<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 23, 1996
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ETEC SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
NEVADA 3559 94-3094580
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION INDUSTRIAL
OF INCORPORATION OR CLASSIFICATION CODE IDENTIFICATION NO.)
ORGANIZATION) NUMBER)
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
DAVID R. LAMARRE JACQUELINE E. COWDEN
ARNOLD E. BROWN II 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 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, 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
AMOUNT MAXIMUM MAXIMUM
CLASS OF SECURITIES TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par
value................. 5,290,000 $24.25 $128,282,500 $44,236
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated pursuant to Rule 457(c) solely for the purpose of computing the
registration fee, based on the average of the high and low prices per
share of Common Stock reported on the Nasdaq National Market on May ,
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>
ETEC SYSTEMS, INC.
CROSS-REFERENCE SHEET BETWEEN ITEMS OF FORM S-1 AND
FORM OF PROSPECTUS PURSUANT TO REGULATION S-K, ITEM 501(B)
<TABLE>
<CAPTION>
ITEM NO. LOCATION IN PROSPECTUS
-------- ----------------------
<C> <C> <S>
1. Forepart of the Registration Statement
and Outside Front Cover Page of
Prospectus................................ Outside Front Cover Page
2. Inside Front and Outside Back
Cover Pages of Prospectus................. Inside Front and Outside
Back Cover Pages;
Available Information
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; The
Company; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Not Applicable
6. Dilution................................... Not Applicable
7. Selling Security Holders................... Principal and Selling
Stockholders
8. Plan of Distribution....................... Outside Front Cover Page;
Underwriting
9. Description of Securities to Be Registered. Description of Capital
Stock
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information with Respect to the Registrant. Prospectus Summary; Risk
Factors; The Company;
Investment by Intel;
Dividend Policy;
Capitalization; Selected
Consolidated Financial
Data; Management's
Discussion and Analysis
of Financial Condition
and Results of
Operations; Business;
Management; Certain
Transactions; Principal
and Selling
Stockholders;
Description of Capital
Stock; Shares Eligible
for Future Sale;
Experts; Change in
Accountants;
Consolidated Financial
Statements
12. Disclosure of Commission Position
on Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<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 MAY 23, 1996
LOGO
4,600,000 SHARES
COMMON STOCK
Of the 4,600,000 shares of Common Stock offered hereby, 500,000 shares are
being issued and sold by Etec Systems, Inc. ("Etec" or the "Company") and
4,100,000 shares are being sold by the Selling Stockholders. See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from
the sale of shares by the Selling Stockholders. On May 20, 1996 the last sale
price of the Common Stock, as reported on the Nasdaq National Market, was
$24.50 per share. See "Price Range of Common Stock." The Common Stock trades on
the Nasdaq National Market under the symbol "ETEC."
Concurrently with the closing of this offering, Intel Corporation ("Intel")
will purchase $10.0 million of Common Stock directly from the Company at the
Price to Public, together with certain warrants. See "Investment by Intel."
-----------
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 COMPANY(1) STOCKHOLDERS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
- --------------------------------------------------------------------------------
Total(2).................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company, estimated at $400,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 690,000 shares of Common Stock solely to cover over-
allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions and
Proceeds to Company will be $ , $ and $ , respectively.
-----------
The Common Stock is offered by the Underwriters as stated herein, subject to
receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of Robertson, Stephens & Company LLC ("Robertson, Stephens
& Company"), San Francisco, California, on or about , 1996.
ROBERTSON, STEPHENS & COMPANY NEEDHAM & COMPANY, INC.
The date of this Prospectus is , 1996
<PAGE>
[GRAPHICS: 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 OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS
IN THE COMPANY'S COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
<PAGE>
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE 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, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 7
The Company............................................................... 16
Investment by Intel....................................................... 17
Use of Proceeds........................................................... 17
Price Range of Common Stock............................................... 18
Dividend Policy........................................................... 18
Capitalization............................................................ 19
Selected Consolidated Financial Data...................................... 20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 22
Business.................................................................. 34
Management................................................................ 54
Certain Transactions...................................................... 62
Principal and Selling Stockholders........................................ 65
Description of Capital Stock.............................................. 68
Shares Eligible for Future Sale........................................... 71
Underwriting.............................................................. 73
Legal Matters............................................................. 74
Experts................................................................... 74
Change in Accountants..................................................... 74
Additional Information.................................................... 74
Index to Consolidated Financial Statements................................ F-1
</TABLE>
----------------
MEBES(R), CORE(R), Etec(R), the Etec logo, Polyscan 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.
THE COMPANY
Etec Systems, Inc. ("Etec" or the "Company") is the world leader in the
production of mask pattern generation equipment for the semiconductor industry.
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 $2.5 million to
$7.5 million each and accessories and upgrades at prices currently ranging from
approximately $1.5 million to $5.0 million each. The Company also derives
significant revenues from service and support of its installed base of systems.
The Company believes that over 230 commercial electron beam and laser beam mask
pattern generation systems are currently installed outside the former Eastern
Bloc, of which over 155 have been produced by Etec.
The Company believes that advanced masks and mask pattern generation tools
are becoming 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 will result
in mask demand more closely correlating with semiconductor 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. In
furtherance of this strategy, the Company acquired substantially all of the
assets of Polyscan, Inc. ("Polyscan"), a developer of laser direct imaging
systems for large-area pattern generation applications, in February 1996. 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.
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
("Intel"), Samsung Electronics Co., Ltd. and Sony Corporation. Concurrently
with the completion of this offering, Intel will purchase $10.0 million of the
Company's Common Stock and will receive warrants to purchase additional shares
of Common Stock. The Company markets and distributes its products directly into
North America,
4
<PAGE>
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.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............... 500,000 shares
Common Stock offered by the Selling Stockholders.. 4,100,000 shares
Common Stock to be outstanding after the offering. 18,983,200 shares(1)
Use of proceeds................................... For capital expenditures
and for general corporate
purposes including working
capital.
Nasdaq National Market symbol..................... ETEC
</TABLE>
- --------
(1) Includes 408,163 shares to be sold to Intel pursuant to a private placement
concurrently with the consummation of this offering, based on an assumed
offering price of $24.50. See "Investment by Intel." Excludes shares of
Common Stock issuable upon exercise of stock options of 1,464,233 as of
April 30, 1996 and 376,997 shares issuable upon exercise of warrants. Also
excludes warrants to purchase 15% of the number of shares of Common Stock
purchased by Intel, to be issued to Intel concurrently with such purchase.
See "Capitalization" and Note 5 and Note 9 of Notes to Consolidated
Financial Statements.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
PRO
NINE FORMA
MONTHS NINE
ENDED MONTHS
YEAR ENDED JULY 31, APRIL 30, ENDED
------------------------- ------------------ APRIL 30,
1993 1994 1995(1) 1995 1996(2)(3) 1996(4)
-------- ------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 58,582 $68,710 $82,916 $61,045 $98,035 $98,035
Gross profit............ 16,644 25,481 35,297 25,623 43,635 43,635
Write-off of in-process
technology acquired(5). -- -- -- -- 6,269 --
Income (loss) from
operations............. (4,439) 9,576 11,403 9,477 10,402 15,540
Income (loss) before
income tax provision
(benefit), minority
interest and
extraordinary items.... (9,530) 4,390 7,340 6,011 11,083 16,429
Net income (loss)....... (11,409) 1,612 9,936 4,018 21,846 27,192
Net income (loss) per
share.................. $ (0.94) $ 0.12 $ 0.68 $ 0.28 $ 1.23 $ 1.51
Weighted average common
shares(6).............. 12,168 14,008 14,594 14,594 17,750 17,996
</TABLE>
<TABLE>
<CAPTION>
APRIL 30, 1996
------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA(7) ADJUSTED(7)(8)
-------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments....................... $ 40,996 $ 50,996 $ 62,234
Working capital............................ 74,052 84,052 95,290
Total assets............................... 157,482 168,082 179,320
Long-term debt, less current portion....... 7,625 7,625 7,625
Total stockholders' equity................. 73,377 83,977 95,215
</TABLE>
- --------
(1) Net income (loss) reflects the inclusion of 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.
(2) Net income (loss) reflects the inclusion of an extraordinary loss of
$300,000 recorded as a result of the early extinguishment of $5.0 million
of secured notes payable.
(3) Net income (loss) reflects a $15.4 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 6 of Notes to Consolidated Financial
Statements.
(4) Pro forma statement of operations data reflects the consolidated results of
the Company after giving effect to the acquisition of substantially all of
the assets and certain specified liabilities of Polyscan assuming that the
acquisition took place on August 1, 1995.
(5) In 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 13 of Notes to
Consolidated Financial Statements.
(6) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(7) Pro forma balance sheet data reflects the sale of $10.0 million of Common
Stock to Intel at an assumed price of $24.50 per share and the issuance of
warrants to Intel. See "Investment by Intel."
(8) Reflects the event specified in footnote (7) above, and as adjusted to
reflect the sale by the Company of the 500,000 shares of Common Stock being
offered hereby after deducting estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company, and the
application of the estimated net proceeds therefrom as set forth under "Use
of Proceeds." See "Capitalization."
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. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could 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."
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, 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.
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 ratio of semiconductor orders to shipments (the "book-
to-bill" ratio) for U.S.-based semiconductor manufacturers, as reported by the
Semiconductor Industry Association, has declined to less than one in recent
periods. 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 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."
FLUCTUATIONS IN OPERATING RESULTS
The Company derives most of its annual revenues from the sale of a small
number of systems and upgrades at prices currently ranging from approximately
$2.5 million to $7.5 million each for systems, and from approximately $1.5
million to $5.0 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. 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, materially affecting fourth quarter
results. In addition, some of the Company's sales have been realized near the
end of a 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.
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,
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 timing of payments of sales commissions,
the availability of components and subassemblies, changes in product
development costs, expenses associated with acquisitions and exchange rate
fluctuations. 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
7
<PAGE>
different times. Over the last seven 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 $27.3 million for federal
income tax purposes at April 30, 1996, against taxable income in future
periods. 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
consummation of this offering will result in a cumulative change in ownership
of the Company in excess of 50%, measured over the past three-year period. As
a result, based on the Company's market value on May 20, 1996, the Company's
utilization of the NOLs cannot exceed $22.0 million per fiscal year commencing
with the completion of this offering. This limitation could have an adverse
effect on the Company's net income. The Company cannot predict the impact of
these and other factors on its financial performance in any future period.
IMPORTANCE OF RECENTLY INTRODUCED PRODUCTS
The Company's future success depends upon the market's acceptance of new
generations of its systems. The Company commenced shipments of its MEBES 4500
electron beam systems in June 1995 and of its ALTA 3000 laser beam systems in
June 1994, both of which are targeted at the 0.25- to 0.35-micron generation
of semiconductor devices currently in pilot production and under development.
The Company has limited experience with the production of the MEBES 4500 and
ALTA 3000 systems, having shipped five MEBES 4500 systems, two MEBES 4500
upgrades and seven ALTA 3000 systems to date. Any technical or manufacturing
difficulties with these systems (or subsequent generations of the Company's
systems) would have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, there can be no
assurance that the market for the leading-edge applications targeted by the
MEBES 4500 and ALTA 3000 systems will develop as quickly or to the degree that
the Company currently anticipates.
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 and manufacture 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
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, cost-
effective manufacturing and product performance in the field. The Company's
new product
8
<PAGE>
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. There can be no assurance
that the Company will be successful in selecting, developing, manufacturing
and marketing new products 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
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."
LIMITED MANUFACTURING CAPACITY
The Company's systems have a large number of components and are highly
complex. The Company has experienced delays from time to time in manufacturing
and delivering its systems and upgrades and may experience similar delays in
the future. 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's ability to increase its
manufacturing capacity in response to an increase in demand 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.
However, manufacturing capacity is not currently limited by facility
constraints. The failure of the Company to keep pace with customer demand
could lead to extensions of delivery times, which could
9
<PAGE>
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, is
performing vendor certifications, is partnering to reduce lead times on
critical components, and is 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.
The Company conducts all of its manufacturing activities at its leased
facilities in Hayward, California, Beaverton, Oregon and Tucson, Arizona. The
Company's Hayward facility 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.
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 80% of total revenues in fiscal 1994,
fiscal 1995 and the first nine months of fiscal 1996, respectively. Sales to
the largest customer during those periods accounted for approximately 13%, 14%
and 19% 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; NEW MANAGEMENT; 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, including its Chief Executive
Officer, Chief Financial Officer, Vice President, Operations, and Vice
President, Human Resources and Administration and the General Manager of the
Company's subsidiary, Etec Polyscan, Inc., joined the Company within the past
three
10
<PAGE>
and one-half 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.
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
The Company's business strategy includes expanding its product lines and
markets through internal product development or 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 not yet sold a product and
has had net operating losses since its inception. The Company expects that
Etec Polyscan will continue to have net operating losses for the foreseeable
future. 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
11
<PAGE>
relationships or alliances with leading semiconductor manufacturers. In
particular, the Company believes that Japanese competitors such as Hitachi and
JEOL 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. 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.
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
43%, 44% and 59% of revenues in fiscal 1994, fiscal 1995 and the first nine
months of fiscal 1996, respectively, with an additional 10%, 16% and 18% of
revenues, respectively, attributable to sales in the United States for
shipment abroad. In particular, sales of systems delivered in Japan accounted
for 16%, 14% and 42% of revenues in fiscal 1994, fiscal 1995 and the first
nine months of fiscal 1996, 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."
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."
12
<PAGE>
FUTURE CAPITAL NEEDS
The development, manufacture and marketing of pattern generation systems are
highly capital intensive. The Company has budgeted a total of approximately
$19.0 million for the purchase of testing equipment, the upgrading of
manufacturing facilities and improvements to management information systems in
fiscal 1996, of which $7.9 million had been expended as of April 30, 1996. The
Company has also budgeted in excess of $20.0 million for capital expenditures
in fiscal 1997. The Company expects that the proceeds of this offering and the
concurrent sale of Common Stock to Intel, together with anticipated cash flow
from operations and existing cash balances, 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 $16.1 million in fiscal 1994, approximately $7.3 million in
fiscal 1995 and approximately $725,000 in the first nine months of fiscal
1996. Governmental funding of the Company's development activities has
declined precipitously in recent periods, and the Company and SEMATECH
recently ended their most recent cooperative development agreement. 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. See "Business--Product Development."
PATENTS AND OTHER INTELLECTUAL PROPERTY
The Company currently holds 44 United States patents expiring on various
dates from 1999 through 2012, and holds corresponding patents and applications
in several foreign countries for most of such patents. The Company also has
five 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 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 on a non-exclusive basis from Patlex
Corporation. 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.
13
<PAGE>
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. 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. The Perkin-Elmer Corporation ("Perkin-Elmer"),
the former owner of the property, has agreed to indemnify the Company, subject
to a 50% copayment by the Company of the first $600,000 of indemnifiable
costs, in the event that any toxic substances which were present and
identified at the time of the Company's acquisition of the property in 1990
require remediation. The Company is obligated to indemnify the current owner
of the Hayward property, which is leased by the Company, in the event that
soil or groundwater remediation at the site becomes necessary.
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 systems currently do not comply
with the additional EU regulations which became effective in January 1996, and
further EU regulations in this area are scheduled to become effective in
January 1997. 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
14
<PAGE>
regulations, the Company may be barred from selling its products directly or
through its customers to 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 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 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.
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 4,600,000 shares to be sold in this offering and the
4,830,000 shares sold in the Company's initial public offering, approximately
143,850 shares are eligible for immediate sale in the public market.
Commencing July 20, 1996, 60 days after the effective date of the Registration
Statement of which this Prospectus is a part and January 20, 1997, upon the
expiration of lock-up agreements with the Company and the underwriters,
approximately 22,448, 48,347 and 6,613,820 additional shares, respectively,
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. Holders of an aggregate of approximately 9,320,649
shares of Common Stock and warrants to purchase 212,418 shares of Common Stock
have rights under certain circumstances to request that the Company register
their shares for future sale. See "Description of Capital Stock--Registration
Rights," "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 $29.375. The Company believes
that factors such as announcements of developments related to the Company's
business, 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.
FACTORS AFFECTING A CHANGE IN CONTROL
The Company's five largest institutional investors will, in the aggregate,
own beneficially approximately 29.2% of the Company's outstanding shares of
Common Stock after this offering (assuming that the concurrent purchase of
shares by Intel occurs at a price of $24.50, the closing price of the Common
Stock on May 20, 1996). As a result, these stockholders, acting together, may
be able to exert significant influence over the election of directors and
other corporate actions requiring stockholder approval. The Company's charter
provides for authorized but unissued preferred stock, the terms of which may
be fixed by the Board of Directors. In addition, certain provisions of Nevada
law will prohibit certain significant stockholders from entering into a
business combination with the Company unless certain conditions are met. These
charter and statutory provisions could have the effect of delaying, deferring
or preventing a change of control of the Company. See "Description of Capital
Stock."
15
<PAGE>
THE COMPANY
Etec Systems, Inc. ("Etec" or the "Company") is the world leader in the
production of mask pattern generation equipment for the semiconductor
industry. 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
$2.5 million to $7.5 million each and accessories and upgrades at prices
currently ranging from approximately $1.5 million to $5.0 million each. The
Company also derives significant revenues from service and support of its
installed base of systems. The Company believes that over 230 commercial
electron beam and laser beam mask pattern generation systems are currently
installed outside the former Eastern Bloc, of which over 155 have been
produced by Etec. The Company's customers include merchant semiconductor mask
manufacturers and semiconductor manufacturers with captive mask manufacturing
operations.
The Company's business commenced in 1970 and was sold to The Perkin-Elmer
Corporation ("Perkin-Elmer") in 1979, at which point it became Perkin-Elmer's
Electron Beam Technology Division ("EBT"). The Company was incorporated in
Nevada on May 10, 1989 by the management of EBT to acquire the majority of the
assets and certain of the liabilities of EBT from Perkin-Elmer in 1990 (the
"LBO"). The purchase price consisted of cash, subordinated notes, and
preferred stock, all of which has been converted into Common Stock. See
"Certain Transactions." In November 1991, the Company acquired approximately
98% of the outstanding capital stock of ATEQ Corporation ("ATEQ"), a supplier
of laser beam maskmaking systems. In August 1995, ATEQ was merged into Etec.
During fiscal 1995, the Company undertook a recapitalization involving the
sale and leaseback of its facility in Hayward, California for proceeds of
approximately $11.8 million, the repayment of $6.0 million in respect of
senior notes, the conversion of $19.7 million in senior subordinated debt into
preferred stock and convertible debt and accrued interest, and the acquisition
of the 18% minority equity interest in the Company's subsidiary, Etec Systems
Japan Ltd. ("Etec Japan"), for 75,753 shares of Series E Cumulative,
Participating, Convertible Preferred Stock ("Series E Preferred Stock"). All
such preferred stock was converted into Common Stock upon the consummation of
the Company's initial public offering in October 1995. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
In February 1996, the Company acquired substantially all of the assets and
certain specified liabilities of Polyscan, a development-stage company that
designs and develops laser direct imaging systems for large-area pattern
generation applications.
The Company's principal offices are located at 26460 Corporate Avenue,
Hayward, California 94545, and its telephone number is (510) 783-9210. Unless
the context otherwise requires, references herein to "Etec" and the "Company"
refer to Etec Systems, Inc., its consolidated subsidiaries and its
predecessor, EBT.
16
<PAGE>
INVESTMENT BY INTEL
Intel Corporation ("Intel") has agreed to purchase $10.0 million of Common
Stock directly from the Company. This purchase will occur concurrently with
the consummation of this offering at the Price to Public set forth on the
cover page of this Prospectus (408,163 shares, assuming an offering price
equal to the closing price of the Common Stock on the Nasdaq National Market
on May 20, 1996) or, should the offering not be completed, at the average
closing price of the Company's Common Stock for the 15 trading days preceding
the date of the agreement. Intel will also receive warrants to purchase
additional shares of Common Stock equal in number to 15% of the shares
purchased. These warrants will be exercisable only if Intel's purchases of
products and services from the Company over the succeeding four years exceed
certain thresholds, or upon the occurrence of certain other conditions. The
Company will also grant Intel certain registration rights with respect to its
shares. See "Description of Capital Stock." Intel will agree not to sell any
of the purchased shares for two years following such purchase, other than in a
private transaction to a purchaser that assumes this obligation, and will
agree not to purchase additional shares of Common Stock or securities
convertible into Common Stock if it would own 20% or more of the Company's
Common Stock on a fully diluted basis after such purchase.
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
$11.2 million ($27.3 million if the Underwriters' over-allotment option is
exercised in full) at an assumed public offering price of $24.50 per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. The Company will receive an additional $10.0 million from
Intel upon the sale of Common Stock to Intel concurrently with the completion
of this offering. See "Investment by Intel." The Company anticipates using a
portion of the net proceeds of this offering and the concurrent Intel
investment 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 and
the Intel investment 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.
17
<PAGE>
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 (through May 20, 1996)...................... 28.25 21.75
</TABLE>
On May 20, 1996, the closing price for the Company's Common Stock as
reported on the Nasdaq National Market was $24.50. As of April 30, 1996, there
were approximately 330 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 its 10.65% Senior Secured Notes. In
addition, the lease of the Company's Hayward, California property restricts
the Company from paying cash dividends under certain conditions. The Company's
ability to pay dividends may also be indirectly affected by an excess cash
sharing agreement among the Company and a noteholder, which obligates the
Company to make certain prepayments on the notes in the event that certain
tests are met. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
18
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
April 30, 1996; and (ii) on a pro forma basis, assuming that the sale of $10.0
million of Common Stock to Intel had occurred as of such date at an assumed
price of $24.50 per share, and as adjusted to reflect the sale by the Company
of the 500,000 shares of Common Stock being offered by the Company after
deducting estimated underwriting discounts and commissions and estimated
offering expenses payable by the Company, and the application of the estimated
net proceeds therefrom as set forth under "Use of Proceeds."
<TABLE>
<CAPTION>
APRIL 30, 1996
---------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1)............. $ 1,336 $ 1,336
======== ========
Long-term debt, less current portion(1)............. $ 7,625 $ 7,625
-------- --------
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; 18,075,037 shares
issued and outstanding, actual; 18,983,200 shares
issued and outstanding, pro forma(2)............... 181 190
Warrants.......................................... 496 1,096
Additional paid-in capital........................ 123,176 144,405
Notes receivable from stockholders................ (47) (47)
Cumulative translation adjustment................... 70 70
Accumulated deficit................................. (50,499) (50,499)
-------- --------
Total stockholders' equity...................... 73,377 95,215
-------- --------
Total capitalization.......................... $ 81,002 $102,840
======== ========
</TABLE>
- --------
(1) See Note 3 of Notes to Consolidated Financial Statements for a description
of the Company's notes payable.
(2) Excludes 1,232,259 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 1,464,233 shares of Common Stock at a weighted average
exercise price of $3.25 per share as of April 30, 1996. See "Management--
Stock Option Plans" and Note 9 of Notes to Consolidated Financial
Statements. Also excludes warrants to purchase 376,997 shares of Common
Stock outstanding at April 30, 1996 and warrants to purchase shares of
Common Stock to be issued to Intel concurrently with the completion of
this offering. See "Description of Capital Stock" and Notes 5 and 9 of
Notes to Consolidated Financial Statements.
19
<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 three-year
period ended July 31, 1995 are derived from financial statements of the
Company included herein that have been audited by Price Waterhouse LLP,
independent accountants. The selected consolidated financial data for the
fiscal years ended July 31, 1991 and 1992 and the nine months ended April 30,
1995 are derived from financial statements not included herein. The selected
consolidated financial data as of and for the nine months ended April 30, 1996
are derived from the financial statements of the Company included herein and
are unaudited. In the opinion of management, such unaudited data reflect all
adjustments (consisting only of normal recurring adjustments) necessary for a
fair statement of the financial data for such period. The results of
operations for the nine months ended April 30, 1996 are not necessarily
indicative of results that may be expected for the full year. The pro forma
results of operations for the nine months ended April 30, 1996 and balance
sheet data as of April 30, 1996 reflect the transactions described in
footnotes 5 and 8 below, respectively. Such pro forma results are not
necessarily indicative of results of operations that would have been attained
had these transactions actually occurred on the dates indicated or of future
operating results. 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>
PRO
NINE FORMA
MONTHS NINE
ENDED MONTHS
YEAR ENDED JULY 31, APRIL 30, ENDED
-------------------------------------------------- -------------------- APRIL 30,
1991 1992(1) 1993 1994 1995(2) 1995 1996(3)(4) 1996(5)
-------- --------- --------- -------- -------- -------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Products............... $ 21,938 $ 41,819 $ 31,650 $ 40,731 $ 51,395 $ 38,143 $ 73,983 $ 73,983
Services............... 24,442 26,769 26,932 27,979 31,521 22,902 24,052 24,052
-------- --------- --------- -------- -------- -------- -------- --------
46,380 68,588 58,582 68,710 82,916 61,045 98,035 98,035
-------- --------- --------- -------- -------- -------- -------- --------
Cost of revenue:
Cost of products....... 13,473 32,682 25,450 25,559 27,015 20,756 37,606 37,606
Cost of services....... 15,779 17,655 16,488 17,670 20,604 14,666 16,794 16,794
-------- --------- --------- -------- -------- -------- -------- --------
29,252 50,337 41,938 43,229 47,619 35,422 54,400 54,400
-------- --------- --------- -------- -------- -------- -------- --------
Gross profit............ 17,128 18,251 16,644 25,481 35,297 25,623 43,635 43,635
-------- --------- --------- -------- -------- -------- -------- --------
Operating expenses:
Research, development
and engineering....... 3,208 9,472 11,034 5,102 10,497 6,952 11,991 12,598
Write-off of in-process
technology
acquired(6)........... -- 10,600 -- -- -- -- 6,269 --
Selling, general and
administrative........ 11,139 25,331 10,049 10,803 13,397 9,194 14,973 15,497
-------- --------- --------- -------- -------- -------- -------- --------
14,347 45,403 21,083 15,905 23,894 16,146 33,233 28,095
-------- --------- --------- -------- -------- -------- -------- --------
Income (loss) from
operations............. 2,781 (27,152) (4,439) 9,576 11,403 9,477 10,402 15,540
Interest expense........ (3,093) (5,277) (5,880) (5,115) (4,238) (3,369) (1,462) (1,462)
Other income (expense),
net.................... -- (795) 789 (71) 175 (97) 2,143 2,351
-------- --------- --------- -------- -------- -------- -------- --------
Income (loss) before
income tax provision
(benefit), minority
interest and
extraordinary items.... (312) (33,224) (9,530) 4,390 7,340 6,011 11,083 16,429
Income tax provision
(benefit).............. 2,081 1,296 1,500 2,316 2,289 1,600 (11,063) (11,063)
Minority interest in
earnings of subsidiary. -- 321 379 462 527 393 -- --
-------- --------- --------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary items.... (2,393) (34,841) (11,409) 1,612 4,524 4,018 22,146 27,492
Extraordinary gain
(loss) on early
extinguishment of debt. -- -- -- -- 5,412 -- (300) (300)
-------- --------- --------- -------- -------- -------- -------- --------
Net income (loss)....... (2,393) (34,841) (11,409) 1,612 9,936 4,018 21,846 27,192
Accretion of mandatorily
redeemable convertible
preferred stock........ 2,143 2,541 2,740 2,946 3,092 2,319 1,078 1,078
-------- --------- --------- -------- -------- -------- -------- --------
Net income (loss)
attributable to Common
Stockholders........... $ (4,536) $ (37,382) $ (14,149) $ (1,334) $ 6,844 $ 1,699 $ 20,768 $ 26,114
======== ========= ========= ======== ======== ======== ======== ========
Per share data:
Income (loss) before
extraordinary items... $ (0.23) $ (2.86) $ (0.94) $ 0.12 $ 0.31 $ 0.28 $ 1.25 $ 1.53
Extraordinary items.... -- -- -- -- 0.37 -- (0.02) (0.02)
-------- --------- --------- -------- -------- -------- -------- --------
Net income (loss)...... $ (0.23) $ (2.86) $ (0.94) $ 0.12 $ 0.68 $ 0.28 $ 1.23 $ 1.51
======== ========= ========= ======== ======== ======== ======== ========
Weighted average common
shares(7).............. 10,428 12,167 12,168 14,008 14,594 14,594 17,750 17,996
======== ========= ========= ======== ======== ======== ======== ========
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
JULY 31, PRO FORMA
--------------------------------------------- APRIL 30, APRIL 30,
1991 1992 1993 1994 1995 1996 1996(8)
-------- ------- ------- ------- -------- --------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and investments.... $ 13,403 $ 1,919 $ 7,234 $ 6,571 $ 23,638 $ 40,996 $ 50,996
Working capital......... 36,252 18,764 9,942 6,184 23,215 74,052 84,052
Total assets............ 80,322 76,793 66,151 62,782 85,984 157,482 168,082
Long-term debt, less
current portion........ 30,057 49,377 46,573 31,251 16,866 7,625 7,625
Minority interest....... 4,891 5,632 7,093 7,711 -- -- --
Mandatorily redeemable
convertible preferred
stock.................. 29,036 41,577 44,317 54,362 76,397 -- --
Accumulated deficit..... (25,246) (62,628) (76,777) (78,111) (71,267) (50,499) (50,499)
Total stockholders' eq-
uity (deficit)......... (19,058) (61,700) (75,575) (76,341) (67,415) 73,377 83,977
</TABLE>
- --------
(1) In 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) Net income (loss) reflects the inclusion of 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.
(3) Net income (loss) reflects the inclusion of an extraordinary loss of
$300,000 recorded as a result of the early extinguishment of $5.0 million
of secured notes payable.
(4) Net income (loss) reflects a $15.4 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 6 of Notes to
Consolidated Financial Statements.
(5) Pro forma statement of operations data reflects the consolidated results
of the Company after giving effect to the acquisition of substantially all
of the assets and certain specified liabilities of Polyscan, assuming that
the acquisition took place on August 1, 1995.
(6) In 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 13 of Notes to
Consolidated Financial Statements.
(7) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(8) Pro forma balance sheet data reflects the sale of $10.0 million of Common
Stock to Intel at an assumed price of $24.50 per share and the issuance of
warrants to Intel. See "Investment by Intel."
21
<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."
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, a supplier of laser beam maskmaking systems. In
February 1996, the Company acquired substantially all of the assets and
certain specified liabilities of Polyscan, a developer of laser direct imaging
systems for large-area pattern generation applications. See "The Company."
From the LBO through fiscal 1993, the Company incurred net losses primarily
due to the depressed demand for maskmaking equipment, substantial interest
expense relating to the debt incurred in the LBO, costs incurred to develop
new technology and high overhead costs. During calendar 1993, the Company
hired its current Chief Executive Officer and other members of senior
management.
Beginning in fiscal 1994, Etec's 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 1994, fiscal
1995 and the nine months ended April 30, 1996, reflecting an upturn in the
maskmaking industry and the Company's introduction of new products.
The Company completed its initial public offering ("IPO") in October 1995.
The Company's sale of 3,841,667 shares in the IPO raised approximately $35.7
million before offering expenses. In connection with the IPO, in November
1995, the underwriters exercised their option to purchase an additional
630,000 shares from the Company. Net proceeds in connection with this exercise
amounted to approximately $5.9 million.
The Company derives most of its annual revenues from the sale of a small
number of systems and upgrades at prices currently ranging from approximately
$2.5 million to $7.5 million each for systems and from approximately $1.5
million to $5.0 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. 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. See "Risk Factors--Fluctuations in Operating Results."
The Company generally recognizes product revenue upon shipment. A provision
for installation and estimated future warranty costs is recorded at the time
revenue is recognized. Revenue associated with upgrading machines is generally
recognized upon customer final acceptance. 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 service period of
the related contract.
Sales to customers in countries other than the United States accounted for
59%, 44%, 43%, and 46% of total revenues in the nine months ended April 30,
1996, fiscal 1995, fiscal 1994 and fiscal 1993, respectively, with an
additional 18%, 16%, 10%, and 13% 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
22
<PAGE>
denominated in currencies other than U.S. dollars, have not presented
significant currency exchange exposure. Accordingly, the Company has not
entered into hedging transactions. The Company plans to actively monitor its
foreign exchange exposure and to take appropriate action to reduce its foreign
exchange risk, if such risk becomes significant.
The following table sets forth certain consolidated statement of operations
data as a percentage of total revenue for the periods indicated, and on a pro
forma basis for the nine months ended April 30, 1996 giving effect to the
Polyscan acquisition as if it had occurred on August 1, 1995 as described
below:
<TABLE>
<CAPTION>
PRO
FORMA
NINE MONTHS NINE
ENDED MONTHS
YEAR ENDED JULY 31, APRIL 30, ENDED
------------------------- ------------- APRIL 30,
1993 1994 1995 1995 1996 1996
------ ------ ------ ----- ----- ---------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Products.................... 54% 59% 62% 62% 75% 75%
Services.................... 46 41 38 38 25 25
------ ------ ------ ----- ----- ---
100 100 100 100 100 100
------ ------ ------ ----- ----- ---
Cost of revenue:
Cost of products............ 44 37 32 34 38 38
Cost of services............ 28 26 25 24 17 17
------ ------ ------ ----- ----- ---
72 63 57 58 55 55
------ ------ ------ ----- ----- ---
Gross margin.................. 28 37 43 42 45 45
------ ------ ------ ----- ----- ---
Operating expenses:
Research, development and
engineering.................. 19 7 13 11 12 13
Write-off of in-process
technology acquired.......... -- -- -- -- 7 --
Selling, general and
administrative............... 17 16 16 15 15 16
------ ------ ------ ----- ----- ---
36 23 29 26 34 29
------ ------ ------ ----- ----- ---
Income (loss) from operations. (8) 14 14 16 11 16
Interest expense.............. (9) (8) (4) (6) (1) (1)
Other income, net............. 1 -- -- -- 2 2
------ ------ ------ ----- ----- ---
Income (loss) before income
tax provision (benefit),
minority interest and
extraordinary items.......... (16) 6 10 10 12 17
Income tax provision
(benefit).................... 3 3 3 3 (11) (11)
Minority interest in earnings
of subsidiary................ 1 1 1 -- -- --
------ ------ ------ ----- ----- ---
Income (loss) before
extraordinary items.......... (20)% 2% 6% 7% 23% 28%
====== ====== ====== ===== ===== ===
</TABLE>
At April 30, 1996, the Company had remaining net operating loss
carryforwards ("NOLs") of approximately $27.3 million for federal tax
purposes. These carryforwards, if not utilized to offset future taxable
income, expire at various dates through the year 2008. 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 consummation of this
offering will result in a cumulative change in ownership of the Company in
excess of 50%, measured over the past three-year period. As a result, based on
the Company's market value as of May 20, 1996, the Company's usage of the NOLs
cannot exceed $22.0 million per fiscal year, commencing with the completion of
this offering.
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 facility in Hayward, California and the repayment of $6.0
million in respect of senior notes, the exchange of $19.7 million of senior
subordinated
23
<PAGE>
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. See "Certain Transactions."
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.
NINE MONTHS ENDED APRIL 30, 1996 AND APRIL 30, 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 94% to $74.0 million from $38.1
million for the nine months ended April 30, 1996 and 1995, respectively. This
increase reflects the sale of four additional systems, higher average selling
prices, changes in product mix toward a higher-priced new product, the MEBES
4500, in the fourth quarter of fiscal 1995, and increased revenues from the
ALTA 3000, offset by a reduction in the sales of upgrades and accessories of
approximately $5.2 million.
Service revenue increased 5.0% to $24.1 million from $22.9 million for the
nine months ended April 30, 1996 and 1995, respectively, due primarily to
price increases on service contracts and an increase in the installed base of
systems.
Gross Profit. The Company's gross profit on product revenue increased 109%
to $36.4 million from $17.4 million for the nine months ended April 30, 1996
and 1995, 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 49.2% from 45.6% for the nine months ended April
30, 1996 compared to the nine months ended April 30, 1995. The increase in
product gross margin is primarily attributable to generally higher selling
prices for the Company's products and improved manufacturing efficiencies.
The Company's gross profit on service revenue decreased 11.9% to $7.3
million from $8.2 million for the nine months ended April 30, 1996 and 1995,
respectively. Gross margin on service revenue was 30.2% and 36.0% for the nine
months ended April 30, 1996 and 1995, respectively. The decrease in margin
reflects an investment in service personnel and training to support the
growing installed base. The Company continues to make such investments, which
it expects will result in additional erosion of service margins.
Research, Development and Engineering. Research, development and engineering
expenses, net of third-party funding under cooperative development agreements,
increased to $12.0 million, representing 12.2% of revenue, from $7.0 million,
representing 11.4% of revenue, for the nine months ended April 30, 1996 and
1995, respectively. This increase primarily reflects a reduction in third-
party funding. For the nine months ended April 30, 1996 and 1995, $725,000 and
$5.5 million, respectively, of funds received under the cooperative
development agreements were applied against research, development and
engineering expenses. See Note 1 of Notes to Consolidated Financial
Statements. Excluding these cost reimbursements, gross research, development
and engineering spending was $12.7 million and $12.5 million in each of the
nine month periods ended April 30, 1996 and 1995, respectively. Due to the
Company's commitment to product development, net research, development and
engineering expenses are expected to increase in future periods.
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. See "Risk Factors--Rapid Technological
Change; Dependence on Product Development."
Write-Off of In-Process Technology Acquired. In the third quarter of fiscal
1996, the Company acquired substantially all of the assets and certain
specified liabilities of Polyscan in exchange for 350,000 shares
24
<PAGE>
of the Company's Common Stock. The excess of the purchase price over the fair
market value of the net tangible assets of $6.3 million was allocated to in-
process technology acquired which, because of the uncertainty as to
realization, the Company wrote off in the third quarter of fiscal 1996.
Selling, General and Administrative. Selling, general and administrative
expenses increased to $15.0 million, representing 15.3% of revenue, from $9.2
million, representing 15.1% of revenue, for the nine months ended April 30,
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, additional professional fees
associated with becoming a public company, increased profit sharing, costs
associated with an increase in hiring and an increase in market development
fees tied to shipments of laser beam products.
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 nine months ended April 30, 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 $10.4
million for the nine months ended April 30, 1995. No such funding was offset
against selling, general and administrative expenses for the nine months ended
April 30, 1996.
Interest Expense. Interest expense for the nine months ended April 30, 1996
and 1995 was $1.5 million and $3.4 million, respectively, and resulted from
the substantial debt incurred to finance the LBO. The decrease in interest
expense from the corresponding period of the preceding fiscal year 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 facility; (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) and approximately $3.5 million of senior subordinated
convertible notes which were repaid in the first quarter of fiscal 1996; and
(iii) the repayment of approximately $9.3 million of senior secured notes
during the first half of fiscal 1996.
Other Income, Net. Other income was $2.1 million of income for the nine
months ended April 30, 1996. Included in other income is approximately $1.2
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 Provision (Benefit). During the nine months ended April 30, 1996,
the Company evaluated the recoverability of its deferred tax assets and
recognized $15.4 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 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. The Company recorded a
benefit for income taxes for the nine months ended April 30, 1996 of $11.1
million and a provision for income taxes for the nine months ended April 30,
1995 of $1.6 million, primarily reflecting taxes payable by the Company's
foreign subsidiaries and the $15.4 million income tax benefit in fiscal 1996.
Minority Interest. Minority interest in the Company's Japanese subsidiary,
Etec Japan, was $393,000 for the nine months ended April 30, 1995. On July 31,
1995, the minority interest was exchanged for shares of the Company's Series E
Preferred Stock (which were converted into Common Stock on the completion of
the IPO) and a payment of approximately $400,000 to one of the minority
investors, who is the President of Etec Japan and a director of the Company.
Accordingly, no minority interest was recorded during fiscal 1996.
Extraordinary Loss on Early Extinguishment of Debt. During the nine months
ended April 30, 1996, the Company recorded an extraordinary loss of
approximately $300,000 related to the accelerated amortization of financing
costs resulting from a $5.0 million prepayment on its outstanding debt to a
senior lender.
25
<PAGE>
YEARS ENDED JULY 31, 1995 AND JULY 31, 1994
Revenue. Product revenue increased 26.2% 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 by 12.7% 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, as well as the
relocation of a customer's system to a different facility and generally higher
service activity.
Gross Profit. The Company's gross profit on product revenue increased 60.7%
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 47.4% from 37.2% for the year ended July 31, 1995 compared
to the year ended July 31, 1994. The increase in product gross margin 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. In
the year ended July 31, 1994, the Company sold two systems that it had
previously capitalized as demonstration and test equipment and fully amortized
in prior fiscal years, which favorably impacted gross margin for the year
ended July 31, 1994. 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 5.9% to $10.9
million from $10.3 million for the years ended July 31, 1995 and 1994,
respectively. Gross margin on service revenue was 34.6% and 36.8% 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
12.7% of revenue, from $5.1 million, representing 7.4% 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 16.2% of revenue, from $10.8
million, representing 15.7% 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.
26
<PAGE>
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 sale and leaseback transaction.
Other Income (Expense). Other income (expense) was $175,000 of income and
$71,000 of expense for the years ended July 31, 1995 and 1994, respectively.
Included in income for the year ended July 31, 1995 is approximately $195,000
of deferred gain amortization related to the sale and leaseback of the
Company's Hayward facility during fiscal 1995.
Provision for Income Taxes. 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 U.S have been
substantially offset by net operating loss carryforward benefits.
Minority Interest. Minority interest in the Company's Japanese subsidiary,
Etec Japan, was $527,000 and $462,000, respectively, for the years ended July
31, 1995 and 1994.
YEARS ENDED JULY 31, 1994 AND JULY 31, 1993
Revenue. Product revenue increased 28.7% to $40.7 million from $31.7 million
for the years ended July 31, 1994 and 1993, respectively, due primarily to an
increase in the number of systems sold and increased sales of upgrades from
MEBES III to MEBES IV systems.
Service revenue increased 3.9% to $28.0 million from $26.9 million in the
years ended July 31, 1994 and 1993, respectively. Service revenue did not
increase at the same rate as product revenue because new systems generally
have a one-year warranty and because the number of new service contracts is
relatively small compared to the total number of systems under contract.
Gross Profit. The Company's gross profit on product revenue increased 145%
to $15.2 million from $6.2 million for the years ended July 31, 1994 and 1993,
respectively. The increase in gross profit was due to increases in product
revenue and gross margin on product revenue, which were 37.2% and 19.6% for
the years ended July 31, 1994 and 1993, respectively. The improvement in
product gross margin was due to a variety of factors, including: the sale of
two systems in fiscal 1994 that had been previously capitalized as
demonstration and test equipment and fully amortized in prior fiscal years;
improved manufacturing efficiencies; reduced costs of manufacturing MEBES IV
systems, which were introduced in fiscal 1993; absorption of overhead costs
over a larger sales volume; and increased sales of upgrades and accessories,
which generally have a higher gross margin than new systems. Excluding the
sale of the two systems mentioned above, gross margin for the year ended July
31, 1994 was approximately 32%.
The Company's gross profit on service revenue decreased 1% to $10.3 million
from $10.4 million for the years ended July 31, 1994 and 1993, respectively.
The Company's gross margin on service revenue was 36.8% and 38.8% for the
years ended July 31, 1994 and 1993, respectively. The decrease in gross margin
reflects increased maintenance costs for MEBES III tools.
Research, Development and Engineering. Research, development and engineering
expenses decreased to $5.1 million, representing 7.4% of revenue, from $11.0
million, representing 18.8% of revenue, during the years ended July 31, 1994
and 1993, respectively. During the years ended July 31, 1994 and 1993, $13.9
million and $9.3 million, respectively, of cooperative development agreement
funding was applied against research, development and engineering costs.
Including these cost reimbursements, gross research, development and
engineering spending was $19.0 million and $20.3 million for the years ended
July 31, 1994 and 1993, respectively. The decrease in gross spending of $1.3
million reflects a reduction in engineering personnel, the completion of the
development stage of the ALTA 3000 and a reallocation of engineering personnel
to manufacturing operations.
27
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses increased to $10.8 million, representing 15.7% of revenue, from $10.0
million, representing 17.2% of revenue, during the years ended July 31, 1994
and 1993, respectively. During the years ended July 31, 1994 and 1993, $2.2
million and $1.7 million of cooperative development agreement funding received
was offset against selling, general and administrative costs. Including these
cost reimbursements, gross selling, general and administrative spending for
the years ended July 31, 1994 and 1993 was $13.0 million and $11.7 million,
respectively. The increase in absolute dollars is due to increased sales and
marketing expenses. The number of sales and marketing personnel increased,
resulting in an increase in salaries, commissions and benefits. In addition,
costs incurred for customer demonstrations and other marketing expenses
including costs for trade shows and international travel increased.
Interest Expense. Interest expense for the years ended July 31, 1994 and
1993 was $5.1 million and $5.9 million, respectively, and resulted from the
substantial debt incurred to finance the LBO. The decrease in interest expense
reflects the retirement of a bank loan and certain notes payable.
Other Income (Expense). Other income (expense) was $71,000 of expense and
$789,000 of income for the years ended July 31, 1994 and 1993, respectively.
Included in income for the year ended July 31, 1993 is certain miscellaneous
nonrecurring income resulting from the liquidation of intercompany loan
balances at favorable foreign currency rates, the disposal of certain capital
equipment and several other nonrecurring transactions.
Provision for Income Taxes. The Company recorded a provision for income
taxes of $2.3 million and $1.5 million for the years ended July 31, 1994 and
1993, respectively. The provisions primarily reflect taxes on the earnings of
the Company's foreign subsidiaries.
Minority Interest. Minority interest expense for the years ended July 31,
1994 and 1993 was $462,000 and $379,000, respectively. The minority interest
expense reflected the percentage of the mandatory redemption amount of the
minority shares in Etec Japan equal to the Japanese long-term interest rate
plus 1%.
28
<PAGE>
QUARTERLY INFORMATION
The following tables present certain unaudited quarterly data for the seven
quarters ended April 30, 1996, and such data expressed as a percentage of
revenue 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>
THREE MONTHS ENDED
---------------------------------------------------------------------
OCT. 31, JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30,
1994 1995 1995 1995 1995 1996 1996
-------- -------- --------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products.............. $12,603 $12,630 $12,910 $13,252 $17,103 $23,522 $ 33,358
Services.............. 6,941 7,194 8,767 8,619 7,605 8,083 8,364
------- ------- ------- ------- ------- ------- --------
19,544 19,824 21,677 21,871 24,708 31,605 41,722
------- ------- ------- ------- ------- ------- --------
Cost of revenue:
Cost of products...... 6,706 7,063 6,987 6,259 8,381 12,826 16,399
Cost of services...... 4,476 4,968 5,222 5,938 5,371 5,548 5,875
------- ------- ------- ------- ------- ------- --------
11,182 12,031 12,209 12,197 13,752 18,374 22,274
------- ------- ------- ------- ------- ------- --------
Gross profit............ 8,362 7,793 9,468 9,674 10,956 13,231 19,448
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Research, development
and engineering...... 2,277 2,124 2,551 3,545 3,271 3,568 5,152
Write-off of in-
process technology
acquired............. -- -- -- -- -- -- 6,269
Selling, general and
administrative....... 2,915 2,736 3,543 4,203 4,453 4,771 5,749
------- ------- ------- ------- ------- ------- --------
5,192 4,860 6,094 7,748 7,724 8,339 17,170
------- ------- ------- ------- ------- ------- --------
Income from operations.. 3,170 2,933 3,374 1,926 3,232 4,892 2,278
Interest expense........ (1,195) (1,146) (1,028) (869) (612) (512) (338)
Other income (expense),
net.................... (154) 110 (53) 272 929 671 543
------- ------- ------- ------- ------- ------- --------
Income before income tax
provision (benefit),
minority interest and
extraordinary items.... 1,821 1,897 2,293 1,329 3,549 5,051 2,483
Income tax provision
(benefit).............. 480 500 620 689 887 1,263 (13,213)
Minority interest in
earnings of subsidiary. 129 129 135 134 -- -- --
------- ------- ------- ------- ------- ------- --------
Income before
extraordinary items.... 1,212 1,268 1,538 506 2,662 3,788 15,696
Extraordinary gain
(loss) on early
extinguishment of debt. -- -- -- 5,412 -- (300) --
------- ------- ------- ------- ------- ------- --------
Net income.............. $ 1,212 $ 1,268 $ 1,538 $ 5,918 $ 2,662 $ 3,488 $ 15,696
======= ======= ======= ======= ======= ======= ========
PERCENTAGE OF REVENUE:
Revenue:
Products.............. 64% 64% 60% 61% 69% 74% 80%
Services.............. 36 36 40 39 31 26 20
------- ------- ------- ------- ------- ------- --------
100 100 100 100 100 100 100
------- ------- ------- ------- ------- ------- --------
Cost of revenue:
Cost of products...... 34 36 32 29 34 41 39
Cost of services...... 23 25 24 27 22 17 14
------- ------- ------- ------- ------- ------- --------
57 61 56 56 56 58 53
------- ------- ------- ------- ------- ------- --------
Gross profit............ 43 39 44 44 44 42 47
------- ------- ------- ------- ------- ------- --------
Operating expenses:
Research, development
and engineering...... 12 10 12 16 13 11 12
Write-off of in-
process technology
acquired............. -- -- -- -- -- -- 15
Selling, general and
administrative....... 15 14 16 19 18 15 14
------- ------- ------- ------- ------- ------- --------
27 24 28 35 31 26 41
------- ------- ------- ------- ------- ------- --------
Income from operations.. 16 15 16 9 13 16 6
Interest expense........ (6) (6) (5) (4) (3) (2) (1)
Other income (expense),
net.................... (1) 1 0 1 4 2 1
------- ------- ------- ------- ------- ------- --------
Income before income tax
provision (benefit),
minority interest and
extraordinary items.... 9 10 11 6 14 16 6
Income tax provision
(benefit).............. 2 3 3 3 4 4 (32)
Minority interest in
earnings of subsidiary. 1 1 1 1 -- -- --
------- ------- ------- ------- ------- ------- --------
Income before
extraordinary items.... 6 6 7 2 10 12 38
Extraordinary gain
(loss) on early
extinguishment of debt. -- -- -- 25 -- (1) --
------- ------- ------- ------- ------- ------- --------
Net income.............. 6% 6% 7% 27% 10% 11% 38%
======= ======= ======= ======= ======= ======= ========
</TABLE>
29
<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, market acceptance of the Company's
products, fluctuations in the grant and funding of development contracts,
consolidation of the number 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 timing of payments of sales commissions, changes in product
development costs, expenses associated with acquisitions and exchange rate
fluctuations. The Company's net income and cash flow will also be affected by
its ability to apply its NOLs, which totaled approximately $27.3 million for
federal income tax purposes at April 30, 1996, against taxable income in
future periods. The utilization of the Company's NOLs cannot exceed $22.0
million per fiscal year following this offering, based on the Company's market
value on May 20, 1996. 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 seven 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 significant 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. Product revenues increased significantly from
the fourth quarter of fiscal 1995 to the third 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 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 revenues and gross margin on services increased significantly in the
third quarter of fiscal 1995 primarily as a result of favorable exchange rates
on foreign service contracts and the relocation of a customer's system to a
different facility. In the fourth quarter of fiscal 1995, favorable exchange
rates continued to affect service revenue, and the Company relocated another
customer's system to a different facility. 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.
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. Research, development and
engineering expenses increased significantly in the third quarter 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
of approximately $500,000 and research and development expenses incurred at
Etec Polyscan, Inc. of approximately $168,000. 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.
Selling, general and administrative expenses 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 quarter of fiscal 1995. Selling, general and administrative expenses
increased significantly in the third quarter 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.
30
<PAGE>
Included in the fourth quarter of fiscal 1995 is an extraordinary gain of
$5.4 million recorded as result of the early extinguishment of $19.7 million
of subordinated notes payable and accrued interest. Included in the second
quarter of fiscal 1996 is an extraordinary loss of $300,000 recorded as result
of the early extinguishment of $5.0 million of senior secured debt. See Note 3
of Notes to Consolidated Financial Statements.
Included in the third quarter of fiscal 1996 is a $6.3 million charge for
in-process technology acquired related to the excess of the purchase price
over net assets acquired in the acquisition of substantially all of the assets
of Polyscan. See Note 13 of Notes to Consolidated Financial Statements.
In the third quarter of fiscal 1996, the Company evaluated the
recoverability of its deferred tax assets and recognized $15.4 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 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.
LIQUIDITY AND CAPITAL RESOURCES
Since the beginning of fiscal 1993, 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
facility in fiscal 1995, and $41.6 million from the Company's IPO in the first
half of fiscal 1996.
The Company has budgeted a total of approximately $19.0 million for capital
expenditures in fiscal 1996 primarily to purchase testing and other equipment,
upgrade its manufacturing facilities and implement an enterprise-wide business
software system, of which $7.9 million had been expended as of April 30, 1996.
The Company has budgeted in excess of $20.0 million for capital expenditures
in fiscal 1997. In April 1996, the Company commenced construction of a 60,000
square foot administrative building in Hayward, California, and is financing
the construction with available cash.
As of April 30, 1996, the Company had cash and cash equivalents and
marketable securities of $41.0 million. The Company believes that the net
proceeds from this offering and from the concurrent sale of Common Stock to
Intel, together with existing sources of liquidity including cash flow from
operations, will provide adequate cash to fund its operations for at least the
next twelve months.
Cash Flow from Operations
Net cash used in operations for the nine months ended April 30, 1996 was
$4.5 million compared to $3.0 million provided by operations for the
corresponding period in 1995. Net cash provided by operations for the fiscal
years ended July 31, 1995, 1994 and 1993 was $9.1 million, $3.6 million and
$12.0 million, respectively.
Cash flow from operations for the nine months ended April 30, 1996 reflected
net income of $21.8 million, decreased by non-cash items (which include $15.4
million of deferred taxes, partially offset by depreciation and amortization
of intangibles of $2.2 million and the write-off of in-process technology
acquired of $6.3 million); cash inflows from decreases in prepaid expenses and
other assets of $1.2 million, and increases in accounts payable and other
current liabilities of $16.1 million; and cash outflows from increases in
accounts receivable of $19.5 million and inventory of $17.5 million.
Cash flow from operations for the nine months ended April 30, 1995 reflected
net income of $4.0 million, increased by non-cash items (which include
depreciation and amortization of intangibles of $2.5 million); cash inflows
from decreases in inventory, prepaid expenses and other assets of $2.3
million; and cash outflows from an increase in accounts receivable of $3.4
million and a decrease in current liabilities of $2.3 million.
31
<PAGE>
Cash flow from operations in fiscal 1995 reflected net income of $9.9
million, decreased by non-cash items (which include an extraordinary gain of
$5.4 million, partially offset by depreciation and amortization of intangibles
of $3.0 million), increases in accounts receivable, inventory, prepaid
expenses and other assets, accrued and other liabilities of $14.7 million, and
decreases in accounts payable of $1.2 million.
Cash flow from operations in fiscal 1994 reflected net income of $1.6
million, increased by non-cash items (which include depreciation and
amortization of intangibles of $3.8 million), decreases in inventory of $7.9
million, increases in accounts receivable of $4.7 million, and decreases in
current liabilities of $4.1 million.
Cash flow from operations in fiscal 1993 reflected a net loss of $11.4
million partially offset by non-cash items (which include depreciation and
amortization of intangibles of $4.6 million), and reflected a decrease in
accounts receivable and inventory of $5.5 million and $5.5 million,
respectively, and an increase in current liabilities of $6.5 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 the nine
months ended April 30, 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 depending on each system's status within the manufacturing cycle. Advances
from customers increased significantly to $22.1 million at April 30, 1996 from
$12.9 million at July 31, 1995 and from $3.8 million at July 31, 1994 because
the Company's backlog for products increased to $142.8 million from $65.2
million and $30.1 million, respectively. See "Business--Backlog".
Financing and Investing Activities
During fiscal 1995, the Company sold its headquarters facility 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. See Note 11 of Notes to Consolidated
Financial Statements. The Company intends to restructure the existing sale and
leaseback arrangement to include its new administrative facility upon the
completion of construction.
Net cash provided by financing activities for the nine months ended April
30, 1996 was $31.2 million, and net cash used in financing activities for the
same period ended in 1995 was $8.6 million. In the first half of fiscal 1996,
the Company raised approximately $41.6 million before offering expenses in
connection with its IPO. The Company also received interim financing on
foreign sales of $3.5 million from one of its stockholders during the nine
months ended April 30, 1996. See "Sales and Marketing." During that period,
the Company prepaid $9.3 million of its senior secured indebtedness and repaid
$3.8 million of subordinated convertible notes out of the proceeds of the IPO.
Net cash provided by financing activities for fiscal 1995 was $162,000 and
net cash used in financing activities for fiscal 1994 and fiscal 1993 was $2.3
million and $6.0 million, respectively. During fiscal 1995 and fiscal 1994,
the Company repaid $6.0 million and $600,000, respectively, of its senior
secured notes. During fiscal 1994 and 1993, the Company repaid $2.8 million
and $5.2 million, respectively, of a bank loan and other notes payable.
Additionally, during fiscal 1995 and fiscal 1994 the Company received interim
financing on foreign sales of $6.2 million and $507,000, respectively, from
one of its stockholders.
32
<PAGE>
The Company's senior secured notes are due in quarterly installments
maturing in the year 2000 and bear interest at 10.65% per annum. These notes
are secured by substantially all of the Company's assets. The terms of these
notes require the Company to comply with certain financial ratios, minimum net
worth criteria, restrictions on capital expenditures and incurrence of
indebtedness and various other covenants. The Company was in compliance with
all such covenants as of April 30, 1996. The Company also has an excess cash
sharing agreement that requires the Company to make an annual prepayment on
its senior secured notes equal to 50% of its "excess cash," which is based on
the Company's financial performance during the fiscal year and its cash
balance at the end of the year. Pursuant to a prepayment agreement with the
noteholders, no payment will be due under the excess cash sharing agreement
with respect to fiscal 1996. The Company intends to refinance the senior
secured notes and has given notice to the noteholders that it intends to
prepay the notes in full during the fourth quarter of fiscal 1996.
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 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.
Concurrently with the completion of this offering, Intel will purchase $10.0
million of the Company's Common Stock and will receive warrants to purchase
additional shares of Common Stock equal in number to 15% of the shares
purchased. These warrants will be exercisable only if Intel's purchases of
products and services from the Company over the succeeding four years exceed
certain thresholds, or upon the occurrence of certain other conditions.
33
<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."
INTRODUCTION
Etec Systems, Inc. ("Etec" or the "Company") is the world leader in the
production of mask pattern generation equipment for the semiconductor
industry. 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
$2.5 million to $7.5 million each and accessories and upgrades at prices
currently ranging from approximately $1.5 million to $5.0 million each. The
Company also derives significant revenues from service and support of its
installed base of systems. The Company believes that over 230 commercial
electron beam and laser beam mask pattern generation systems are currently
installed outside the former Eastern Bloc, of which over 155 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.
In furtherance of this strategy, the Company acquired substantially all of the
assets of Polyscan, a developer of laser direct imaging systems for large-area
pattern generation applications, in February 1996. 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.
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. Concurrently with the
completion of this offering, Intel will purchase $10.0 million of the
Company's Common Stock and will receive warrants to purchase additional shares
of Common Stock. 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
The worldwide semiconductor industry is large and growing. 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 increase in demand is driven by growth in 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.
34
<PAGE>
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 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.
35
<PAGE>
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 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 and below has
exceeded the capabilities of pattern generation systems designed in the early
1980s,
36
<PAGE>
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. PSM and OPC are still
under development, but as they emerge, the Company believes that they will
lead 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.
37
<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.
38
<PAGE>
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 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 110 remain in service. MEBES systems currently
sell for approximately $5.0 million to $7.5 million.
39
<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]
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. Seven MEBES 4500
systems, including two upgrades from older configurations, have been shipped
to date. See "Risk Factors--Importance of Recently Introduced Products." 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>
40
<PAGE>
- --------
* Represents semiconductor device feature size, in microns, for typical
commercial production application. 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, improving throughput and accuracy, and detects 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 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. Thirty-eight CORE systems had been delivered from 1987 to April
30, 1996, all but one of which were in service as of such date. CORE systems
sell for approximately $2.5 million to $4.0 million. The Company's latest
laser beam system, the ALTA 3000, was first shipped in 1994. 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 application. 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-format masks, and
currently sells for approximately $5.5 million to $7.0 million. Seven ALTA
3000 systems have been shipped to date. See "Risk Factors--Importance of
Recently Introduced Products."
41
<PAGE>
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.
LOGO
[Digitized Pictorial representation of ALTA system.]
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 $1.0 million, and
upgrades currently range in price from approximately $1.5 million to $5.0
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 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.
42
<PAGE>
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 94 field engineers and service
administrators located in Japan, Taiwan, 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 recently implemented a 24-hour, toll-free customer
support hotline and has asked customers for a critical assessment of its
performance in two recent 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 125 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 $28.0 million, $31.5 million and $24.1 million in
fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996,
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.
43
<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]
44
<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.
45
<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
The Company acquired substantially all of the assets of Polyscan, a
development-stage company based in Tucson, Arizona, in February 1996, in
furtherance of its strategy to develop or acquire pattern generation and
lithography-related products that serve additional markets. 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
46
<PAGE>
Company believes 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 never shipped a product and has had
net operating losses since its inception. The Company expects that Etec
Polyscan will continue to experience net 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 155 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. Oki Electric Industries Co. Ltd.
Compugraphics International Ltd. Photronics, Inc.
Dai Nippon Printing Co. Ltd. P.K. Ltd. (formerly Anam S&T Co. Ltd.)
DuPont Photomasks, Inc. Raytheon Company
Fujitsu Ltd. Rockwell International Corp.
Hewlett-Packard Company Samsung Electronics Co., Ltd.
Hoya Corporation Sharp Corporation
Hyundai Electronics Industries Co., Siemens AG
Ltd.
Intel Corporation Sony Corporation
International Business Machines Taiwan Mask Corp.
Corporation
Motorola, Inc. Toppan Printing Company, Ltd.
NEC Corporation Toshiba Corporation
</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 1994, fiscal 1995 and the first nine months of fiscal
1996, sales to the Company's ten largest customers accounted for approximately
76%, 74% and 80% of total revenues, respectively. IBM and Toppan Printing
accounted for approximately 13% and 12%, respectively, of total revenues in
fiscal 1994. DuPont, Dai Nippon Printing and Photronics accounted for
approximately 14%, 14% and 12%, respectively, of total revenues in fiscal
1995. Dai Nippon Printing and Photronics accounted for approximately 19% and
18%, respectively, of total revenues in the nine months
47
<PAGE>
ended April 30, 1996. 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 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. The Company effects sales
in Japan through its wholly-owned subsidiary, Etec Japan. Customer orders for
MEBES equipment 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 percentage of revenue 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 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, Korea, Taiwan and Singapore. QC Optics'
inspection products are used to detect defects in masks, flat panel displays
and magnetic media.
48
<PAGE>
BACKLOG
The Company's backlog for products was approximately $30.1 million, $65.2
million and $142.8 million at July 31, 1994, July 31, 1995 and April 30, 1996,
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 are
subject to penalties, depending upon the time of cancellation. Cancellations
prior to 30 days before estimated shipment are generally subject to charges 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 subject to rescheduling by the customer without penalty.
Accordingly, backlog is not necessarily representative of future sales.
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 $5.1 million, $10.5 million and $12.0 million in
fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996,
respectively, representing 7.4%, 12.7% and 12.2% 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 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 $16.1 million and
$7.3 million for fiscal 1994 and fiscal 1995, respectively, and approximately
$725,000 for the first nine months of fiscal 1996. 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 $5.5 million, $1.3 million and $280,000 during
fiscal 1994, fiscal 1995 and the first nine months of fiscal 1996,
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.
49
<PAGE>
MANUFACTURING
Etec leases a 150,000 square foot design and manufacturing facility 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 sufficient to satisfy the Company's needs for at
least the next eighteen months. 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 22,000 square foot facility in Tucson, Arizona. The Company's
Hayward facility 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 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 manufacturing cycle
time, and manufactured its most recent shipments in 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's
ability to increase its manufacturing capacity in response to any future
increase in demand is limited. 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 the future. Any
disruption of the Company's supply of critical components and subassemblies
50
<PAGE>
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 JEOL and Hitachi. 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 44 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 most 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 five 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 and Patlex Corporation, 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.
51
<PAGE>
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, 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. The Company currently
maintains groundwater monitoring wells on its Hayward, California property,
although it may discontinue monitoring due to the recent concurrence of the
California Regional Water Quality Board in the Company's proposal to cease
groundwater monitoring at the site. See "Risk Factors--Environmental
Regulation."
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 systems currently do not comply
with the additional EU regulations which became effective in January 1996, and
further EU regulations in this area are scheduled to become effective in
January 1997. 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 directly or
through its customers to 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.
52
<PAGE>
LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
EMPLOYEES
As of April 30, 1996, Etec had 639 employees, including 142 in research,
development and engineering-related functions, 191 in manufacturing and
production, 108 in administration, 158 in field service, and 40 in marketing
and sales. Etec's foreign offices employed 121 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 facility under a lease that expires in 2010
unless extended at the Company's option for up to four five-year renewal
periods. The Hayward facility consists of two buildings with a total area of
150,000 square feet. The Company recently broke ground for the construction of
a 60,000-square-foot administrative building in Hayward, which is expected to
be completed in early 1997. The manufacturing building 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 5,000 square feet of
cleanroom space, including six 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 22,000 square foot facility in
Tucson, Arizona under a lease that expires in 2000. This facility is currently
under renovation. When this renovation is completed, the facility will include
4,500 square feet of cleanroom space.
53
<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, Customer Support
Trisha A. Dohren........ 50 Vice President, Human Resources and Administration
Roy A. Earle............ 39 Vice President, Operations
Mark A. Gesley.......... 40 Vice President, Engineering
Philip J. Koen, Jr...... 44 Vice President and Chief Financial Officer
Takeshi (John) Suzuki... 57 President, Etec Japan and Director
Paul A. Warkentin....... 42 Vice President, Marketing
Edward L. Gelbach....... 64 Director
Catherine P. Good-
rich(1)................ 39 Director
Jack H. King(2)......... 61 Director
John McBennett(1)....... 57 Director
Thomas Michael Trent(2). 50 Director
Robert L. Wehrli(2)..... 73 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, Customer Support
since June 1994. 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.
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.
54
<PAGE>
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).
Dr. Gesley has been Vice President, Engineering of Etec since April 1995. 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. He joined Etec in 1988. 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 joined Etec as Vice President, Chief Financial Officer and
Treasurer in December 1993. 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 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.
Ms. Goodrich has been a director of Etec since September 1991. From June
1992 to the present, Ms. Goodrich has been self-employed as a financial
consultant. From July 1981 to May 1992, Ms. Goodrich held various positions
with Oak Management Corp., a venture capital firm. Ms. Goodrich 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. Goodrich
is also a director of Uniphase Corp., Zitel and SanDisk Corporation.
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 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.
55
<PAGE>
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. Mr. Trent has
been a Vice President of Micron, a semiconductor manufacturer, since 1986. 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 joined the Company's Board of Directors in 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.
The Company currently has authorized ten directors. All directors are
elected to hold office until the next annual meeting of stockholders of the
Company and until their successors have been elected. Officers are elected at
the first Board of Directors meeting following the stockholders' meeting at
which the directors are elected and serve at the discretion of the Board of
Directors. There are no family relationships among any of the directors or
executive officers of the Company.
The Company has granted to IBM, Grumman and DuPont observer rights to attend
meetings of the Company's Board of Directors. Grumman's and DuPont's observer
rights expire on December 31, 1996.
The Board of Directors has a Compensation Committee (consisting of Messrs.
King, Trent and Wehrli), which makes recommendations concerning salaries and
incentive compensation for employees of the Company and administers the
Company's incentive compensation and benefit plans, and an Audit Committee
(consisting of Ms. Goodrich and Mr. McBennett) which reviews the results and
scope of the audit and other services provided by the Company's independent
auditors.
COMPENSATION OF DIRECTORS
Ms. Goodrich provided consulting services to the Company from July 1993
until July 1995, for which she received a monthly fee of $2,000. In December
1994, Ms. Goodrich was awarded options to purchase 5,000 shares of Common
Stock at an exercise price of $0.45 per share. Ms. Goodrich exercised these
options in July 1995.
Each director who is not a Company employee is eligible to receive $1,500
for each Board meeting and $500 for each Board committee meeting attended in
person. Directors are also reimbursed for their expenses for each meeting
attended in person and are eligible to participate in the Company's 1995
Directors' Stock Option Plan. See "Stock Option Plans" and "Certain
Transactions."
EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by or paid to the
Company's Chief Executive Officer and to each of the Company's four most
highly compensated executive officers other than the Chief Executive Officer
whose total annual salary and bonus exceeded $100,000, for services rendered
in all capacities to the Company during the fiscal year ended July 31, 1995.
56
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------- ------------
SECURITIES ALL
UNDERLYING OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- --------------------------- ---- ---------- --------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Stephen E. Cooper....... 1995 $ 200,655 $ 93,698 44,000 $ 2,006(1)
President and Chief
Executive Officer
Takeshi (John) Suzuki... 1995 277,610 63,058 16,000 62,710(2)
President, Etec Japan
Philip J. Koen, Jr...... 1995 150,001 68,144 22,000 1,500(1)
Vice President and
Chief Financial Officer
Paul A. Warkentin....... 1995 110,001 35,776 12,000 1,100(1)
Vice President of
Marketing
Trisha A. Dohren........ 1995 105,238 27,258 12,000 1,047(1)
Vice President, Human
Resources and
Administration
</TABLE>
- --------
(1) Represents contributions by the Company under its 401(k) plan.
(2) Represents contributions of approximately $50,000 by the Company to a plan
which provides for payments to Mr. Suzuki during his retirement, pursuant
to an agreement between the Company and Mr. Suzuki entered into in fiscal
1994, and approximately $12,000 for a housing allowance.
The following tables set forth certain information as of July 31, 1995 and
for the fiscal year ended July 31, 1995 with respect to stock options granted
to the individuals named in the Summary Compensation Table above. No stock
appreciation rights have been granted to date.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES
OF STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS(1) OPTION TERM(2)
--------------------------------------------- ---------------------
NUMBER OF % OF
SECURITIES TOTAL OPTIONS
UNDERLYING GRANTED TO EXERCISE
OPTIONS EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% 10%
---- ---------- ------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Stephen E. Cooper....... 44,000 8% $4.00 6/06/05 540,714 965,247
Takeshi (John) Suzuki... 16,000 3% $4.00 6/06/05 196,623 350,999
Philip J. Koen, Jr. .... 10,000 2% $1.70 2/16/05 145,889 242,374
12,000 2% $4.00 6/06/05 147,467 263,249
Paul A. Warkentin....... 12,000 2% $4.00 6/06/05 147,467 263,249
Trisha A. Dohren........ 12,000 2% $4.00 6/06/05 147,467 263,249
OPTION GRANTS IN FISCAL YEAR 1995
</TABLE>
- --------
(1) These options have a term of ten years, subject to earlier termination in
certain events related to termination of employment. Each of these options
was granted at an exercise price equal to the fair market value of the
underlying stock on the date of grant, as determined by the Board of
Directors. They vest as to 25% of the underlying shares on each
anniversary of the date of grant, becoming fully vested on the fourth
anniversary of the date of grant.
(2) Based on assumed rates of appreciation from the Company's initial public
offering price of $10.00 per share. The 5% and 10% assumed rates of
appreciation are mandated by the rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection of
the future price of the Company's Common Stock. There can be no assurance
that any of the values reflected in the table will be achieved.
57
<PAGE>
AGGREGATED OPTION EXERCISES IN FISCAL YEAR 1995 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS
FISCAL YEAR- AT FISCAL YEAR-
END(#)(1) END($)(2)
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
- ------------------------ --------------- ----------- ------------- -----------------
<S> <C> <C> <C> <C>
Stephen E. Cooper....... 20,000 $25,000.00 42,500/81,500 $405,875/$622,125
Takeshi (John) Suzuki... -- -- 13,334/16,000 127,340/96,000
Philip J. Koen, Jr...... 33,333 41,666.25 0/88,667 0/791,670
Paul A. Warkentin....... -- -- 15,124/44,663 144,434/383,932
Trisha A. Dohren........ -- -- 14,167/47,833 135,295/414,205
</TABLE>
- --------
(1) Includes unexercisable options granted effective as of June 1995, as
follows: Mr. Cooper, 44,000; Mr. Koen, Dr. Warkentin and Ms. Dohren,
12,000; and Mr. Suzuki, 16,000.
(2) There was no public trading market for the Common Stock at July 31, 1995.
Accordingly, these values have been calculated on the basis of the
Company's initial public offering price of $10.00 per share, minus the
exercise price.
EMPLOYMENT AGREEMENTS AND TERMINATION AGREEMENTS
None of the executive officers named in the Summary Compensation Table has
an employment agreement with the Company, except that Mr. Cooper is entitled
to six months' salary continuance if the Company terminates his employment at
its discretion, and Mr. Koen and Ms. Dohren are each entitled to 26 weeks of
salary continuance if the Company terminates such employees other than for
cause.
STOCK OPTION PLANS
As of April 30, 1996, options to purchase an aggregate of 1,424,830 shares
of Common Stock were outstanding under the Company's 1990 Executive Stock
Plan, 1990 Employee Stock Option Plan, 1994 Employee Stock Option Plan, 1995
Omnibus Incentive Plan and 1995 Directors' Stock Option Plan, at exercise
prices ranging from $0.45 to $17.88 per share. Options to purchase 39,403
shares granted under the nonstatutory stock option agreements for former
holders of ATEQ securities were also outstanding as of such date, at an
average exercise price of $0.45. The weighted average exercise price of the
foregoing options was $3.25. As of April 30, 1996, 746,193 shares of Common
Stock were available for future issuance under the above plans.
1995 Omnibus Incentive Plan. The 1995 Omnibus Incentive Plan of the Company
(the "1995 Plan") was adopted by the Company's Board of Directors in July 1995
and approved by the stockholders in September 1995, and became effective upon
the consummation of the Company's initial public offering.
The 1995 Plan provides for awards in the form of restricted shares, stock
units, stock appreciation rights ("SARs") and options. Options issued under
the 1995 Plan may take the form of incentive stock options ("ISOs") intended
to qualify for preferential tax treatment under section 422 of the Internal
Revenue Code (the "Code"), and nonstatutory stock options ("NSOs") that do not
qualify for such treatment. A total of 1,000,000 shares of Common Stock have
been reserved for issuance under the 1995 Plan.
58
<PAGE>
The 1995 Plan is administered by the Compensation Committee of the Board of
Directors, which is comprised of directors of the Company who are
disinterested within the meaning of Rule 16b-3 of the Exchange Act. The Board
of Directors may appoint another committee, which may consist of any two or
more members of the Board of Directors, to administer the 1995 Plan with
respect to employees who are not officers or directors. Subject to the
limitations set forth in the 1995 Plan, the applicable committee has the
authority to determine to whom options will be granted or shares will be sold
or awarded and to determine the terms and conditions of each grant, sale or
award. Options and rights to purchase shares under the 1995 Plan are
nontransferable.
Employees and consultants of the Company are eligible for awards under the
Plan, except that only employees are eligible for the grant of ISOs. No
participant may be granted options covering more than 100,000 shares under the
1995 Plan in any calendar year, and no participant may be awarded more than
100,000 SARs under the 1995 Plan in any calendar year.
Vesting of restricted shares, stock units, SARs or stock options will be
specified in individual agreements. Stock options become immediately
exercisable in the event of death or total and permanent disability, and
vesting of stock options may be accelerated in the event of a merger,
consolidation or sale of substantially all of the assets of the Company that
constitutes a change in the control of the Company, or in the event of the
employee's retirement or any other event determined by the administering
committee.
The committee may grant options that are exercisable prior to becoming
vested, subject to the Company's right to repurchase unvested shares.
The exercise price of NSOs granted under the 1995 Plan may vary in
accordance with a predetermined formula. The exercise price of an ISO cannot
be less than 100% of the fair market value of the Common Stock on the date of
grant and, if the ISO is granted to a holder of more than 10% of the voting
power of the Company, not less than 110% of such fair market value. The
maximum term of an ISO is 10 years and, if the ISO is granted to a holder of
more than 10% of the voting power of the Company, five years.
At April 30, 1996, options to purchase 452,496 shares had been granted under
the 1995 Plan, and an additional 547,504 shares are available for future
grants. If any restricted shares, stock units or options granted under the
1995 Plan are forfeited, or if options or SARs terminate prior to exercise,
then they will again become available for awards under the 1995 Plan. The 1995
Plan automatically terminates 10 years from the date of shareholder approval.
1995 Directors' Stock Option Plan. The 1995 Directors' Stock Option Plan of
the Company (the "1995 Directors' Plan") was approved by the Board of
Directors in June 1995 and approved by the stockholders in September 1995. The
purpose of this plan is to allow the Company to recruit and retain qualified
outside directors to serve on the Company's Board of Directors.
Under the 1995 Directors' Plan, each director of the Company who is not an
employee of the Company (and who is not precluded by his or her employer from
receiving such grant) will receive a one-time grant of options to purchase
8,000 shares of the Company's Common Stock upon first joining the Board of
Directors (or, in the case of the Board members serving as of the plan's
adoption, upon the original grant of options under the plan by the Board of
Directors). Thereafter, each non-employee director will receive, during his or
her tenure as a director, annual grants of options covering 3,000 shares upon
each anniversary of such director's initial grant of options. To date, options
to purchase 38,000 shares have been granted under the 1995 Directors' Plan,
and an additional 112,000 shares are available for future grants.
Under the 1995 Directors' Plan, each option's exercise price is 100% of the
fair market value of the underlying shares on the grant date. One-time grants
vest in two installments, with half of the shares vesting immediately and the
other half vesting upon the first anniversary of the grant date; however,
after the Company becomes a reporting company under the Exchange Act, then
half of the shares will vest six months after the grant date and the other
half will vest on the first anniversary of the grant date. Annual grants of
3,000 options vest on the first anniversary of the grant date.
59
<PAGE>
Other Plans. The Company's 1994 Employee Stock Option Plan of Etec Systems,
Inc. (the "1994 Plan") was adopted by the Company's Board of Directors in June
1994, and subsequently approved by the stockholders. The 1994 Plan provides
for the grant of both ISOs and NSOs. Selected employees, directors, officers
and consultants of the Company are eligible for the grant of NSOs. Only
employees are eligible for the grant of ISOs. Options granted under the 1994
Plan generally vest over a four-year period. The 1994 Plan was amended in July
1995 to provide that options become immediately exercisable in the event of
death or total and permanent disability. The 1994 Plan is administered by the
Company's Compensation Committee. Under the 1994 Plan, options to purchase
442,621 shares of Common Stock were outstanding at April 30, 1996, with an
additional 721 shares available for future grants.
The 1990 Employee Stock Option Plan of Etec (the "1990 Plan") was adopted by
the Company's Board of Directors in March 1990, and subsequently approved by
its stockholders. The 1990 Plan was amended in November 1991. The 1990 Plan
provides for the grant of both ISOs and NSOs. Selected employees, directors,
officers and consultants of the Company are eligible for the grant of NSOs.
Only employees are eligible for the grant of ISOs. Options granted under the
1990 Plan generally vest over a four-year period. Under the 1990 Plan, options
to purchase 386,930 shares of Common Stock were outstanding at April 30, 1996,
with an additional 50,270 shares available for future grants. The 1990 Plan is
administered by the Compensation Committee.
The 1990 Executive Stock Plan of Etec (the "Executive Stock Plan") was
adopted by the Company's Board of Directors in March 1990, and subsequently
approved by its stockholders. The Executive Plan provides for direct sales or
awards of stock and for the grant of both ISOs and NSOs. Only executive
employees of the Company are eligible for the grant of options or for sales or
awards of shares under the Executive Stock Plan. Options granted under the
Executive Stock Plan vested ratably over three years on August 1, 1991, August
1, 1992 and August 1, 1993, subject to performance targets. Under the
Executive Stock Plan, options to purchase 104,783 shares of Common Stock were
outstanding at April 30, 1996, with an additional 20,408 shares available for
future grants. The Executive Stock Plan is administered by the Company's
Compensation Committee.
In connection with the Company's acquisition of ATEQ, options to purchase
Common Stock were issued to holders of options to purchase ATEQ Common Stock
and to the management employees of ATEQ under nonstatutory stock option
agreements. All options granted under these agreements are currently
exercisable.
EMPLOYEE STOCK PURCHASE PLAN
The 1995 Employee Stock Purchase Plan of Etec Systems, Inc. (the "ESPP") was
approved by the Board of Directors of the Company in July 1995 and approved by
the stockholders in September 1995. The ESPP provides employees of the Company
with the opportunity to purchase Common Stock through payroll deductions. A
total of 500,000 shares of Common Stock has been reserved for issuance, of
which 13,934 shares had been issued as of April 30, 1996. All employees are
eligible to participate in the ESPP.
Eligible employees may participate by authorizing payroll deductions of up
to 10% of their cash compensation. Amounts withheld will be applied at the end
of every six-month accumulation period to purchase shares of Common Stock, but
not more than 250 shares per accumulation period. The value of Common Stock
that may be purchased by any participant in a calendar year is limited to
$25,000. Participants may withdraw their contributions at any time before
stock is purchased.
The purchase price of Common Stock is determined as being 85% of the lower
of (i) the market price of the Common Stock immediately before the beginning
of the applicable offering period or (ii) the market price of Common Stock at
the time of the purchase. In general, the offering period is 18 months long,
but a new offering period begins every six months. Thus up to three offering
periods may be in effect at the same time. An offering period continues to
apply to a participant for the full 18 months, unless the market price of the
Common Stock is lower when a subsequent offering period begins. In that event,
the subsequent offering period automatically becomes the applicable period for
purposes of determining the purchase price.
60
<PAGE>
SENIOR MANAGEMENT INCENTIVE PLAN
Senior management employees who hold key positions are selected by the
Company's Board of Directors to participate in the Company's Senior Management
Incentive Plan ("SMIP"). Bonus ranges are established based on the position of
the employee and computed as a percentage of the employee's salary. A
performance goal based on the Company's return on net capital employed is set
by the Board of Directors and the amount of the bonus is calculated based on
the employees bonus range and the performance of the Company compared with the
performance goal.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Nevada General Corporation Law (the "Nevada Law") permits a
corporation's Articles of Incorporation to limit the liability of its
directors or officers for monetary damages for breach of their fiduciary duty
as directors or officers, except for liability (i) for acts or omissions that
involve intentional misconduct, fraud or a knowing violation of law, or (ii)
for unlawful payment of dividends or unlawful stock repurchases or
redemptions. The Company's Articles of Incorporation limit the liability of
the Company's directors and officers to the fullest extent permitted by the
Nevada Law.
The Nevada Law also permits a corporation to indemnify each of its directors
and officers against expenses, including attorneys' fees, judgments, fines and
amounts paid in settlement, reasonably incurred in connection with a
threatened or pending suit or proceeding arising out of such person's status
as a director and officer, so long as he or she acted in good faith and in a
manner that he or she reasonably believed to be in or not opposed to the
Company's best interests and, with respect to a criminal proceeding, had no
reason to believe that his or her conduct was unlawful. The Company's Articles
of Incorporation and By-Laws provide that the Company shall indemnify its
directors and officers to the fullest extent permitted by the Nevada Law. The
Company has entered into separate indemnification agreements with its
directors and executive officers that could require the Company, among other
things, to indemnify them against certain liabilities that may arise by reason
of their status or service as directors or officers and to advance expenses
that they may incur in any proceeding as to which they are entitled to be
indemnified. The Company also maintains directors' and officers' liability
insurance covering all of its directors and executive officers against
liabilities arising out of their service as directors or officers.
The Company believes that the indemnification and insurance arrangements
described above will enable it to continue to attract and retain qualified
individuals to serve as directors and officers.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors, consisting of Messrs.
King, Trent and Wehrli, makes recommendations concerning salaries incentive
compensation for the Company's employees and administers its incentive
compensation and benefit plans. Mr. King is the President and Chief Executive
Officer and a director of Zitel. In connection with the LBO, the Company sold
Zitel 10,000 shares of Series B Preferred Stock at a price of $100 per share.
Such shares converted at the Company's option into 205,128 shares of Common
Stock upon the consummation of the Company's initial public offering. In
addition, the Company paid Zitel approximately $590,000 in 1994 under a
technology transfer agreement. Mr. Trent is Vice President of Micron. In
connection with the LBO, the Company sold Micron 50,000 shares of Series B
Preferred Stock at a price of $100 per share. Such shares converted at the
Company's option into 1,025,640 shares of Common Stock upon the consummation
of the Company's initial public offering. See "Certain Transactions."
61
<PAGE>
CERTAIN TRANSACTIONS
Sales of Preferred Stock. From March 1990 through December 1994, the Company
issued shares of its Preferred Stock in private transactions, as follows:
260,000 shares of Series B Preferred Stock at a price of $100 per share in
connection with the LBO in March 1990; 81,278 shares of Series C Preferred
Stock in connection with the ATEQ acquisition in November 1991; and 50,000
shares of Series D Preferred Stock to IBM in January 1994 in exchange for the
cancellation of approximately $7.1 million in principal and accrued interest
on a note from the Company. In July 1995 the Company entered into an agreement
with IBM and Perkin-Elmer, under which the Company exchanged three senior
subordinated notes owed to IBM and Perkin-Elmer in the aggregate principal
plus interest amount of approximately $19.7 million for 105,641 shares of
Series B Preferred Stock and two new senior subordinated notes that were
repaid out of the proceeds of the Company's IPO. In July 1995, the Company
also issued 75,753 shares of Series E Preferred Stock in satisfaction of the
Company's obligation to repurchase the minority interest in Etec Japan. Upon
the consummation of the Company's IPO, each share of Series B Preferred Stock,
Series C Preferred Stock Series D Preferred Stock and Series E Preferred Stock
was converted into approximately 20.51 shares of Common Stock. The purchasers
of the Preferred Stock included the following holders of more than 5% of each
class of the Company's Preferred Stock, determined immediately prior to the
conversion of the Preferred Stock into Common Stock, and entities associated
with the Company's directors:
<TABLE>
<CAPTION>
SHARES
-----------------------------------
SERIES B SERIES C SERIES D SERIES E
-------- -------- -------- --------
<S> <C> <C> <C> <C>
IBM...................................... 90,251 -- 50,000 --
Perkin-Elmer............................. 115,390 -- -- --
DuPont................................... 50,000 -- -- --
Grumman.................................. 50,000 -- -- --
Micron................................... 50,000 -- -- --
Zitel.................................... 10,000 -- -- --
Asset Management Associates 1984......... -- 4,103 -- --
CH Partners III.......................... -- 10,651 -- --
Hambrecht & Quist(1)..................... -- 8,370 -- --
Institutional Venture Partners........... -- 13,245 -- --
Oak Investment Partners III.............. -- 6,818 -- --
Sequoia Capital IV....................... -- 5,799 -- --
Kanematsu Corporation.................... -- -- -- 22,902
Japan Associated Finance Co., Ltd........ -- -- -- 52,851
</TABLE>
- --------
(1) Includes 4,156 shares of Series C Preferred Stock purchased by H&Q
Ventures IV; 4,156 shares purchased by H&Q Ventures International C.V.;
and 58 shares purchased by five other entities affiliated with Hambrecht &
Quist.
The above stockholders have certain rights to have their Company securities
registered under the Securities Act of 1933, as amended (the "Securities
Act"). See "Description of Capital Stock--Registration Rights."
IBM. IBM has been a customer of the Company. See "Business--Customers." In
1990, in return for a license of certain technology, the Company issued a
$10.0 million subordinated note to IBM. In January 1994, IBM exchanged $5.0
million of the note's principal balance and approximately $2.1 million in
accrued interest for 50,000 shares of the Company's Series D Preferred Stock.
In February 1995, in connection with the Company's sale and leaseback
transaction, the note was amended to extend the payment schedule and to
condition the Company's obligation to make payments on the achievement of
certain operating cash flow and cash balance tests. The Company also agreed to
make certain prepayments in accordance with an excess cash sharing agreement.
62
<PAGE>
In July 1995, IBM exchanged its senior subordinated note for 40,251 shares
of Series B Preferred Stock and a new subordinated convertible note with a
principal amount of approximately $1.6 million. Such note was repaid out of
the proceeds of the Company's initial public offering.
In connection with the LBO, the Company licensed certain technology from IBM
and IBM agreed to purchase two systems employing the licensed technology. IBM
placed a purchase order for these systems and advanced the Company
approximately $6.0 million toward its purchase commitment in fiscal 1992. In
fiscal 1994, IBM canceled its purchase order for the two systems, at which
time the Company had incurred approximately $2.9 million in manufacturing
costs for the relevant systems. In fiscal 1995, the Company and IBM agreed (i)
to apply $2.4 million of the $6.0 million advance toward the purchase of a
CORE system, (ii) that the Company would purchase an older system from IBM for
$200,000, (iii) that the Company would be entitled to the remaining $3.4
million, (iv) that the Company released IBM from its obligation to purchase
two systems employing the licensed technology, and (v) that IBM released the
Company from claims relating to the alleged failure of an ALTA 3000 system
that IBM had ordered from the Company to achieve certain performance
specifications by an agreed date.
In connection with an agreement for services provided in conjunction with
the Company's research and development contract with ARPA/NAVAIR, the Company
paid IBM approximately $400,000, $1.8 million and $800,000 during fiscal 1993,
1994 and 1995, respectively.
In 1990, the Company agreed to lease software and computer equipment from
IBM under an agreement which expired in November 1995. The aggregate amount of
payments over the lease's term was approximately $285,000.
Perkin-Elmer. In March 1990, the Company issued its Series A Payment-in-Kind
Preferred Stock (the "Series A Preferred Stock") and a $6.0 million senior
subordinated note to Perkin-Elmer in partial payment of the purchase price in
the LBO. The principal of the note was reduced to $4.4 million in December
1991, in settlement of purchase price adjustments for the LBO. In July 1992,
the Company redeemed all outstanding shares of Series A Preferred Stock for
$250,000 in cash and a $5.8 million senior subordinated note.
In February 1995, in connection with the Company's sale and leaseback
transaction, both senior subordinated notes held by Perkin-Elmer were amended
in a manner similar to the amendment of the IBM subordinated note, as
described above.
In July 1995, Perkin-Elmer exchanged its senior subordinated notes for
65,390 shares of Series B Preferred Stock and a new subordinated convertible
note with a principal amount of approximately $2.0 million. This note was
repaid out of the proceeds of the Company's initial public offering.
Grumman. In March 1990, the Company entered into a purchase agreement with
Grumman 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. During 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.
Zitel. Zitel has been a supplier of memory boards and subsystems to the
Company. In 1994, the Company purchased approximately $590,000 of pattern
memory boards, beam sequencers and other related materials from Zitel.
63
<PAGE>
DuPont. DuPont has been a customer of the Company. See "Business--
Customers." DuPont has also supplied masks to the Company for use by the
Company in developing products. In 1995 and the first nine months of fiscal
1996, the Company purchased approximately $200,000 and $183,000, respectively,
of photomasks from DuPont.
Other. In September 1993, the Company sold 50,000 shares of Common Stock to
Stephen E. Cooper, the Company's President and Chief Executive Officer, for a
purchase price of $0.45 per share. Mr. Cooper executed a promissory note in
the amount of the purchase price; the note is payable over a ten-year period
in semi-annual installments. The Company also granted Mr. Cooper options to
purchase a total of 100,000 shares of Common Stock in January and December
1993 at an exercise price of $0.45 per share, of which he exercised 23,000 in
1995, and options to purchase 44,000 shares at an exercise price of $4.00 per
share in June 1995, of which none has been exercised.
The Company has granted certain of its other named executive officers and
directors stock options with exercise prices below the public offering price,
as follows: Trisha Dohren, a total of 50,000 shares in 1993 and 1994 at an
exercise price of $0.45 and 12,000 shares in 1995 at an exercise price of
$4.00; Philip Koen, Jr., 100,000 shares in 1993 at an exercise price of $0.45,
and 10,000 shares at an exercise price of $1.70 and 12,000 shares at an
exercise price of $4.00 in 1995; John Suzuki, 13,333 shares in 1991 at an
exercise price of $0.45 and 16,000 in 1995 at an exercise price of $4.00; Paul
Warkentin, 45,568 shares in 1991, 1993 and 1994 at an exercise price of $0.45,
2,216 shares in connection with the acquisition of ATEQ in 1991 at an exercise
price of $0.01, and 12,000 shares in 1995 at an exercise price of $4.00;
Edward Gelbach and Robert Wehrli, 8,000 shares in 1995, under the 1995
Directors' Stock Option Plan, at exercise prices of $1.70 and $4.00; Jack King
and Catherine Goodrich, 8,000 shares in 1995 at exercise prices of $1.70 and
$4.00 and 3,000 shares in 1996 at an exercise price of $12.125, under the 1995
Directors' Stock Option Plan; and all directors and executive officers as a
group, 2,216 shares at an exercise price of $0.01, 208,901 shares at an
exercise price of $0.45, 34,000 shares at an exercise price of $1.70, 44,000
shares at an exercise price of $4.00, and 6,000 shares at an exercise price of
$12.125. Some of the above options have been exercised.
Effective July 31, 1995, the Company repurchased shares of Etec Japan's
common stock held by John Suzuki, a director of the Company and President of
Etec Japan, for approximately 35.4 million Japanese yen (approximately
$400,000 as of July 31, 1995).
Upon his retirement as Chief Executive Officer in July 1993, Charles Minihan
entered into a three-year consulting agreement with the Company providing for
payments of $650 per day of service, up to 100 days per year. In connection
with his retirement from the Board of Directors in March 1995, the Company
entered into a one-year consulting agreement providing for aggregate payments
to Mr. Minihan of $90,000 and loaned him $30,000 toward the payment of the
exercise price of his outstanding options. This loan was forgiven in July
1995.
The Company believes that the foregoing transactions were in its best
interests. It is the Company's current policy that it will enter into
transactions with officers, directors, five percent stockholders and their
affiliates only if such transactions are approved by a majority of the
disinterested independent directors, are on terms no less favorable to the
Company than could be obtained from unaffiliated parties and are reasonably
expected to benefit the Company.
For information concerning indemnification of directors and officers, see
"Management--Limitation of Liability and Indemnification Matters."
64
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of April 30, 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 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..................... 2,876,940 15.9% 1,197,439 1,679,501 8.8%
Old Orchard Road
Armonk, NY 10504
The Perkin-Elmer Corporation..... 2,366,971 13.1% 862,824 1,504,147 7.9%
761 Main Avenue
Norwalk, CT 06859
Grumman Aerospace Corporation(3). 1,175,640 6.5% 631,770 543,870 2.8%
c/o Northrop Grumman Corporation
2301 West 120th Street
Hawthorne, CA 90250
Micron Technology, Inc........... 1,025,640 5.7% 205,128 820,512 4.3%
8000 S. Federal Way
Boise, ID 83707
DuPont Photomasks, Inc. ......... 1,025,640 5.7% 0 1,025,640 5.4%
1007 Market Street
Wilmington, DE 19898
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------
Frank E. Abboud(4)............... 32,512 * 20,000 12,512 *
Stephen E. Cooper(5)............. 174,715 * 30,000 144,715 *
Roy A. Earle..................... 0 -- 0 0 --
Philip J. Koen, Jr.(6)........... 72,166 * 0 72,166 *
Trisha A. Dohren(7).............. 31,333 * 0 31,333 *
Edward L. Gelbach(8)............. 8,000 * 0 8,000 *
Mark A. Gesley(9)................ 13,254 * 10,000 3,254 *
Catherine P. Goodrich(10)........ 13,000 * 0 13,000 *
Jack H. King(8)(11).............. 8,000 * 0 8,000 *
John McBennett(12)............... 0 -- 0 0 --
Takeshi (John) Suzuki(13)........ 30,667 * 0 30,667 *
Thomas Michael Trent(14)......... 0 -- 0 0 --
Paul A. Warkentin(15)............ 29,028 * 0 29,028 *
Robert L. Wehrli(8).............. 8,000 * 0 8,000 *
All directors and executive
officers as a group (14
persons)(16).................... 420,675 2.3% 60,000 360,675 1.9%
</TABLE>
65
<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>
Asset Management Associates 1984....... 84,164 * 33,822 50,342 *
John G. Balletto....................... 39,404 * 15,835 23,569 *
William E. Boeing, Jr.................. 64,183 * 25,793 38,390 *
Cable & Howse Investment Partners(17).. 222,127 1.2% 89,265 132,862 *
Charles River Partnership V............ 80,040 * 32,165 47,875 *
CIGNA Mezzanine Partners II, L.P....... 258,936 1.4% 86,310 172,626 *
Connecticut General Life Insurance
Company............................... 176,072 * 58,690 117,382 *
Joseph P. Donahue...................... 69,816 * 39,895 29,921 *
Stephen Emmanuele(18).................. 33,792 * 13,792 20,000 *
Foreign & Colonial Enterprise Trust
PLC................................... 33,128 * 13,313 19,815 *
Hambrecht & Quist(19).................. 171,709 * 40,000 131,709 *
Institutional Venture Partners(20)..... 271,794 1.5% 109,224 162,570 *
Charles Minihan........................ 129,650 * 79,375 50,275 *
O'Donnell & Masur, L.P. ............... 62,789 * 25,233 37,556 *
Oak Investment Partners III............ 139,856 * 56,203 83,653 *
Orien I, L.P. ......................... 49,805 * 20,015 29,790 *
R.A. Properties, Ltd. ................. 64,164 * 25,785 38,379 *
Robert L. Smith(21).................... 35,070 * 35,070 0 --
Union Venture Corporation.............. 62,789 * 25,233 37,556 *
Venrock Associates(22)................. 78,666 * 31,613 47,053 *
Vista II Limited Partnership........... 58,646 * 23,568 35,078 *
Richard Worthington(23)................ 39,356 * 20,000 19,356 *
Zitel Corporation...................... 205,128 1.1% 110,232 94,896 *
Other Selling Stockholders(24)......... 288,775 1.6% 132,408 156,367 *
</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) Shares outstanding after the offering include $10.0 million of Common
Stock to be purchased by Intel upon consummation of this offering
(408,163 shares, assuming an offering price of $24.50).
(3) Includes 150,000 shares issuable upon exercise of warrants.
(4) Includes 30,512 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(5) Includes 63,000 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(6) Includes 38,833 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(7) Includes 21,333 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(8) Represents shares subject to stock options exercisable on April 30, 1996
or within 60 days thereafter.
(9) Includes 11,921 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(10) Includes 8,000 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(11) Excludes 205,128 shares held by Zitel. Mr. King, as President, Chief
Executive Officer and a director of Zitel, may be deemed to share voting
and investment power with respect to such shares.
(12) Excludes 2,366,971 shares held by Perkin-Elmer, 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.
(13) Includes 17,334 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(14) Excludes 1,025,640 shares held by Micron, of which Mr. Trent is a Vice
President. Mr. Trent has indicated to the Company that he does not have
or share voting or dispositive power over such shares.
(15) Includes 29,013 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
66
<PAGE>
(16) Includes 243,946 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(17) Consists of 218,481 shares beneficially owned by CH Partners III, of
which 87,800 are being offered; 2,748 shares beneficially owned by Cable
& Howse Investment Partners, of which 1,104 are being offered; and 898
shares beneficially owned by CH Partners II, of which 361 are being
offered.
(18) Includes 13,792 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(19) Consists of 85,251 shares beneficially owned by H&Q Ventures IV, of which
39,856 are being offered; 307 shares beneficially owned by H&Q Ventures
III, of which 144 are being offered; and 85,251 shares, 348 shares, 328
shares, 143 shares and 61 shares beneficially owned by H&Q Ventures
International C.V., Hamquist, H&Q Investors, Hamco Capital Corp. and H&Q
Alliance Fund, respectively.
(20) Consists of 267,712 shares beneficially owned by Institutional Venture
Partners III, of which 107,584 are being offered, and 4,082 shares
beneficially owned by Institutional Venture Management III, of which
1,640 are being offered.
(21) Includes 18,404 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(22) Consists of 54,297 shares beneficially owned by Venrock Associates, of
which 21,820 are being offered, and 24,369 shares beneficially owned by
Venrock Associates II, L.P., of which 9,793 are being offered.
(23) Includes 19,146 shares subject to stock options exercisable on April 30,
1996 or within 60 days thereafter.
(24) Consists of 55 individuals and institutions, 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 73,628 shares subject to stock options exercisable on April
30, 1996 or within 60 days thereafter.
67
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 30,000,000 shares of
Common Stock, $0.01 par value per share, and 10,000,000 shares of Preferred
Stock, $0.01 par value per share.
COMMON STOCK
As of April 30, 1996, there were 18,075,037 shares of Common Stock
outstanding held by approximately 330 stockholders of record.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, including the
election of directors, and do not have cumulative voting rights. Accordingly,
the holders of a majority of the shares of Common Stock entitled to vote in
any election of directors can elect all of the directors standing for
election. Subject to preferences that may be applicable to any then
outstanding Preferred Stock, holders of Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors
out of funds legally available therefor. See "Dividend Policy." Upon a
liquidation, dissolution or winding up of the Company, the holders of Common
Stock will be entitled to share ratably in the net assets legally available
for distribution to stockholders after the payment of all debts and other
liabilities of the Company, subject to the prior rights of any Preferred Stock
then outstanding. Holders of Common Stock have no preemptive or conversion
rights and there are no redemption or sinking fund provisions applicable to
the Common Stock. All outstanding shares of Common Stock are, and the Common
Stock to be outstanding upon completion of this offering will be, fully paid
and nonassessable.
PREFERRED STOCK
The Board of Directors has the authority, without further action by the
stockholders, to issue from time to time additional shares of Preferred Stock
in one or more series and to fix the number of shares, designations,
preferences, powers, and relative, participating, optional or other special
rights and the qualifications or restrictions thereof. The preferences,
powers, rights and restrictions of different series of Preferred Stock may
differ with respect to dividend rates, amounts payable on liquidation, voting
rights, conversion rights, redemption provisions, sinking fund provisions, and
purchase funds and other matters. The issuance of Preferred Stock could
decrease the amount of earnings and assets available for distribution to
holders of Common Stock or affect adversely the rights and powers, including
voting rights, of the holders of Common Stock, and may have the effect of
delaying, deferring or preventing a change in control of the Company. The
Company has no present plan to issue any shares of Preferred Stock.
WARRANTS
As of April 30, 1996, warrants to purchase 376,997 shares of Common Stock
were outstanding. These consist of the following: warrants to purchase 150,000
shares exercisable at $1.70 per share which were issued to Grumman in April
1995 pursuant to a settlement agreement and which expire on March 4, 2010;
warrants to purchase 212,418 shares exercisable at $0.45 per share which were
issued in connection with the sale and leaseback of the Company's Hayward
property and which expire on November 15, 2003; and warrants to purchase 1,064
shares and 13,515 shares which expire on October 14, 1996 and October 14,
2001, respectively.
Concurrently with the completion of this offering, Intel will receive
warrants to purchase shares of Common Stock equal in number to 15% of the
shares purchased by Intel for $10.0 million. See "Investment by Intel." The
warrants will become exercisable only if Intel's purchases of products and
services from the Company during the succeeding four years exceed certain
thresholds, or upon the occurrence of certain other conditions. The warrants'
exercise price will be equal to the price per share paid by Intel for the
shares purchased concurrently with the completion of this offering.
68
<PAGE>
REGISTRATION RIGHTS
Following this offering, the holders of 9,327,550 shares of Common Stock,
(including the shares of Common Stock sold to Intel concurrently herewith) and
the holders of warrants to purchase 212,418 shares of Common Stock, or their
permitted transferees, are entitled to certain rights with respect to the
registration of such shares (the "Registrable Shares") under the Securities
Act. Two years after the completion of this offering, Intel will be entitled
to request that the Company file a registration statement under the Securities
Act covering the resale of some or all of its Registrable Shares subject to
certain conditions. The Company is required to bear all costs associated with
such registration.
In addition, if the Company proposes to register any of its securities under
the Securities Act for its own account, the holders of Registrable Shares are
entitled to notice of such registration and are entitled to include
Registrable Shares therein, provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of shares
included in such registration. The Company is required to bear all costs
associated with such registration.
The shares offered herein by the Selling Stockholders are in exercise of the
registration rights of the Selling Stockholders. All other registration rights
have either been waived or been limited by the underwriters.
In addition, holders of 1,195,565 Registrable Shares have the right
commencing October 23, 1996 to request the Company to file a registration
statement covering such shares or the resale of such shares. The Company is
required to bear all costs associated with such registration.
NEVADA ANTI-TAKEOVER LAWS AND CERTAIN CHARTER PROVISIONS
Nevada's "Combination with Interested Stockholders Statute," which applies
to Nevada corporations having at least 200 stockholders, prohibits an
"interested stockholder" from entering into a "combination" with the
corporation, unless certain conditions are met. A "combination" includes (a)
any merger with an "interested stockholder," (b) any consolidation, sale,
lease, exchange, mortgage, pledge, transfer or other disposition of assets, in
one transaction or a series of transactions, to an "interested stockholder,"
having: (i) an aggregate market value equal to 5% or more of the aggregate
market value of the corporation's assets; (ii) an aggregate market value equal
to 5% or more of the aggregate market value of all outstanding shares of the
corporation; or (iii) representing 10% or more of the earning power or net
income of the corporation, or (c) any issuance or transfer of shares of the
corporation or its subsidiaries having an aggregate market value equal to 5%
or more of the aggregate market value of all the outstanding shares of the
corporation. An "interested stockholder" is a person who, together with
affiliates and associates, beneficially owns (or within the prior three years,
did beneficially own) 10% or more of the corporation's voting stock.
Stockholders who owned 10% or more of the corporation's stock on January 1,
1991 are exempt.
A corporation to which the statute applies may not engage in a "combination"
within three years after the interested stockholder acquired its shares,
unless the combination or the interested stockholder's acquisition of shares
was approved by the board of directors before the interested stockholder
acquired the shares. If this approval is not obtained, then after the three-
year period expires, the combination may be consummated with the approval of
the board of directors or a majority of the voting power held by disinterested
stockholders, or if the consideration to be paid by the interested stockholder
is at least equal to the higher of: (i) the highest price per share paid by
the interested stockholder within the three years immediately preceding the
date of the announcement of the combination or in the transaction in which it
became an interested stockholder, whichever is higher; (ii) the market value
per common share on the date of announcement of the combination or the date
the interested stockholder acquired the shares, whichever is higher; or (iii)
if higher for the holders of preferred stock, the highest liquidation value of
the preferred stock.
Nevada's "Control Share Acquisition Statute" prohibits an acquiror, under
certain circumstances, from voting shares of a target corporation's stock
after crossing certain threshold ownership percentages, unless the acquiror
obtains the approval of the target corporation's stockholders. The statute
specifies three thresholds:
69
<PAGE>
at least one-fifth but less than one-third, at least one-third but less than a
majority, and a majority or more, of the outstanding voting power. Once an
acquiror crosses one of the above thresholds, shares which it acquired in the
transaction taking it over the threshold or within ninety days become "Control
Shares" which are deprived of the right to vote until a majority of the
disinterested stockholders restore that right. If the stockholders fail to
restore voting rights to the acquiror, then the corporation may, if so
provided in its Articles of Incorporation or By-Laws, call certain of the
acquiror's shares for redemption. The Company's Articles of Incorporation and
By-Laws do not currently permit it to call an acquiror's shares for redemption
under these circumstances. The Control Share Acquisition Statute also provides
that in the event the stockholders restore full voting rights to a holder of
Control Shares which owns a majority of the voting stock, then all other
stockholders who do not vote in favor of restoring voting rights to the
Control Shares may demand payment for the "fair value" of their shares (which
is generally equal to the highest price paid in the transaction subjecting the
stockholder to the statute). The Control Share Acquisition Statute only
applies to Nevada corporations with at least 200 stockholders, including at
least 100 record stockholders who are Nevada residents, and which do business
directly or indirectly in Nevada.
The provisions described above, together with the ability of the Board of
Directors to issue Preferred Stock as described under "--Preferred Stock," may
have the effect of delaying or deterring a change in the control or management
of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Chemical Mellon
Shareholder Services.
70
<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
18,983,200 shares of Common Stock (assuming that Intel's concurrent purchase
of shares occurs at a price of $24.50 per share and assuming no exercise of
options and warrants to purchase 1,841,230 shares). Of these, 9,573,850 shares
of Common Stock (including the 4,600,000 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 9,409,350 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. These
shares may be sold in the public market only if registered or pursuant to an
an exemption from registration such as Rules 144 or 701 under the Securities
Act.
Of the Restricted Shares, 48,347 are held by three officers and one director
of the Company who have agreed not to sell, directly or indirectly, any shares
owned by them for a period of 60 days from the date of this Prospectus, 22,448
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 July 20, 1996 and 8,669,475 are held by certain
other stockholders (including the Company's remaining officers and directors
and the Selling Stockholders) who have agreed not to sell, directly or
indirectly, any shares owned by them until January 20, 1997 (collectively, the
"Lock-up Restrictions") without prior written consent of the Company and
Robertson, Stephens & Company. Of the remaining 669,080 Restricted Shares not
subject to the Lock-up Restrictions, 2,811 are eligible for immediate sale in
the public market in reliance on Rule 144(k), 8,106 shares are eligible for
sale, subject to the restrictions of Rule 144 and Rule 701 and 658,163 will
become eligible for sale upon satisfaction of certain requirements under Rule
144 including the holding period requirements which presently will not be
satisfied prior to February 1998.
Commencing July 20, 1996, upon the expiration of Lock-up Restrictions (or
earlier upon the consent of the Company and Robertson, Stephens & Company),
5,286 Restricted Shares will become eligible for sale without restriction in
reliance on Rule 144(k), and 17,162 Restricted Shares will become eligible for
sale subject to the restrictions of Rule 144 and Rule 701. Commencing 60 days
after the offering, upon the expiration of Lock-up Restrictions (or earlier
upon the consent of the Company and Robertson, Stephens & Company), 38,347
additional Restricted Shares will become eligible for sale subject to the
restrictions of Rule 144 and Rule 701. Commencing January 20, 1997, upon the
expiration of Lock-up Restrictions (or earlier upon the consent of the Company
and Robertson, Stephens & Company) 1,095,255 additional Restricted Shares will
become eligible for sale without restriction in reliance on Rule 144(k), and
5,518,565 Restricted Shares will become eligible for sale subject to the
restrictions of Rule 144.
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 189,832 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 Securities and Exchange Commission (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
71
<PAGE>
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
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 April 30, 1996, options to
purchase 1,424,830 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
April 30, 1996, 13,934 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 in 1991, and as of April 30, 1996, 30,770 shares of Common
Stock have been issued upon exercise of such warrants and are available for
resale in the public market.
Certain other holders of Restricted Shares have the right to cause the
company to register the sale of their shares under the Securities Act. If such
registration rights are exercised, the shares can be sold without any holding
period or sales volume limitation under the Securities Act. See "Description
of Capital Stock--Registration Rights."
The holders of certain additional shares of Common Stock will be entitled to
cause the Company to register the sale of such shares under the Securities
Act, subject in some cases to the lock-up agreements described above. 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. See "Description of Capital Stock--
Registration Rights."
72
<PAGE>
UNDERWRITING
The Underwriters named below, acting through their representatives,
Robertson, Stephens & Company LLC and Needham & Company, Inc. (the
"Representatives"), have severally agreed with the Company and the Selling
Stockholders subject to the terms and conditions of the underwriting
agreement, to purchase from the Company and the Selling Stockholders the
numbers of shares of Common Stock set forth opposite their respective names
below. The Underwriters are committed to purchase and pay for all of such
shares if any are purchased:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Robertson, Stephens & Company LLC ...............................
Needham & Company, Inc...........................................
---------
Total.......................................................... 4,600,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose to offer shares of Common Stock to the public at
the offering price set forth on the cover page of this Prospectus and to
certain dealers at such price less a concession of not in excess of $ per
share, of which $ per share may be reallowed to other dealers. After
commencement of the public offering, the public offering price, concession and
reallowance to dealers may be varied by the Representatives. No such reduction
shall change the amount of proceeds to be received by the Company as set forth
on the cover page of the Prospectus.
The Company has granted the Underwriters the option, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 690,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of the
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the
same percentage of such additional shares as the number of shares of Common
Stock to be purchased by it shown in the above table bears to the total number
of shares of Common Stock offered hereby. The Company will be obligated,
pursuant to such option, to sell such shares to the Underwriters to the extent
such option is exercised. The Underwriters may exercise such option only to
cover over-allotments made in connection with the sale of Common Stock offered
hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the Underwriters may be required
to make in respect thereof.
Except for the Common Stock to be sold in this offering, the Company has
agreed not to offer, sell or dispose of any Common Stock or any rights to
acquire Common Stock, subject to certain exceptions, prior to the expiration
of days from the date of this Prospectus, without the prior written consent
of Robertson, Stephens & Company LLC. Officers and directors of the Company
holding an aggregate of approximately shares have agreed not to offer,
sell or otherwise dispose in the public market of their shares of Common Stock
owned at the time of this offering during a period of 60 days following the
date of this Prospectus, and certain other stockholders (including the Selling
Stockholders) holding an aggregate of shares have agreed not to sell any
shares owned by them until January 20, 1997, without the prior written consent
of the Company and Robertson, Stephens & Company LLC. See "Shares Eligible for
Future Sale."
The Representatives have informed the Company that they do not intend to
sell the Common Stock to any accounts over which they have discretionary
authority.
The rules of the Securities and Exchange Commission (the "Commission")
generally prohibit the Underwriters and other members of the selling group
from making a market in the Company's Common Stock
73
<PAGE>
during the "cooling-off" period immediately preceding the commencement of
sales in the offering. The Commission has, however, adopted an exemption from
these rules that permits passive market making under certain conditions. These
rules permit an Underwriter or other member of the selling group, if any, to
continue to make a market in the Company's Common Stock subject to the
conditions, among others, that its bid not exceed the highest bid by a market
maker not connected with the offering and that its net purchases on any one
trading day not exceed prescribed limits. Pursuant to these exemptions,
certain Underwriters and other members of the selling group, if any, may
engage in passive market making in the Company's Common Stock during the
cooling-off period.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company 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, 1994 and July
31, 1995, and for each of the three years in the period ended July 31, 1995
and the financial statements of Polyscan, Inc. as of March 31, 1995 and for
the year then ended, 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.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which constitutes part of the Registration Statement, does
not contain all of the information set forth in the Registration Statement and
the exhibits and schedules thereto. For further information with respect to
the Company and the Common Stock offered hereby, reference is hereby made to
such Registration Statement, exhibits and schedules. Statements contained in
this Prospectus regarding the contents of any contract or other document are
not necessarily complete; with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. A copy
of the Registration Statement, including the exhibits and schedules thereto,
may be inspected without charge at the principal office of the Commission, 450
Fifth Street, N.W., Washington, D.C. 20549, and copies of such material may be
obtained from such office upon payment of the fees prescribed by the
Commission.
74
<PAGE>
ETEC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ETEC SYSTEMS, INC.
Report of Independent Accountants......................................... F-2
Consolidated Balance Sheets at July 31, 1994, July 31, 1995 and April 30,
1996 (unaudited)......................................................... F-3
Consolidated Statements of Operations for the years ended July 31, 1993,
1994 and 1995 and for the nine months ended April 30, 1995 and 1996
(unaudited).............................................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended July 31, 1993, 1994 and 1995 and for the nine months ended April
30, 1996 (unaudited)..................................................... F-5
Consolidated Statements of Cash Flows for the years ended July 31, 1993,
1994 and 1995 and for the nine months ended April 30, 1995 and 1996
(unaudited).............................................................. F-6
Notes to Consolidated Financial Statements................................ F-7
POLYSCAN, INC.
Report of Independent Accountants......................................... F-23
Balance Sheets at March 31, 1995 and January 31, 1996 (unaudited)......... F-24
Statements of Operations and Accumulated Deficits for the year ended March
31, 1995 and for the ten months ended January 31, 1996 (unaudited)....... F-25
Statements of Cash Flows for the year ended March 31, 1995 and for the ten
months ended January 31, 1996 (unaudited)................................ F-26
Notes to Financial Statements............................................. F-27
PRO FORMA FINANCIAL STATEMENTS (Unaudited)
Pro Forma Consolidated Statement of Operations for the year ended July 31,
1995 with explanatory notes thereon...................................... F-32
Pro Forma Consolidated Statement of Operations for the nine months ended
April 30, 1996 with explanatory notes thereon............................ F-33
</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 statement 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, 1994, 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, 1995 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 21, 1995
F-2
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31, PRO FORMA
------------------ APRIL 30, APRIL 30,
1994 1995 1996 1996
-------- -------- ----------- -----------
ASSETS (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........ $ 6,571 $ 23,638 $ 28,031 $ 38,031
Marketable securities............ -- -- 12,965 12,965
Accounts receivable, less
allowance for doubtful accounts
of $1,436, $1,270 and $1,156.... 20,216 24,572 40,638 40,638
Inventory........................ 21,685 24,238 44,032 44,032
Prepaid expenses and other cur-
rent assets..................... 1,329 1,972 1,151 1,151
Deferred tax assets.............. 659 944 16,345 16,345
-------- -------- -------- --------
Total current assets............. 50,460 75,364 143,162 153,162
Property, plant and equipment, net. 8,140 6,474 10,288 10,288
Other assets....................... 4,182 4,146 4,032 4,632
-------- -------- -------- --------
$ 62,782 $ 85,984 $157,482 $168,082
======== ======== ======== ========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK, AND
COMMON STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities:
Current maturities of long-term
debt............................ $ 12,441 $ 5,386 $ 1,336 $ 1,336
Accounts payable................. 7,098 6,575 13,380 13,380
Accrued and other liabilities.... 23,324 38,671 51,052 51,052
Taxes payable.................... 1,413 1,517 3,342 3,342
-------- -------- -------- --------
Total current liabilities...... 44,276 52,149 69,110 69,110
Long-term debt, less current
portion........................... 31,251 16,866 7,625 7,625
Deferred gain on sale of asset..... -- 6,015 5,682 5,682
Other liabilities.................. 1,523 1,972 1,688 1,688
-------- -------- -------- --------
Total liabilities.............. 77,050 77,002 84,105 84,105
-------- -------- -------- --------
Minority interest.................. 7,711 -- -- --
-------- -------- -------- --------
Mandatorily redeemable convertible
preferred stock................... 54,362 76,397 -- --
-------- -------- -------- --------
Commitments and Contingencies (Note
11)
Common stockholders' equity
(deficit):
Common Stock, par value $0.01 per
share; 20,000,000 shares
authorized at July 31, 1994 and
1995, 30,000,000 shares
authorized at April 30, 1996;
and 711,171, 910,402 and
18,075,037 issued and
outstanding and 18,483,200 pro
forma........................... 7 9 181 185
Warrants......................... -- 562 496 1,096
Additional paid-in capital....... 324 400 123,176 133,172
Notes receivable from
stockholders.................... (89) (55) (47) (47)
Cumulative translation
adjustment...................... 1,528 2,936 70 70
Accumulated deficit.............. (78,111) (71,267) (50,499) (50,499)
-------- -------- -------- --------
Total common stockholders'
equity (deficit).............. (76,341) (67,415) 73,377 83,977
-------- -------- -------- --------
$ 62,782 $ 85,984 $157,482 $168,082
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JULY 31, APRIL 30,
-------------------------- ------------------
1993 1994 1995 1995 1996
-------- ------- ------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Products..................... $ 31,650 $40,731 $51,395 $ 38,143 $ 73,983
Services..................... 26,932 27,979 31,521 22,902 24,052
-------- ------- ------- -------- --------
58,582 68,710 82,916 61,045 98,035
-------- ------- ------- -------- --------
Cost of revenue:
Cost of products............. 25,450 25,559 27,015 20,756 37,606
Cost of services............. 16,488 17,670 20,604 14,666 16,794
-------- ------- ------- -------- --------
41,938 43,229 47,619 35,422 54,400
-------- ------- ------- -------- --------
Gross profit................... 16,644 25,481 35,297 25,623 43,635
-------- ------- ------- -------- --------
Operating expenses:
Research, development and
engineering................. 11,034 5,102 10,497 6,952 11,991
Write-off of in-process
technology acquired......... -- -- -- -- 6,269
Selling, general and
administrative.............. 10,049 10,803 13,397 9,194 14,973
-------- ------- ------- -------- --------
21,083 15,905 23,894 16,146 33,233
-------- ------- ------- -------- --------
Income (loss) from operations.. (4,439) 9,576 11,403 9,477 10,402
Interest expense............... (5,880) (5,115) (4,238) (3,369) (1,462)
Other income (expense), net.... 789 (71) 175 (97) 2,143
-------- ------- ------- -------- --------
Income (loss) before income tax
provision (benefit), minority
interest and extraordinary
items......................... (9,530) 4,390 7,340 6,011 11,083
Income tax provision (benefit). 1,500 2,316 2,289 1,600 (11,063)
Minority interest in earnings
of subsidiary................. 379 462 527 393 --
-------- ------- ------- -------- --------
Income (loss) before
extraordinary items........... (11,409) 1,612 4,524 4,018 22,146
Extraordinary gain (loss) on
early extinguishment of debt.. -- -- 5,412 -- (300)
-------- ------- ------- -------- --------
Net income (loss).............. (11,409) 1,612 9,936 4,018 21,846
Accretion of mandatorily
redeemable convertible
preferred stock............... 2,740 2,946 3,092 2,319 1,078
-------- ------- ------- -------- --------
Net income (loss) attributable
to Common Stockholders........ $(14,149) $(1,334) $ 6,844 $ 1,699 $ 20,768
======== ======= ======= ======== ========
Per share data:
Income (loss) before
extraordinary items......... $ (0.94) $ 0.12 $ 0.31 $ 0.28 $ 1.25
Extraordinary gain (loss).... -- -- 0.37 -- (0.02)
-------- ------- ------- -------- --------
Net income (loss)............ $ (0.94) $ 0.12 $ 0.68 $ 0.28 $ 1.23
======== ======= ======= ======== ========
Weighted average common shares. 12,168 14,008 14,594 14,594 17,750
======== ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL CUMULATIVE
----------------- PAID-IN NOTES TRANSLATION ACCUMULATED
SHARES AMOUNT WARRANTS CAPITAL RECEIVABLE ADJUSTMENT DEFICIT TOTAL
---------- ------ -------- ---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at July 31,
1992................... 642,544 $ 6 $ -- $ 270 $ (72) $ 724 $(62,628) $(61,700)
Issuance of Common
Stock.................. 1,473 -- -- 3 (3) -- -- --
Payments on notes
receivable............. -- -- -- -- 14 -- -- 14
Cumulative translation
adjustment............. -- -- -- -- -- 260 -- 260
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
redemption value....... -- -- -- -- -- -- (2,740) (2,740)
Net loss................ -- -- -- -- -- -- (11,409) (11,409)
---------- ----- ------- -------- ----- ------- -------- --------
Balance at July 31,
1993................... 644,017 6 -- 273 (61) 984 (76,777) (75,575)
Issuance of Common
Stock.................. 67,154 1 -- 29 (23) -- -- 7
Payments on notes
receivable............. -- -- -- 22 (5) -- -- 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 -- 324 (89) 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 9 562 400 (55) 2,936 (71,267) (67,415)
Stock offering
(unaudited)............ 4,471,667 45 -- 40,696 -- -- -- 40,741
Shares issued in
conjunction with the
Polyscan acquisition
(unaudited)............ 350,000 4 -- 3,496 -- -- -- 3,500
Issuance of warrants
(see Note 5)
(unaudited)............ -- -- 1,031 -- -- -- -- 1,031
Exchange of Ateq stock
for Common Stock
(unaudited)............ 66,915 -- -- -- -- -- -- --
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
(unaudited)............ -- -- -- -- -- -- (1,078) (1,078)
Conversion of
Mandatorily Redeemable
Convertible Preferred
Stock (unaudited)...... 11,747,057 118 -- 77,357 -- -- -- 77,475
Payments on notes
receivable (unaudited). -- -- -- -- 8 -- -- 8
Cumulative translation
adjustment (unaudited). -- -- -- -- -- (2,866) -- (2,866)
Issuance under stock
plans (unaudited)...... 93,988 1 -- 134 -- -- -- 135
Exercise of warrants
(unaudited)............ 435,008 4 (1,097) 1,093 -- -- -- --
Net income (unaudited).. -- -- -- -- -- -- 21,846 21,846
---------- ----- ------- -------- ----- ------- -------- --------
Balance at April 30,
1996 (unaudited)....... 18,075,037 $ 181 $ 496 $123,176 $ (47) $ 70 $(50,499) $ 73,377
========== ===== ======= ======== ===== ======= ======== ========
</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>
NINE MONTHS ENDED
YEARS ENDED JULY 31, APRIL 30,
--------------------------- -------------------
1993 1994 1995 1995 1996
-------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........... $(11,409) $ 1,612 $ 9,936 $ 4,018 $ 21,846
Adjustments to reconcile
net income (loss) to net
cash (used in) provided by
operating activities:
Extraordinary (gain) loss
on early extinguishment
of debt.................. -- -- (5,412) -- 300
Write-off of in-process
technology acquired...... -- -- -- -- 6,269
Depreciation and
amortization............. 4,605 3,790 2,951 2,456 2,165
Deferred taxes............ (547) (103) (442) (580) (15,401)
Provision for doubtful
accounts................. 950 74 -- 100 --
Minority interest in
earnings of subsidiary... 379 462 527 393 --
Changes in assets and
liabilities:
Accounts receivable..... 5,506 (4,676) (2,745) (3,374) (19,512)
Inventory............... 5,466 7,890 (3,217) 516 (17,473)
Prepaid expenses and
other assets........... 595 (1,347) (18) 1,785 1,216
Accounts payable........ (3,865) (2,703) (1,178) (4,726) 6,786
Accrued and other
liabilities............ 10,346 (1,425) 8,697 2,430 9,285
-------- ------- -------- -------- ---------
Net cash (used in)
provided by operating
activities............. 12,026 3,574 9,099 3,018 (4,519)
-------- ------- -------- -------- ---------
Cash flows from investing
activities:
Purchase of marketable
securities, net............ -- -- -- -- (12,965)
Loan to Polyscan, Inc, net
and other.................. -- -- (825) -- (637)
Proceeds from sale of
plant...................... -- -- 10,969 10,969 --
Capital expenditures for
property and equipment..... (656) (1,957) (2,915) (1,365) (7,947)
-------- ------- -------- -------- ---------
Net cash provided by (used
in) investing activities. (656) (1,957) 7,229 9,604 (21,549)
-------- ------- -------- -------- ---------
Cash flows from financing
activities:
Repayment of debt and
capital leases............. (5,208) (2,850) (6,169) (6,126) (13,099)
Financing from (repayment
to) a related party........ (834) 507 6,219 (2,575) 3,497
Proceeds from issuance of
Common Stock............... 14 24 112 88 40,884
-------- ------- -------- -------- ---------
Net cash provided by (used
in) financing activities. (6,028) (2,319) 162 (8,613) 31,282
-------- ------- -------- -------- ---------
Effect of exchange rate
changes on cash............ (27) 39 577 674 (821)
Net change in cash and cash
equivalents................ 5,315 (663) 17,067 4,683 4,393
Cash and cash equivalents
at beginning of the
period..................... 1,919 7,234 6,571 6,571 23,638
-------- ------- -------- -------- ---------
Cash and cash equivalents
at the end of the period... $ 7,234 $ 6,571 $ 23,638 $ 11,254 $ 28,031
======== ======= ======== ======== =========
Supplemental disclosures of
cash flow information:
Cash paid during the period
for interest............... $ 3,431 $ 3,827 $ 3,342 $ 2,840 $ 1,552
======== ======= ======== ======== =========
Cash paid during the period
for income taxes........... $ 462 $ 2,559 $ 2,831 $ 2,439 $ 2,513
======== ======= ======== ======== =========
Supplemental schedule of
noncash financing
activities:
Conversion of Senior
subordinated debt into
mandatorily redeemable
convertible preferred
stock...................... $ -- $ 7,099 $ 10,564 $ -- $ --
======== ======= ======== ======== =========
Conversion of mandatorily
redeemable convertible
preferred stock to Common
Stock...................... $ -- $ -- $ -- $ -- $ 77,475
======== ======= ======== ======== =========
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 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.
Certain Equity Transactions
The pro forma presentation reflects the issuance of 408,163 new shares
(assuming a purchase price equal to the closing stock price on May 20, 1996,
which was $24.50), to an investor in the fourth quarter of fiscal 1996 and the
commitment to issue warrants to purchase additional shares of Common Stock
equal in number to 15% of the shares purchased at an exercise price equal to
the price of the shares purchased. The pro forma effect of this transaction is
unaudited and has been reflected on the accompanying consolidated balance
sheet at April 30, 1996. See Note 14.
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 revenue and expenses are translated using
weighted average rates. Gains and losses from foreign currency translations
are included as a separate component of stockholders' equity (deficit).
Foreign currency transactions gains and losses are included as a component of
other income (expense), net. Such gains and losses have not been significant.
For the purposes of presentation, the Company has indicated its interim
fiscal periods as ending on April 30, 1995 and 1996. As the Company's annual
fiscal period is accounted for on a 52-53 week year, the interim period
financial statements included herein represent interim results through April
28, 1995 and April 26, 1996, respectively.
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.
Interim Results (Unaudited)
The accompanying balance sheet at April 30, 1996 and the statements of
operations, stockholders' equity and cash flows for the nine-month periods
ended April 30, 1995 and April 30, 1996, are unaudited. In the opinion of
management, these statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting of normal
recurring adjustments, necessary for the fair statement of the results for the
interim periods. The results of operations and cash flows for the interim
periods are not necessarily indicative of the results to be expected for any
interim period or for the year ending July 31, 1996.
Revenue Recognition
Product revenue is generally recognized upon shipment. A provision for
installation and estimated future warranty costs is recorded at the time
revenue is recognized. Revenue associated with retrofitting machines is
generally recognized upon completion of the retrofit. Service revenue is
deferred and is recognized on a straight-line basis over the service period of
the related contract.
F-7
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 its fair value is
recorded as a separate component of stockholders' equity.
At April 30, 1996, the fair value of the Company's investments approximated
cost. At April 30, 1996, $21.0 million of investments are included in cash and
cash equivalents on the balance sheet. The investment portfolio at April 30,
1996 is comprised of investments in commercial paper, money market funds, U.S.
Government obligations, and corporate debentures.
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 furniture, fixtures, and equipment. Assets held under capital leases are
amortized using the straight-line method over the shorter of their estimated
useful life of three to five years or the term of the related lease. Leasehold
improvements are amortized over the term of the related lease or the estimated
useful life, if shorter.
Capitalization of Software
The Company capitalizes substantially all costs related to the purchase of
software and its implementation which include purchased software, hardware,
consulting fees, and use of certain specified Company resources. As of April
30, 1996, $1.6 million of the software had been capitalized and is included in
machinery and equipment.
Research, Development and Engineering
Research, development and engineering costs are expensed as incurred. As
more fully described in Note 8, 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 cost is incurred. In
the aggregate, the Company has received funding of approximately $11.0
million, $16.1 million and $7.3 million during the year ended July 31, 1993,
1994 and 1995, respectively and $6.7 million and $725,000 for the nine months
ended April 30, 1995 and 1996, respectively. The Company has recorded
approximately $9.3 million, $13.9 million and $6.1 million of this funding as
an offset to research, development and engineering costs during the year ended
July 31, 1993, 1994 and 1995 and $5.5 million and $725,000 during the nine
months ended April 30, 1995 and 1996. The Company has recorded approximately
$1.7 million, $2.2 million and $1.2 million, respectively, as an offset to
selling, general and administrative expenses during the year ended July 31,
1993, 1994 and 1995.
F-8
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company accounts for income taxes in accordance with the liability
approach.
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 significant 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
79%, 76%, 74% and 80% of revenues in fiscal 1993, fiscal 1994, fiscal 1995 and
the nine months ended April 30, 1996.
At July 31, 1994, outstanding receivables from three customers represented
20%, 14% and 13%, 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. At April 30, 1996,
outstanding receivables from four customers represented 21%, 21%, 20% and 10%,
respectively, of the Company's accounts receivable.
Net Income (Loss) Per Share
Net income (loss) per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period. Common
equivalent shares for the nine months ended April 30, 1996 consist of stock
options and warrants using the treasury stock method except when antidilutive.
Common equivalent shares for the years ending July 31, 1993, 1994 and 1995 and
the nine months ended April 30, 1995 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 IPO date, are included in the
computation of net income (loss) per share for the years ending July 31, 1993,
1994 and 1995 and the nine months ended April 30, 1995, as if they were
outstanding for the entire period.
F-9
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JULY 31,
---------------- APRIL 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Inventory:
Purchased parts............................ $ 4,127 $ 5,703 $13,253
Work-in-process............................ 11,398 10,855 20,309
Finished parts and assemblies.............. 6,160 7,680 10,470
------- ------- -------
$21,685 $24,238 $44,032
======= ======= =======
Property, plant and equipment:
Land....................................... $ 863 $ -- $ --
Buildings.................................. 4,102 693 1,849
Machinery and equipment.................... 11,964 14,938 18,768
------- ------- -------
16,929 15,631 20,617
Less accumulated depreciation.............. (8,789) (9,157) (10,329)
------- ------- -------
$ 8,140 $ 6,474 $10,288
======= ======= =======
Accrued and other liabilities:
Customer advances.......................... $ 3,785 $12,898 $22,107
Accrued employee costs..................... 3,355 4,362 4,699
Accrued warranty and installation.......... 2,459 2,960 4,982
Deferred service revenue................... 2,510 1,066 629
Payable to related party................... 3,550 8,936 11,405
Other accrued liabilities.................. 7,665 8,449 7,230
------- ------- -------
$23,324 $38,671 $51,052
======= ======= =======
</TABLE>
NOTE 3--LONG-TERM DEBT:
<TABLE>
<CAPTION>
JULY 31,
--------------- APRIL 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Long-term debt:
Senior secured notes payable................ $24,864 $18,706 $8,961
Senior subordinated notes payable to Perkin-
Elmer...................................... 11,683 1,979 --
Senior subordinated note payable to IBM..... 7,145 1,567 --
------- ------- ------
Total debt.................................. 43,692 22,252 8,961
Less current maturities..................... 12,441 5,386 1,336
------- ------- ------
$31,251 $16,866 $7,625
======= ======= ======
</TABLE>
Senior Secured Notes Payable
The senior secured notes payable of approximately $9.0 million bears
interest at 10.65% per annum which is payable quarterly. The note is secured
by substantially all of the Company's assets. The note is payable in
installments over the next four fiscal years. The terms of the senior secured
note payable require
F-10
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company to comply with certain financial and restrictive covenants
including maintenance of certain financial ratios and minimum net worth
criteria and restrictions on capital expenditures, indebtedness and dividends.
The Company was in compliance with the covenants as of April 30, 1996.
In February 1995, as part of a sale and leaseback of its Hayward, California
facility, the Company entered into an excess cash sharing agreement with the
holders of the senior secured notes. This agreement required that the Company
make an annual prepayment on its senior secured notes equal to 50% of its
"excess cash," which, as defined in the agreement, is based on the Company's
financial performance during the fiscal year and its cash balance at the end
of the year. At July 31, 1995, there was no payment due under this agreement.
The $5.0 million prepayment on the Company's senior secured debt in January
1996 satisfied any excess cash payment that would have been due under the
agreement at July 31, 1996.
Minimum annual repayments of the senior secured notes payable are as follows
(in thousands):
<TABLE>
<S> <C>
Three months ending July 31, 1996.................................. $ 191
Fiscal year ending:
1997............................................................. 1,832
1998............................................................. 2,750
1999............................................................. 2,750
2000............................................................. 1,438
------
$8,961
======
</TABLE>
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 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 reflects 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.
The Series B mandatorily redeemable convertible preferred stock was
converted upon the closing of the initial public offering on October 24, 1995,
into 825,660 and 1,341,331 shares of common stock, respectively. The notes
were repaid in October 1995.
F-11
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4--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,
-----------------------
1993 1994 1995
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Series B, 260,000 shares designated, issued and
outstanding in 1993 and 1994; 365,641 shares
designated, issued and outstanding at July 31,
1995............................................. $33,323 $35,465 $48,172
Series C, 86,400 shares designated, 81,278 shares
issued and outstanding........................... 10,996 11,593 12,190
Series D, 50,000 shares designated, issued and
outstanding...................................... -- 7,304 7,656
Series E, 75,753 shares designated, issued and
outstanding...................................... -- -- 8,379
------- ------- -------
$44,319 $54,362 $76,397
======= ======= =======
</TABLE>
All of the series of mandatorily redeemable convertible preferred stock were
converted upon completion of the initial public offering on October 24, 1995
into 11,747,057 common shares.
NOTE 5--STOCKHOLDERS' EQUITY:
Warrants
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 and $0.01 per share, respectively. Upon
completion of the initial public offering these warrants were exchanged for
warrants to purchase common stock. At April 30, 1996, 52 and 659 of these
warrants are exercisable into 1,064 and 13,515 shares of Common Stock,
respectively. These warrants expire on October 14, 1996 and on October 14,
2001, respectively.
In February 1995, in conjunction with entering into a sale and leaseback
agreement (Note 11), 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.
During fiscal 1992 and 1993, the Company issued warrants to Cigna to
purchase 307,341 and 21,875 shares of the Company's common stock at $0.70 per
share, respectively, in connection with its senior secured notes. During the
nine months ended April 30, 1996, Cigna received the right to acquire 105,794
additional shares of Common Stock pursuant to the terms of the Warrant
Agreement. Subsequently, in February 1996, 435,008 shares of Common Stock were
issued upon exercise of such warrants for an aggregate exercise price of and
proceeds to the Company in the amount of $230,000.
F-12
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Debt issuance costs in the amount of $1.1 million were recorded upon the
issuance of warrants which are being amortized over the remaining term of the
senior secured notes. During the second quarter of fiscal 1996, the Company
made a $5.0 million prepayment on its outstanding debt resulting in the
accelerated amortization of deferred financing costs and recognition of an
extraordinary loss in the amount of $300,000.
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. (See
Note 10--Related Party Transactions.)
NOTE 6--INCOME TAXES:
The components of income (loss) before provision for income taxes and
minority interest are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1993 1994 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic.......................................... $(12,950) $ (353) $ 3,401
Foreign........................................... 3,420 4,743 3,939
-------- ------- -------
$ (9,530) $ 4,390 $ 7,340
======== ======= =======
</TABLE>
The component of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
------------------------
1993 1994 1995
------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
U.S.............................................. $ -- $ 5 $ 200
Foreign.......................................... 2,046 2,359 2,481
State............................................ 1 55 50
------ ------- -------
2,047 2,419 2,731
Deferred:
Foreign.......................................... (547) (103) (442)
------ ------- -------
Provision for income taxes......................... $1,500 $ 2,316 $ 2,289
====== ======= =======
</TABLE>
The provision for income taxes differs from the amount computed by applying
the statutory U.S. federal income tax rate as follows (in thousands):
<TABLE>
<CAPTION>
JULY 31,
-------------------------
1993 1994 1995
-------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax provision (benefit) at U.S. statutory rate.. $ (3,240) $ 1,493 $ 2,496
State income taxes, net of federal income tax
benefit........................................ -- 36 33
Purchase accounting adjustments resulting from
differences between tax basis and book basis of
assets acquired................................ 1,248 -- --
Change in the valuation allowance............... 3,156 -- (1,182)
Foreign earnings taxed at higher rates.......... 336 644 700
Alternative minimum tax and other............... -- 143 242
-------- ------- -------
Total......................................... $ 1,500 $ 2,316 $ 2,289
======== ======= =======
</TABLE>
The Company recorded a tax benefit of $11.1 million for the nine months
ended April 30, 1996. The benefit reflects the release in the third fiscal
quarter of $15.4 million of valuation allowances previously recorded against
F-13
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. The provision for income taxes for the nine months ended
April 30, 1996 otherwise includes taxes on foreign earnings as the Company
continues to utilize net operating loss ("NOL") carryforwards in the U.S.
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
JULY 31,
---------------------------- APRIL 30,
1993 1994 1995 1996
-------- -------- -------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Current:
Nondeductible accruals and
reserves...................... $ 12,774 $ 12,547 $ 11,229 $14,762
Uniform capitalization
adjustment to inventory....... 1,121 1,542 1,536 1,667
Revenue recognized for tax
return purposes and deferred
for financial statements...... 893 1,028 2,031 324
Net operating loss
carryforward.................. -- -- -- 9,552
Valuation allowance............ (14,115) (14,458) (13,852) (9,960)
-------- -------- -------- -------
Net current deferred tax asset. 673 659 944 16,345
-------- -------- -------- -------
Noncurrent:
Book depreciation in excess of
tax depreciation.............. 3,050 3,037 4,609 3,790
Net operating loss
carryforwards................. 21,482 21,228 14,743 --
Other.......................... 393 655 1,110 899
Valuation allowance............ (24,644) (24,522) (19,907) (4,134)
-------- -------- -------- -------
Net noncurrent deferred tax
asset......................... 281 398 555 555
-------- -------- -------- -------
Net deferred tax asset....... $ 954 $ 1,057 $ 1,499 $16,900
======== ======== ======== =======
</TABLE>
At April 30, 1996, the Company had NOL carryforwards for federal income tax
purposes of approximately $27.3 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 proposed public offering will result in a cumulative change in
ownership of the Company in excess of 50% and as a consequence the utilization
of NOLs will be subject to limitation.
NOTE 7--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 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
F-14
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 initial public offering, the 75,753 shares of Series E mandatorily
redeemable convertible preferred stock were converted to 1,553,898 shares of
common stock.
NOTE 8--RESEARCH, DEVELOPMENT AND ENGINEERING CONTRACTS:
In November 1992, the Company entered into a cost reimbursement research and
development contract with ARPA/NAVAIR under which the Company was entitled to
receive approximately $22 million. In connection with this contract, funding
in the amount of approximately $6.0 million, $10.3 million, $5.7 million and
$5.7 million was recognized and billed during the years ended July 31, 1993,
1994 and 1995, and the nine months ended April 30, 1995. The Company did not
receive any funding under this contract during the nine months ended April 30,
1996. The Company also received $400,000 from ARPA/NAVAIR under another
contract during the year ended July 31, 1993. Costs incurred during each of
these periods approximated billings and are included in research, development
and engineering and general and administrative expenses.
During the years ended July 31, 1993, 1994 and 1995, and the nine months
ended April 30, 1996, 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 $4.6 million, $5.8 million and $1.6 million and $1 million
and $725,000 during the years ended July 31, 1993, 1994 and 1995, and the nine
months ended April 30, 1995 and 1996, respectively. Costs of approximately
$12.8 million, $7.5 million and $3.8 million and $2.6 million and $2.9 million
for these projects were included in research and development expense during
the years ended July 31, 1993, 1994 and 1995, and the nine months ended
April 30, 1995 and 1996, respectively.
Etec Polyscan, Inc. ("Etec Polyscan"), a wholly owned subsidiary of the
Company, has a cost reimbursement research and development contract with the
United States Department of Defense, Advanced Research Projects Agency
("ARPA"), pursuant to which Etec Polyscan is entitled to receive approximately
$3.9 million. Funding is due in three phases with approximately $1.2 million,
$1.4 million and $1.3 million being due for each of the respective phases.
There are deliverables at the end of each phase. As of April 30, 1996. Etec
Polyscan is in the process of completing phase I and had received
approximately $1.2 million in funding and is awaiting approval from ARPA for
phase II. Approximately $1.2 million in funding which had been received as of
the date of the acquisition of Polyscan, Inc. has been deferred and is
included in accrued and other liabilities. Since the date of the acquisition,
the Company has incurred costs of $411,000 under this development contract.
In February 1996, Etec Polyscan was authorized to proceed and incur costs of
$207,000 by MCM-D Consortium in anticipation of the Consortium being awarded a
contract to be funded by ARPA to develop technology for a large format
maskless exposure system. As of April 30, 1996, no costs have been incurred
under this agreement.
NOTE 9--EMPLOYEE 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.
F-15
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 in the case of
employees owning more than 10 percent of the total combined voting of all
classes of outstanding stock of the Company or any of its subsidiaries whereby
the option price must be at least 110 percent of the fair market value.
Options generally vest annually over a four-year period and expire over terms
not exceeding 10 years.
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, except that options
granted to an employee who owns more than 10% of the total combined voting
power of all classes of outstanding stock of the Company expire five years
from the date of grant.
In addition, the Company has granted options to purchase 39,403 shares of
Common Stock under certain other option agreements.
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 a 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 not less
than the fair value of a share 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.
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 April 30, 1996, 13,934 shares
have been purchased under the Employee Stock Purchase Plan.
F-16
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1992............ 792,840 586,452 $ 0.45
---------- --------- -------------
Granted............................... (244,187) 244,187 $ 0.45
Canceled.............................. 34,971 (34,971) $ 0.45
Exercised............................. -- (1,473) $ 0.45
---------- --------- -------------
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............................... (387,531) 387,531 $7.20- $17.88
Canceled.............................. 17,222 (17,222) $0.45- $13.75
-------------
Exercised............................. -- (51,008) $ 0.45
---------- --------- -------------
Outstanding, April 30, 1996........... 746,193 1,464,233 $0.45- $17.88
========== ========= =============
</TABLE>
At July 31, 1994, July 31, 1995, and April 30, 1996 exercisable options were
404,925, 412,426 and 480,965 respectively.
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 $145,000, $151,000 and $173,000 to the Plan during the years ended
July 31, 1993, 1994 and 1995, respectively and $127,000 and $133,000 during
the nine months ended April 30, 1995 and 1996, respectively.
NOTE 10--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 shares, 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.
The Company paid approximately $400,000, $1.8 million and $800,000 in fiscal
1993, 1994 and 1995, respectively, and $800,000 during the nine months ended
April 30, 1995, for services provided in conjunction
F-17
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 shares 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 nine months ended April 30, 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 1995 and during the nine months ended April 30, 1996, the Company
purchased masks for use by the Company in the development of new products for
approximately $200,000 and $180,000, 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
1993, 1994 and 1995 are approximately $15 million, $15 million and $13
million, respectively and $11 million and $6.2 million during the nine months
ended April 30, 1995 and 1996, respectively.
In fiscal 1994, a party which at the time held shares of the Company's
Series B and D mandatorily redeemable convertible preferred stock canceled an
order and the Company recognized approximately $500,000 in penalty
cancellation fees; which is included in revenue for that period.
At July 31, 1994, July 31, 1995, and April 30, 1996 included in accrued
liabilities is approximately $3.5 million, $8.9 million and $11.4 million,
respectively, due to a party which held shares of the Company's Series E
mandatorily redeemable 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
U.S. prime rate plus 1.25% per annum, which at April 30, 1996 was 8.25%, when
financing is received in the U.S. or the Japanese prime rate plus 1.25% per
annum, which at April 30,1996 was 3.6%, when financing is received in Japan.
NOTE 11--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 fifteen 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 April 30, 1996, the Company was in compliance with these
covenants.
F-18
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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, 1993, 1994 and 1995, was $2.1 million, $1.9 million and
$2.6 million, respectively. Rent expense for the nine months ended April 30,
1996 was $2.6 million. Future minimum lease commitments excluding property
taxes, maintenance and insurance under leases having initial or remaining
terms in excess of one year agreements, are as follows (in thousands):
<TABLE>
<S> <C>
April 30, 1996 through July 31, 1996.............................. $ 879
1997............................................................ 3,378
1998............................................................ 2,783
1999............................................................ 2,549
2000............................................................ 1,905
2001............................................................ 1,523
Thereafter...................................................... 13,019
-------
$26,036
=======
</TABLE>
In April 1996, the Company entered into an agreement in principle with a
contractor to construct a new facility at a cost not to exceed approximately
$4.3 million.
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
percentage of revenue for each CORE and ALTA system sold in the defined sales
territory for the next four years. In May 1996, the Company purchased
approximately $1.1 million of the distributor's inventory. This amount is
payable in equal installments over four quarters commencing in May 1996.
F-19
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--GEOGRAPHIC REPORTING AND CUSTOMER CONCENTRATION:
<TABLE>
<CAPTION>
UNITED JAPAN AND
STATES FAR EAST EUROPE TOTAL
------- --------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues to third parties:
Year ended July 31, 1993
Domestic................................. $24,091 $ -- $ -- $24,091
Foreign.................................. 7,552 21,477 5,462 34,491
------- ------- ------- -------
$31,643 $21,477 $ 5,462 $58,582
======= ======= ======= =======
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
======= ======= ======= =======
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
======= ======= ======= =======
Nine months ended April 30, 1995
(unaudited)
Domestic................................. $29,676 $ -- $ -- $29,676
Foreign.................................. 8,748 18,738 3,883 31,369
------- ------- ------- -------
$38,424 $18,738 $ 3,883 $61,045
======= ======= ======= =======
Nine months ended April 30, 1996 (unau-
dited)
Domestic................................. $22,812 $ -- $ -- $22,812
Foreign.................................. 17,605 53,605 4,013 75,223
------- ------- ------- -------
$40,417 $53,605 $ 4,013 $98,035
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31, NINE MONTHS ENDED APRIL 30,
------------------------- ---------------------------
1993 1994 1995 1995 1996
-------- ------- ------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Operating income (loss):
United States......... $ (8,153) $ 4,377 $ 7,415 $ 5,494 $ 5,485
Japan and Far East.... 3,216 4,456 3,975 4,163 4,729
Europe................ 498 743 13 (180) 188
-------- ------- ------- ------------- -------------
Total................. $ (4,439) $ 9,576 $11,403 $ 9,477 $ 10,402
======== ======= ======= ============= =============
</TABLE>
<TABLE>
<CAPTION>
JULY 31,
--------------- APRIL 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Identifiable assets:
United States..................................... $40,744 $51,736 $117,626
Japan and Far East................................ 18,371 30,577 37,421
Europe............................................ 3,667 3,671 2,435
------- ------- --------
Total............................................. $62,782 $85,984 $157,482
======= ======= ========
</TABLE>
F-20
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JULY 31, ENDED APRIL 30,
------------------------ -----------------
1993 1994 1995 1995 1996
------ ------ ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Customers comprising 10% or
more of the Company's total
revenue for the periods
indicated:
A............................ 18% 9% 14% 17% 5%
B............................ 14% 7% 14% 16% 19%
C............................ 14% 12% 4% 4% 9%
D............................ 8% 13% 2% 2% 1%
E............................ 12% 2% 12% 14% 18%
</TABLE>
NOTE 13--POLYSCAN ACQUISITION (UNAUDITED):
On June 27, 1995, the Company entered into a loan agreement with Polyscan,
Inc. ("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.
On February 5, 1996, Etec Polyscan acquired substantially all of the assets
and certain specified liabilities of Polyscan in exchange for 350,000 shares
of the Company's Common Stock with a market value of $3.5 million. Etec
Polyscan will retain 175,000 of the Company's common shares issued until up to
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. On February 5, 1996,
Polyscan's obligation to repay the outstanding loan in the amount of
approximately $1.2 million was assumed by Etec Polyscan.
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 market value of the net
tangible 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 $6.3 million write-off of in-process technology
acquired. Polyscan's results included in the pro forma presentation for the
year ended July 31, 1995 and the nine months ended April 30, 1996 are for the
twelve months ended June 30, 1995 and for the period from July 1, 1995 through
January 31, 1996, 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 the results which may occur in the future.
F-21
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JULY 31, 1995 APRIL 30, 1996
------------- -----------------
<S> <C> <C>
Net income (in thousands)....................... $8,170 $27,192
Net income per common share..................... $ 0.54 $ 1.51
</TABLE>
NOTE 14--SUBSEQUENT EVENTS (UNAUDITED):
In the fourth quarter of 1996, the Company entered into an equity investment
agreement whereby in exchange for $10.0 million, the Company will issue shares
of common stock. The number of shares will be determined based on the price to
public of this offering or, should the offering not be completed, at the
average closing price of the Company's Common Stock for the 15 trading days
preceding the date of the agreement. Additionally, the Company agreed to issue
warrants equal to 15% of the number of shares purchased at an exercise price
equal to the price of the shares purchased. Such warrants only become
exercisable if the investor purchases products and services that exceed
certain thresholds from the Company over the succeeding four years or upon the
occurrence of certain other conditions. The Company estimates that the value
of the warrants will be approximately $600,000 and will be amortized to costs
of sales as product purchases are made by the investor in future periods.
F-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of Polyscan, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations and accumulated deficit, and of cash flows present fairly, in all
material respects, the financial position of Polyscan, Inc. (a company in the
development stage) at March 31, 1995, and the results of its operations and
cash flows for the year then ended, 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 audit. We conducted our audit 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
use and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As explained in note 1, on February 5, 1996, substantially all of the assets
and certain specified liabilities of the Company were sold to Etec Polyscan,
Inc., a wholly owned subsidiary of Etec Systems, Inc., in exchange for 350,000
common shares of Etec Systems, Inc.
Price Waterhouse LLP
San Jose, California
February 5, 1996
F-23
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
BALANCE SHEETS
AT MARCH 31, 1995 AND JANUARY 31, 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MARCH 31, 1995 JANUARY 31, 1996
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash......................................... $ 63 $ 6
Accounts receivable.......................... 14 --
Inventory.................................... 515 723
Prepaid expenses and other current assets.... 55 65
------- -------
Total current assets....................... 647 794
Property, plant and equipment, net............. 90 100
------- -------
$ 737 $ 894
======= =======
LIABILITIES AND COMMON STOCKHOLDERS' DEFICIT
Current liabilities:
Current maturities of obligations under
capital leases.............................. $ 31 $ 39
Note payable................................. 95 1,262
Accounts payable............................. 194 133
Accrued and other liabilities................ 1,829 2,189
------- -------
Total current liabilities.................. 2,149 3,623
Long-term obligations under capital leases,
less current maturities....................... 37 46
------- -------
Total liabilities.......................... 2,186 3,669
------- -------
Commitments and Contingencies (Notes 8 and 9)
Common stockholders' deficit:
Common Stock, no par value; 4,000,000 shares
authorized; 1,920,000 issued and outstanding
shares...................................... -- --
Accumulated deficit.......................... (1,449) (2,775)
------- -------
Total common stockholders' deficit......... (1,449) (2,775)
------- -------
$ 737 $ 894
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
FOR THE YEAR ENDED MARCH 31, 1995
FOR THE PERIOD FROM APRIL 1, 1995 TO JANUARY 31, 1996
FOR THE PERIOD FROM INCEPTION (MAY 27, 1993) THROUGH TO JANUARY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
TEN MONTH (MAY 27, 1993)
YEAR ENDED PERIOD ENDED THROUGH
MARCH 31, 1995 JANUARY 31, 1996 JANUARY 31, 1996)
-------------- ---------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Operating expenses:
Research, development and
engineering............... $ 881 $ 848 $1,729
Selling, general and
administrative............ 568 684 1,252
Insurance settlement....... -- (276) (276)
-------- -------- -------
1,449 1,256 2,705
-------- -------- -------
Interest expense............. -- 70 70
Net loss..................... (1,449) (1,326) (2,775)
Accumulated deficit, begin-
ning of period.............. -- (1,449) --
-------- -------- -------
Accumulated deficit, end of
period...................... $ (1,449) $ (2,775) $(2,775)
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED MARCH 31, 1995
FOR THE PERIOD FROM APRIL 1, 1995 TO JANUARY 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
TEN MONTH (MAY 27, 1993)
YEAR ENDED PERIOD ENDED THROUGH
MARCH 31, 1995 JANUARY 31, 1996 JANUARY 31, 1996
-------------- ---------------- ----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss................... $(1,449) $(1,326) $(2,775)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Write-off of in-process
technology acquired..... 95 -- 95
Depreciation............. 30 28 58
Changes in assets and
liabilities:
Accounts receivable.... (14) 14 --
Inventory.............. (515) (208) (723)
Prepaid expenses and
other current assets.. (55) (10) (65)
Accounts payable....... 195 (61) 134
Accrued and other
liabilities........... 1,829 360 2,189
------- ------- -------
Net cash provided by
(used in) operating
activities............ 116 (1,203) (1,087)
------- ------- -------
Cash flows from financing
activities:
Payment of obligations
under capital leases...... (54) (21) (75)
Repayment of note from
shareholder............... -- (95) (95)
Proceeds from note payable. -- 1,862 1,862
Repayment of note payable
using insurance proceeds
received.................. -- (600) (600)
------- ------- -------
Net cash (used in) provided
by financing activities..... (54) 1,146 1,092
------- ------- -------
Net change in cash and cash
equivalents................. 62 (57) 5
Cash at beginning of the
period...................... 1 63 1
------- ------- -------
Cash at the end of period.... $ 63 $ 6 $ 6
======= ======= =======
Supplemental disclosure of
non-cash investing and
financing activities:
Equipment acquired under
capital leases.............. $ 88 $ 38 $ 126
======= ======= =======
Acquisition of technology in
exchange for note payable... $ 95 $ 95
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS
NOTE 1--THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
Polyscan, Inc. ("Polyscan") was incorporated in Arizona on May 27, 1993 and
commenced development activities on April 1, 1994. Since commencing activities
Polyscan has been principally involved in research and development related to
direct write laser beam products, market analysis and other business planning
activities. Polyscan has had no revenue from product sales and since inception
has incurred net losses. Because Polyscan was in development stage at March
31, 1995, and at January 31, 1996, the accompanying financial statements
should not be regarded as typical for normal operating periods.
On February 5, 1996, Etec Polyscan, Inc. ("Etec Polyscan"), a wholly-owned
subsidiary of Etec Systems, Inc. ("Etec"), acquired substantially all of the
assets of Polyscan and certain specified liabilities in exchange for 350,000
common shares of Etec with a deemed market value of $3.5 million. The
financial information presented in these financial statements is based on
historical cost and does not give consideration to the adjustments that will
result from Etec Polyscan's acquisition.
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 is four years. Assets held
under capital leases are amortized using the straight-line method over the
shorter of the estimated useful life of three to five years or the term of the
related lease.
Research, Development and Engineering
Research, development and engineering costs are expensed as incurred. As
more fully described in Note 5, Polyscan is party to a research and
development contract which provides for partial funding of certain research,
development and engineering costs. Amounts funded under this contract are
being recognized using the completed contract method.
Income Taxes
Polyscan accounts for income taxes in accordance with the liability
approach.
Interim Results and Period From Inception (May 27, 1993) through January 31,
1996 (Unaudited)
The accompanying balance sheet at January 31, 1996 and the related
statements of operations and accumulated deficit and cash flows for the ten-
month period ended January 31, 1996 and for the period from inception (May 27,
1993) through January 31, 1996 are unaudited. In the opinion of management,
these statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results for the interim
period. The results of operations and cash flows for the interim period are
not necessarily indicative of the results to be expected for any other interim
period or for the year ending March 31, 1996.
F-27
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
MARCH 31, JANUARY 31,
1995 1996
--------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
Inventory:
Purchased parts...................................... $ 89 $ 302
Work-in-process...................................... 426 421
------ ------
$ 515 $ 723
====== ======
Property plant and equipment:
Machinery and equipment.............................. $ 120 $ 158
Less accumulated depreciation........................ (30) (58)
------ ------
$ 90 $ 100
====== ======
Accrued and other liabilities:
Customer advances.................................... $ 523 $ 621
Accrued employee costs............................... 104 60
Government contract advances......................... 1,202 1,202
Other accrued liabilities............................ -- 306
------ ------
$1,829 $2,189
====== ======
</TABLE>
At March 31, 1995 and January 31, 1996, $88,000 and $126,000, respectively,
of machinery and equipment was held under capital leases. Depreciation for
such leases was $20,000 for the year ended March 31, 1995 and $19,000 for the
ten month period ended January 31, 1996.
NOTE 3--DEBT
On June 27, 1995, Polyscan entered into a loan agreement with Etec whereby
Etec provided financing to Polyscan up to a maximum of $925,000. On August 16,
1995, Etec increased the maximum amount of financing available to Polyscan to
approximately $1.8 million. The loan bore interest at prime plus 3% and was
due on January 31, 1996. The loan was secured by all of the assets of Polyscan
and the shares of the major shareholders. On January 31, 1996, Etec increased
the maximum amount of financing available to Polyscan to approximately $2.4
million. On January 31, 1996, Polyscan repaid $600,000 of the outstanding
loan. On February 5, 1996, the outstanding loan in the amount of approximately
$1.2 million was assumed by Etec Polyscan (See Note 1.)
NOTE 4--INCOME TAXES
<TABLE>
<CAPTION>
MARCH 31,
1995
--------------
(IN THOUSANDS)
<S> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 242
Reserve for future losses on development contract........... 244
Other reserves.............................................. --
-----
486
-----
Less: valuation allowance................................... (486)
-----
$ --
=====
</TABLE>
F-28
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Polyscan established a full valuation allowance against the deferred tax
assets due to the uncertainty of their realization. At March 31, 1995,
Polyscan had net operating loss carryforwards for federal income tax purposes
of approximately $700,000. These carryforwards, if not utilized to offset
future taxable income and income taxes payable, will expire through the year
2008. Additionally, under the Tax Reform Act of 1986, the amount of the
benefit from net operating loss carryforwards may be impaired or limited in
certain circumstances, including a cumulative stock ownership change of more
than 50% over a three-year period.
NOTE 5--RESEARCH, DEVELOPMENT AND ENGINEERING CONTRACTS
In May 1994, Polyscan entered into a cost reimbursement research and
development contract with the Advanced Research Projects Agency ("ARPA"),
pursuant to which Polyscan is entitled to receive approximately $3.9 million.
Funding is due in three phases with approximately $1.2 million, $1.4 million
and $1.3 million being due for each of the respective phases. There are
deliverables at the end of each phase. However, Polyscan is under no
obligation to complete all of the phases provided that it terminates the
arrangement prior to commencement and receipt of funding for a respective
phase. Polyscan is in the process of completing Phase I and as of March 31,
1995 had received approximately $1.2 million in funding. Polyscan has deferred
this funding received and this amount is included in accrued and other
liabilities. At March 31, 1995, Polyscan anticipated that it would incur a
loss of approximately $719,000 in order to satisfy its obligations under Phase
I of the contract which it has accrued.
NOTE 6--RELATED PARTY TRANSACTIONS
In April 1994, one of the founders of Polyscan who is a majority
shareholder, contributed certain intellectual property to Polyscan in exchange
for a note for approximately $95,000. This note was paid in July 1995. The
statement of operations for the year ended March 31, 1995 includes a charge of
$95,000 for the write off of this purchased in-process technology.
NOTE 7--INSURANCE REFUND
During the ten months ended January 31, 1996, Polyscan experienced business
interruptions as a result of a flood, and received approximately $329,000 in
payments under its business interruption insurance policy. The payments of
$240,000 and $89,000 have been recorded as reductions in research, development
and engineering, and selling, general and administrative expenses,
respectively.
On January 31, 1996 Polyscan received a $600,000 payment in settlement of
its claims for damages incurred as a result of the flood. Approximately
$142,000 of the settlement covered damaged inventory and approximately
$182,000 of the settlement represents an amount that has been delineated to
make certain leasehold improvements to its current facility. Under the
settlement, Polyscan was required to utilize the entire $182,000 by March 24,
1996, or refund the shortfall. As of March 24, 1996, the entire amount had
been utilized. The remaining amount of $276,000 represents a general insurance
payment covering interruptions and has been reflected as income in the ten
month period ended January 31, 1996 statement of operations and accumulated
deficit.
NOTE 8--COMMITMENTS
Polyscan leases its facilities and certain equipment under cancelable
operating lease agreements. Rent expense under all operating leases for the
year ended March 31, 1995 and the period ended January 31,
F-29
<PAGE>
POLYSCAN, INC.
(A COMPANY IN THE DEVELOPMENT STAGE)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1996 was approximately $145,000 and $126,000, respectively. Future minimum
lease commitments under all of these agreements, excluding property taxes and
insurance, are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
(IN THOUSANDS)
<S> <C> <C>
Two months ending March 31, 1996........................... $ 43 $ 17
Years ending March 31:
1997....................................................... 130 40
1998....................................................... 125 34
1999....................................................... 114 11
2000....................................................... 114 --
Thereafter................................................. 57 --
----- ----
Total minimum payments................................... $ 583 102
=====
Less: imputed interest..................................... (17)
----
Present value of minimum lease payments.................... 85
Less: current maturities................................... (39)
----
Long-term lease obligations, less current maturities....... $ 46
====
</TABLE>
Polyscan is in the process of designing and manufacturing a tool for two
customers that paid Polyscan deposits. These deposits have been deferred and
are included in accrued and other liabilities in the amount of $523,000 and
$621,000 at March 31, 1995 and January 31, 1996, respectively. Polyscan has
expensed all design costs to date with respect to developing these tools. On
September 1, 1995, one of the customers attempted to cancel its purchase order
and made a demand for the return of its tendered progress payments. In
February 1996, Polyscan refunded both customer deposits without further
obligation to either customer.
NOTE 9--LITIGATION
Polyscan is involved in various litigation matters and potential claims
which management believes, based on facts presently known, will not have a
material adverse effect on the results of operations of Polyscan.
F-30
<PAGE>
ETEC SYSTEMS, INC.
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(UNAUDITED)
On February 5, 1996, Etec Polyscan, Inc. a wholly-owned subsidiary of Etec
Systems, Inc. ("the Company") acquired substantially all of the assets,
properties and businesses of Polyscan, Inc. ("Polyscan") and assumed certain
specified liabilities of Polyscan in exchange for 350,000 common shares of the
Company.
The following unaudited pro forma consolidated statements of operations give
effect to the acquisition as if it had occurred on August 1, 1994, by
consolidating the results of operations of the Company and Polyscan for the
year ended July 31, 1995 and for the nine months ended April 30, 1996. The pro
forma adjustments include elimination of all intercompany transactions and the
increase in common equivalent shares outstanding.
No pro forma balance sheet as of April 30, 1996 has been presented because
the acquisition took place on February 5, 1996 and consequently the effect of
the acquisition is already reflected in the Company's balance sheet as of
April 30, 1996.
The unaudited pro forma consolidated statements of operations are not
necessarily indicative of the operating results that would have been achieved
had the transaction been in effect as of the beginning of the periods
presented and should not be construed as representative of future operating
results.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical financial statements and related
notes of the Company.
F-31
<PAGE>
ETEC SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL POLYSCAN(A) ADJUSTMENTS PRO FORMA(D)
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenue:
Products................. $ 51,395 $ -- $-- $ 51,395
Services................. 31,521 -- -- 31,521
-------- -------- ---- --------
82,916 -- -- 82,916
-------- -------- ---- --------
Cost of revenue:
Cost of products......... 27,015 -- -- 27,015
Cost of services......... 20,604 -- -- 20,604
-------- -------- ---- --------
47,619 -- -- 47,619
-------- -------- ---- --------
Gross profit.............. 35,297 -- -- 35,297
-------- -------- ---- --------
Operating expenses:
Research, development and
engineering............. 10,497 1,225 -- 11,722
Selling, general and
administrative.......... 13,397 535 -- 13,932
-------- -------- ---- --------
23,894 1,760 -- 25,654
-------- -------- ---- --------
Income (loss) from
operations............... 11,403 (1,760) -- 9,643
Interest expense.......... (4,238) (2) 2 (b)(c) (4,238)
Other income (expense),
net...................... 175 -- (6)(c) 169
-------- -------- ---- --------
Income (loss) before
provision for income
taxes and minority
interest................. 7,340 (1,762) (4) 5,574
Provision for income
taxes.................... 2,289 -- -- 2,289
Minority interest in
earnings of subsidiary... 527 -- -- 527
-------- -------- ---- --------
Income (loss) before
extraordinary item....... 4,524 (1,762) (4) 2,758
Extraordinary gain on
early extinguishment of
debt..................... 5,412 -- -- 5,412
-------- -------- ---- --------
Net income (loss)......... 9,936 (1,762) (4) 8,170
Accretion of mandatorily
redeemable convertible
preferred stock.......... 3,092 -- -- 3,092
-------- -------- ---- --------
Net income (loss)
attributable to Common
Stockholders............. $ 6,844 $ (1,762) $ (4) $ 5,078
======== ======== ==== ========
Per share data:
Income before
extraordinary item...... $ 0.31 $ 0.18
Extraordinary gain....... 0.37 0.36
-------- --------
$ 0.68 $ 0.54
======== ========
Weighted average common
shares................... 14,594 350 14,944
======== ==== ========
</TABLE>
- --------
(a) Polyscan amounts are for the twelve months ended June 30, 1995.
(b) To adjust Polyscan's interest expense on the note payable to the Company
from $2 for the year ended June 30, 1995 to $6 for the twelve months ended
July 31, 1995.
(c) To eliminate the interest expense on the note between Polyscan and the
Company.
(d) The pro forma information does not reflect a one-time charge for in-
process technology write-off of $6.3 million which is directly
attributable to the transaction that was charged to expense in the quarter
ended April 30, 1996.
F-32
<PAGE>
ETEC SYSTEMS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 1, 1995 TO APRIL 30, 1996
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
HISTORICAL POLYSCAN(A) ADJUSTMENTS PRO FORMA
---------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
Products...................... $ 73,983 $ -- $ -- $ 73,983
Services...................... 24,052 -- -- 24,052
-------- ------ ------- --------
98,035 -- -- 98,035
-------- ------ ------- --------
Cost of revenue:
Cost of products.............. 37,606 -- -- 37,606
Cost of services.............. 16,794 -- -- 16,794
-------- ------ ------- --------
54,400 -- -- 54,400
-------- ------ ------- --------
Gross profit................... 43,635 -- -- 43,635
-------- ------ ------- --------
Operating expenses:
Research, development and
engineering.................. 11,991 607 -- 12,598
Write-off of in-process
technology acquired.......... 6,269 -- (6,269)(c) --
Selling, general and
administrative............... 14,973 524 -- 15,497
-------- ------ ------- --------
33,233 1,131 (6,269) 28,095
-------- ------ ------- --------
Income (loss) from operations.. 10,402 (1,131) 6,269 15,540
Interest expense............... (1,462) (68) 68 (b) (1,462)
Other income (expense), net.... 2,143 276 (68)(b) 2,351
-------- ------ ------- --------
Income (loss) before income tax
(benefit) and extraordinary
item.......................... 11,083 (923) 6,269 16,429
Income tax (benefit)........... (11,063) -- -- (11,063)
-------- ------ ------- --------
Net income (loss) before
extraordinary item............ 22,146 (923) 6,269 27,492
Extraordinary item............. (300) -- -- (300)
-------- ------ ------- --------
21,846 (923) 6,269 27,192
Accretion of mandatorily
redeemable convertible
preferred stock............... 1,078 -- -- 1,078
-------- ------ ------- --------
Net income (loss) attributable
to Common Stockholders........ $ 20,768 $ (923) $ 6,269 $ 26,114
======== ====== ======= ========
Per share data:
Income before extraordinary
item......................... $ 1.25 $ 1.53
Extraordinary item............ (0.02) (0.02)
-------- --------
$ 1.23 $ 1.51
======== ========
Weighted average common shares. 17,750 246 17,996
======== ======= ========
</TABLE>
- --------
(a) Polyscan amounts are for the period from July 1, 1995 through January 31,
1996.
(b) To eliminate the interest expense on the note between Polyscan and the
Company.
(c) To reverse one-time charge to write-off in-process technology acquired.
F-33
<PAGE>
[GRAPHICS: See Appendix]
<PAGE>
[GRAPHICS: See Appendix]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. 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.......................................... $ 44,236
National Association of Securities
Dealers, Inc. filing fee..................................... 13,461
Blue Sky fees and expenses.................................... 5,000
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............................... 57,303
--------
Total....................................................... $400,000
========
</TABLE>
ITEM 14. 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 Agreement (Exhibit 1.1 hereto) provides for indemnification
by the Underwriters of the Registrant and its directors and officers, and by
the Registrant of the Underwriters, for certain liabilities, including
liabilities arising under the Act, and affords certain rights of contribution
with respect thereto.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Between July 31, 1992 and April 30, 1996, the Registrant issued 515,727
shares of its Common Stock to employees and consultants all at an exercise
price of $.45, for an aggregate consideration of $232,077. The Registrant
relied on the exemption provided for by Rule 701 under the Act and Section
4(2) of the Act.
In December 1993, the Company amended a 10.65% Senior Secured Note which was
originally issued in November 1991 to Cigna and simultaneously issued warrants
to purchase 21,875 shares of Common Stock to Cigna. The issuance of the Note
and warrants were qualified in California by permit dated December 17, 1991.
The Registrant relied on the exemption provided by Section 4(2) of the Act.
II-1
<PAGE>
In January 1994, the Registrant issued 50,000 shares of its Series D
Preferred Stock to IBM in exchange for $5 million of principal and $2 million
in interest on the 12% Amended and Restated Senior Subordinated Note
originally issued in 1990 to IBM. The Registrant relied on the exemption
provided by Section 4(2) of the Act.
In January 1995, the Registrant issued warrants to purchase 159,314 shares
of Common Stock at an exercise price of $0.45 per share to the purchaser and
landlord of its Hayward facility as a part of consideration for the purchase
proceeds and lease agreement. The Registrant simultaneously issued warrants to
purchase 53,104 shares of Common Stock to a bank that provided financing for
the purchaser and landlord. The Registrant relied on the exemption provided by
Section 4(2) of the Act.
In January 1995, the Registrant amended the 10.65% Senior Secured Note,
which was originally issued to Cigna in November 1991 and subsequently amended
in 1993. The Registrant relied on the exemption provided by Section 4(2) of
the Act.
In April 1995, the Registrant issued to Grumman a warrant to purchase
150,000 shares of Common Stock pursuant to a Settlement Agreement. The
Registrant relied on the exemption provided by Section 4(2) of the Act.
In July 1995, the Registrant issued to the investors in Etec Japan 75,753
shares of its Series E Preferred Stock in consideration of the minority
interest in Etec Japan. The Registrant relied on Section 4(2) of the Act.
In July 1995, the Registrant issued 105,641 shares of Series B Preferred
Stock to the holders of the Registrant's subordinated notes in exchange for
$19.7 million of the principal and accrued interest of the senior subordinated
notes. Simultaneously, the Registrant issued a 12% Subordinated note and a
10.3% subordinated note to IBM and Perkin-Elmer. The Registrant relied on
Section 4(2) of the Act.
In February 1996, the Registrant issued 329,216 shares of Common Stock to
Cigna upon exercise of a warrant for an aggregate purchase price of $230,000
and issued an additional 105,704 shares of Common Stock which at the time of
the Registrant's initial public offering became issuable in connection with
the exercise of warrants pursuant to certain provisions of Cigna's warrant
agreement. The Registrant relied upon the exemption provided by Section 4(2)
of the Act.
In February 1996, the Registrant issued 350,000 shares of Common Stock to
the stockholders of Polyscan, Inc. in exchange for substantially all of the
assets of Polyscan, Inc. The Registrant relied on Section 4(2) of the Act.
The recipients of the above-described securities represented their intention
to acquire the securities for investment only and not with a view to
distribution thereof. Appropriate legends were affixed to the stock
certificates and warrants issued in such transactions. All recipients had
adequate access, through employment or other relationships, to information
about the Registrant.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1**** Agreement and Plan of Reorganization among the Registrant, Etec
Polyscan, Inc., Polyscan, Inc. and the shareholders of Polyscan, Inc.
dated January 30, 1996.
3.1** Seventh Amended and Restated Articles of Incorporation.
3.2*** Bylaws of the Registrant, as amended.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.1* 1990 Stock Plan of Registrant.
10.2* 1990 Executive Stock Plan of Registrant.
10.3* 1994 Employee Stock Option Plan of Registrant.
10.4* 1995 Omnibus Incentive Plan of Registrant.
10.5* 1995 Employee Stock Purchase Plan of Registrant.
10.6* 1995 Directors' Stock Option Plan of Registrant.
10.7* Senior Management Incentive Plan of Registrant.
10.8* Lease Agreement dated February 1, 1995 by and between Registrant and
ESI(CA) QRS 12-6, Inc.
10.9* Lease Agreement between Beaverton-Redmond Tech Properties and ATEQ
Corporation dated June 18, 1985, as amended May 15, 1987 and September
20, 1989.
10.12* Note Purchase Agreement between Registrant and Cigna dated as of
November 15, 1991, as amended May 28, 1993, December 31, 1993 and
January 2, 1995.
10.11* Warrant Agreement between Registrant and Cigna dated as of November
15, 1991, as amended April 1, 1995.
10.12* Series C Shareholders' Rights Agreement by and among the Registrant
and Certain Former Holders of Capital Stock of ATEQ Corporation and
Warrants to Purchase Capital Stock of ATEQ Corporation dated as of
November 8, 1991, as amended December 1991 and January 14, 1994.
10.13* Exchange Agreement dated January 14, 1994 between IBM and Registrant.
10.14+* EBES Information Agreement dated October 1, 1975 between Western
Electric Company, Inc. and Etec, as amended April 1, 1976, August 3,
1976, July 1, 1980, November 22, 1983 and December 20, 1983.
10.14* Consent to Assignment by AT&T to assignment by Perkin-Elmer to Etec of
the EBES Information Agreement dated October 1, 1975 between Western
Electric Company, Inc. and Etec.
10.15* Excess Cash Sharing Agreement dated January 2, 1995, between Cigna,
IBM, Perkin-Elmer and the Registrant.
10.16* Senior Subordinated Debt Restructuring Agreement dated January 2, 1995
among the Registrant and IBM and Perkin-Elmer.
10.17* Senior Subordinated Debt Exchange Agreement dated as of July 31, 1995
among the Registrant and IBM and Perkin-Elmer.
10.18* Letter Agreement between Grumman and Registrant dated April 26, 1995.
10.19* Non-statutory Stock Option Agreement by and between Catherine P.
Goodrich and the Company dated as of December 6, 1994, as amended July
18, 1995.
10.20* Consulting Agreement between the Registrant and Charles E. Minihan
dated March 8, 1995.
10.21* Agreement on Officers Retirement between the Registrant and John
Suzuki dated as of
January 25, 1994.
10.22* Form of Indemnity Agreements.
10.23* Amendment to Senior Subordinated Debt Exchange Agreement Amended and
Restated Loan and Security Agreement between the Registrant and
Polyscan, Inc. dated as of August 16, 1995.
10.24* Registration Rights Agreement of the Registrant dated August 29, 1995.
10.25* First Amendment to Excess Cash Sharing Agreement dated August 15, 1995
(including Registrant's 12% Senior Subordinated Note and 10.3% Senior
Subordinated Note).
10.26* Note Purchase Agreement between Cigna and the Registrant, as amended
through Fourth Amendment and Waiver Agreement dated August 15, 1995.
10.27 Amendment Three dated April 3, 1996 to Lease Agreement dated June 18,
1985 and as amended May 15, 1987 and September 20, 1989 between
Beaverton-Redmond Tech Properties and the Registrant.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S>
10.28**** Registration Rights Agreement dated as of February 5, 1996 among the
Registrant, Polyscan, Inc. and the stockholders of Polyscan, Inc.
10.29 Letter Agreement dated January 25, 1996 between Registrant and Cigna
amending and modifying certain obligations under the Note Purchase
Agreement and Excess Cash Sharing Agreement with Cigna.
10.30 Form of Investor Agreement between the Registrant and Intel
Corporation.
11.1 Statement of computation of earnings per share.
16.1* Letter from former independent accountant.
23.1 Consent of Price Waterhouse LLP (see Page II-7).
23.2 Consent of Pillsbury Madison & Sutro LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see Page II-5).
27 Financial Data Schedules.
</TABLE>
- --------
* Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 (File No. 33-95648).
** Incorporated herein by reference to Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended October 27, 1995.
*** Incorporated herein by reference to Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 26, 1996.
**** Incorporated herein by reference to Exhibits 2.1 and 2.2, respectively,
to Registrant's Current Report on Form 8-K dated February 5, 1996.
+ Confidential treatment has been previously granted.
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.
(3) It will provide to the underwriters at the closing(s) specified in
the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
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 16th day of May, 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 or her and in his
or her 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
or she 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
- ------------------------------------ May 16, 1996
STEPHEN E. COOPER President, Chief Executive
Officer (Principal
Executive Officer) and
Chairman of the Board
/s/ Philip J. Koen, Jr.
- ------------------------------------ May 23, 1996
PHILIP J. KOEN, JR. Vice President, Chief
Financial Officer
(Principal Financial
Officer)
/s/ Edward Quigley
- ------------------------------------ May 23, 1996
EDWARD QUIGLEY Controller (Principal
Accounting Officer)
- ------------------------------------ May , 1996
EDWARD L. GELBACH Director
/s/ Catherine P. Goodrich
- ------------------------------------ May 23, 1996
CATHERINE P. GOODRICH Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
/s/ Jack H. King
- ------------------------------------ May 23, 1996
JACK H. KING Director
/s/ John McBennett
- ------------------------------------ May 23, 1996
JOHN MCBENNETT Director
/s/ John Suzuki
- ------------------------------------ May 23, 1996
JOHN SUZUKI Director
/s/ Thomas Michael Trent
- ------------------------------------ May 23, 1996
THOMAS MICHAEL TRENT Director
/s/ Robert L. Wehrli
- ------------------------------------ May 16, 1996
ROBERT L. WEHRLI Director
</TABLE>
II-6
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our reports dated August 21, 1995
relating to the consolidated financial statements of Etec Systems, Inc., and
dated February 5, 1996 relating to the financial statements of Polyscan, Inc.,
which appear 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
May 23, 1996
II-7
<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." Below, footer at the
bottom of the page:
"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 OR THEIR AFFILIATES MAY ENGAGE IN
PASSIVE MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON
STOCK ON NASDAQ IN ACCORDANCE WITH RULE 10b-6A UNDER THE
SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
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."
35 GRAPHIC 10: Schematic diagram of boxes with arrows describing
the semiconductor manufacturing process.
40 GRAPHIC 11: Schematic drawing of MEBES system with inset
diagrams of electronics console and utility console.
42 GRAPHIC 12: Schematic drawing of ALTA system from above and
to the side.
44 GRAPHIC 13: Schematic drawing of electron-beam column.
45 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
BACK COVER GRAPHIC 18: Photograph of laser component.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1**** Agreement and Plan of Reorganization among the
Registrant, Etec Polyscan, Inc., Polyscan, Inc. and the
shareholders of Polyscan, Inc. dated January 30, 1996.
3.1** Seventh Amended and Restated Articles of Incorporation.
3.2*** Bylaws of the Registrant, as amended.
5.1 Opinion of Pillsbury Madison & Sutro LLP.
10.1* 1990 Stock Plan of Registrant.
10.2* 1990 Executive Stock Plan of Registrant.
10.3* 1994 Employee Stock Option Plan of Registrant.
10.4* 1995 Omnibus Incentive Plan of Registrant.
10.5* 1995 Employee Stock Purchase Plan of Registrant.
10.6* 1995 Directors' Stock Option Plan of Registrant.
10.7* Senior Management Incentive Plan of Registrant.
10.8* Lease Agreement dated February 1, 1995 by and between
Registrant and ESI(CA) QRS 12-6, Inc.
10.9* Lease Agreement between Beaverton-Redmond Tech
Properties and ATEQ Corporation dated June 18, 1985, as
amended May 15, 1987 and September 20, 1989.
10.12* Note Purchase Agreement between Registrant and Cigna
dated as of November 15, 1991, as amended May 28, 1993,
December 31, 1993 and January 2, 1995.
10.11* Warrant Agreement between Registrant and Cigna dated as
of November 15, 1991, as amended April 1, 1995.
10.12* Series C Shareholders' Rights Agreement by and among
the Registrant and Certain Former Holders of Capital
Stock of ATEQ Corporation and Warrants to Purchase
Capital Stock of ATEQ Corporation dated as of November
8, 1991, as amended December 1991 and January 14, 1994.
10.13* Exchange Agreement dated January 14, 1994 between IBM
and Registrant.
10.14+* EBES Information Agreement dated October 1, 1975
between Western Electric Company, Inc. and Etec, as
amended April 1, 1976, August 3, 1976, July 1, 1980,
November 22, 1983 and December 20, 1983.
10.14* Consent to Assignment by AT&T to assignment by Perkin-
Elmer to Etec of the EBES Information Agreement dated
October 1, 1975 between Western Electric Company, Inc.
and Etec.
10.15* Excess Cash Sharing Agreement dated January 2, 1995,
between Cigna, IBM, Perkin-Elmer and the Registrant.
10.16* Senior Subordinated Debt Restructuring Agreement dated
January 2, 1995 among the Registrant and IBM and
Perkin-Elmer.
10.17* Senior Subordinated Debt Exchange Agreement dated as of
July 31, 1995 among the Registrant and IBM and Perkin-
Elmer.
10.18* Letter Agreement between Grumman and Registrant dated
April 26, 1995.
10.19* Non-statutory Stock Option Agreement by and between
Catherine P. Goodrich and the Company dated as of
December 6, 1994, as amended July 18, 1995.
10.20* Consulting Agreement between the Registrant and Charles
E. Minihan dated March 8, 1995.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
------- ----------------------- ------------
<C> <S> <C>
10.21* Agreement on Officers Retirement between the
Registrant and John Suzuki dated as of January 25,
1994.
10.22* Form of Indemnity Agreements.
10.23* Amendment to Senior Subordinated Debt Exchange
Agreement Amended and Restated Loan and Security
Agreement between the Registrant and Polyscan, Inc.
dated as of August 16, 1995.
10.24* Registration Rights Agreement of the Registrant dated
August 29, 1995.
10.25* First Amendment to Excess Cash Sharing Agreement
dated August 15, 1995 (including Registrant's 12%
Senior Subordinated Note and 10.3% Senior
Subordinated Note).
10.26* Note Purchase Agreement between Cigna and the
Registrant, as amended through Fourth Amendment and
Waiver Agreement dated August 15, 1995.
10.27 Amendment Three dated April 3, 1996 to Lease
Agreement dated June 18, 1985 and as amended May 15,
1987 and September 20, 1989 between Beaverton-Redmond
Tech Properties and the Registrant.
10.28**** Registration Rights Agreement dated as of February 5,
1996 among the Registrant, Polyscan, Inc. and the
stockholders of Polyscan, Inc.
10.29 Letter Agreement dated January 25, 1996 between
Registrant and Cigna amending and modifying certain
obligations under the Note Purchase Agreement and
Excess Cash Sharing Agreement with Cigna.
10.30 Form of Investor Agreement between the Registrant and
Intel Corporation.
11.1 Statement of computation of earnings per share.
16.1* Letter from former independent accountant.
23.1 Consent of Price Waterhouse LLP (see Page II-7).
23.2 Consent of Pillsbury Madison & Sutro LLP (included in
Exhibit 5.1).
24.1 Power of Attorney (see Page II-5).
27 Financial Data Schedules.
</TABLE>
- --------
* Incorporated herein by reference to Registrant's Registration Statement on
Form S-1 (File No. 33-95648).
** Incorporated herein by reference to Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended October 27, 1995.
*** Incorporated herein by reference to Exhibit 3.1 to Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 26, 1996.
**** Incorporated herein by reference to Exhibits 2.1 and 2.2, respectively,
to Registrant's Current Report on Form 8-K dated February 5, 1996.
+ Confidential treatment has been previously granted.
<PAGE>
Exhibit 1.1
4,600,000 Shares(1)
ETEC SYSTEMS, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
June , 1996
--
ROBERTSON, STEPHENS & COMPANY, L.P.
NEEDHAM & COMPANY, INC.
As Representatives of the several Underwriters
c/o Robertson, Stephens & Company, L.P.
555 California Street
26th Floor
San Francisco, California 94104
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 "Underwriters") and hereby confirm their respective agreements with
the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
---------------------
500,000 shares of its authorized and unissued Common Stock to the several
Underwriters. The Selling Stockholders, acting severally and not jointly,
propose to sell an aggregate of 4,100,000 shares of authorized and outstanding
shares of the Company's Common Stock to the several Underwriters.
The 500,000 shares of Common Stock of the Company to be sold by the Company
are hereinafter called the "Company Shares" and the 4,100,000 shares of Common
Stock to be sold by the Selling Stockholders are hereinafter called the "Selling
Stockholder Shares." The Company
- -------------------
(1) Plus an option to purchase up to 690,000 additional shares from the Company
to cover over-allotments.
1
<PAGE>
Shares and the Selling Stockholder Shares are hereinafter collectively referred
to as the "Firm Shares." The Company also proposes to grant to the Underwriters
an option to purchase up to 690,000 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."
2. Representations, Warranties and Agreements of the Company.
---------------------------------------------------------
I. The Company represents and warrants to and agrees with each Underwriter
that:
(a) A registration statement on Form S-1 (File No. 333-____) 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 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
2
<PAGE>
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
Underwriters for such use.
(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 and 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, 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 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, other than the lien in favor of Connecticut General
Life Insurance Company and Cigna Mezzanine Partners II, L.P. with respect to the
stock of Etec Systems Japan Ltd., Etec France, Etec GmbH and Etec Korea; 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
3
<PAGE>
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 are 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 and Etec Polyscan, 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 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
4
<PAGE>
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 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 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 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 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 or other securities or
Blue Sky laws. All issued and outstanding shares of capital stock of
5
<PAGE>
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 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 subsidi-
6
<PAGE>
aries 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 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.
7
<PAGE>
(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
8
<PAGE>
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 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.
(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 and each other securityholder of the
Company on whose behalf the Company has delivered to the Underwriters or their
counsel a copy of an agreement pursuant to which such person has agreed, in
accordance with the terms thereof, that such person will not, for a period of
60 days after the effective date of the Registration Statement with respect to
the officers and directors, and January 20, 1997 with respect to the
securityholders directly or indirectly sell, offer, contract to sell (including
without limitation any short sale), grant any option for the sale of or
otherwise dispose (provided, however, that the foregoing "lock-up" agreement
shall not apply to a sale of all of the shares of Common Stock owned by a
stockholder, including shares issuable upon exercise of options, in a private
transaction, or, in the case of a stockholder which is a partnership, to a
distribution of Common Stock to the partners thereof, provided that in either
such case the purchaser or the distributee agrees in writing to be bound by the
terms of the foregoing "lock-up" agreement) of any shares of Common Stock
including, without limitation, shares (including shares that may be issued upon
conversion of any preferred stock or any debt instrument or upon exercise of an
option or warrant) that may be beneficially owned by, but are not registered in
the name of, such securityholder in accordance with the rules and regulations of
the Commission) or any securities convertible into or exercisable or
exchangeable for such shares.
9
<PAGE>
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 Brobeck, Phleger & Harrison LLP counsel for the
Underwriters, ("Underwriters' Counsel") a complete and accurate list of all
securityholders of the Company and the number and type of securities held by
each securityholder. The Company has provided to Underwriters' Counsel accurate
and complete copies of all of the agreements that are presently in effect and
pursuant to which its officers, directors and securityholders have agreed not to
offer to sell, contract to sell, or otherwise sell, dispose of, loan, pledge or
grant any rights with respect to any shares of Common Stock of the Company, any
options or warrants to purchase any shares of Common Stock of the Company, or
any securities convertible into or exchangeable for shares of Common Stock of
the Company (the "Lock-Up Agreements"). The Company hereby represents and
warrants that it will not release any of its officers, directors or stockholders
from any Lock-Up Agreements currently existing or hereafter effected without the
prior written consent of Robertson, Stephens & Company, L.P.
(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
10
<PAGE>
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).
II. Each Selling Stockholder, severally and not jointly, represents and
warrants to and agrees with each Underwriter and the Company that:
(a) Such Selling Stockholder now has and on the Closing Date, will
have valid marketable title to such of the Shares as are to be sold by such
Selling Stockholder, free and clear of any pledge, lien, security interest,
encumbrance, claim or equitable interest other than pursuant to this Agreement;
such Selling Stockholder has full right, power and authority to sell, assign,
transfer and deliver the Shares which are to be sold by such Selling Stockholder
hereunder; and upon delivery hereunder of the Shares and payment of the purchase
price as herein contemplated, each of the Underwriters will obtain good and
valid marketable 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, in the form heretofore furnished to the Representatives,
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 Chemical Mellon Shareholder
Services LLC 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(g) hereof on behalf of such Selling
Stockholder, to determine the purchase price to be paid by the several
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, to
accept payment therefor, and otherwise to act on behalf of such Selling
Stockholder in connection with this Agreement.
(c) All authorizations, approvals, consents and orders necessary
for 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
11
<PAGE>
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.
(d) Such Selling Stockholder will not, until January 20, 1997,
sell, contract to sell, or otherwise transfer or dispose (other than certain
permitted private sales and other dispositions, provided such transferee agrees
in writing to be bound by the terms of the foregoing "lock-up" agreement) of any
shares of Common Stock of the Company, or any options or warrants to purchase
any shares of Common Stock of the Company, or any securities convertible into or
exchangeable for shares of Common Stock of the Company, held by such Selling
Stockholder (other than those included in the registration), otherwise than
hereunder or with the prior written consent of the Company and the
Representatives. Such Selling Stockholder agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of shares of Common Stock held by such Selling Stockholder except in
compliance with the foregoing restrictions.
(e) 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.
(f) This Agreement has been duly authorized by such Selling
Stockholder that is not a natural person and has been duly executed and
delivered by or on behalf of such Selling Stockholder and is a valid and binding
agreement of such Selling Stockholder, enforceable in accordance with its terms,
except 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 the performance of this Agreement and the consummation of the
transactions herein contemplated 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 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
12
<PAGE>
natural person, result in any violation of any provisions of the charter, bylaws
or other organizational documents of such Selling Stockholder.
(g) 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.
(h) Such Selling Stockholder has not distributed and will not
distribute 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.
(i) All information furnished by or on behalf of such Selling
Stockholder relating to such Selling Stockholder and the Selling Stockholder
Shares that is contained in the representations and warranties of such Selling
Stockholder in such Selling Stockholder's Power of Attorney and all such
information set forth in the Registration Statement and the Prospectus 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.
(j) Such Selling Stockholder will review the 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, or
any later date on which Option Shares are to be purchased, as the case may be,
and will advise one of its Attorneys prior to the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, if any
statement to be made on behalf of such Selling Stockholder in the certificate
contemplated by Section 6(g) would be inaccurate if made as of the Closing Date
or such later date on which Option Shares are to be purchased, as the case may
be.
(k) Such Selling Stockholder does not have, or 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 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
13
<PAGE>
herein set forth, the Company and the Selling Stockholders agree, severally and
not jointly, to sell to the Underwriters, and each 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 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, as determined by you) 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 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 is 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 Underwriters pursuant to this Section 3 shall be made against payment of
the purchase price therefor by the several Underwriters by certified or official
bank check in next-day funds, 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 (and the Company and such
Selling Stockholders agree not to deposit any such check in the bank on which it
is drawn until the day following the date of its delivery to the Company or the
Custodian, as the case may be) at the offices of Pillsbury Madison & Sutro LLP,
235 Montgomery Street, San Francisco, CA 94104 (or at such
14
<PAGE>
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 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 Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or 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 Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
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 Underwriters), the legend appearing
on the inside front cover page and under "Underwriting" in any Preliminary
Prospectus and in the Prospectus filed pursuant to Rule 424(b) constitutes the
only information furnished by the Underwriters to the Company for inclusion in
any Preliminary Prospectus, the Prospectus or the Registration Statement, and
you, on behalf of the respective 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
---------------------------------
Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and amendment 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
15
<PAGE>
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 Underwriters' Counsel, may be necessary or advisable in
connection with the distribution of the Shares by the 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 or
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 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 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
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.
16
<PAGE>
(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 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
17
<PAGE>
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 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 of such fiscal quarter, to retain Price
Waterhouse, LLP or other 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.
(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) The Company will file Form SR in conformity with the
requirements of the Act and the Rules and Regulations.
(k) 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 Underwriters' obligations
hereunder, or if the Company shall terminate the Agreement under Section 11(a),
the Company will reimburse the several Underwriters for all out-of-pocket
expenses (including reasonable fees and disbursements of counsel for the several
Underwriters) incurred by the Underwriters in investigating, preparing to market
or marketing the Shares.
(l) 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
18
<PAGE>
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.
(m) During a period of 60 days from the effective date of the
Registration Statement, 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").
(n) 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.
(o) 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 60 days after the effective date of the
Registration Statement with respect to the officers and directors or January 20,
1997 with respect to the stockholders, without the prior written consent of
Robertson, Stephens and Company, L.P.
5. Expenses.
--------
(a) The Company agrees with each 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 Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney,
19
<PAGE>
and any instruments related to any of the foregoing; the issuance and delivery
of the Shares hereunder to the several Underwriters, 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 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 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. Any additional
expenses incurred as a result of the sale of the Shares by the Selling
Stockholders will be borne collectively by the Company and the Selling
Stockholders. The provisions of this Section 5(a)(i) are intended to relieve the
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 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 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
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 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 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
20
<PAGE>
statement or omission, or any alleged statement or omission, described in
Section 8(b) hereof, it will reimburse the 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
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 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 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 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
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 Underwriters 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) 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
21
<PAGE>
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 Underwriters' Obligations. The obligations of the
---------------------------------------
several 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 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 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 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 and 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 Underwriters and with
reproduced copies or signed counterparts thereof for each of the 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
22
<PAGE>
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, and Etec Polyscan, Inc., 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, other than the lien in favor of Connecticut General Life Insurance
Company and Cigna Mezzanine Partners II, L.P. with respect to the stock of Etec
Systems Japan Ltd., Etec France, Etec GmbH and Etec Korea;
(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.
23
<PAGE>
(viii) The Company has the corporate power and authority to enter
into this Agreement and to issue, sell and deliver to the 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 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, complied as to form in all material respects with requirements of the
Act and the applicable Rules and Regulations;
(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 captions "Legal
Proceedings," "Limitation of Liability and Indemnification Matters,"
"Description of Capital Stock," and "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
24
<PAGE>
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 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 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 subsidiaries having rights to registration of such
shares of Common Stock, or
25
<PAGE>
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 or 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 Underwriters' Counsel (or
such local counsel may deliver separate opinions directly to the 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
Underwriters, and to 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, to the effect that:
26
<PAGE>
(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 hereto (the "Patent Applications").
of such Patent Applications, listed on Exhibit B hereto,
- --------------------
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 hereto, 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; and
(iii) to such counsel's knowledge and except as set forth on Exhibit
D hereto, 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.
(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 (the "Patents") 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 and on any later date
on which Option Shares are purchased, as the case may be, an opinion from
counsel for the respective Selling Stockholders, which counsel shall be
reasonably satisfactory to you, each dated the Closing Date or such later date
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the 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, Custody Agreement and Lock-
Up Agreement
27
<PAGE>
to be executed and delivered by it in connection with the transactions
contemplated herein; the Power of Attorney, Custody Agreement and Lock-Up
Agreement of such Selling Stockholder that is not a natural person has been duly
authorized by such Selling Stockholder; the Power of Attorney, Custody Agreement
and Lock-Up Agreement of the Selling Stockholder has been duly executed and
delivered by or on behalf of such Selling Stockholder; and the Power of
Attorney, Custody Agreement and Lock-Up 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 valid
marketable 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 without notice of any defect in the title of any of such
Selling Stockholders to the Shares being purchased from such Selling
Stockholders.
(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
28
<PAGE>
Waterhouse, LLP addressed to the Company and the 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
Underwriters setting forth their opinion with respect to their examination of
the consolidated balance sheet of the Company as of April 30, 1996 and related
consolidated statements of operations, shareholders' equity, and cash flow for
the twelve months ended July 31, 1995 and the nine months ended April 30, 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 April 30, 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;
29
<PAGE>
(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, 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, or any later date on which Option Shares
are to be purchased, as the case may be, from the Attorneys for each Selling
Stockholder to the effect that, as of the Closing Date, or any later date on
which Option Shares are to be purchased, as the case may be, 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 on any later date on which Option Shares are to be purchased, as
the case may be; 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.
30
<PAGE>
(j) The Company shall have obtained and delivered to you a copy of a
Lock-Up Agreement for certain of the Company's securityholders. Each such person
shall also agree and consent to the entry of stop transfer instructions with the
Company's transfer agent against the transfer of shares of Common Stock held by
such person except in compliance with the foregoing restrictions.
(k) 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 Underwriters hereunder.
All such opinions, certificates, letters and documents will be in
compliance with the provisions hereof only if they are reasonably satisfactory
to 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 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 690,000 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 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 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 Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several 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 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 Underwriters by certified or official bank check or
checks drawn in next-day funds,
31
<PAGE>
payable to the order of the Company (and the Company agrees not to deposit any
such check in the bank on which it is drawn until the day following the date of
its delivery to 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 Underwriters, may (but shall not be obligated to) make payment of the
purchase price on behalf of any Underwriter or 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 Underwriter or
Underwriters. Any such payment by you shall not relieve any Underwriter or
Underwriters of any of its or their obligations hereunder.
The several 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 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 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 and the Selling Stockholders herein, to the accuracy of the statements
of the Company, the Selling Stockholders and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their respective 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 Underwriters' Counsel, and you
shall have been
32
<PAGE>
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 and the Selling Stockholders or the compliance with any
of the conditions herein contained.
8. Indemnification and Contribution.
--------------------------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
against any losses, claims, damages or liabilities, joint or several, to which
such Underwriter may become subject (including, without limitation, in its
capacity as an 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 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 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 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 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 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 person, if any,
who controls any Underwriter within the meaning of the Act. This indemnity
agreement shall be in addition to any liabilities which the Company may
otherwise have.
33
<PAGE>
(b) Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter 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 any
Underwriter, 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. 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 Underwriter, directly or through such Selling Stockholder's
representatives, specifically for inclusion therein, and, subject to Section
8(f), agrees to reimburse each 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 indemnity agreement in this Section 8(b) shall extend upon the same
terms and conditions to, and shall inure to the benefit of each person, if any,
who controls any 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 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
34
<PAGE>
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
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
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 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
35
<PAGE>
participate in the defense of such action on behalf of such indemnified party or
parties. 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 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 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 responsible for the remaining portion, provided, however, that (i) no
Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Shares purchased by such 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 as to any Underwriter to the extent that the Company or
any Selling Stockholder has received indemnity under this 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 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 hereof and under the indemnity,
reimbursement and contribution agreements contained in the provisions of this
Section 8 shall be limited
36
<PAGE>
to an amount equal to the initial public offering price of the Selling
Stockholder Shares sold by such Selling Stockholder to the Underwriters minus
the amount of the underwriting discount paid thereon to the Underwriters by such
Selling Stockholder. The Company and such Selling Stockholders may agree, as
among themselves and without limiting the rights of the Underwriters under this
Agreement, as to the respective amounts of such liability for which they each
shall be responsible.
(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 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 Underwriters hereunder or termination of this Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
----------------------------
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or 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 Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining Underwriters
shall be obligated, severally in proportion to their respective commitments
hereunder, to take up and pay for the Firm Shares of such defaulting Underwriter
or Underwriters.
If any Underwriter or Underwriters so defaults and the aggregate number
of Firm Shares which such defaulting Underwriter or Underwriters agreed but
failed to take up and pay for exceeds 10% of the Firm Shares, the remaining
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 Underwriter or
37
<PAGE>
Underwriters so agreed but failed to purchase. If such remaining Underwriters do
not, at the Closing Date, take up and pay for the Firm Shares which the
defaulting Underwriter or 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 Underwriters the privilege of substituting within
twenty-four hours another underwriter or underwriters (which may include any
nondefaulting 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 Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriters to take up the Firm Shares of the
defaulting Underwriter or 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 Underwriters and substituted underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or 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 Underwriter (except as provided in Sections
4(k), 5 and 8 hereof) nor shall any Underwriter (other than an Underwriter who
shall have failed, otherwise than for some reason permitted under this
Agreement, to purchase the number of Firm Shares agreed by such Underwriter to
be purchased hereunder, which Underwriter shall remain liable to the Company,
the Selling Stockholders and the other 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 "Underwriter" in this Agreement shall include any person
substituted for an 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
38
<PAGE>
the Registration Statement, or (ii) the time of the initial public offering of
any of the Shares by the 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 advertisement relating
to the sale of the Shares, or the time at which the Shares are first generally
offered by the 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(l), 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 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(l), 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(l) and 5 hereof.
39
<PAGE>
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 Robertson, Stephens & Company, 555 California
Street, 26th Floor, San Francisco, California 94111, telecopier number
(415) 781-0278, Attention: Syndicate; 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, (510) 783-9210.
13. Parties. This Agreement shall inure to the benefit of and be binding
-------
upon the several 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 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. Applicable Law. This Agreement shall be governed by, and construed in
--------------
accordance with, the laws of the State of California.
40
<PAGE>
15. Counterparts. This Agreement may be signed in several counterparts,
------------
each of which will constitute an original.
41
<PAGE>
If the foregoing correctly sets forth the understanding among the
Company, the Selling Stockholders and the several 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 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:
ROBERTSON, STEPHENS & COMPANY, L.P.
NEEDHAM & COMPANY, INC.
On their behalf and on behalf of
each of the several Underwriters
named in Schedule A hereto.
ROBERTSON, STEPHENS & COMPANY, L.P.
By ROBERTSON, STEPHENS & COMPANY, INC.
By:
-----------------------------------
Authorized Signatory
-----------------------------------
Please Print Name
42
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
Number of
Firm Shares
Underwriters To Be Purchased
- ------------------------------- ---------------
<S> <C>
Robertson, Stephens & Company, L.P....................
Needham & Company, Inc.
Total............................................ 4,600,000
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
Number of
Company
Shares
Company To Be Sold
- ------------------------- ----------
<S> <C>
500,000
</TABLE>
<TABLE>
<CAPTION>
Number of
Selling
Stockholder
Shares
Name of Selling Stockholder To Be Sold
- ------------------------------------- -----------
<S> <C>
Total.................................. 4,100,000
</TABLE>
<PAGE>
EXHIBIT 5.1
[PILLSBURY MADISON & SUTRO LLP LETTERHEAD]
May 23, 1996
Etec Systems, Inc.
26460 Corporate Avenue
Hayward, CA 94545
Re: Registration Statement on Form S-1
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 5,290,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"), of the Company (including 690,000 shares subject to the
underwriters' over-allotment option), of which 1,190,000 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-1 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
<PAGE>
Etec Systems, Inc.
May 23, 1996
Page 2
name under the caption "Legal Matters" in the Registration Statement and in the
Prospectus included therein.
Very truly yours,
/s/ Pillsbury Madison & Sutro LLP
<PAGE>
EXHIBIT 10.27
AMENDMENT THREE TO LEASE AGREEMENT
APRIL 3, 1996
________________________________________
The following paragraphs hereby amend the current corresponding paragraphs to
the Lease Agreement between Beaverton-Redmond Tech Properties, a joint venture
("Landlord"), and ETEC Systems, Inc., successor in interest to ATEQ Corporation
("Tenant"), dated June 18, 1985, as amended May 15, 1987, and September 20, 1989
(the "Lease"), and are incorporated therein as of the stated date hereof. In
the event of a conflict in the interpretation of any preceding paragraphs of the
Lease and this amendment, the provisions of the amendment shall prevail.
Amendment to Paragraph 1 - Lease Term. The Lease term shall be extended Thirty
- -------------------------------------
Six (36) months, commencing on July 1, 1996 and ending on June 30, 1999.
Amendment to Paragraph 2 - Monthly Base Rent. Effective July 1, 1996, the
- --------------------------------------------
Monthly Base Rent as provided for in Paragraph 2 of the Lease shall be increased
to Fifty Thousand Five Hundred Fifty Six and No/100 Dollars ($50,556.00).
Additional Paragraph 28 - Tenant Improvement Allowance. Landlord shall provide
- ------------------------------------------------------
Tenant a Tenant Improvement Allowance of $176,358 to be administered as follows.
Within thirty (30) days of submission by Tenant to Landlord of invoices for
actual allowable expenditures by Tenant for alterations to the Premises and
receipt of lien releases, if applicable, from any one who has supplied work to
the property, Landlord shall reimburse Tenant for expenditures up to a maximum
of $176,358. Allowable expenditures under this paragraph shall be expenditures
for construction of alterations or improvements to the Premises, fees for
architectural, engineering, consulting, or brokerage services related to such
alterations or improvements or to negotiation of this amendment to lease or
costs of permits or other fees.
Additional Paragraph 29 - Erisa Provision. Tenant warrants and represents that
- -----------------------------------------
Tenant is not a contributing employer or otherwise a "party-in-interest" (within
the meaning of Section 3(14) of the Employee Retirement Income Security Act of
1974 ("ERISA") with respect to any one or more of the employee benefit plans
listed on Exhibit D. If there is any extension or renewal provision in this
Lease, Tenant may be required, as a condition to any such extensions or renewal,
to reaffirm the warranty and representation in this Section. With the exception
of this Lease, neither the Tenant nor any affiliate of Tenant is a tenant under
a lease or any other tenancy agreement (1) with (a) The Riggs National Bank of
Washington, D.C., as Trustee of the Multi-Employer Property Trust; (b) the
Multi-Employer Property Trust; (c) The National Bank of Washington Multi-
Employer Property Trust, the previous name of the Multi-Employer Property Trust;
(d) Alameda Industrial Properties Joint Venture; (e) Harman International
Business Campus Joint Venture; (f) Beaverton-Redmond Tech Properties; (g)
Corporate Drive Corporation as trustee of the Corporate Drive Nominee Realty
Trust; (h) Goldbelt Place Joint Venture; or (i) Boca 1515, a joint venture; or
(2) involving any property in which any one or more of the entities named in
clauses (a) through (i) are known by the Tenant to have an ownership interest.
Additional Paragraph 30 - Liability of Landlord. Tenant agrees that no trustee,
- -----------------------------------------------
officer, employee, agent or individual partner of Landlord, or its constituent
entities, shall be personally liable for any obligation of Landlord hereunder,
and that Tenant must look solely to the interests of Landlord, or its
constituent entities, in the subject real estate, for the enforcement of any
claims against Landlord arising hereunder. Landlord has executed this Lease by
the Investment Advisors of its Joint Venturers (the "Investment Advisors")
signing in a representative capacity. The Investment Advisors execute, not
personally, but solely in a representative capacity for Landlord. Anything
contained in this Lease to the contrary notwithstanding, Tenant confirms that
each and all of the covenants, undertakings, and agreements of Landlord are made
and intended, not as personal covenants, undertakings, and agreements of the
Investment Advisors, or for the purpose of binding the Investment Advisors
personally, but solely in the exercise of the power conferred upon the
Investment Advisors by their principals and in a representative capacity. No
personal liability or personal responsibility is assumed by, nor shall at any
time be asserted or enforced against the Investment Advisors of Landlord, or any
beneficiary of the Landlord, on account of any covenant, undertaking, or
agreement contained in or claim made under this Lease. Any and all personal
liability, if any, beyond that which may be asserted under this paragraph, is
expressly waived and released by Tenant and by all persons claiming by, through
or under Tenant.
Additional Paragraph 31 - Hazardous Substances. The following defined terms are
- ----------------------------------------------
used within this paragraph:
1
<PAGE>
Governmental Agency: The United States of America, the state in which the
-------------------
Land is located, any county, city, district, municipality of other
governmental subdivision, court or agency or quasi-governmental agency
having jurisdiction over the Land and any board, agency or authority
associated with any such governmental entity, including the fire department
having jurisdiction over the Land.
Governmental Requirements: Any and all statutes, ordinances, codes, laws,
-------------------------
rules, regulations, orders and directives of any Governmental Agency as now
or later amended.
Hazardous Substance(s): Asbestos, PCBs, petroleum or petroleum-based
----------------------
chemicals or substances, urea formaldehyde or any chemical, material,
element, compound, solution, mixture, substance or other matter of any kind
whatsoever which is now or later defined, classified, listed, designated or
regulated as hazardous, toxic or radioactive by any Governmental Agency.
Landlord's Agents: Any and all partners, officers, agents, employees,
-----------------
trustees, investment advisors and consultants of Landlord.
Tenant's Agents: Any and all officers, contractors, subcontractors,
---------------
licensees, agents, concessionaires, subtenants, servants, employees,
customers, guests, invitees or visitors of Tenant.
Tenant agrees that neither Tenant, any of Tenant's Agents nor any other person
will store, place, generate, manufacture, refine, handle, or locate on, in,
under or around the Business Park any Hazardous Substance, except for (1)
storage, handling and use of reasonable quantities of cleaning fluids and office
supplies in the Premises to be used in the ordinary course of business in the
Premises, or (2) storage, handling, and use and disposal of reasonable
quantities of the Substances described in Exhibit E to be used in the ordinary
course of Tenant's business in the Premises as reasonably necessary to
accomplish the Permitted Use; provided that, (a) the storage, handling, use and
disposal use of such permitted Hazardous Substances must at all times conform to
all Governmental Requirements and to applicable fire, safety and insurance
requirements; (b) the types and quantities of permitted Hazardous Substances
which are stored in the Premises must be reasonable and appropriate to the
nature and size of Tenant's operation in the Premises; (c) no Hazardous
Substance shall be spilled or disposed of on, in, under or around the Business
Park or any area adjacent to the Business park; and (d) in no event will Tenant
be permitted to store, handle or use on, in, under or around the Premises any
Hazardous Substance which will increase the rate of fire or extended coverage
insurance on the Business Park, unless: (1) such Hazardous Substance and the
expected rate increase have been specifically disclosed in writing to Landlord;
(2) Tenant has agreed in writing to pay any rate increase related to each such
Hazardous Substance; and (3) Landlord has approved in writing each such
Hazardous Substance, which approval shall be subject to Landlord's sole
discretion.
Tenant shall indemnify, defend and hold harmless Landlord and Landlord's Agents
from and against any and all claims, demands, damages, injuries, losses, liens,
liabilities, penalties, fines, lawsuits, actions, and other procedures and
expenses, including attorneys' fees and court costs at trial and or appeal,
arising out of any breach of any provision of this paragraph, which expenses
shall also include laboratory testing fees, personal injury claims, cleanup
costs and environmental consultants' fees. Tenant agrees that Landlord may be
irreparably harmed by Tenant's breach of this paragraph and that a specific
performance action may appropriately be brought by Landlord; provided that,
Landlord's election to bring or not bring any such specific performance action
shall in no way limit, waive, impair or hinder Landlord's other remedies against
Tenant.
As of the execution date of this Lease, Landlord represents and warrants to
Tenant that, except as otherwise disclosed by Landlord to Tenant, the Investment
Advisors of the Venturers of Landlord who are in charge of the affairs of the
Business Park have no actual knowledge of any Hazardous Substances on, in or
under the Premises in violation of any applicable Governmental Requirements,
Tenant acknowledges that the Investment Advisors of the Venturers have not
conducted any independent inquiry or investigation of the Business Park other
than the environmental and site assessment report for the Business Park in the
files of Landlord.
Additional Paragraph 32 - Broker. Tenant's broker is Corporate Realty Advisors
- --------------------------------
("Tenant's Broker"). Except for such broker, Tenant covenants, warrants and
represents that it has not engaged any broker, agent or finder who would be
entitled to any commission or fee in connection with the negotiation and
execution of this Lease. Tenant agrees to indemnify and hold harmless Landlord
against and from any claims for any brokerage commissions and all costs,
expenses and liabilities in connection therewith,
2
<PAGE>
including attorneys' fees and expenses, arising out of any charge or claim for a
commission or fee by any broker, agent or finder on the basis of any agreements
made or alleged to have been made by or on behalf of Tenant including Tenant's
Broker but excluding any brokers with whom Landlord has an express written
brokerage agreement. Notwithstanding the above, Tenant may request reimbursement
of fees paid by it to Tenant's Broker as an allowable expenditure under the
Tenant Improvement Allowance.
Additional Paragraph 33 - Option to Renew. While this Lease is in full force
- -----------------------------------------
and effect, provided that Tenant is not in default of any of the terms,
covenants and conditions thereof, Landlord grants to Tenant one (1) option to
extend the term of the Lease for a period of three (3) years, commencing July 1,
1999, exercisable by giving Landlord notice in writing not later than December
31, 1998. Such extension or renewal of the term shall be on the same terms,
covenants or conditions as provided for in the original or immediately preceding
term except that the monthly base rent during the extended term shall be 95% of
the fair market rental then in effect for the term covered by the option for
equivalent properties, of equivalent size, in the Highway 217 area of Beaverton.
However, in no event shall the rental in the renewal term be below the rental in
the primary term of the Lease.
By: /s/ Mark T. Walsh
-----------------
Mark T. Walsh, CPM(R), RPA(R)
Vice President
Date: 4/18/96
By: Riggs National Bank, N.A. as Trustee of
the Multi-Employer Property Trust, Venturer
By: /s/ Maria Fleming
-----------------
Maria Fleming
Senior Trust Officer
Date: 4/19/96
TENANT:
ETEC SYSTEMS, INC.,
successor in interest to ATEQ Corporation
By: /s/ Melanie J. Mock
-------------------
Name: Melanie J. Mock
-------------------
Its: Treasurer
--------------------
Date: April 9, 1996
-------------------
3
<PAGE>
Beaverton Material Safety Data Sheet Listing
EXHIBIT E
<TABLE>
<CAPTION>
====================================================================
REVISION 3
- --------------------------------------------------------------------
DATE 3/19/96
- --------------------------------------------------------------------
PRODUCT MANUFACTURER/ADDRESS
<S> <C>
- ---------------------------------------------------------------------
*2001 Stripper OCG
- ---------------------------------------------------------------------
*3-Methoxy Propionic Acid OCG
- ---------------------------------------------------------------------
*8951 Resist KTI (OCG)
- ---------------------------------------------------------------------
*934 Developer KTI (OCG)
- ---------------------------------------------------------------------
*950 Developer KTI (OCG)
- ---------------------------------------------------------------------
*ARC Cleaner Brewer
- ---------------------------------------------------------------------
*Nitric Acid Mallinckrodt
- ---------------------------------------------------------------------
*NMD-3 Developer TOK
- ---------------------------------------------------------------------
*NMD-W TOK
- ---------------------------------------------------------------------
*OIR 32 Resist OCG
- ---------------------------------------------------------------------
*OPD-4262 Developer OCG
- ---------------------------------------------------------------------
*PEH-1 Pre-Etch Cyantek
- ---------------------------------------------------------------------
*PM Acetate KTI (OCG)
- ---------------------------------------------------------------------
*RBS-35 Sulfuric Acid Pierce
- ---------------------------------------------------------------------
*SD-1 Silicon Valley Chemlab
- ---------------------------------------------------------------------
*SVC Cleaner Silicon Valley Chemlab
- ---------------------------------------------------------------------
*Tergitol (Soap) KTI (OCG)
- ---------------------------------------------------------------------
*THML-IP3500 Resist TOK
- ---------------------------------------------------------------------
**825 Resist KTI (OCG)
- ---------------------------------------------------------------------
**AZ425 MIF Developer Shipley
- ---------------------------------------------------------------------
**CC200 Developer Cyantek
- ---------------------------------------------------------------------
**Dualtone Resist CX-875 KTI (OCG)
- ---------------------------------------------------------------------
**Megaposit 3813 Resist Shipley
- ---------------------------------------------------------------------
**Negative I Line LMB OCG
7011
- ---------------------------------------------------------------------
**TSMR-I-1100 Resist TOK
- ---------------------------------------------------------------------
**Spin on Glass Accuglass
- ---------------------------------------------------------------------
2-Propanol JT Baker,
Phillipsburg, NJ 08865
- ---------------------------------------------------------------------
3M 4323 Construction 3M Corp.
Mastic
- ---------------------------------------------------------------------
3M Desk & Office Cleaner 3M Corp. (612) 733-
573 0110 Operator 55
- ---------------------------------------------------------------------
945 Developer OCG
- ---------------------------------------------------------------------
Acetone JT Baker,
Phillipsburg, NJ 08865
- ---------------------------------------------------------------------
Acetone UN1090 CAS67-64-1 Baxter
- ---------------------------------------------------------------------
</TABLE>
Page 1
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Ammonium Biflouride Mallinkrodt, Inc., PO
Box M, Paris, KY 40361
- ---------------------------------------------------------------------
Anti-Static Spray R.A., 22 Jericho
Turnpike, Mineola, NY
11501
- ---------------------------------------------------------------------
AP-10 Process Cleaner Cyantek
- ---------------------------------------------------------------------
Braycote 631RP Burmah-Castrol
- ---------------------------------------------------------------------
Braycote 813A Burmah Castrol
- ---------------------------------------------------------------------
Calcium Carbonate Mallinkrodt, Inc., PO
Box M, Paris, KY 40361
- ---------------------------------------------------------------------
Cleaner for Static 3M Electrical
Control Mats Specialties Div.,
Austin, TX 78726-9000
- ---------------------------------------------------------------------
Computer Print Off R.A., 22 Jericho
Turnpike, Mineola, NY
11501
- ---------------------------------------------------------------------
Conductive Cleaner #6002 ACL Inc., Elk Grove
Village, IL 60007
- ---------------------------------------------------------------------
CR-3 Etchant Cyantek
- ---------------------------------------------------------------------
Decap Dynaloy, Inc., 7 Great
Meadow Ln., Hanover,
NJ 07936
- ---------------------------------------------------------------------
Desk and Office Cleaner 3M Commercial Office
573 Supply Div., St. Paul,
MN 55144-1000
- ---------------------------------------------------------------------
Dynasolve 165 Dynaloy, Inc., 7 Great
Meadow Ln., Hanover,
NJ 07936
- ---------------------------------------------------------------------
Dynasolve 185 Dynaloy, Inc., 7 Great
Meadow Ln., Hanover,
NJ 07936
- ---------------------------------------------------------------------
Epo-Tek 301 Epoxy Technology Inc.
- ---------------------------------------------------------------------
Epo-Tek 302-3 Epoxy Technology Inc.
- ---------------------------------------------------------------------
Epoxi-Patch Kit #907 Blue Hysol, 2850 Willow
Pass Rd., Pittsburgh,
CA 94585 (415) 687-
4201
- ---------------------------------------------------------------------
Flux Remover MicroCare Corp., 34
Ronzo Rd., Bristol, CT
06010
- ---------------------------------------------------------------------
Frozen Adhesive Able Stik
- ---------------------------------------------------------------------
GE RTV 102 GE Silicones,
Waterford, NY 12188
(518) 237-0737
- ---------------------------------------------------------------------
GE RTV 162 GE Silicones,
Waterford, NY 12188
(518) 237-0737
- ---------------------------------------------------------------------
Grease Apiezon L Apiezon
- ---------------------------------------------------------------------
H.M.D.S. KTI
- ---------------------------------------------------------------------
Hexane JT Baker,
Phillipsburg, NJ 08865
- ---------------------------------------------------------------------
Insulating Varnish 10- GC Electronics,
9002 Rockford, IL 61102
- ---------------------------------------------------------------------
IPA KTI
- ---------------------------------------------------------------------
IsoPropyl Alcohol CAS 67- Baxter
63-0
- ---------------------------------------------------------------------
Krytox Flourinated Oil Dupont
143 AY
- ---------------------------------------------------------------------
Lab Clean All Purpose EKC Technology Inc.,
Cleaner 1739 Sabre St.,
Hayward, CA 94545 (510
887-3711
- ---------------------------------------------------------------------
LocQuic Primer 7471 Loctite Corp.
- ---------------------------------------------------------------------
</TABLE>
Page 2
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Loctite 222 Threadlocker Loctite Corp.
- ---------------------------------------------------------------------
Loctite 242 Loctite Corp.
- ---------------------------------------------------------------------
Loctite 290 Loctite Corp.
Adhesive/Sealant
- ---------------------------------------------------------------------
Loctite 292 Loctite Corp.
Adhesive/Sealant
- ---------------------------------------------------------------------
Loctite Accelerator 712 Loctite Corp.
- ---------------------------------------------------------------------
Loctite Activator 11476 Loctite Corp.
- ---------------------------------------------------------------------
Loctite BlackMax 38050 Loctite Corp.
- ---------------------------------------------------------------------
Loctite Naval Jelly 80278 Loctite Corp.
- ---------------------------------------------------------------------
Loctite Primer T Loctite Corp.
- ---------------------------------------------------------------------
Loctite Primer T 747 Loctite Corp.
- ---------------------------------------------------------------------
Loctite PST Loctite Corp.
- ---------------------------------------------------------------------
Loctite RC/609 Retaining Loctite Corp.
Compound
- ---------------------------------------------------------------------
Loctite RC/680 Retaining Loctite Corp.
Compound
- ---------------------------------------------------------------------
Loctite Speedbonder 325 Loctite Corp.
- ---------------------------------------------------------------------
Loctite Superbonder 420 Loctite Corp.
- ---------------------------------------------------------------------
Loctite Superbonder 495 Loctite Corp.
- ---------------------------------------------------------------------
Loctite TakPak 444 Loctite Corp.
- ---------------------------------------------------------------------
Methanol Baxter
- ---------------------------------------------------------------------
Microscope Cleaning Kit Texwipe Co., Upper
Saddle River, NJ 07548
- ---------------------------------------------------------------------
Miller Stephenson Clean Miller Stephenson Co.,
Solvent MS944 12261 Foothill Blvd.,
Sylmar, CA 91342
- ---------------------------------------------------------------------
Miller Stephenson Flux Miller Stephenson Co.,
Remover MS195 12261 Foothill Blvd.,
Sylmar, CA 91342
- ---------------------------------------------------------------------
Molycote G-n Paste Dow Corning
- ---------------------------------------------------------------------
Nanostrip Cyantek
- ---------------------------------------------------------------------
NSK Grease No. 1 Nippon Seiko K.K.
- ---------------------------------------------------------------------
Parker Super O Lube Parker Seals
- ---------------------------------------------------------------------
Permatex Poxy-Pak 81120 Permatex, Newington,
CT 06111
- ---------------------------------------------------------------------
Poxy Pak TC-533 Permatex Corp.,
Newington, CT 06111
- ---------------------------------------------------------------------
Rector Seal Pipe Thread Rector Seal Corp. 2830
Compound No. 5 Produce Row, Houston,
TX 77023-5822
- ---------------------------------------------------------------------
Reztore Antistatic Charles Water, 93
Surface Cleaner #10422 Border St., West
Newton, MA 02165
- ---------------------------------------------------------------------
Rosin Core Solder Kester Corp., Des
Plaines, IL 60018-2675
- ---------------------------------------------------------------------
RS-2 Stripper Cyantek
- ---------------------------------------------------------------------
RTV Silicone Rubber GE Silicones,
Waterford, NY 12188
(518) 237-0737
- ---------------------------------------------------------------------
ScotchWeld DP-110 ID #62- 3M
3533-1434-7
- ---------------------------------------------------------------------
ScotchWeld DP-190 ID #62- 3M
3553-1435-2
- ---------------------------------------------------------------------
Silicone Stripper Unmarked Bottle
- ---------------------------------------------------------------------
</TABLE>
Page 3
<PAGE>
<TABLE>
<S> <C>
- ---------------------------------------------------------------------
Staticide ACL Inc., Elk Grove
Village, IL 60007
- ---------------------------------------------------------------------
Stripper 1534 Park's Corp.,
Somerset, MA 02726
- ---------------------------------------------------------------------
Super Alloy Silver 500 Philadelphia Resin, PO
3300-U Box 309,
Montgomeryville, PA
18936
- ---------------------------------------------------------------------
Tech Spray Coolant 1672- Tech Spray Inc., PO
10S Box 949, Amarillo, TX
79105
- ---------------------------------------------------------------------
Tech Spray Holding Foam Tech Spray EC Ltd., 55
2101-12S East Parade, Harrogate
HG1 5LQ, North
Yorkshire, UK
- ---------------------------------------------------------------------
Tech Spray Mat & Table Tech Spray Inc., PO
Top Cleaner Box 949, Amarillo, TX
79105
- ---------------------------------------------------------------------
Techform TC-564 Techform Labs Inc.,
2021 N. Glassell St.,
Orange, CA 92665
- ---------------------------------------------------------------------
Texwipe Glass/Plastic Texwipe Corp.
Cleaner 100 TX150
- ---------------------------------------------------------------------
Thinner for Rubber Cement Sanford Corp.,
#00092 Bellwood, IL 60104
- ---------------------------------------------------------------------
Vac Goop Swagelok Crawford Fitting
Company, 29500 Solon
Rd., Solon, Ohio 44139
- ---------------------------------------------------------------------
WD-40 Spray Lube WD 40 Co., San Diego,
CA 92110
- ---------------------------------------------------------------------
Weld-On PVC Cement 711 Industrial
Polychemical Service,
Gardena, CA 90247
- ---------------------------------------------------------------------
Weld-On PVC Primer P-70-C Industrial
Polychemical Service,
Gardena, CA 90247
- ---------------------------------------------------------------------
ZipStrip 72008 Star Bronze, PO Box
2206, Alliance, OH
44601-0206
- ---------------------------------------------------------------------
* Small chemical samples for testing
** Items that are designated for disposal
=================================================================
</TABLE>
Page 4
<PAGE>
EXHIBIT 10.29
ETEC Etec Systems, Inc.
26460 Corporate Avenue
Hayward, CA 94545 USA
(510) 783-9210
Fax (510) 887-2870
January 25, 1996
Mr. Edward Lewis
Managing Director
CIGNA Investment Management
900 Cottage Grove Road, S-307
Hartford, CT 06002
Re: Etec Systems, Inc. (the "Company")
10.65% Senior Secured Notes due November 15, 2000 (as amended, the
"Notes")
Dear Ed:
As discussed, the Company intends to prepay $5,000,000 in principal amount
of the Notes on January 25, 1996, plus interest in the amount of $289,917
accrued on such principal amount to the date of prepayment (the "Prepayment").
The Company and the holders of the Notes (such holders, collectively,
"CIGNA") hereby agree that, to the extent (and only to the extent) set forth
herein, the Note Purchase Agreement dated as of November 15, 1991 (as amended
from time to time and as in effect on the date hereof, the "Note Purchase
Agreement") and the Excess Cash Sharing Agreement dated as of January 2, 1995
(as amended from time to time and as in effect on the date hereof, the "Cash
Sharing Agreement") are amended, and compliance with certain provisions thereof
are waived, as set forth below:
1. The Company and CIGNA hereby agree that the $5,000,000 principal
component of the Prepayment shall be applied to the Notes as follows:
(a) $687,500 to satisfy the May 15, 1996 required principal
prepayment;
(b) $687,500 to satisfy the August 15, 1996 required principal
prepayment;
(c) $625,000 to reduce the February 15, 2000 required principal
prepayment;
(d) $687,500 to satisfy the May 15, 2000 required principal
prepayment;
(e) $687,500 to satisfy the August 15, 2000 required principal
prepayment;
and
(f) $1,625,000 to satisfy the November 15, 2000 required
principal payment.
2. Compliance with the notification provisions and notice timing
provisions of Section 5 of the Note Purchase Agreement, as they relate to
the Prepayment, is hereby waived.
3. The payment obligation, if any, of the Company to CIGNA under the
Cash Sharing Agreement in respect of the fiscal year of the Company ended
July 31, 1996 (such payment obligation, the "1996 Cash Sharing Payment") is
deemed satisfied in all respects; provided, however, that no obligation of
the Company under the Cash Sharing Agreement in respect of any fiscal year
other than that ended July 31, 1996 shall be affected hereby, and provided
further that CIGNA shall have no obligation to return the 1996 Cash Sharing
Payment to the Company if no payment, or a lesser payment, would otherwise
be due under the Cash Sharing Agreement in respect of the fiscal year of
the Company ended July 31, 1996.
Other than as expressly set forth herein, the terms and provisions of the
Note Purchase Agreement and the Cash Sharing Agreement shall not be affected
hereby and the Company hereby acknowledges and affirms all of its obligations
under each such agreement and each other Financing Document (as such term is
defined in the Note Purchase Agreement).
<PAGE>
The Company acknowledges its obligations under Section 1.5 of the Note
Purchase Agreement in connection with the Prepayment.
This letter agreement shall be construed, interpreted and enforced in
accordance with, and governed by, internal Connecticut law.
If CIGNA is in agreement with the terms and conditions set forth in this
letter agreement, kindly sign in the space provided below and return a copy
hereof to the Company.
Sincerely,
ETEC SYSTEMS, INC.
By: /s/ Melanie J. Mock
-------------------------
Name: Melanie J. Mock
Title: Treasurer
Accepted:
CIG & CO. (AS NOMINEE FOR EACH OF
CONNECTICUT GENERAL LIFE INSURANCE COMPANY AND
CIGNA MEZZANINE PARTNERS II, L.P.)
By: /s/ Edward Lewis
--------------------------
Name: Edward Lewis
Title: Partner
2
<PAGE>
EXHIBIT 10.30
ETEC SYSTEMS, INC.
INTEL CORPORATION
_________________________________________
INVESTOR AGREEMENT
THIS INVESTOR AGREEMENT (this "Agreement") is made and entered into as of
the day of , 1996, by and among ETEC SYSTEMS, INC. a Nevada
---- ----------- ------------------
corporation (the "Company"), and INTEL CORPORATION, a Delaware corporation (the
-----------------
"Investor").
RECITALS:
A. Contemporaneously with the execution and delivery hereof, the Investor
is purchasing from the Company, and the Company is selling to the Investor,
( ) shares of the Company's Common Stock (as defined in
- -------------------- -----
Section 1 below) pursuant to the Common Stock Purchase Agreement (as defined in
Section 1 below), and the Company is at the same time issuing the Warrants (as
defined in Section 1 below) to the Investor.
B. In connection with the Investor's acquisition of Common Stock and the
Warrants, the Investor and the Company are entering into this Investor Agreement
to provide for certain rights and obligations with respect thereto.
SECTION 1
---------
Definitions
-----------
1.1 Certain Definitions. As used in this Agreement, the following terms
-------------------
shall have the meanings set forth below:
(a) "Affiliate" shall have the meaning specified in Rule 12b-2 under the
Exchange Act, as such rule is currently in effect.
(b) "Commission" shall mean the Securities and Exchange Commission or any
other federal agency at the time administering the Securities Act.
(c) "Common Stock" shall mean the Common Stock, par value $.01 per share,
of the Company.
(d) "Common Stock Purchase Agreement" shall mean that certain Common Stock
Purchase Agreement dated as of May , 1996 by and between the Company and the
--
Investor.
-1-
<PAGE>
(e) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(f) "Holder" shall mean the Investor, so long as the Investor holds
Registrable Securities, and any holder of Registrable Securities to whom the
registration rights conferred by this Agreement have been transferred in
compliance with Section 5 hereof.
(g) "Initial Public Offering" shall mean the initial sale of Common Stock
of the Company to the public which is effected pursuant to a registration
statement filed with, and declared effective by, the SEC under the Securities
Act.
(h) "Other Shareholders" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their securities
in certain registrations.
(i) "Registrable Securities" shall mean (i) shares of Common Stock
purchased by the Investor from the Company pursuant to the Common Stock Purchase
Agreement, (ii) any shares of Common Stock issued or issuable upon complete or
partial exercise of the Warrants, and (iii) any shares of Common Stock issued as
a dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (i) and (ii) above, provided, however,
that Registrable Securities shall not include any shares of Common Stock which
have previously been registered or which have been sold to the public.
(j) The terms "register," "registered" and "registration" shall refer to a
registration effected by preparing and filing a registration statement in
compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(k) "Registration Expenses" shall mean all expenses incurred in effecting
any registration pursuant to this Agreement, including, without limitation, all
registration, qualification, and filing fees, printing expenses, escrow fees,
fees and disbursements of counsel for the Company, blue sky fees and expenses,
and expenses of any regular or special audits incident to or required by any
such registration, but shall not include Selling Expenses and fees and
disbursements of counsel for the Holders (but excluding the compensation of
regular employees of the Company, which shall be paid in any event by the
Company).
(l) "Rule 144" shall mean Rule 144 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
-2-
<PAGE>
(m) "Rule 145" shall mean Rule 145 as promulgated by the Commission under
the Securities Act, as such Rule may be amended from time to time, or any
similar successor rule that may be promulgated by the Commission.
(n) "Securities Act" shall mean the Securities Act of 1933, as amended, or
any similar successor federal statute and the rules and regulations thereunder,
all as the same shall be in effect from time to time.
(o) "Selling Expenses" shall mean all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities and fees and
disbursements of counsel for the Holder (other than the fees and disbursements
of counsel included in Registration Expenses).
(p) "Subsidiary" of any party shall mean any corporation, partnership,
joint venture, association or other business entity of which such party now or
hereafter owns, directly or indirectly, securities or other ownership interests
having ordinary voting power to elect a majority of the board of directors or
other governing body thereof.
(q) "Voting Securities" shall mean any securities of the Company (unless
the context specifically contemplates another issuer) having the ordinary power
to vote, in the absence of contingencies, in the election of directors of the
Company and any securities convertible, exchangeable or exercisable for such
securities (whether or not presently so convertible, exchangeable or
exercisable).
(r) "Warrants" shall mean the Warrants dated the date hereof issued by the
Company to the Investor.
SECTION 2
---------
"Lock-Up" Agreement
------------------
The Investor agrees that it will not sell, exchange or transfer for value
any shares of Common Stock purchased pursuant to the Common Stock Purchase
Agreement in a public market transaction, other than shares of Common Stock
which are issued to the Investor pursuant to the exercise of the Warrants,
during the period extending from the date hereof until the second anniversary of
the date hereof. The foregoing shall not preclude any private sale or other
private disposition of such shares of Common Stock or any transfer of shares
from the Investor to a Subsidiary of the Investor, provided that in any such
case the transferee assumes the obligations of the Investor under this Section
2, as provided in Section 5 hereof.
SECTION 3
---------
"Standstill" Agreement
---------------------
-3-
<PAGE>
3.1 Standstill Obligation. Subject to Section 3.2 and other provisions
---------------------
hereof, from the date hereof until the second anniversary of the date hereof,
the Investor covenants to and agrees with the Company that, unless the Investor
is specifically invited in writing to do so by the Company, the Investor shall
not, and shall cause each of its Subsidiaries not to, directly or indirectly:
(i) in any way acquire or agree to acquire beneficial ownership of
any securities or any direct or indirect rights or options to acquire
beneficial ownership of any securities of the Company, if the aggregate
percentage (calculated by voting power) of the Voting Securities
beneficially owned by the Investor and its Subsidiaries after giving effect
to such acquisition would equal or exceed 20% (the "Percentage Limitation")
of the aggregate Voting Securities then outstanding, measured by ordinary
voting power, and assuming the conversion, exchange or exercise of all
securities then outstanding which may be (at that time or at a later time
or upon the occurrence of one or more contingencies);
(ii) make any public announcement with respect to, or submit to the
Company or any of its directors, officers, representatives, employees,
attorneys, advisers, agents or Affiliates (whether publicly or otherwise)
any proposal for, the acquisition of Voting Securities not permitted by
subsection (a) above or for or with respect to any merger, consolidation or
business combination involving the Company or its Affiliates or for or with
respect to any purchase of a substantial portion of the assets of the
Company or its Affiliates, whether or not any parties other than the
Investor and its Affiliates are involved, and whether or not such proposal
might require the making of a public announcement by the Investor;
provided, however, that the foregoing shall not be deemed to preclude the
Investor from making any filing or public announcement required in order to
comply with applicable law as a result of purchases by the Investor of
shares of Common Stock which do not result in a breach by the Investor of
subsection (a) above;
(iii) make, or in any way participate in, any "solicitation" of
"proxies" to vote any Voting Securities or become a "participant" in any
"election contest" (as such terms are defined or used in Regulation 14A
under the Exchange Act, as such Regulation is currently in effect),
provided that the Investor shall not be deemed to be a "participant" by
--------
reason of exercise of its ordinary voting rights;
-4-
<PAGE>
(iv) form, join or in any way participate in a "group" (within the
meaning of Section 13(d)(3) of the Exchange Act) with respect to any Voting
Securities of the Company;
(v) grant any proxy with respect to any Voting Securities to any
Person not approved by the Company;
(vi) deposit any Voting Securities in a voting trust or subject any
Voting Securities to any arrangement or agreement with respect to the
voting of such Voting Securities or other agreement having similar effect;
(vii) take any action which would be reasonably likely to require the
Company or the Investor to make a public announcement regarding any of the
matters specified in this Section 3;
(viii) enter into any negotiations, arrangements or understandings
with any third party with respect to any of the foregoing, or any
discussions designed to advise, assist or encourage any third party in
connection with any of the foregoing;
(ix) disclose publicly any intention, plan or arrangement
inconsistent with the foregoing; or
(x) otherwise act, alone or in concert with others, to seek to
control or influence the management, Board of Directors or policies of the
Company, other than through the exercise of ordinary voting rights.
The Investor may acquire Voting Securities without regard to the foregoing
limitations, and such limitations shall be suspended, but not terminated, if and
for so long as (A) a tender or exchange offer is made and is not withdrawn or
terminated by another person or group to purchase or exchange for cash or other
consideration any Voting Securities which, if accepted or if otherwise
successful, would result in such person or group beneficially owning or having
the right to acquire Voting Securities representing twenty percent (20%) or more
of the aggregate outstanding Voting Securities measured by ordinary voting
power, and assuming the conversion, exchange or exercise of all securities then
outstanding which may be (at that time or at a later time or upon the occurrence
of one or more contingencies), and such offer is not withdrawn or terminated
prior to the Investor making an offer to acquire Voting Securities or acquiring
Voting Securities, or (B) another person or group hereafter acquires Voting
Securities which results in such person or group beneficially owning or having
the right to acquire Voting Securities representing twenty percent (20%) or more
of the aggregate outstanding Voting Securities measured by ordinary voting
power, and assuming the conversion, exchange or
-5-
<PAGE>
exercise of all securities then outstanding which may be (at that time or at a
later time or upon the occurrence of one or more contingencies) and such person
or group would be required to file a Schedule 13D (under the rules promulgated
under Section 13(d) of the Exchange Act as such rules are in effect on the date
hereof) indicating pursuant to Item 4 of such Schedule 13D that the purpose of
such acquisition is other than for investment; provided, however, that the
foregoing limitation regarding purchases of Voting Securities shall be
reinstated, in the case of (A) above, once any such tender or exchange offer is
withdrawn or terminated, or, in the case of (B) above, once the Voting
Securities beneficially owned by such other person falls below twenty percent
(20%) of the aggregate outstanding Voting Securities measured by ordinary voting
power, and assuming the conversion, exchange or exercise of all securities then
outstanding which may be (at that time or at a later time or upon the occurrence
of one or more contingencies).
3.2 "Standstill" Obligation Limitations. The Investor shall not be
-----------------------------------
obligated to dispose of any Voting Securities if the aggregate percentage of
Voting Securities owned by the Investor and its Subsidiaries equals or exceeds
the Percentage Limitation, measured by ordinary voting power, and assuming the
conversion, exchange or exercise of all securities then outstanding which may be
(at that time or at a later time or upon the occurrence of one or more
contingencies) (a) as a result of any transaction approved by the Board of
Directors of the Company, (b) as a result of any acquisition of Voting
Securities made during the period when the Investor's "standstill" obligations
may be suspended pursuant to Section 3.1, (c) as a result of any equity index
transaction, provided that the Investor shall not vote or give a proxy with
respect to any Voting Securities acquired in connection with such transaction,
or (d) as part of a transaction on behalf of the Investor's Defined Benefit
Pension Plan, Profit Sharing Retirement Plan 401(k) Savings Plan, Sheltered
Employee Retirement Plan and Sheltered Employee Retirement Plan Plus, or any
successor plans thereto or additional retirement plans (collectively, the
"Retirement Plans") where the Company's shares held by such Retirement Plans are
voted by a trustee independent of the Investor or otherwise are voted in the
same percentages as all other shares voting.
3.3 Retirement Plans. For purposes of this Section 3, the Investor shall
----------------
be deemed not to have beneficial ownership of any Voting Securities held by any
Retirement Plan if the Investor does not have the power to control the
investment decisions or voting of such Retirement Plan.
SECTION 4
---------
Registration Rights
-------------------
4.1 Demand Registration.
-------------------
-6-
<PAGE>
(a) Demand for Registration. If the Company shall receive from the Holder
-----------------------
at any time not earlier than (I) as to Registrable Securities issuable upon
exercise of the Warrants, the dates as of which the Warrants become exercisable
in accordance with the conditions therefor specified in each Section 1 thereof,
and (II) as to any other Registrable Securities, the second anniversary of the
date hereof, a written request that the Company effect any registration with
respect to all or a part of the Registrable Securities the Company will, as soon
as practicable, use its best efforts to effect such registration (including,
without limitation, filing post-effective amendments, appropriate qualifications
under applicable blue sky or other state securities laws, and appropriate
compliance with the Securities Act) and as would permit or facilitate (subject
to Section ___ hereof) the sale and distribution of all or such portion of such
Registrable Securities as are specified in such request. The Company shall not
be obligated to effect, or to take any action to effect, any such registration
pursuant to this Section 4.1(a):
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting
such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(B) Subject to the proviso in clause (A)(y) of Section 4.3 hereof,
after the Holder has initiated one such registration pursuant to this
Section 4.1(a);
(C) During the period starting with the date sixty (60) days prior
to the Company's good faith estimate of the date of filing of, and ending
on a date one hundred eighty (180) days after the effective date of, a
Company-initiated registration; provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective;
(D) If the Holder proposes to dispose of shares of Registrable
Securities which may be immediately registered on Form S-3 pursuant to a
request made under Section 4.4 hereof;
(E) If the Holders do not request that such offering be firmly
underwritten by one or more underwriters selected by the Holder (subject to
the consent of the Company, which consent will not be unreasonably
withheld); or
(F) If the Company and the Holder are unable to obtain the
commitment of the underwriter described in clause (E) above to firmly
underwrite the offer.
-7-
<PAGE>
(b) Deferral. Subject to the foregoing clauses (i) through (vi) of
--------
subsection 4.1(a) above, the Company shall file a registration statement
covering the Registrable Securities so requested to be registered as soon as
practicable after receipt of the request or requests of the Holders; provided,
however, that if (i) in the good faith judgment of the Board of Directors of the
Company, such registration would be seriously detrimental to the Company and the
Board of Directors of the Company concludes, as a result, that it is essential
to defer the filing of such registration statement at such time, and (ii) the
Company shall furnish to the Holder a certificate signed by the President of the
Company stating that in the good faith judgment of the Board of Directors of the
Company, it would be seriously detrimental to the Company for such registration
statement to be filed in the near future and that it is, therefore, essential to
defer the filing of such registration statement, then the Company shall have the
right to defer such filing for the period during which such disclosure would be
seriously detrimental, provided that (except as provided in clause (iii) of
subsection 4.1(a) above) the Company may not defer the filing for a period of
more than one hundred eighty (180) days after receipt of the request of the
Holder, and, provided further, that the Company shall not defer its obligation
in this manner more than once in any twelve-month period. The registration
statement filed pursuant to the request of the Holder may, subject to the
provisions of Section 4.3 hereof, include other securities of the Company.
(c) Procedures and Cutbacks. If the Company shall request inclusion of
-----------------------
other securities in any registration or underwriting pursuant to Section 4.1(a),
such securities shall be included in such registration and underwriting, subject
to the terms and conditions hereof. In such event the Company shall (together
with the Holder and other persons proposing to distribute their securities
through such underwriting) enter into an underwriting agreement in customary
form with the representative of the underwriter or underwriters selected for
such underwriting by the Holder, which underwriter or underwriters are
reasonably acceptable to the Company. If a person who has requested inclusion in
such registration as provided above does not agree to the terms of any such
underwriting agreement, such person shall be excluded therefrom by written
notice from the Company, the underwriter or the Holders. The securities so
excluded shall also be withdrawn from registration. Notwithstanding any other
provision of this Section 4.1, if the representative of the underwriters advises
the Holder in writing that marketing factors require a limitation on the number
of shares to be underwritten, the number of shares to be included in the
underwriting or registration shall be allocated as set forth in Section 4.3
hereof.
4.2 Piggyback Registration. (a) If the Company shall propose, at any
----------------------
time not earlier than (I) as to Registrable Securities issuable upon exercise of
the Warrants, the dates as of which the Warrants may become exercisable in
accordance with
-8-
<PAGE>
the conditions therefor specified in each Section 1 thereof, and (II) as to any
other Registrable Securities, the second anniversary of the date hereof, to
register any of its securities under the Securities Act for sale for cash for
its own account or for the account of investors exercising their respective
registration rights (otherwise than in connection with the registration of
securities issuable pursuant to an employee stock option, stock purchase or
similar plan or pursuant to a merger, exchange offer or a transaction of the
type specified in Rule 145(a) under the Securities Act), or a registration is
requested by other holders of securities issued by the Company exercising their
respective registration rights, the Company shall give the Holder notice of such
proposed registration at least 20 days prior to the filing of a registration
statement. At the written request of the Holder delivered to the Company within
15 days after the receipt of the notice from the Company, which request shall
state the number of Registrable Securities that the Holder wishes to sell or
distribute publicly under the registration statement proposed to be filed by the
Company, the Company shall use its best efforts, subject to Section 4.3 hereof,
to register under the Securities Act such Registrable Securities (the "Piggyback
Registration"). The Company shall not be obligated to so use its best efforts
more than two (2) times.
(b) Procedures and Cutbacks. If a Piggyback Registration is to be an
-----------------------
underwritten offering, the Company shall so advise the Holders as a part of the
written notice given pursuant to Section 4.2(a). In such event, the right of the
Holder to registration pursuant to Section 4.2(a) shall be conditioned upon the
Holder's participation in such underwriting and the inclusion of the Holder's
Registrable Securities in the underwriting to the extent provided herein. If the
Holder intends to distribute its securities through such underwriting, the
Holder shall (together with the Company and the other holders of securities of
the Company with registration rights to participate therein distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the representative of the underwriter or underwriters
selected by the Company. Notwithstanding any other provision of this Section
4.1, if the representative of the underwriters advises the Holder in writing
that marketing factors require a limitation on the number of shares to be
underwritten, the number of shares to be included in the underwriting or
registration shall be allocated as set forth in Section 4.3 hereof.
4.3 Allocation of Registration Opportunities. If a registration is to be
----------------------------------------
an underwritten registration and the managing underwriters thereof advise the
Company in writing that in their opinion the number of securities requested to
be included in the registration (including all shares desired to be included by
the Company or by any other party holding demand or piggyback registration
rights) exceeds the number which can be sold in the offering, then: (A) if the
registration is initiated by the Holder under Section 4.1(a) hereof, then the
Company shall
-9-
<PAGE>
include in the registration (x) first, any securities the Company proposes to
sell; and (y) second, the Registrable Securities the Holder proposes to sell,
together as one group with any securities proposed to be sold by any other party
then having piggyback registration rights but not any demand registration
rights, pro rata according to the total number of Voting Securities owned by
each such party (provided, however, that if as a result of the Company's
registration of any securities the Company proposes to sell, the Holder is
unable to register all of the Registrable Securities the Holder proposes to sell
pursuant to the notice by which such registration was initiated, then the Holder
shall have the right to initiate an additional registration under Section 4.1(a)
hereof); and (z) third, the shares proposed to be sold by any other party having
piggyback registration rights, together as one group pro rata according to the
total Voting Securities owned by each; or (B) if the registration is initiated
by the Company, then the Company shall include in the registration (y) first,
the securities the Company proposes to sell and (z) second, the shares proposed
to be sold by the Holder and any other party having piggyback registration
rights, together as one group pro rata according to the total Voting Securities
owned by each; or (C) if the registration is initiated by a party other than the
Holder or the Company, then the Company shall include in the registration (x)
first, any securities the Company proposes to sell, and (y) second, the shares
proposed to be sold by the party exercising its demand registration right,
together as one group with any shares proposed to be sold by any party then
having piggyback registration rights but not any demand registration rights, pro
rata according to the total number of Voting Securities owned by each such
party, and (z) third, any shares proposed to be sold by the Holder and any other
party having registration rights, pro rata according to the total number of
Voting Securities owned by each such party. Registrable Securities not included
in a registration pursuant to the foregoing shall be withdrawn therefrom, and
the Company shall have no obligation to register such Registrable Securities.
4.4 Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to
Sections 4.1, 4.2 and 4.5 hereof, and the reasonable fees of one counsel for the
selling shareholders in the case of a registration pursuant to Section 4.1 shall
be borne by the Company.
4.5 Registration on Form S-3.
------------------------
(a) The Company shall use its best efforts to qualify for registration on
Form S-3 or any comparable or successor form or forms. After the Company has
qualified for the use of Form S-3, in addition to the rights contained in
Sections 4.1 and 4.2, the Holders of Registrable Securities shall have the right
to request registrations on Form S-3 (such requests shall be in writing and
shall state the number of shares of Registrable Securities to be
-10-
<PAGE>
disposed of and the intended methods of disposition of such shares by the
Holder), provided, however, that the Company shall not be obligated to effect
any such registration if (i) the Holder, together with the holders of any other
securities of the Company entitled to inclusion in such registration, propose to
sell Registrable Securities and such other securities (if any) on Form S-3 at an
aggregate price to the public of less than $1,000,000, or (ii) in the event that
the Company shall furnish the certification described in paragraph 4.1(b) (but
subject to the limitations set forth therein) or (iii) in a given twelve-month
period, after the Company has effected one (1) such registration in any such
period.
(b) If a request complying with the requirements of subsection (a) above
is delivered to the Company, the provisions of Section 4.1(b) hereof shall apply
to such registration.
4.6 Registration Procedures. In the case of a registration effected by
-----------------------
the Company pursuant to Section 4.1, 4.2 or 4.5, the Company will keep the
Holder advised in writing as to the initiation of the registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of one hundred twenty
(120) days or until the Holder or Holders have completed the distribution
described in the registration statement relating thereto, whichever first
occurs; provided, however, that (i) such 120-day period shall be extended for a
period of time equal to the period the Holder refrains from selling any
securities included in such registration at the request of an underwriter of
Common Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 120-day period shall be extended,
if necessary, to keep the registration statement effective until all such
Registrable Securities are sold, provided that Rule 145, or any successor rule
under the Securities Act, permits an offering on a continuous or delayed basis,
and provided further that applicable rules under the Securities Act governing
the obligation to file a post-effective amendment permit, in lieu of filing a
post-effective amendment that (I) includes any prospectus required by Section
10(a)(3) of the Securities Act or (II) reflects facts or events representing a
material or fundamental change in the information set forth in the registration
statement, the incorporation by reference of information required to be included
in (I) and (II) above to be contained in periodic reports filed pursuant to
Section 13 or 15(d) of the Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act
-11-
<PAGE>
with respect to the disposition of all securities covered by such registration
statement;
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as the
Holder from time to time may reasonably request;
(d) Notify the Holder at any time when a prospectus relating to
Registrable Securities being sold is required to be delivered under the
Securities Act of the happening of any event as a result of which the prospectus
included in such registration statement, as then in effect, includes an untrue
statement of a material fact or omits to state a material fact required to be
stated therein or necessary to make the statements therein not misleading or
incomplete in the light of the circumstances then existing, and at the request
of the Holder, prepare and furnish to the Holder a reasonable number of copies
of a supplement to or an amendment of such prospectus as may be necessary so
that, as thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading or incomplete in the light of the circumstances then
existing;
(e) Cause all such Registrable Securities registered pursuant hereunder to
be listed on each securities exchange on which similar securities issued by the
Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable Securities
registered pursuant to such registration statement and a CUSIP number for all
such Registrable Securities, in each case not later than the effective date of
such registration; and
(g) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 4.1 or 4.2 hereof, the Company
will enter into an underwriting agreement reasonably necessary to effect the
offer and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the underwriter
so requests the underwriting agreement will contain customary contribution
provisions.
4.7 Indemnification.
---------------
(a) The Company will indemnify the Holder, each of its officers, directors
and partners, legal counsel, and accountants and each person controlling the
Holder within the meaning of Section 15 of the Securities Act, with respect to
which registration, qualification, or compliance has been effected pursuant to
this Section 4, and each underwriter, if any, and each person who controls
within the meaning of Section 15 of the
-12-
<PAGE>
Securities Act any underwriter, against all expenses, claims, losses, damages,
and liabilities (or actions, proceedings, or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any prospectus, offering circular, or other
document (including any related registration statement, notification, or the
like) incident to any such registration, qualification, or compliance, or based
on any omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
or any violation by the Company of the Securities Act, the Securities Exchange
Act of 1934 or any rule or regulation thereunder applicable to the Company and
relating to action or inaction required of the Company in connection with any
such registration, qualification, or compliance, and will reimburse the Holder,
each of its officers, directors, partners, legal counsel, and accountants and
each person controlling the Holder, each such underwriter, and each person who
controls any such underwriter, for any legal and any other expenses reasonably
incurred in connection with investigating and defending or settling any such
claim, loss, damage, liability, or action, provided that the Company will not be
liable in any such case to the extent that any such claim, loss, damage,
liability, or expense arises out of or is based on any untrue statement or
omission based upon written information furnished to the Company by the Holder
or underwriter and stated to be specifically for use therein. It is agreed that
the indemnity agreement contained in this Section 4.7(a) shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
has not been unreasonably withheld).
(b) The Holder will, if Registrable Securities are included in the
securities as to which such registration, qualification, or compliance is being
effected, indemnify the Company, each of its directors, officers, partners,
legal counsel, and accountants and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who controls
the Company or such underwriter within the meaning of Section 15 of the
Securities Act, each Other Shareholder, and each of their officers, directors,
and partners, and each person controlling such Other Shareholder, against all
claims, losses, damages and liabilities (or actions in respect thereof) arising
out of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement, prospectus, offering
circular, or other document, or any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and will reimburse the Company and such Other
Shareholders, directors, officers, partners, legal counsel, and accountants,
persons, underwriters, or control persons for any legal or any other expenses
reasonably incurred in connection with investigating or defending any such
claim, loss, damage, liability, or action, in each case to the extent, but only
to the
-13-
<PAGE>
extent, that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus, offering
circular, or other document in reliance upon and in conformity with written
information furnished to the Company by the Holder and stated to be specifically
for use therein; provided, however, that the obligations of the Holder hereunder
shall not apply to amounts paid in settlement of any such claims, losses,
damages, or liabilities (or actions in respect thereof) if such settlement is
effected without the consent of the Holder (which consent shall not be
unreasonably withheld).
(c) Each party entitled to indemnification under this Section 4.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of such claim or any
litigation resulting therefrom, provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or any litigation resulting
therefrom, shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in such
defense at such party's expense, and provided further that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section 4.7, to the extent such
failure is not prejudicial. No Indemnifying Party, in the defense of any such
claim or litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement that does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect to such
claim or litigation. Each Indemnified Party shall furnish such information
regarding itself or the claim in question as an Indemnifying Party may
reasonably request in writing and as shall be reasonably required in connection
with defense of such claim and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 4.7 is held by a
court of competent jurisdiction to be unavailable to an Indemnified Party with
respect to any loss, liability, claim, damage, or expense referred to therein,
then the Indemnifying Party, in lieu of indemnifying such Indemnified Party
hereunder, shall contribute to the amount paid or payable by such Indemnified
Party as a result of such loss, liability, claim, damage, or expense in such
proportion as is appropriate to reflect the relative fault of the Indemnifying
Party on the one hand and of the Indemnified Party on the other in connection
with the statements or omissions that resulted in such loss, liability, claim,
damage, or expense as well as any other relevant equitable considerations. The
relative fault of the Indemnifying Party and of the Indemnified Party shall be
deter-
-14-
<PAGE>
mined by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact relates to
information supplied by the Indemnifying Party or by the Indemnified Party and
the parties' relative intent, knowledge, access to information, and opportunity
to correct or prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement entered
into in connection with the underwritten public offering are in conflict with
the foregoing provisions, the provisions in the underwriting agreement shall
control as among the parties to the underwriting agreement.
4.8 Information by Holder. The Holder shall furnish to the Company such
---------------------
information regarding the Holder and the distribution proposed by the Holder as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification, or compliance
referred to in this Section 4.
4.9 Rule 144 Reporting. With a view to making available the benefits of
------------------
certain rules and regulations of the Commission that may permit the sale of the
Restricted Securities to the public without registration, the Company agrees to
use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act, at
all times from and after ninety (90) days following the effective date of the
first registration under the Securities Act filed by the Company for an offering
of its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
at any time after it has become subject to such reporting requirements;
(c) So long as the Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as to
its compliance with the reporting requirements of Rule 144 (at any time from and
after ninety (90) days following the effective date of the first registration
statement filed by the Company for an offering of its securities to the general
public), and of the Securities Act and the Exchange Act (at any time after it
has become subject to such reporting requirements), a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed as the Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing the Holder to sell any such securities
without registration.
-15-
<PAGE>
4.10 Delay of Registration. The Holder shall not have any right to take
---------------------
any action to restrain, enjoin, or otherwise delay any registration as the
result of any controversy that might arise with respect to the interpretation or
implementation of this Section 4.
4.11 Expiration of Rights. All rights of the Investor under this Section 4
--------------------
shall expire on the tenth anniversary of the date hereof.
SECTION 5
Transfer of Shares
------------------
If prior to the expiration of the period provided in Section 2 hereof, the
Holder transfers shares of Common Stock to a Subsidiary as provided therein, the
Holder may transfer or assign to such Subsidiary the rights to cause the Company
to register Registrable Securities under Section 4 hereof, provided that the
Company is given written notice at the time of or within a reasonable time after
such transfer or assignment, stating the name and address of the transferee or
assignee and identifying the securities with respect to which such registration
rights are being transferred or assigned, and, provided further, that the
transferee or assignee of such rights assumes all of the obligations of the
Holder under this Agreement and no such assignment or transfer shall operate to
release the Holder from any of its obligations or liabilities hereunder. If, at
any time, the Holder sells or otherwise transfers the Warrants, or if, after the
expiration of the period provided in Section 2 hereof, the Holder sells or
otherwise transfers shares of Common Stock, then, in connection therewith, the
Holder may also transfer or assign the rights to cause the Company to register
securities under Section 4 hereof, provided that the Company is given written
notice at the time of or within a reasonable time after such transfer or
assignment, stating the name and address of the transferee or assignee and
identifying the securities with respect to which such registration rights are
being transferred or assigned, and, provided further, that the transferee or
assignee of such rights assumes the obligations of the Holder under this
Agreement other than Sections 2 and 3 hereof.
SECTION 6
Miscellaneous
-------------
6.1 Governing law. This Agreement shall be governed in all respects by
-------------
the laws of the State of Delaware.
6.2 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
-16-
<PAGE>
6.3 Entire Agreement; Amendment; Waiver. This Agreement constitutes the
-----------------------------------
full and entire understanding and agreement between the parties with regard to
the subjects hereof and thereof. Neither this Agreement nor any term hereof may
be amended, waived, discharged or terminated, except by a written instrument
signed by the Company and the holders of all of the Registrable Securities and
any such amendment, waiver, discharge or termination shall be binding on all
such holders, but in no event shall the obligation of any such holder hereunder
be materially increased, except upon the written consent of such holder.
6.4 Notices, etc. All notices required or permitted hereunder shall be in
-------------
writing and shall be deemed effectively given (a) upon personal delivery to the
party notified, (b) three days after deposit with the United States Post Office,
by registered or certified mail, postage prepaid, return receipt requested, (c)
one day after deposit with a nationally recognized air courier service such as
DHL or Federal Express for next day delivery, or (d) on the day of facsimile
transmission, with confirmed transmission, to the facsimile number shown below
(or to such other facsimile number as the party to be notified may indicate by
ten (10) days' advance written notice to the other party in the manner herein
provided), provided that notice is also given under clauses (a), (b) or (c)
above; in any such case addressed to the party to be notified at the address
indicated below for that party, or at such other address as that party may
indicate by ten (10) days' advance written notice to the other party in the
manner herein provided.
6.5 Delays or Omissions. No delay or omission to exercise any right,
-------------------
power or remedy accruing to the Holder, upon any breach or default of the
Company under this Agreement shall impair any such right, power or remedy of the
Holder nor shall it be construed to be a waiver of any such breach or default,
or an acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default therefore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of the
Holder of any breach or default under this Agreement or any waiver on the part
of the Holder of any provisions or conditions of this Agreement must be made in
writing and shall be effective only to the extent specifically set forth in such
writing. All remedies, either under this Agreement or by law or otherwise
afforded to the Holder, shall be cumulative and not alternative.
6.6 Rights; Separability. Unless otherwise expressly provided herein, the
--------------------
Holder's rights hereunder are several rights, not rights jointly held with any
of the other Holders. In case any provision of the Agreement shall be invalid,
illegal or unenforceable, the validity, legality and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
-17-
<PAGE>
6.7 Information Rights. The Company shall, so long as the Investor holds
------------------
shares of Common Stock purchased pursuant to the Common Stock Purchase Agreement
dated as of May __, 1996 by and between the Company and the Investor, or the
Warrants, or shares issued pursuant to the exercise of the Warrants, furnish the
Investor with a copy of all reports (including annual reports on Form 10-K and
quarterly reports on Form 10-Q) filed under the Exchange Act or otherwise mailed
to shareholders generally.
6.8 Information Confidential. The Holder and the Company each acknowledge
------------------------
to the other that the information received from the other party pursuant hereto
may be confidential and for the use of the recipient only. Unless and until such
information is made available to the public generally, the recipient will not
use such confidential information in violation of the Exchange Act or reproduce,
disclose or disseminate such information to any other person (other than its
employees or agents having a need to know the contents of such information, and
its attorneys), except in connection with the exercise of rights under this
Agreement, disclosure of such information is required by law or legal process,
in which event the party required to disclose such information shall notify the
other party in advance of such disclosure and shall cooperate to give the other
party a reasonable opportunity to seek a protective order or a designation of
"confidential treatment" or other action or designation whereby such information
will not be disclosed to the public generally.
6.9 Titles and Subtitles. The titles of the paragraphs and subparagraphs
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
-18-
<PAGE>
6.10 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Investor
Agreement effective as of the day and year first above written.
ETEC SYSTEMS, INC.
By:
-------------------------------
Title:
----------------------------
HOLDER:
INTEL CORPORATION
By:
-------------------------------
Title:
----------------------------
Addresses and facsimile numbers for notices:
Etec Systems, Inc.
26460 Corporate Avenue
Hayward, California 94545
Facsimile: (510) 732-1469
Intel Corporation
2200 Mission College Boulevard
Santa Clara, California 95052-8119
Facsimile: (408) 765-7636
-19-
<PAGE>
EXHIBIT 11.1
ETEC SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE AND EQUIVALENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
APRIL 30, APRIL 30, APRIL 30, APRIL 30,
1996 1995 1996 1995
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Weighted average common shares
outstanding........................... 17,860 839 15,936 839
Common equivalent shares from options,
warrants, and convertible preferred
stock (1)............................. -- 4,524 -- 4,524
Weighted average common equivalent
shares from convertible preferred
stock, calculated using if-converted
method................................ -- 8,026 -- 8,026
Weighted average common stock
equivalents calculated by the treasury
stock method applied to options and
warrants issued 1,680 1,205 1,814 1,205
------- ------ -------- ------
Weighted average common shares and
equivalents........................... 19,540 14,594 17,750 14,594
======= ====== ======== ======
Net income............................. $15,696 $1,538 $ 21,846 $4,018
======= ====== ======== ======
Net income per share................... $ 0.80 $ 0.11 $ 1.23 $ 0.28
======= ====== ======== ======
</TABLE>
- --------
(1) Pursuant to the requirements of the Securities and Exchange Commission,
common equivalent shares relating to stock options and warrants, using the
treasury stock method and the assumed initial public offering price, and
common equivalent shares from convertible preferred stock, using the if-
converted method, issued during the twelve-month period prior to the IPO
are included in the computation for the quarter and nine-month periods
ended April 30, 1995.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUL-31-1996
<PERIOD-START> AUG-01-1995
<PERIOD-END> APR-30-1996
<CASH> 28,031
<SECURITIES> 12,965
<RECEIVABLES> 41,794
<ALLOWANCES> 1,156
<INVENTORY> 44,032
<CURRENT-ASSETS> 143,162
<PP&E> 20,617
<DEPRECIATION> 10,329
<TOTAL-ASSETS> 157,482
<CURRENT-LIABILITIES> 69,110
<BONDS> 7,625
0
0
<COMMON> 181
<OTHER-SE> 73,196
<TOTAL-LIABILITY-AND-EQUITY> 157,482
<SALES> 73,983
<TOTAL-REVENUES> 98,035
<CGS> 37,606
<TOTAL-COSTS> 54,400
<OTHER-EXPENSES> 18,260<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,462
<INCOME-PRETAX> 11,083
<INCOME-TAX> (11,063)
<INCOME-CONTINUING> 22,146
<DISCONTINUED> 0
<EXTRAORDINARY> (300)
<CHANGES> 0
<NET-INCOME> 21,846
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 0
<FN>
<F1>EXCLUDES SG&A AS SG&A IS PART OF 5-03(b)(4).
</FN>
</TABLE>
