus and any amendments or supplements thereto contained
all statements and information required to be included therein, and neither the
Registration Statement nor the Prospectus nor any amendment or supplement
thereto included an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein in light of the circumstances in which made, not misleading, and, since
the effective date of the Registration Statement,
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there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been so set forth;
(iv) Subsequent to the respective dates as of which information is given
in the Registration Statement and the Prospectus, there has not been (A) any
material adverse change in the properties or assets described or referred to in
the Registration Statement and the Prospectus or in the condition (financial or
otherwise), earnings, operations, business or business prospects of the Company
and its subsidiaries considered as one enterprise, (B) any transaction which is
material to the Company and its subsidiaries considered as one enterprise,
except transactions entered into in the ordinary course of business, (C) any
obligation, direct or contingent, incurred by the Company or any of its
subsidiaries which is material to the Company and its subsidiaries considered as
one enterprise, except obligations incurred in the ordinary course of business,
(D) any change in the capital stock or outstanding indebtedness of the Company
or any of its subsidiaries which is material to the Company and its subsidiaries
considered as one enterprise or (E) any dividend or distribution of any kind
declared, paid or made on the capital stock of the Company or any of its
subsidiaries.
(i) You shall be satisfied that, and you shall have received a certificate,
dated the Closing Date from the Attorneys for each Selling Stockholder to the
effect that, as of the Closing Date, they have not been informed that:
(i) The representations and warranties made by such Selling Stockholder
herein are not true or correct in any material respect on the Closing Date; or
(ii) Such Selling Stockholder has not complied with any obligation or
satisfied any condition which is required to be performed or satisfied on his or
its part at or prior to the Closing Date or any later date on which Option
Shares are to be purchased, as the case may be.
(j) The Company and the Selling Stockholders shall have furnished to you
such further certificates and documents as you shall reasonably request
(including certificates of officers of the Company, the Selling Stockholders or
officers of the Selling Stockholders (when the Selling Stockholder is not a
natural person)) as to the accuracy of the representations and warranties of the
Company and the Selling Stockholders herein, as to the performance by the
Company of its obligations hereunder and as to the other conditions concurrent
and precedent to the obligations of the International Managers hereunder.
All such opinions, certificates, letters and documents will be in compliance
with the provisions hereof only if they are reasonably satisfactory to
International Managers' Counsel. The Company and the Selling Stockholders will
furnish you with such number of conformed copies of such opinions, certificates,
letters and documents as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations and warranties herein contained, but
subject to the terms and conditions herein set forth, the Company hereby grants
to the several International Managers, for the purpose of covering over-
allotments in connection with the distribution and sale of the Firm Shares only,
a non-transferable option to purchase up to an aggregate of 132,000 Option
Shares at the purchase price per share for the Firm Shares set forth in Section
3 hereof. Such option may be exercised by the Lead Managers on behalf of the
several International Managers on one occasion in whole or in part during the
period of thirty (30) days from and after the date on which the Firm Shares are
initially offered to the public, by giving written notice to the Company and the
Custodian. The number of Option Shares to be purchased by each International
Manager upon the exercise of such option shall be the same proportion of the
total number of Option Shares to be purchased by the several International
Managers
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pursuant to the exercise of such option as the number of Firm Shares purchased
by such International Manager (set forth in Schedule A hereto) bears to the
total number of Firm Shares purchased by the several International Managers (set
forth in Schedule A hereto), adjusted by the Lead Managers in such manner as to
avoid fractional shares.
Delivery of definitive certificates for the Option Shares to be purchased by
the several International Managers pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several International Managers by wire transfer or certified or
official bank check or checks drawn in same-day funds, as elected by the
Company, payable to the order of the Company. Such delivery and payment shall
take place at the offices of Pillsbury Madison & Sutro LLP, 235 Montgomery
Street, San Francisco, CA 94104 or at such other place as may be agreed upon
among the Lead Managers and the Company (i) on the Closing Date, if written
notice of the exercise of such option is received by the Company and the
Custodian not later than two full business days prior to the Closing Date or
(ii) on a later date, not later than the third full business day following the
date the Company and the Custodian receives written notice of the exercise of
such option, if such notice is not received by the Company and the Custodian at
least three full business days prior to the Closing Date.
The certificates for the Option Shares so to be delivered will be made
available to you at such office or other location including, without limitation,
in New York City, as you may reasonably request for checking at least one full
business day prior to the date of payment and delivery and will be in such names
and denominations as you may request, such request to be made at least two full
days prior to such date of payment and delivery. If the Lead Managers so elect,
delivery of the Shares may be made by credit through full fast transfer to the
accounts at Depository Trust Company of the Lead Managers.
It is understood that you, individually, and not as the Lead Managers of the
International Managers, may (but shall not be obligated to) make payment of the
purchase price on behalf of any International Manager or International Managers
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such International
Manager or U.S. s. Any such payment by you shall not relieve any International
Manager or International Managers of any of its or their obligations hereunder.
The several International Managers intend to make an initial public offering
(as such term is described in Section 11 hereof) of the Option Shares to be
issued upon exercise of such option as set forth in the Prospectus, but after
the initial public offering the several International Managers may in their
discretion vary the public offering price.
(b) Upon exercise of any option provided for in Section 7(a) hereof the
obligations of the International Managers to purchase such Option Shares will be
subject (as of the date hereof and as of the date of payment for such Option
Shares) to the accuracy of and compliance with the representations and
warranties of the Company herein, to the accuracy of the statements of the
Company and officers of the Company made pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder, and to the
condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be
satisfactory in form and substance to you and to International Managers'
Counsel, and you shall have been furnished with all such documents, certificates
and opinions as you may request in order to evidence the accuracy and
completeness of any of the representations, warranties or statements, the
performance of any of the covenants of the Company or the compliance with any of
the conditions herein contained.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each International
Manager against any losses, claims, damages or liabilities, joint or several, to
which such International Manager may become subject (including, without
limitation, in its capacity as an International Manager or as a "qualified
independent underwriter" within the meaning of Schedule E of the Bylaws of the
NASD), under the Act or otherwise, specifically including but not limited to
losses, claims, damages or liabilities related to negligence on the part of any
International Manager, insofar as such
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losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any breach of any representation, warranty, agreement or
covenant of the Company herein contained or any untrue statement or alleged
untrue statement of any material fact contained in the Registration Statement,
any Preliminary Prospectus, the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances in which they were made,
not misleading; and agrees to reimburse each International Manager for any legal
or other expenses reasonably incurred by it in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by any International Manager,
directly or through you, or by any Selling Stockholder, specifically for use in
the preparation thereof and, provided further, that the indemnity agreement
provided in this Section 8(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any International Manager from whom the person
asserting any losses, claims, charges, liabilities or litigation based upon any
untrue statement or alleged untrue statement of material fact or omission or
alleged omission to state therein a material fact purchased Shares, if a copy of
the Prospectus in which such untrue statement or alleged untrue statement or
omission or alleged omission was corrected has not been sent or given to such
person within the time required by the Act and the Rules and Regulations
thereunder, unless such failure is the result of noncompliance by the Company
with Section 4(d) hereof.
The indemnity agreement in this Section 8(a) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each officer and
employee of any International Manager, and each person, if any, who controls any
International Manager within the meaning of the Act. This indemnity agreement
shall be in addition to any liabilities which the Company may otherwise have.
(b) Each Selling Stockholder, severally and not jointly, agrees to indemnify
and hold harmless each International Manager against any losses, claims, damages
or liabilities, joint or several, to which such International Manager may become
subject, under the Act or otherwise, only insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any breach of any representation, warranty, agreement or covenant of such
Selling Stockholder contained in Section 2.II. hereof or any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in each case to the extent, but only
to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company or such International Manager,
directly by such Selling Stockholder or through such Selling Stockholder's
representatives, specifically for inclusion therein, and, subject to Section
8(f), agrees to reimburse each International Manager for any legal or other
expenses reasonably incurred by it in connection with investigating or defending
any such loss, claim, damage, liability or action; provided, however, that such
Selling Stockholder shall not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in
the Registration Statement, such Preliminary Prospectus or the Prospectus, or
any such amendment or supplement, in reliance upon and in conformity with
written information furnished to the Company by any International Manager,
through you, specifically for use in the preparation thereof and, provided
further, that the indemnity agreement provided in this Section 8(b) with respect
to any Preliminary Prospectus shall not inure to the benefit of any
International Manager from whom the person asserting any losses, claims,
charges, liabilities or litigation based upon any untrue statement or alleged
untrue statement of a material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected has not been sent or given to such person within the time
required by the Act and the Rules and Regulations thereunder, unless such
failure is the result of noncompliance by the Company with Section 4(d) hereof.
The Company and the International Managers acknowledge that the only written
information furnished to them by or on behalf of the
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Selling Stockholders specifically for inclusion in the Registration Statement,
any Preliminary Prospectus, the Prospectus or any amendment or supplement
thereto are the representations, warranties, agreements and covenants in Section
2.II of this Agreement and those contained in the Custody Agreement, the Power
of Attorney and the accompanying Information Statement.
The indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each officer and
employee of any International Manager, and each person, if any, who controls any
International Manager within the meaning of the Act. This indemnity agreement
shall be in addition to any liabilities which such Selling Stockholder may
otherwise have.
(c) Each International Manager, severally and not jointly, agrees to
indemnify and hold harmless the Company and each Selling Stockholder against any
losses, claims, damages or liabilities, joint or several, to which the Company
or such Selling Stockholder may become subject under the Act or otherwise,
specifically including but not limited to losses, claims, damages or liabilities
related to negligence on the part of the Company or such Selling Stockholder,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any breach of any representation,
warranty, agreement or covenant of such International Manager herein contained
or any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances in which made, not misleading, in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon and in conformity with
written information furnished to the Company by such International Manager,
directly or through you, specifically for inclusion therein, and will reimburse
the Company and each such Selling Stockholder for any legal or other expenses
reasonably incurred by the Company and each such Selling Stockholder in
connection with investigating or defending any such loss, claim, damage,
liability or action. The indemnity agreement in this Section 8(c) shall extend
upon the same terms and conditions to, and shall inure to the benefit of each
officer and director of the Company, each Selling Stockholder and each officer
or director of each Selling Stockholder and each person, if any, who controls
the Company or any Selling Stockholder within the meaning of the Act. This
indemnity agreement shall be in addition to any liabilities which each
International Manager may otherwise have.
(d) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section 8 and without limiting the generality of the foregoing, shall not
relieve it from any liability which it may have to any indemnified party under
Section 8, except to the extent it has been prejudiced by such omission. In case
any such action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein, and to the extent that it may elect by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof, with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified parties and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties, at the expense of the indemnifying party. Upon receipt of notice from
the indemnifying party to such indemnified party of its election so to assume
the defense of such action and approval by the indemnified party of counsel, the
indemnifying party will not be liable to such indemnified party under this
Section 8 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that the
indemnifying party shall not be liable for the expenses of more than one
separate counsel approved by the indemnifying party, representing all the
indemnified parties under Section 8(a)
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or 8(b) hereof who are parties to such action), (ii) the indemnifying party
shall not have employed counsel satisfactory to the indemnified party to
represent the indemnified party within a reasonable time after notice of
commencement of the action, or (iii) the indemnifying party has authorized the
employment of counsel for the indemnified party at the expense of the
indemnifying party. In no event shall any indemnifying party be liable in
respect of any amounts paid in settlement of any action unless the indemnifying
party shall have approved the terms of such settlement; provided however that
such consent shall not be unreasonably withheld.
(e) In order to provide for just and equitable contribution in any action in
which a claim for indemnification is made pursuant to this Section 8 but it is
judicially determined (by the entry of a final judgment or decree by a court of
competent jurisdiction and the expiration of time to appeal or the denial of the
last right of appeal) that such indemnification may not be enforced in such case
notwithstanding the fact that this Section 8 provides for indemnification in
such case, all the parties hereto shall contribute to the aggregate losses,
claims, damages or liabilities to which they may be subject (after contribution
from others) in such proportion so that, except as set forth in Section 8(f)
hereof, the International Managers are responsible pro rata for the portion
represented by the percentage that the underwriting discount bears to the
initial public offering price, and the Company and the Selling Stockholders are
severally responsible for the remaining portion, provided, however, that (i) no
International Manager shall be required to contribute any amount in excess of
the underwriting discount applicable to the Shares purchased by such
International Manager, and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to a contribution from any person who is not guilty of such fraudulent
misrepresentation. This subsection (e) shall not be operative (i) as to any
International Manager to the extent that the Company or any Selling Stockholder
has received indemnity under this Section 8; or (ii) as to the Company or any
Selling Stockholder to the extent that any International Manager has received
indemnity under Section 8. The contribution agreement in this Section 8(e) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any International Manager, the Company or any
Selling Stockholder within the meaning of the Act or the Exchange Act.
(f) The liability of each Selling Stockholder under the representations and
warranties contained in Section 2.II hereof and under the indemnity,
reimbursement and contribution agreements contained in the provisions of this
Section 8 shall be limited to an amount equal to the initial public offering
price of the Selling Stockholder Shares sold by such Selling Stockholder to the
International Managers minus the amount of the underwriting discount paid
thereon to the International Managers by such Selling Stockholder. The Company
and such Selling Stockholders may agree, as among themselves and without
limiting the rights of the International Managers under this Agreement, as to
the respective amounts of such liability for which they each shall be
responsible. The provisions of this Section 8 shall not limit the liability of
the Company in respect of indemnity of any Selling Stockholder pursuant to any
other agreement.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including without limitation the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Securities
Exchange Act of 1934, as amended. The parties are advised that federal or state
public policy, as interpreted by the courts in certain jurisdictions, may be
contrary to certain of the provisions of this Section 8, and the parties hereto
hereby expressly waive and relinquish any right or ability to assert such public
policy as a defense to a claim under this Section 8 and further agree not to
attempt to assert any such defense.
9. Representations, Warranties and Agreements to Survive Delivery. All
representations, warranties, covenants and agreements of the Company and the
Selling Stockholders herein or in certificates delivered pursuant hereto, and
the indemnity and contribution agreements contained in Section 8 hereof shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any International Manager or any controlling person, or
by or on behalf of the Company or any Selling Stockholder, or any of their
officers, directors or controlling
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persons, and shall survive the delivery of the Shares to the several
International Managers hereunder or termination of this Agreement.
10. Substitution of International Managers. If any International Manager or
International Managers shall fail to take up and pay for the number of Firm
Shares agreed by such International Manager or International Managers to be
purchased hereunder upon tender of such Firm Shares in accordance with the terms
hereof, and if the aggregate number of Firm Shares which such defaulting
International Manager or International Managers so agreed but failed to purchase
does not exceed 10% of the Firm Shares, the remaining International Managers
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting
International Manager or International Managers.
If any International Manager or International Managers so defaults and the
aggregate number of Firm Shares which such defaulting International Manager or
International Managers agreed but failed to take up and pay for exceeds 10% of
the Firm Shares, the remaining International Managers shall have the right, but
shall not be obligated, to take up and pay for (in such proportions as may be
agreed upon among them) the Firm Shares which the defaulting International
Manager or International Managers so agreed but failed to purchase. If such
remaining International Managers do not, at the Closing Date, take up and pay
for the Firm Shares which the defaulting International Manager or International
Managers so agreed but failed to purchase, the Closing Date shall be postponed
for twenty-four hours (including non-business hours) to allow the several
International Managers the privilege of substituting within twenty-four hours
another international manager or international managers (which may include any
nondefaulting International Manager) satisfactory to the Company. If no such
international manager or international managers shall have been substituted as
aforesaid by such postponed Closing Date, the Closing Date may, at the option of
the Company, be postponed for a further twenty-four hours, if necessary, to
allow the Company the privilege of finding another international manager or
international managers, satisfactory to you, to purchase the Firm Shares which
the defaulting International Manager or International Managers so agreed but
failed to purchase. If it shall be arranged for the remaining International
Managers or substituted international managers to take up the Firm Shares of the
defaulting International Manager or International Managers as provided in this
Section, (i) the Company shall have the right to postpone the time of delivery
for a period of not more than seven full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement or
supplements to the Prospectus which may thereby be made necessary, and (ii) the
respective number of Firm Shares to be purchased by the remaining International
Managers and substituted international managers shall be taken as the basis of
their underwriting obligation. If the remaining International Managers shall not
take up and pay for all such Firm Shares so agreed to be purchased by the
defaulting International Manager or International Managers or substitute another
international manager or international managers as aforesaid and the Company
shall not find or shall not elect to seek another international manager or
international managers for such Firm Shares as aforesaid, then this Agreement
shall terminate.
In the event of any termination of this Agreement pursuant to the preceding
paragraph of this Section, neither the Company nor any Selling Stockholder shall
be liable to any International Manager (except to the extent provided in
Sections 4(j), 5 and 8 hereof) nor shall any International Manager (other than
an International Manager who shall have failed, otherwise than for some reason
permitted under this Agreement, to purchase the number of Firm Shares agreed by
such International Manager to be purchased hereunder, which International
Manager shall remain liable to the Company, the Selling Stockholders and the
other International Managers for damages, if any, resulting from such default)
be liable to the Company or any Selling Stockholder (except to the extent
provided in Sections 5 and 8 hereof).
The term "International Manager" in this Agreement shall include any person
substituted for an International Manager under this Section.
11. Effective Date of this Agreement and Termination.
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(a) This Agreement shall become effective at the earlier of (i) 6:30 A.M.,
San Francisco Time, on the first full business day following the effective date
of the Registration Statement, or (ii) the time of the initial public offering
of any of the Shares by the International Managers after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the sale of the Shares, or the time at which the
Shares are first generally offered by the International Managers to dealers by
letter or telegram or telecopy, whichever shall first occur. By giving notice as
set forth in Section 12 before the time this Agreement becomes effective, you,
as Lead Managers of the several International Managers, or the Company, may
prevent this Agreement from becoming effective without liability of any party to
any other party, except that the Company and the Selling Stockholders shall
remain obligated to pay costs and expenses to the extent provided in Sections
4(j), 5 and 8 hereof.
(b) You, as Lead Managers of the several International Managers, shall have
the right to terminate this Agreement by giving notice as hereinafter specified
at any time at or prior to the Closing Date or on or prior to any later date on
which the Option Shares are to be purchased, as the case may be, (i) if the
Company or any Selling Stockholder shall have failed, refused or been unable, at
or prior to the Closing Date, or on or prior to any later date on which the
Option Shares are to be purchased, as the case may be, to perform any agreement
on its part to be performed, or because any other condition of the International
Managers' obligations hereunder required to be fulfilled by the Company or any
Selling Stockholder is not fulfilled, or (ii) if trading on the New York Stock
Exchange shall have been suspended, or minimum or maximum prices for trading
shall have been fixed, or maximum ranges for prices for securities shall have
been required on the New York Stock Exchange, by the New York Stock Exchange or
by order of the Commission or any other governmental authority having
jurisdiction, or if a banking moratorium shall have been declared by federal or
New York or California authorities, or (iii) if on or prior to the Closing Date,
or on or prior to any later date on which Option Shares are to be purchased, as
the case may be, the Company shall have sustained a loss by strike, fire, flood,
earthquake, accident or other calamity of such character as to interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured, or (iv) if there
shall have been a material adverse change in the general political or economic
conditions or financial markets in the United States as in your reasonable
judgment makes it inadvisable or impracticable to proceed with the offering,
sale and delivery of the Shares, or (v) if on or prior to the Closing Date, or
on or prior to any later date on which Option Shares are to be purchased, as the
case may be, there shall have been an outbreak or escalation of hostilities
between the United States and any foreign power or of any other insurrection or
armed conflict involving the United States or the declaration by the United
States of a national emergency which, in the reasonable opinion of the Lead
Managers, makes it impracticable or inadvisable to offer or sell the Shares. Any
such termination shall be without liability of any party to any other party
except as provided in Sections 4(j), 5 and 8 hereof and except that in the event
of termination solely pursuant to Section 11(b)(i) hereof, the Company shall
remain obligated to pay costs and expenses pursuant to Sections 4(j) and 5
hereof.
If you elect to prevent this Agreement from becoming effective or to
terminate this Agreement as provided in this Section 11, you shall promptly
notify the Company by telephone, telecopy or telegram, in each case confirmed by
letter. If the Company shall elect to prevent this Agreement from becoming
effective, the Company shall promptly notify you by telephone, telecopy or
telegram, in each case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o Lehman Brothers Inc., Three World Financial
Center, New York, New York 10285, telecopier number (212) 526-6588, Attention:
Syndicate Department, with a copy, in the case of any notice pursuant to Section
10(d), to the Director of Litigation, Office of the General Counsel, Lehman
Brothers Inc., Three World Financial Center, 10th Floor, New York, New York
10285; if sent to the Company, such notice shall be mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Etec Systems, Inc., 26460 Corporate Avenue, Hayward, CA 94545, telecopier number
(510) 732-1469, Attention: Stephen E. Cooper, President; if sent to one or more
of the Selling Stockholders, such notice shall be sent mailed, delivered,
telegraphed (and confirmed by letter) or telecopied (and confirmed by letter) to
Stephen E. Cooper, Philip J. Koen, Jr., or Saul
27
<PAGE>
Arnold, as Attorney-in-Fact for the Selling Stockholders, at Etec Systems, Inc.,
26460 Corporate Avenue, Hayward, CA 94545, telecopier (510) 732-1469.
13. Parties. This Agreement shall inure to the benefit of and be binding
upon the several International Managers and the Company, the Selling
Stockholders and their respective executors, administrators, successors and
assigns. Nothing expressed or mentioned in this Agreement is intended or shall
be construed to give any person or corporation, other than the parties hereto
and their respective executors, administrators, successors and assigns, and the
controlling persons, officers and directors referred to in Section 8 hereof, any
legal or equitable right, remedy or claim or in respect of this Agreement or any
provisions herein contained, this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective executors, administrators, successors and
assigns and said controlling persons and said officers and directors, and for
the benefit of no other person or corporation. No purchaser of any of the Shares
from any International Manager shall be construed a successor or assign by
reason merely of such purchase.
In all dealings with the Company and the Selling Stockholders under this
Agreement, you shall act on behalf of each of the several International
Managers, and the Company and the Selling Stockholders shall be entitled to act
and rely upon any statement, request, notice or agreement made or given by you
jointly or by Robertson, Stephens & Company on behalf of you.
14. Governing Law. This Agreement shall be governed by, and construed in
accordance with, the laws of New York.
15. Counterparts. This Agreement may be signed in several counterparts, each
of which will constitute an original.
28
<PAGE>
If the foregoing correctly sets forth the understanding among the Company,
the Selling Stockholders and the several International Managers, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, the Selling Stockholders
and the several International Managers.
Very truly yours,
ETEC SYSTEMS, INC.
By:
---------------------------
SELLING STOCKHOLDERS
By:
---------------------------
Attorney-in-Fact for the
Selling Stockholders named
in Schedule B hereto
Accepted as of the date first
above written:
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
ROBERTSON, STEPHENS & COMPANY, LLC
SMITH BARNEY INC.
NEEDHAM & COMPANY, INC.
For themselves and as Lead Managers
of the several International Managers
named in Schedule A hereto.
By Lehman Brothers International (Europe)
By:
----------------------------
Authorized Lead Manager
----------------------------
Please Print Name
29
<PAGE>
SCHEDULE A
International Managers Number of Firm Shares
- ------------------------------------------------------------------------------
To Be Purchased
- --------------------
Lehman Brothers International (Europe)....................
Robertson, Stephens & Company, LLC........................
Smith Barney Inc..........................................
Needham & Company.........................................
Total................................................. 880,000
=======
30
<PAGE>
SCHEDULE B
Number of Company
Company Shares To Be Sold
------- -----------------
.................................................. 96,800
Total ..................................................
Number of Selling
Name of Selling Stockholder Shares
Stockholder To Be Sold
--------------- ------------------
Total Selling Stockholders .............................. 783,200
31
<PAGE>
EXHIBIT 5.1
November 19, 1996
Etec Systems, Inc.
26460 Corporate Avenue
Hayward, CA 94545
Re: Registration Statement on Form S-3
Ladies and Gentlemen:
We are acting as counsel for Etec Systems, Inc., a Nevada corporation (the
"Company"), in connection with the registration under the Securities Act of
1933, as amended, of 5,060,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"), of the Company (including 660,000 shares subject to the
underwriters' over-allotment option), of which 500,000 are authorized but
heretofore unissued shares to be offered and sold by the Company. In this regard
we have participated in the preparation of a Registration Statement on Form S-3
relating to such shares of Common Stock. Such Registration Statement, as
amended, and including any registration statement related thereto and filed
pursuant to Rule 462(b) under the Securities Act (a "Rule 462(b) registration
statement") is herein referred to as the "Registration Statement."
We are of the opinion that the shares of Common Stock to be offered and
sold by the Company (including any shares of Common Stock registered pursuant to
a Rule 462(b) registration statement) have been duly authorized and, when issued
and sold by the Company in the manner described in the Registration Statement
and in accordance with the resolutions adopted by the Board of Directors of the
Company and the Pricing Committee of the Board of Directors of the Company, will
be legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion as Exhibit 5.1 to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Registration Statement and in the Prospectus included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
---------------------------------
Pillsbury Madison & Sutro LLP
