<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 31, 1996
REGISTRATION NO. 333-04363
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1
TO
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. [_]
----------------
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.
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<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 31, 1996
[LOGO OF ETEC APPEARS HERE]
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 30, 1996 the last sale
price of the Common Stock, as reported on the Nasdaq National Market, was
$34.50 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.
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<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND PROCEEDS TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
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<S> <C> <C> <C> <C>
Per Share................... $ $ $ $
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Total(2).................... $ $ $ $
</TABLE>
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(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>
[GRAPHIC: SEE APPENDIX]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS 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. 18,864,892 shares(1)
Use of proceeds................................... For capital expenditures
and for general corporate
purposes including working
capital.
Nasdaq National Market symbol..................... ETEC
</TABLE>
- --------
(1) Includes 289,855 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 $34.50. 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 $ 66,983
Working capital............................ 74,052 84,052 100,039
Total assets............................... 157,482 168,082 184,069
Long-term debt, less current portion....... 7,625 7,625 7,625
Total stockholders' equity................. 73,377 83,977 99,964
</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 $34.50 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
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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
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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
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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."
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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.
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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
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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 9,202,341
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 $39.00. 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 29.3% 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 $34.50, the closing price of the Common
Stock on May 30, 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."
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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.
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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 (289,855 shares, assuming an offering price
equal to the closing price of the Common Stock on the Nasdaq National Market
on May 30, 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
$16.0 million ($38.6 million if the Underwriters' over-allotment option is
exercised in full) at an assumed public offering price of $34.50 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 30, 1996)...................... 37.00 21.75
</TABLE>
On May 30, 1996, the closing price for the Company's Common Stock as
reported on the Nasdaq National Market was $34.50. 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 $30.0 million financing facility.
In addition, the lease of the Company's Hayward, California property restricts
the Company from paying cash dividends under certain conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 $34.50 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; 18,864,892 shares
issued and outstanding, pro forma(2)............... 181 189
Warrants.......................................... 496 1,096
Additional paid-in capital........................ 123,176 149,155
Notes receivable from stockholders................ (47) (47)
Cumulative translation adjustment................... 70 70
Accumulated deficit................................. (50,499) (50,499)
-------- --------
Total stockholders' equity...................... 73,377 99,964
-------- --------
Total capitalization.......................... $ 81,002 $107,589
======== ========
</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 $34.50 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 2009. Additionally, under the
Tax Reform Act of 1986, the amount of the benefit from NOLs may be impaired or
limited in certain circumstances, including a cumulative stock ownership
change of more than 50% over a three-year period. The 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 six 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 $6.1 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 a $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 a 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 a
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>
On May 24, 1996, the Company entered into a $30.0 million financing facility
with a major financial institution, which includes a $20.0 million two-year
revolving credit facility and a $10.0 million three-year term note.
Indebtedness under the revolving credit facility and term note will be
unsecured and will bear interest at the London Interbank Offered Rate plus
1.25%. The London Interbank Offered Rate was 5.5% on May 30, 1996. The terms
of the financing facility will require the Company to comply with certain
financial and restrictive covenants, including maintenance of certain
financial ratios and minimum net worth criteria, restrictions on the
incurrence of indebtedness and certain dividend restrictions. On May 31, 1996,
the Company drew down the $10.0 million term note to prepay in full its 10.65%
senior secured notes. As a result of the early extinguishment of the senior
secured notes, the Company will record an extraordinary charge of
approximately $600,000 in the fourth quarter of fiscal 1996, related to the
accelerated amortization of financing costs.
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.
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<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.
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<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]
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<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. Photronics, Inc.
Compugraphics International Ltd. P.K. Ltd. (formerly Anam S&T Co. Ltd.)
Dai Nippon Printing Co. Ltd. Raytheon Company
DuPont Photomasks, Inc. Rockwell International Corp.
Hewlett-Packard Company Samsung Electronics Co., Ltd.
Hoya Corporation Sharp Corporation
Hyundai Electronics Industries Co.,
Ltd. Siemens AG
Intel Corporation Sony Corporation
International Business Machines
Corporation Taiwan Mask Corp.
Motorola, Inc. Toppan Printing Company, Ltd.
NEC Corporation Toshiba Corporation
Oki Electric Industries Co. Ltd.
</TABLE>
Historically, a significant portion of the Company's revenues in any
particular period has been attributable to sales to a limited number of
customers. In fiscal 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
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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.
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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."
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<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 8.9%
Old Orchard Road
Armonk, NY 10504
The Perkin-Elmer Corporation..... 2,366,971 13.1% 862,824 1,504,147 8.0%
761 Main Avenue
Norwalk, CT 06859
Grumman Aerospace Corporation(3). 1,175,640 6.4% 631,770 543,870 2.9%
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
(289,855 shares, assuming an offering price of $34.50).
(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.
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<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.
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<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.
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<PAGE>
REGISTRATION RIGHTS
Following this offering, the holders of 9,209,242 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.
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<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
18,864,892 shares of Common Stock (assuming that Intel's concurrent purchase
of shares occurs at a price of $34.50 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 9,291,042 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
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 550,772 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 539,855 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
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<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 severally 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 60 days from the date of this Prospectus, without the prior written consent
of Robertson, Stephens & Company LLC. Three officers and one director of the
Company holding an aggregate of approximately 48,347 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 stockholders of the Company
holding an aggregate of 22,448 shares 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 certain other stockholders
(including the remaining officers and directors of the Company and Selling
Stockholders) holding an aggregate of 8,669,475 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."
73
<PAGE>
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 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 and certain of the Selling
Stockholders by Pillsbury Madison & Sutro LLP, San Francisco, California, and
for the Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto,
California. A member of Pillsbury Madison & Sutro LLP is the Secretary of the
Company.
EXPERTS
The financial statements of Etec Systems, Inc. as of July 31, 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 18,364,892 pro
forma........................... 7 9 181 184
Warrants......................... -- 562 496 1,096
Additional paid-in capital....... 324 400 123,176 133,173
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 289,855 new shares
(assuming a purchase price equal to the closing stock price on May 30, 1996,
which was $34.50), 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 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 a $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):
On May 24, 1996, the Company entered into a $30.0 million financing facility
with a major financial institution, which includes a $20.0 million two-year
revolving credit facility and a $10.0 million three-year term note.
Indebtedness under the revolving credit facility and term note will be
unsecured and will bear interest at the London Interbank Offered Rate plus
1.25%. The London Interbank Offered Rate was 5.5% on May 30, 1996. The terms
of the financing facility will require the Company to comply with certain
financial and restrictive covenants, including maintenance of certain
financial ratios and minimum net worth criteria, restrictions on the
incurrence of indebtedness and certain dividend restrictions. On May 31, 1996,
the Company drew down the $10.0 million term note to prepay in full its 10.65%
senior secured notes. As a result of the early extinguishment of the senior
secured notes, the Company will record an extraordinary charge of
approximately $600,000 in the fourth quarter of fiscal 1996, related to the
accelerated amortization of financing costs.
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
the 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 cost
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. (Previously filed).
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. (Previously filed).
</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. (Previously
filed).
</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. (Previously
filed).
10.30 Form of Investor Agreement between the Registrant and Intel
Corporation. (Previously filed).
10.31 Credit Agreement among Registrant and the Lenders named therein and
ABN-AMRO Bank, N.V. as agent for Lenders, dated May 24, 1996.
11.1 Statement of computation of earnings per share. (Previously filed).
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).
(Previously filed).
24.1 Power of Attorney (see Page II-5).
27 Financial Data Schedules. (Previously filed).
</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 Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Hayward,
State of California, on the 29th day of May, 1996.
Etec Systems, Inc.
By /s/ Philip J. Koen, Jr.
_______________________________
PHILIP J. KOEN, JR.
VICE PRESIDENT, CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
*
- ------------------------------------ May 29, 1996
<S> <C> <C>
STEPHEN E. COOPER President, Chief Executive
Officer (Principal
Executive Officer) and
Chairman of the Board
<CAPTION>
/s/ Philip J. Koen, Jr.
- ------------------------------------ May 29, 1996
<S> <C> <C>
PHILIP J. KOEN, JR. Vice President, Chief
Financial Officer
(Principal Financial
Officer)
<CAPTION>
*
- ------------------------------------ May 29, 1996
<S> <C> <C>
EDWARD QUIGLEY Controller (Principal
Accounting Officer)
<CAPTION>
- ------------------------------------ May , 1996
<S> <C> <C>
EDWARD L. GELBACH Director
<CAPTION>
*
- ------------------------------------ May 29, 1996
<S> <C> <C>
CATHERINE P. GOODRICH Director
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<S> <C> <C>
*
- ------------------------------------ May 29, 1996
JACK H. KING Director
*
- ------------------------------------ May 29, 1996
JOHN MCBENNETT Director
*
- ------------------------------------ May 29, 1996
JOHN SUZUKI Director
*
- ------------------------------------ May 29, 1996
THOMAS MICHAEL TRENT Director
*
- ------------------------------------ May 29, 1996
ROBERT L. WEHRLI Director
*By /s/ Philip J. Koen, Jr.
----------------------------------------------
PHILIP J. KOEN, JR.
ATTORNEY-IN-FACT
</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 30, 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. (Previously filed).
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. (Previously
filed).
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. (Previously
filed).
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. (Previously
filed).
10.30 Form of Investor Agreement between the Registrant and
Intel Corporation. (Previously filed).
10.31 Credit Agreement among Registrant and the Lenders
named therein and ABN-AMRO Bank, N.V. as agent for
Lenders, dated May 24, 1996.
11.1 Statement of computation of earnings per share.
(Previously filed).
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). (Previously filed).
24.1 Power of Attorney (see Page II-5).
27 Financial Data Schedules. (Previously filed).
</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>
EXECUTION COPY
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
AMONG
ETEC SYSTEMS, INC.
AND
THE LENDERS NAMED HEREIN
AND
ABN AMRO BANK N.V.,
AS AGENT FOR THE LENDERS
MAY 24, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CREDIT AGREEMENT
----------------
TABLE OF CONTENTS
-----------------
SECTION I. INTERPRETATION
1.01. Definitions................................ 1
1.02. GAAP....................................... 20
1.03. Headings................................... 21
1.04. Plural Terms............................... 21
1.05. Time....................................... 21
1.06. Governing Law.............................. 21
1.07. Construction............................... 21
1.08. Entire Agreement........................... 21
1.09. Calculation of Interest and Fees........... 21
1.10. Other Interpretive Provisions.............. 21
SECTION II. CREDIT FACILITIES
2.01. Revolving Loan Facility.................... 22
2.02. Term Loan Facility......................... 26
2.03. Commitment Reductions, Etc................. 28
2.04. Fees....................................... 29
2.05. Prepayments................................ 29
2.06. Other Payment Terms........................ 30
2.07. Notes and Interest Account................. 31
2.08. Loan Funding............................... 32
2.09. Pro Rata Treatment......................... 33
2.10. Change of Circumstances.................... 34
2.11. Taxes on Payments.......................... 38
2.12. Funding Loss Indemnification............... 40
2.13. Replacement of Lenders..................... 40
SECTION III. CONDITIONS PRECEDENT
3.01. Initial Conditions Precedent............... 41
3.02. Conditions Precedent to Each Credit Event.. 41
3.03. Covenant to Deliver........................ 42
SECTION IV. REPRESENTATIONS AND WARRANTIES
4.01. Borrower's Representations and Warranties.. 42
4.02. Reaffirmation.............................. 48
SECTION V. COVENANTS
5.01. Affirmative Covenants...................... 48
5.02. Negative Covenants......................... 52
5.03. Financial Covenants........................ 60
SECTION VI. DEFAULT
6.01. Events of Default.......................... 61
6.02. Remedies................................... 64
SECTION VII. THE AGENT AND RELATIONS AMONG LENDERS
7.01. Appointment, Powers and Immunities......... 64
i
<PAGE>
7.02. Reliance by Agent.......................... 65
7.03. Defaults................................... 65
7.04. Indemnification............................ 65
7.05. Non-Reliance............................... 66
7.06. Resignation or Removal of Agent............ 67
7.07. Authorization.............................. 67
7.08. Agent in its Individual Capacity........... 67
SECTION VIII. MISCELLANEOUS
8.01. Notices.................................... 67
8.02. Expenses................................... 69
8.03. Indemnification............................ 69
8.04. Waivers; Amendments........................ 70
8.05. Successors and Assigns..................... 70
8.06. Setoff; Security Interest.................. 74
8.07. No Third Party Rights...................... 74
8.08. Partial Invalidity......................... 74
8.09. Jury Trial................................. 74
8.10. Counterparts............................... 75
8.11. Confidentiality............................ 75
ii
<PAGE>
SCHEDULES
- ---------
I Lenders
3.01 Initial Conditions Precedent
4.01(j) Outstanding Subscriptions, Options, Etc.
4.01(q) Subsidiaries
5.02(a) Existing Indebtedness
5.02(b) Existing Liens
5.02(e) Investment Policy
EXHIBITS
- --------
A Notice of Revolving Loan Borrowing (2.01(b))
B Notice of Revolving Loan Conversion (2.01(d))
C Notice of Revolving Loan Interest Period Selection (2.01(e))
D Notice of Term Loan Borrowing (2.02(b))
E Notice of Term Loan Interest Period Selection (2.02(e))
F Revolving Loan Note (2.07(a))
G Term Loan Note (2.07(b))
H Assignment Agreement (8.05(c))
iii
<PAGE>
CREDIT AGREEMENT
----------------
THIS CREDIT AGREEMENT, dated as of May 24, 1996, is entered into by
and among:
(1) ETEC SYSTEMS, INC., a Nevada corporation ("Borrower");
--------
(2) Each of the financial institutions from time to time listed in
Schedule I hereto, as amended from time to time (such financial
----------
institutions to be referred to herein collectively as the "Lenders"); and
-------
(3) ABN AMRO BANK N.V., a public company with limited liability
organized under the laws of The Netherlands, as agent for the Lenders (in
such capacity, "Agent").
-----
RECITALS
--------
A. Borrower has requested the Lenders to provide certain credit
facilities to Borrower.
B. The Lenders are willing to provide such credit facilities upon the
terms and subject to the conditions set forth herein.
AGREEMENT
---------
NOW, THEREFORE, in consideration of the above Recitals and the mutual
covenants herein contained, the parties hereto hereby agree as follows:
SECTION I. INTERPRETATION.
--------------
1.01. Definitions. Unless otherwise indicated in this Agreement or any
-----------
other Credit Document, each term set forth below, when used in this Agreement or
any other Credit Document, shall have the respective meaning given to that term
below or in the provision of this Agreement or other document, instrument or
agreement referenced below.
"Adjusted Net Income" shall mean, with respect to Borrower and its
-------------------
Subsidiaries for any period, the sum of the following, determined on a
consolidated basis in accordance with GAAP where applicable:
<PAGE>
(a) The net income or net loss of Borrower and its Subsidiaries
for such period after provision for income taxes;
plus
----
(b) To the extent deducted in calculating such net income or net
loss, all non-recurring charges incurred by Borrower and its
Subsidiaries during such period for the acquisition of in-process
technology; provided, however, that the sum of all such charges so
-------- -------
added to net income or net loss in calculating the Adjusted Net Income
of Borrower and its Subsidiaries during the period July 31, 1996
through the Term Loan Maturity Date shall not exceed $10,000,000.
"Affiliate" shall mean, with respect to any Person, (a) each Person
---------
that, directly or indirectly, owns or controls, whether beneficially or as
a trustee, guardian or other fiduciary, fifteen percent (15%) or more of
any class of Equity Securities of such Person, (b) each Person that
controls, is controlled by or is under common control with such Person or
any Affiliate of such Person or (c) each of such Person's officers,
directors, joint venturers and partners; provided, however, that in no case
-------- -------
shall Agent or any Lender be deemed to be an Affiliate of Borrower or any
of its Subsidiaries for purposes of this Agreement. For the purpose of
this definition, "control" of a Person shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of its
management or policies, whether through the ownership of voting securities,
by contract or otherwise.
"Agent" shall have the meaning given to that term in clause (3) of the
----- -----------------
introductory paragraph hereof.
----------------------
"Agent's Fee Letter" shall mean the letter agreement dated as of May
------------------
1, 1996 between Borrower and Agent.
"Agreement" shall mean this Credit Agreement.
---------
"Applicable Lending Office" shall mean, with respect to any Lender,
-------------------------
(a) initially, its office designated as such in Schedule I (or, in the case
----------
of any Lender which becomes a Lender by an assignment pursuant to
Subparagraph 8.05(c), its office designated as such in the applicable
--------------------
Assignment Agreement) and (b) subsequently, such other office or offices as
such Lender may designate to Agent as the office at which such Lender's
Loans will thereafter be maintained and for the account of which all
payments of principal of, and interest on, such Lender's Loans will
thereafter be made.
2
<PAGE>
"Applicable Margin" shall mean:
-----------------
(a) With respect to Revolving Base Rate Loans, zero percent (0%);
(b) With respect to Revolving LIBOR Loans, (i) one and one
quarter percent (1.25%) for each day on which the aggregate principal
amount of all Revolving Loans then outstanding is less than fifty
percent (50%) of the Total Revolving Loan Commitment on such day and
(ii) one and one half percent (1.50%) for each day on which the
aggregate principal amount of all Revolving Loans then outstanding is
equal to or greater than fifty percent (50%) of the Total Revolving
Loan Commitment on such day; and
(c) With respect to Term Loans, one and one quarter percent
(1.25%);
provided, however, that each Applicable Margin set forth in subparagraphs
-------- ------- -------------
(a) and (b) of this definition shall be increased by two percent (2.0%) on
------------------------------
the date an Event of Default occurs and shall continue at such increased
rate unless and until such Event of Default is waived in accordance with
this Agreement.
"Assignee Lender" shall have the meaning given to that term in
---------------
Subparagraph 8.05(c).
--------------------
"Assignment" shall have the meaning given to that term in Subparagraph
---------- ------------
8.05(c).
-------
"Assignment Agreement" shall have the meaning given to that term in
--------------------
Subparagraph 8.05(c).
--------------------
"Assignment Effective Date" shall have, with respect to each
-------------------------
Assignment Agreement, the meaning set forth therein.
"Assignor Lender" shall have the meaning given to that term in
---------------
Subparagraph 8.05(c).
--------------------
"Base Rate" shall mean, on any day, the greater of (a) the Prime Rate
---------
in effect on such date and (b) the Federal Funds Rate for such day plus
----
one-half percent (0.50%).
"Borrower" shall have the meaning given to that term in clause (1) of
-------- -------------
the introductory paragraph hereof.
--------------------------
"Borrowing" shall mean a Revolving Loan Borrowing or the Term Loan
---------
Borrowing.
3
<PAGE>
"Business Day" shall mean any day on which (a) commercial banks are
------------
not authorized or required to close in San Francisco, California or New
York, New York and (b) if such Business Day is related to a Revolving LIBOR
Loan or the Term Loan, dealings in Dollar deposits are carried out in the
London interbank market.
"Capital Adequacy Requirement" shall have the meaning given to that
----------------------------
term in Subparagraph 2.10(d).
--------------------
"Capital Asset" shall mean, with respect to any Person, any tangible
-------------
fixed or capital asset owned or leased (in the case of a Capital Lease) by
such Person, or any expense incurred by such Person that is required by
GAAP to be reported as a non-current asset on such Person's balance sheet.
"Capital Expenditures" shall mean, with respect to Borrower and its
--------------------
Subsidiaries for any period, the sum, determined on a consolidated basis in
accordance with GAAP, of all amounts expended and indebtedness incurred or
assumed by Borrower and its Subsidiaries during such period for the
acquisition of Capital Assets (including all amounts expended and
indebtedness incurred or assumed in connection with Capital Leases).
"Capital Leases" shall mean any and all lease obligations that, in
--------------
accordance with GAAP, are required to be capitalized on the books of a
lessee.
"Cash Balances" shall mean, with respect to Borrower and its
-------------
Subsidiaries at any time, the remainder, determined on a consolidated basis
in accordance with GAAP, of:
(a) The sum of the cash and Cash Equivalents of Borrower and its
Subsidiaries at such time;
minus
-----
(b) If the Outstanding Revolver Credit at such time exceeds
$5,000,000, the amount of such excess.
"Cash Equivalents" shall mean:
----------------
(a) Direct obligations of, or obligations the principal and
interest on which are unconditionally guaranteed by, the United States
of America or obligations of any agency of the United States of
America to the extent such obligations are backed by the full faith
and credit of the United States of America, in each case maturing
within one year from the date of acquisition thereof;
4
<PAGE>
(b) Certificates of deposit maturing within one year from the
date of acquisition thereof issued by a commercial bank or trust
company organized under the laws of the United States of America or a
state thereof or that is a Lender, provided that (A) such deposits are
denominated in Dollars, (B) such bank or trust company has capital,
surplus and undivided profits of not less than $100,000,000 and (C)
such bank or trust company has certificates of deposit or other debt
obligations rated at least A-1 (or its equivalent) by Standard and
Poor's Ratings Group or P-1 (or its equivalent) by Moody's Investors
Service, Inc.;
(c) Open market commercial paper maturing within 270 days from
the date of acquisition thereof issued by a corporation organized
under the laws of the United States of America or a state thereof,
provided such commercial paper is rated at least A-1 (or its
equivalent) by Standard and Poor's Ratings Group or P-1 (or its
equivalent) by Moody's Investors Service, Inc.; and
(d) Any repurchase agreement entered into with a commercial bank
or trust company organized under the laws of the United States of
America or a state thereof or that is a Lender, provided that (A) such
bank or trust company has capital, surplus and undivided profits of
not less than $100,000,000, (B) such bank or trust company has
certificates of deposit or other debt obligations rated at least A-1
(or its equivalent) by Standard and Poor's Ratings Group or P-1 (or
its equivalent) by Moody's Investors Service, Inc., (C) the repurchase
obligations of such bank or trust company under such repurchase
agreement are fully secured by a perfected security interest in a
security or instrument of the type described in clause (i), (ii) or
-------------------
(iii) above and (D) such security or instrument so securing the
-----
repurchase obligations has a fair market value at the time such
repurchase agreement is entered into of not less than 100% of such
repurchase obligations.
"Change of Control" shall mean (a) with respect to Borrower, the
-----------------
occurrence of any of the following events: (i) any person or group of
persons (within the meaning of Section 13 or 14 of the Securities Exchange
Act of 1934, as amended) shall (A) acquire beneficial ownership (within the
meaning of Rule 13d-3 promulgated by the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended) of twenty-five
percent (25%) or more of the outstanding Equity Securities of Borrower
entitled to vote for members of the board of directors, or (B) acquire all
or substantially all of the assets of Borrower and its
5
<PAGE>
Subsidiaries taken as a whole, or (ii) during any period of twelve (12)
consecutive calendar months, individuals who are directors of Borrower on
the first day of such period ("Initial Directors") and any directors of
-----------------
Borrower who are specifically approved by two-thirds of the Initial
Directors and previously-approved Directors ("Approved Directors") shall
------------------
cease to constitute a majority of the Board of Directors of Borrower before
the end of such period; and (b) with respect to Borrower's Japanese
Subsidiary, Borrower shall cease to own one hundred percent (100%) of the
Equity Securities of such Subsidiary except for nominal amounts of director
stock necessary to do business in Japan.
"Change of Law" shall have the meaning given to that term in
-------------
Subparagraph 2.10(b).
--------------------
"Closing Date" shall mean the Business Day on or before June 7, 1996
------------
which is designated by Borrower in the Notice of Term Loan Borrowing as the
date on which the Revolving Loans are to be made.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
----
time to time.
"Commitments" shall mean, collectively, the Revolving Loan Commitments
-----------
and the Term Loan Commitments.
"Commitment Fees" shall have the meaning given to that term in
---------------
Subparagraph 2.04(b).
--------------------
"Compliance Certificate" shall have the meaning given to that term in
----------------------
Subparagraph 5.01(a).
--------------------
"Contingent Obligation" shall mean, with respect to any Person, (a)
---------------------
any Guaranty Obligation of that Person; and (b) any direct or indirect
obligation or liability, contingent or otherwise, of that Person (i) in
respect of any Surety Instrument issued for the account of that Person or
as to which that Person is otherwise liable for reimbursement of drawings
or payments, (ii) as a partner or joint venturer in any partnership or
joint venture, (iii) to purchase any materials, supplies or other property
from, or to obtain the services of, another Person if the relevant contract
or other related document or obligation requires that payment for such
materials, supplies or other property, or for such services, shall be made
regardless of whether delivery of such materials, supplies or other
property is ever made or tendered, or such services are ever performed or
tendered, or (iv) in respect to any Rate Contract that is not entered into
in connection with a bona fide hedging operation that provides offsetting
benefits to such Person. The amount of any Contingent Obligation shall
(subject, in
6
<PAGE>
the case of Guaranty Obligations, to the last sentence of the definition of
"Guaranty Obligation") be deemed equal to the maximum reasonably
anticipated liability in respect thereof, and shall, with respect to item
----
(b)(iv) of this definition be marked to market on a current basis.
-------
"Contractual Obligation" of any Person shall mean, any indenture,
----------------------
note, lease, loan agreement, security, deed of trust, mortgage, security
agreement, guaranty, instrument, contract, agreement or other form of
contractual obligation or undertaking to which such Person is a party or by
which such Person or any of its property is bound.
"Credit Documents" shall mean and include this Agreement, the Notes,
----------------
all Rate Contracts of Borrower with any Lender relating to the Loans and
the Agent's Fee Letter; all other documents, instruments and agreements
delivered to Agent or any Lender pursuant to Paragraph 3.01; and all other
--------------
documents, instruments and agreements delivered by Borrower or any of its
Subsidiaries to Agent or any Lender in connection with this Agreement on or
after the date of this Agreement.
"Credit Event" shall mean the making of any Loan; the conversion of
------------
any Revolving Loan into a Revolving LIBOR Loan; or the selection of a new
Interest Period for any Revolving LIBOR Loan or Term Loan.
"Current Ratio" shall mean, with respect to Borrower and its
-------------
Subsidiaries at any time, the ratio, determined on a consolidated basis in
accordance with GAAP, of (a) the current assets of Borrower and its
Subsidiaries at such time to (b) the sum of (i) the current liabilities of
Borrower and its Subsidiaries at such time and (ii) to the extent not
included in such current liabilities, the Outstanding Revolver Credit at
such time.
"Debt Service Coverage Ratio" shall mean, with respect to Borrower and
---------------------------
its Subsidiaries for any period, the ratio, determined on a consolidated
basis in accordance with GAAP where applicable, of;
(a) The remainder of (i) EBITDA of Borrower and its Subsidiaries
for such period minus (ii) all Capital Expenditures of Borrower and
its Subsidiaries for such period;
to
--
(b) The sum of (i) all Interest Expenses of Borrower and its
Subsidiaries for such period and (ii) all principal payments on long-
term Indebtedness for
7
<PAGE>
borrowed money of Borrower and its Subsidiaries scheduled for payment
during the immediately succeeding comparable period;
Provided, however, that, in calculating the Debt Service Coverage Ratio for
-------- -------
any period which includes the fiscal quarter ending July 31, 1996, October
31, 1996 or January 31, 1997, any expenditures by Borrower during such
quarter to purchase the MEBES 140 from Sematech shall be excluded from the
Capital Expenditures deducted from EBITDA pursuant to clause (a)(ii) above,
--------------
but only to the extent that all such expenditures for all three quarters do
not exceed $5,400,000 in aggregate.
"Default" shall mean any event or circumstance not yet constituting an
-------
Event of Default which with the giving of any notice or the lapse of any
period of time or both, would become an Event of Default.
"Defaulting Lender" shall mean a Lender which has failed to fund its
-----------------
portion of any Borrowing which it is required to fund under this Agreement
and has continued in such failure for three (3) Business Days after written
notice from Agent.
"Dollars" and "$" shall mean the lawful currency of the United States
------- -
of America and, in relation to any payment under this Agreement, same day
or immediately available funds.
"EBITDA" shall mean, with respect to Borrower and its Subsidiaries for
------
any period, the sum of the following, determined on a consolidated basis in
accordance with GAAP:
(a) The Adjusted Net Income of Borrower and its Subsidiaries for
such period;
plus
----
(b) The sum (to the extent deducted in calculating such Adjusted
Net Income) of (i) all Interest Expenses of Borrower and its
Subsidiaries accrued during such period, (ii) all income taxes of
Borrower and its Subsidiaries accrued during such period and (ii) all
depreciation and amortization expenses of Borrower and its
Subsidiaries accrued during such period.
"Employee Benefit Plan" shall mean any employee benefit plan within
---------------------
the meaning of section 3(3) of ERISA maintained or contributed to by
Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
8
<PAGE>
"Environmental Laws" shall mean all Requirements of Law relating to
------------------
the protection of human health and the environment, including, without
limitation, all Requirements of Law, pertaining to reporting, licensing,
permitting, transportation, storage, disposal, investigation, and
remediation of emissions, discharges, releases, or threatened releases of
Hazardous Materials, chemical substances, pollutants, contaminants, or
hazardous or toxic substances, materials or wastes, whether solid, liquid,
or gaseous in nature, into the air, surface water, groundwater, or land, or
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport, or handling of chemical substances,
pollutants, contaminants, or hazardous or toxic substances, materials, or
wastes, whether solid, liquid, or gaseous in nature.
"Equity Securities" of any Person shall mean (a) all common stock,
-----------------
preferred stock, participations, shares, partnership interests or other
equity interests in and of such Person (regardless of how designated and
whether or not voting or non-voting) and (b) all warrants, options and
other rights to acquire any of the foregoing.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as the same may from time to time be amended or supplemented,
including any rules or regulations issued in connection therewith.
"ERISA Affiliate" shall mean any Person which is treated as a single
---------------
employer with Borrower under Section 414 of the Code.
"Event of Default" shall have the meaning given to that term in
----------------
Paragraph 6.01.
--------------
"Federal Funds Rate" shall mean, for any day, the rate per annum set
------------------
forth in the weekly statistical release designated as H.15(519), or any
successor publication, published by the Federal Reserve Board (including
any such successor publication, "H.15 (519)") for such day opposite the
caption "Federal Funds (Effective)". If on any relevant day, such rate is
not yet published in H.15 (519), the rate for such day shall be the rate
set forth in the daily statistical release designated as the Composite 3:30
p.m. Quotations for U.S. Government Securities, or any successor
publication, published by the Federal Reserve Bank of New York (including
any such successor publication, the "Composite 3:30 p.m. Quotations") for
such day under the caption "Federal Funds Effective Rate". If on any
relevant day, such rate is not yet published in either H.15 (519) or the
Composite 3:30 p.m. Quotations, the rate for such day shall be the
arithmetic means, as determined by Agent, of
9
<PAGE>
the rates quoted to Agent for such day by three (3) Federal funds brokers
of recognized standing selected by Agent.
"Federal Reserve Board" shall mean the Board of Governors of the
---------------------
Federal Reserve System.
"Financial Statements" shall mean, with respect to any accounting
--------------------
period for any Person, statements of income, shareholders' equity and cash
flows of such Person for such period, and a balance sheet of such Person as
of the end of such period, setting forth in each case in comparative form
figures for the corresponding period in the preceding fiscal year if such
period is less than a full fiscal year or, if such period is a full fiscal
year, corresponding figures from the preceding annual audit, all prepared
in reasonable detail and in accordance with GAAP.
"GAAP" shall mean generally accepted accounting principles and
----
practices as in effect in the United States of America from time to time,
consistently applied.
"Governmental Authority" shall mean any domestic or foreign national,
----------------------
state or local government, any political subdivision thereof, any
department, agency, authority or bureau of any of the foregoing, or any
other entity exercising executive, legislative, judicial, regulatory or
administrative functions of or pertaining to government, including, without
limitation, the Federal Deposit Insurance Corporation, the Federal Reserve
Board, the Comptroller of the Currency, any central bank or any comparable
authority.
"Governmental Charges" shall mean, with respect to any Person, all
--------------------
levies, assessments, fees, claims or other charges imposed by any
Governmental Authority upon such Person or any of its property or otherwise
payable by such Person.
"Governmental Rule" shall mean any law, rule, regulation, ordinance,
-----------------
order, code interpretation, judgment, decree, directive, guidelines, policy
or similar form of decision of any Governmental Authority.
"Guaranty Obligation" shall mean, with respect to any Person, any
-------------------
direct or indirect liability of that Person with respect to any
indebtedness, lease, dividend, letter of credit or other obligation (the
"primary obligations") of another Person (the "primary obligor"), including
any obligation of that Person, whether or not contingent, (a) to purchase,
repurchase or otherwise acquire such primary obligations or any property
constituting direct or indirect security therefor, or (b) to advance or
provide funds (i) for the payment or discharge of any such primary
10
<PAGE>
obligation, or (ii) to maintain working capital or equity capital of the
primary obligor or otherwise to maintain the net worth or solvency or any
balance sheet item, level of income or financial condition of the primary
obligor, or (c) to purchase property, securities or services primarily for
the purpose of assuring the owner of any such primary obligation of the
ability of the primary obligor to make payment of such primary obligation,
or (d) otherwise to assure or hold harmless the holder of any such primary
obligation against loss in respect thereof. The amount of any Guaranty
Obligation shall be deemed equal to the stated or determinable amount of
the primary obligation in respect of which such Guaranty Obligation is made
or, if not stated or if indeterminable, the maximum reasonably anticipated
liability in respect thereof.
"Hazardous Materials" shall mean all materials, substances and wastes
-------------------
which are classified or regulated as "hazardous," "toxic" or similar
descriptions under any Environmental Law.
"Indebtedness" of any Person shall mean, without duplication:
------------
(a) All obligations of such Person evidenced by notes, bonds,
debentures or other similar instruments and all other obligations of
such Person for borrowed money (including obligations to repurchase
receivables and other assets sold with recourse);
(b) All obligations of such Person for the deferred purchase
price of property or services (including obligations under letters of
credit and other credit facilities which secure or finance such
purchase price and obligations under "synthetic" leases but excluding
trade payables incurred in the ordinary course of business on ordinary
terms which are not overdue);
(c) All obligations of such Person under conditional sale or
other title retention agreements with respect to property acquired by
such Person (to the extent of the value of such property if the rights
and remedies of the seller or lender under such agreement in the event
of default are limited solely to repossession or sale of such
property);
(d) All obligations of such Person as lessee under or with
respect to Capital Leases;
11
<PAGE>
(e) All net obligations of such Person, contingent or otherwise,
under or with respect to Rate Contracts;
(f) All Guaranty Obligations of such Person with respect to the
obligations of other Persons of the types described in clauses (a) -
-------------
(e) above; and
---
(h) All obligations of other Persons of the types described in
clauses (a) - (e) above to the extent secured by (or for which any
-----------------
holder of such obligations has an existing right, contingent or
otherwise, to be secured by) any Lien in any property (including
accounts and contract rights) of such Person, even though such Person
has not assumed or become liable for the payment of such obligations.
"Interest Account" shall have the meaning given to that term in
----------------
Subparagraph 2.07(c).
--------------------
"Interest Expenses" shall mean, with respect to Borrower and its
-----------------
Subsidiaries for any period, the sum, determined on a consolidated basis in
accordance with GAAP, of (a) all interest accrued on the indebtedness of
Borrower and its Subsidiaries during such period (including interest
attributable to Capital Leases) and (b) all letter of credit fees payable
by Borrower and its Subsidiaries accrued during such period.
"Interest Period" shall mean, with respect to any Revolving LIBOR Loan
---------------
or Term Loan, the time periods selected by Borrower pursuant to
Subparagraph 2.01(b), Subparagraph 2.01(d), Subparagraph 2.02(b) or
----------------------------------------------------------------
Subparagraph 2.02(d) which commences on the first day of such Loan or the
--------------------
effective date of any conversion and ends on the last day of such time
period, and thereafter, each subsequent time period selected by Borrower
pursuant to Subparagraph 2.01(e) or Subparagraph 2.02(e) which commences on
-------------------- --------------------
the last day of the immediately preceding time period and ends on the last
day of that time period.
"Investment" of any Person shall mean any loan or advance of funds by
----------
such Person to any other Person (other than advances to employees of such
Person for moving and travel expenses, drawing accounts and similar
expenditures in the ordinary course of business), any purchase or other
acquisition of any Equity Securities or Indebtedness of any other Person,
any capital contribution by such Person to or any other investment by such
Person in any other Person (including any Guaranty Obligations of such
Person and any indebtedness of such Person of the type described in clause
------
(h) of the definition of "Indebtedness" on behalf of any
12
<PAGE>
other Person); provided, however, that Investments shall not include (a)
-------- -------
accounts receivable or other indebtedness owed by customers of such Person
which are current assets and arose from sales of inventory in the ordinary
course of such Person's business or (b) prepaid expenses of such Person
incurred and prepaid in the ordinary course of business.
"Lenders" shall have the meaning given to that term in clause (2) of
------- -------------
the introductory paragraph hereof.
---------------------------------
"Leverage Ratio" shall mean, with respect to Borrower and its
--------------
Subsidiaries at any time, the ratio, determined on a consolidated basis in
accordance with GAAP, of (a) the Senior Indebtedness of Borrower and its
Subsidiaries at such time to (b) the Total Capital of Borrower and its
Subsidiaries at such time.
"LIBO Rate" shall mean, with respect to any Interest Period for the
---------
Revolving LIBOR Loans in any Revolving Loan Borrowing consisting of
Revolving LIBOR Loans or for the Term Loans, a rate per annum equal to the
quotient of (a) the arithmetic mean (rounded upward if necessary to the
nearest 1/16 of one percent) of the rates per annum appearing on Telerate
Page 3750 (or any successor publication) on the second Business Day prior
to the first day of such Interest Period at or about 11:00 A.M. (London
time) (for delivery on the first day of such Interest Period) for a term
comparable to such Interest Period, divided by (b) one minus the Reserve
----------
Requirement for such Loans in effect from time to time. If for any reason
rates are not available as provided in clause (a) of the preceding
----------
sentence, the rate to be used in clause (a) shall be, at the Agent's
----------
discretion, (i) the rate per annum at which Dollar deposits are offered to
Agent in the London interbank eurodollar currency market or (ii) the rate
at which Dollar deposits are offered to Agent in, or by Agent to major
banks in, any offshore interbank eurodollar market selected by Agent, in
each case on the second Business Day prior to the commencement of such
Interest Period at or about 10:00 A.M. (New York time) (for delivery on the
first day of such Interest Period) for a term comparable to such Interest
Period and in an amount approximately equal to the amount of the Loan to be
made or funded by Agent as part of such Revolving Loan Borrowing or Term
Loan Borrowing. The LIBO Rate shall be adjusted automatically as to all
Revolving LIBOR Loans and Term Loans then outstanding as of the effective
date of any change in the Reserve Requirement.
"Lien" shall mean, with respect to any property, any security
----
interest, mortgage, pledge, lien, charge or other encumbrance in, of, or on
such property or the income therefrom, including, without limitation, the
interest of a
13
<PAGE>
vendor or lessor under a conditional sale agreement, Capital Lease or other
title retention agreement, or any agreement to provide any of the
foregoing, and the filing of any financing statement or similar instrument
under the Uniform Commercial Code or comparable law of any jurisdiction.
"Loan" shall mean a Revolving Loan or Term Loan.
----
"Margin Stock" shall have the meaning given to that term in Regulation
------------
U issued by the Federal Reserve Board, as amended from time to time, and
any successor regulation thereto.
"Material Adverse Effect" shall mean a material adverse effect on (a)
-----------------------
the business, assets, operations, prospects or financial or other condition
of Borrower and its Subsidiaries, taken as a whole; (b) the ability of
Borrower to pay or perform the Obligations in accordance with the terms of
this Agreement and the other Credit Documents; or (c) the rights and
remedies of Agent or any Lender under this Agreement, the other Credit
Documents or any related document, instrument or agreement.
"maturity" shall mean, with respect to any Loan, interest, fee or
--------
other amount payable by Borrower under this Agreement or the other Credit
Documents, the date such Loan, interest, fee or other amount becomes due,
whether upon the stated maturity or due date, upon acceleration or
otherwise.
"Multiemployer Plan" shall mean any multiemployer plan within the
------------------
meaning of section 3(37) of ERISA maintained or contributed to by Borrower
or any ERISA Affiliate.
"Net Proceeds" shall mean, with respect to any issuance of Equity
------------
Securities by Borrower or any of its Subsidiaries, the aggregate
consideration received by Borrower or such Subsidiary from such issuance
less the sum of the actual amount of the reasonable fees and commissions
----
payable to Persons other than Borrower or any Affiliate of Borrower and the
other reasonable costs and expenses (including reasonable legal expenses)
directly related to such issuance that are to be paid by Borrower or any of
its Subsidiaries.
"Note" shall mean a Revolving Loan Note or a Term Loan Note.
----
"Notice of Borrowing" shall mean a Notice of Revolving Loan Borrowing
-------------------
or the Notice of Term Loan Borrowing.
"Notice of Interest Period Selection" shall mean a Notice of Revolving
-----------------------------------
Loan Interest Period Selection or Notice of Term Loan Interest Period
Selection.
14
<PAGE>
"Notice of Term Loan Interest Period Selection" shall have the meaning
---------------------------------------------
given to that term in Subparagraph 2.02(e).
--------------------
"Notice of Revolving Loan Borrowing" shall have the meaning given to
----------------------------------
that term in Subparagraph 2.01(b).
--------------------
"Notice of Revolving Loan Conversion" shall have the meaning given to
-----------------------------------
that term in Subparagraph 2.01(d).
--------------------
"Notice of Revolving Loan Interest Period Selection" shall have the
--------------------------------------------------
meaning given to that term in Subparagraph 2.01(e).
--------------------
"Notice of Term Loan Borrowing" shall have the meaning given to that
-----------------------------
term in Subparagraph 2.02(b).
--------------------
"Notice of Term Loan Interest Period Selection" shall have the meaning
---------------------------------------------
given to that term in Subparagraph 2.02(d).
--------------------
"Obligations" shall mean and include, with respect to Borrower, all
-----------
loans, advances, debts, liabilities, and obligations, howsoever arising,
owed by Borrower to Agent or any Lender of every kind and description
(whether or not evidenced by any note or instrument and whether or not for
the payment of money), direct or indirect, absolute or contingent, due or
to become due, now existing or hereafter arising pursuant to the terms of
this Agreement or any of the other Credit Documents, including without
limitation all interest, fees, charges, expenses, attorneys' fees and
accountants' fees chargeable to Borrower or payable by Borrower hereunder
or thereunder.
"Operating Income" shall mean, with respect to Borrower and its
----------------
Subsidiaries for any period, the sum of the following, determined on a
consolidated basis in accordance with GAAP where applicable:
(a) The Adjusted Net Income of Borrower and its Subsidiaries for
such period;
plus
----
(b) The remainder of (i) to the extent deducted in calculating
such Adjusted Net Income, all Interest Expenses of Borrower and its
Subsidiaries accrued during such period minus (ii) to the extent
-----
included in calculating such Adjusted Net Income, all interest income
of Borrower and its Subsidiaries accrued during such period;
plus
----
15
<PAGE>
(c) The remainder of (i) to the extent deducted in calculating
such Adjusted Net Income, all extraordinary losses of Borrower and its
Subsidiaries accrued during such period minus (ii) to the extent
-----
included in calculating such Adjusted Net Income, all extraordinary
gains of Borrower and its Subsidiaries accrued during such period;
plus
----
(d) To the extent deducted in calculating such Adjusted Net
Income, all depreciation and amortization expenses of Borrower and its
Subsidiaries accrued during such period.
"Outstanding Revolver Credit" shall mean, with respect to Borrower and
---------------------------
its Subsidiaries at any time, the sum of (a) the aggregate principal amount
of all Revolving Loans outstanding at such time plus (b) the aggregate
----
principal amount of all other loans of Borrower and its Subsidiaries
outstanding at such time under revolving lines of credit.
"Participant" shall have the meaning given to that term in
-----------
Subparagraph 8.05(b).
--------------------
"PBGC" shall mean the Pension Benefit Guaranty Corporation, or any
----
successor thereto.
"Permitted Indebtedness" shall have the meaning given to that term in
----------------------
Subparagraph 5.02(a).
--------------------
"Permitted Liens" shall have the meaning given to that term in
---------------
Subparagraph 5.02(b).
--------------------
"Person" shall mean and include an individual, a partnership, a
------
corporation (including a business trust), a joint stock company, an
unincorporated association, a limited liability company, a joint venture, a
trust or other entity or a Governmental Authority.
"Prime Rate" shall mean the per annum rate publicly announced by ABN
----------
AMRO Bank N.V. from time to time at its Chicago office as its prime
commercial lending rate. The Prime Rate is determined by ABN AMRO Bank
N.V. from time to time as a means of pricing credit extensions to some
customers and is neither directly tied to any external rate of interest or
index nor necessarily the lowest rate of interest charged by ABN AMRO Bank
N.V. at any given time for any particular class of customers or credit
extensions. Any change in the Base Rate resulting from a change in the
Prime Rate shall become effective on the Business Day on which each change
in the Prime Rate occurs.
16
<PAGE>
"Prior Credit Agreement" shall have the meaning given to that term in
----------------------
Subparagraph 2.02(f).
--------------------
"Proportionate Share" shall mean, with respect to each Lender, the
-------------------
percentage set forth under the caption "Proportionate Share" opposite such
Lender's name on Schedule I, or, if changed, such percentage as may be set
----------
forth for such Lender in the Register.
"Rate Contracts" shall mean swap agreements (as that term is defined
--------------
in Section 101 of the Federal Bankruptcy Reform Act of 1978, as amended)
and any other agreements or arrangements designed to provide protection
against fluctuations in interest or currency exchange rates.
"Register" shall have the meaning given to that term in Subparagraph
-------- ------------
8.05(d).
-------
"Reportable Event" shall have the meaning given to that term in ERISA
----------------
and applicable regulations thereunder.
"Required Lenders" shall mean (a) at any time Revolving Loans or Term
----------------
Loans are outstanding, Lenders holding sixty-six and two-thirds percent (66
2/3%) or more of the aggregate principal amount of such Loans and (b) at
any time no Revolving Loans or Term Loans are outstanding, Lenders whose
Proportionate Shares equal or exceed sixty-six and two-thirds percent (66
2/3%).
"Requirement of Law" applicable to any Person shall mean (a) the
------------------
Articles or Certificate of Incorporation and By-laws, Partnership Agreement
or other organizational or governing documents of such Person, (b) any
Governmental Rule applicable to such Person, (c) any license, permit,
approval or other authorization granted by any Governmental Authority to or
for the benefit of such Person or (d) any judgment, decision or
determination of any Governmental Authority or arbitrator, in each case
applicable to or binding upon such Person or any of its property or to
which such Person or any of its property is subject.
"Reserve Requirement" shall mean, with respect to any day in an
-------------------
Interest Period for a Revolving LIBOR Loan or a Term Loan, the aggregate of
the reserve requirement rates (expressed as a decimal) in effect on such
day for eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D of the Federal Reserve Board) maintained by a
member bank of the Federal Reserve System. As used herein, the term
"reserve requirement" shall include, without limitation, any basic,
supplemental or emergency reserve requirements imposed on Lender by any
Governmental Authority.
17
<PAGE>
"Revolving Base Rate Loan" shall mean, at any time, a Revolving Loan
------------------------
which then bears interest as provided in clause (i) of Subparagraph
--------------------------
2.01(c).
"Revolving LIBOR Loan" shall mean, at any time, a Revolving Loan which
--------------------
then bears interest as provided in clause (iii) of Subparagraph 2.01(c).
------------------------------------
"Revolving Loan" shall have the meaning given to that term in
--------------
Subparagraph 2.01(a).
--------------------
"Revolving Loan Borrowing" shall mean a borrowing by Borrower
------------------------
consisting of the Revolving Loans made by each of the Lenders on the same
date and of the same Type pursuant to a single Notice of Revolving Loan
Borrowing.
"Revolving Loan Commitment" shall mean, with respect to any Lender at
-------------------------
any time, such Lender's Proportionate Share at such time of the Total
Revolving Loan Commitment at such time.
"Revolving Loan Maturity Date" shall mean May 31, 1998.
----------------------------
"Revolving Loan Note" shall have the meaning given to that term in
-------------------
Subparagraph 2.07(a).
--------------------
"Senior Indebtedness" shall mean, with respect to Borrower and its
-------------------
Subsidiaries at any time, the remainder, determined on a consolidated basis
in accordance with GAAP, of (a) the total Indebtedness of Borrower and its
Subsidiaries at such time minus (b) the total Subordinated Indebtedness of
-----
Borrower and its Subsidiaries at such time.
"Subordinated Indebtedness" shall mean Indebtedness which is unsecured
-------------------------
and subordinated to the Obligations on terms acceptable to the Required
Lenders.
"Subsidiary" of any Person shall mean (a) any corporation of which
----------
more than 50% of the issued and outstanding Equity Securities having
ordinary voting power to elect a majority of the Board of Directors of such
corporation (irrespective of whether at the time capital stock of any other
class or classes of such corporation shall or might have voting power upon
the occurrence of any contingency) is at the time directly or indirectly
owned or controlled by such Person, by such Person and one or more of its
other Subsidiaries or by one or more of such Person's other Subsidiaries,
(b) any partnership, joint venture, or other association of which more than
50% of the equity interest having the power to vote, direct or control the
management of such partnership, joint venture or other association is at
the time owned and controlled by such
18
<PAGE>
Person, by such Person and one or more of the other Subsidiaries or by one
or more of such Person's other Subsidiaries or (c) any other Person
included in the Financial Statements of such Person on a consolidated
basis.
"Surety Instruments" shall mean all letters of credit (including
------------------
standby and commercial), banker's acceptances, bank guaranties, shipside
bonds, surety bonds and similar instruments.
"Tangible Net Worth" shall mean, with respect to Borrower and its
------------------
Subsidiaries at any time, the remainder at such time, determined on a
consolidated basis in accordance with GAAP, of (a) the total assets of
Borrower and its Subsidiaries minus (b) the sum (without limitation and
-----
without duplication of deductions) of (i) the total liabilities of Borrower
and its Subsidiaries, (ii) all reserves established by Borrower and its
Subsidiaries for anticipated losses and expenses (to the extent not
deducted in calculating total assets in clause (a) above), and (iii) all
----------
intangible assets of Borrower and its Subsidiaries (to the extent included
in calculating total assets in clause (a) above), including, without
----------
limitation, goodwill (including any amounts, however designated on the
balance sheet, representing the cost of acquisition of businesses and
investments in excess of underlying tangible assets), trademarks, trademark
rights, trade name rights, copyrights, patents, patent rights, licenses,
unamortized debt discount, marketing expenses, organizational expenses,
non-compete agreements and deferred research and development.
"Taxes" shall have the meaning given to such term in Subparagraph
----- ------------
2.11(a).
-------
"Term Loan" shall have the meaning given to that term in Subparagraph
--------- ------------
2.02(a).
-------
"Term Loan Borrowing" shall mean the borrowing by Borrower consisting
-------------------
of the Term Loans made by each of the Lenders.
"Term Loan Commitment" shall mean, with respect to any Lender at any
--------------------
time, such Lender's Proportionate Share at such time of the Total Term Loan
Commitment at such time.
"Term Loan Installment Date" shall mean the date which is three (3)
--------------------------
months after the Closing Date and each subsequent date which occurs at
three (3) month intervals thereafter through and including the Term Loan
Maturity Date; provided, however, that (a) any Term Loan Installment Date
-------- -------
which would otherwise occur on a day which is not a Business Day shall be
extended to the next succeeding
19
<PAGE>
Business Day unless such next Business Day falls in another calendar month,
in which case such Term Loan Installment Date shall occur on the
immediately preceding Business Day; (b) any Term Loan Installment Date
which occurs on the last Business Day of a calendar month (or on a day for
which there is no numerically corresponding day in the calendar month three
(3) months thereafter) shall occur on the last Business Day of a calendar
month; and (c) the last Term Loan Installment Date shall occur on the Term
Loan Maturity Date.
"Term Loan Maturity Date" shall mean the date which is three (3) years
-----------------------
after the Closing Date.
"Term Loan Note" shall have the meaning given to that term in
--------------
Subparagraph 2.01(b).
--------------------
"Total Capital" shall mean, with respect to Borrower and its
-------------
Subsidiaries at any time, the sum, determined on a consolidated basis in
accordance with GAAP, of (a) the total Indebtedness of Borrower and its
Subsidiaries at such time plus (b) the net worth of Borrower and its
----
Subsidiaries at such time.
"Total Revolving Loan Commitment" shall mean Twenty Million Dollars
-------------------------------
($20,000,000,00) or, if reduced pursuant to Subparagraph 2.03(a), the
--------------------
amount to which so reduced.
"Total Term Loan Commitment" shall mean Ten Million Dollars
--------------------------
($10,000,000.00).
"Type" shall mean, with respect to any Revolving Loan at any time, the
----
classification of such Loan by the type of interest rate it then bears,
whether an interest rate based upon the Base Rate or the LIBO Rate.
"Unused Commitment" shall mean, at any time, the remainder of (a) the
-----------------
Total Revolving Loan Commitment at such time minus (b) the aggregate
principal amount of all Revolving Loans outstanding at such time.
1.02. GAAP. Unless otherwise indicated in this Agreement or any other
----
Credit Document, all accounting terms used in this Agreement or any other Credit
Document shall be construed, and all accounting and financial computations
hereunder or thereunder shall be computed, in accordance with GAAP. If GAAP
changes during the term of this Agreement such that any covenants contained
herein would then be calculated in a different manner or with different
components, Borrower, the Lenders and Agent agree to negotiate in good faith to
amend this Agreement in such respects as are necessary to conform those
covenants as criteria for evaluating Borrower's financial condition to
substantially the same criteria as were effective
20
<PAGE>
prior to such change in GAAP; provided, however, that, until Borrower, the
-------- -------
Lenders and Agent so amend this Agreement, all such covenants shall be
calculated in accordance with GAAP as in effect immediately prior to such
change.
1.03. Headings. Headings in this Agreement and each of the other
--------
Credit Documents are for convenience of reference only and are not part of the
substance hereof or thereof.
1.04. Plural Terms. All terms defined in this Agreement or any other
------------
Credit Document in the singular form shall have comparable meanings when used in
the plural form and vice versa.
---- -----
1.05. Time. All references in this Agreement and each of the other
----
Credit Documents to a time of day shall mean San Francisco, California time,
unless otherwise indicated.
1.06. Governing Law. This Agreement and each of the other Credit
-------------
Documents (unless otherwise provided in such other Credit Documents) shall be
governed by and construed in accordance with the laws of the State of California
without reference to conflicts of law rules.
1.07. Construction. This Agreement is the result of negotiations
------------
among, and has been reviewed by, Borrower, each Lender, Agent and their
respective counsel. Accordingly, this Agreement shall be deemed to be the
product of all parties hereto, and no ambiguity shall be construed in favor of
or against Borrower, any Lender or Agent.
1.08. Entire Agreement. This Agreement and each of the other Credit
----------------
Documents, taken together, constitute and contain the entire agreement of
Borrower, the Lenders and Agent and supersede any and all prior agreements,
negotiations, correspondence, understandings and communications among the
parties, whether written or oral, respecting the subject matter hereof
(including the commitment letter dated as of May 1, 1996 between Borrower and
ABN AMRO Bank N.V.
1.09. Calculation of Interest and Fees. All calculations of interest
--------------------------------
and fees under this Agreement and the other Credit Documents for any period (a)
shall include the first day of such period and exclude the last day of such
period and (b) shall be calculated on the basis of a year of 360 days for actual
days elapsed, except that during any period any Loan bears interest based upon
the Prime Rate, such interest shall be calculated on the basis of a year of 365
or 366 days, as appropriate, for actual days elapsed.
1.10. Other Interpretive Provisions. References in this Agreement to
-----------------------------
"Recitals," "Sections," "Paragraphs," "Subparagraphs," "Exhibits" and
"Schedules" are to recitals,
21
<PAGE>
sections, paragraphs, subparagraphs, exhibits and schedules herein and hereto
unless otherwise indicated. References in this Agreement and each of the other
Credit Documents to any document, instrument or agreement (a) shall include all
exhibits, schedules and other attachments thereto, (b) shall include all
documents, instruments or agreements issued or executed in replacement thereof,
and (c) shall mean such document, instrument or agreement, or replacement or
predecessor thereto, as amended, modified and supplemented from time to time and
in effect at any given time. References in this Agreement and each of the other
Credit Documents to any statute or other law (i) shall include any successor
statute or law, (ii) shall include all rules and regulations promulgated under
such statute or law (or any successor statute or law), and (iii) shall mean such
statute or law (or successor statute or law) and such rules and regulations, as
amended, modified, codified or reenacted from time to time and in effect at any
given time. The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement or any other Credit Document shall refer to
this Agreement or such other Credit Document, as the case may be, as a whole and
not to any particular provision of this Agreement or such other Credit Document,
as the case may be. The words "include" and "including" and words of similar
import when used in this Agreement or any other Credit Document shall not be
construed to be limiting or exclusive. In the event of any inconsistency between
the terms of this Agreement and the terms of any other Credit Document, the
terms of this Agreement shall govern.
SECTION II. CREDIT FACILITIES.
-----------------
2.01. Revolving Loan Facility.
-----------------------
(a) Revolving Loan Availability. Subject to the terms and conditions
---------------------------
of this Agreement, each Lender severally agrees to advance to Borrower from
time to time during the period beginning on the Closing Date and ending on
the Revolving Loan Maturity Date such loans as Borrower may request under
this Paragraph 2.01 (individually, a "Revolving Loan"); provided, however,
-------------- -------------- -------- -------
that (i) the aggregate principal amount of all Revolving Loans made by such
Lender at any time outstanding shall not exceed such Lender's Revolving
Loan Commitment at such time and (ii) the aggregate principal amount of all
Revolving Loans made by all Lenders at any time outstanding shall not
exceed the Total Revolving Loan Commitment at such time. All Revolving
Loans shall be made on a pro rata basis by the Lenders in accordance with
their respective Proportionate Shares, with each Revolving Loan Borrowing
to be comprised of a Revolving Loan by each Lender equal to such Lender's
Proportionate Share of such Revolving Loan Borrowing. Except as otherwise
22
<PAGE>
provided herein, Borrower may borrow, repay and reborrow Revolving Loans
until the Revolving Loan Maturity Date.
(b) Notice of Revolving Loan Borrowing. Borrower shall request each
----------------------------------
Revolving Loan Borrowing by delivering to Agent an irrevocable written
notice in the form of Exhibit A, appropriately completed (a "Notice of
--------- ---------
Revolving Loan Borrowing"), which specifies, among other things:
------------------------
(i) The principal amount of the requested Revolving Loan
Borrowing, which shall be in the amount of (A) $250,000 or an integral
multiple of $50,000 in excess thereof in the case of a Borrowing
consisting of Revolving Base Rate Loans or (B) $1,000,000 or an
integral multiple of $100,000 in excess thereof in the case of a
Borrowing consisting of Revolving LIBOR Loans;
(ii) Whether the requested Revolving Loan Borrowing is to consist
of Revolving Base Rate Loans or Revolving LIBOR Loans;
(iii) If the requested Revolving Loan Borrowing is to consist of
Revolving LIBOR Loans, the initial Interest Periods selected by
Borrower for such Revolving Loans in accordance with Subparagraph
------------
2.01(e); and
-------
(iv) The date of the requested Revolving Loan Borrowing, which
shall be a Business Day.
Borrower shall give each Notice of Revolving Loan Borrowing to Agent at
least three (3) Business Days before the date of the requested Revolving
Loan Borrowing in the case of a Revolving Loan Borrowing consisting of
Revolving LIBOR Loans and at least one (1) Business Day before the date of
the requested Revolving Loan Borrowing in the case of a Revolving Loan
Borrowing consisting of Revolving Base Rate Loans. Each Notice of
Revolving Loan Borrowing shall be delivered by first-class mail or
facsimile to Agent at the office or facsimile number and during the hours
specified in Paragraph 8.01; provided, however, that Borrower shall
-------------- -------- -------
promptly deliver to Agent the original of any Notice of Revolving Loan
Borrowing initially delivered by facsimile. Agent shall promptly notify
each Lender of the contents of each Notice of Revolving Loan Borrowing and
of the amount and Type of (and, if applicable, the Interest Period for)
each Revolving Loan to be made by such Lender as part of the requested
Revolving Loan Borrowing.
(c) Revolving Loan Interest Rates. Borrower shall pay interest on the
-----------------------------
unpaid principal amount of each Revolving
23
<PAGE>
Loan from the date of such Revolving Loan until the maturity thereof, at
one of the following rates per annum:
(i) During such periods as such Revolving Loan is a Revolving
Base Rate Loan, at a rate per annum equal to the Base Rate plus the
----
Applicable Margin therefor, such rate to change from time to time as
the Applicable Margin or Base Rate shall change; and
(ii) During such periods as such Revolving Loan is a Revolving
LIBOR Loan, at a rate per annum equal at all times during each
Interest Period for such Revolving LIBOR Loan to the LIBO Rate for
such Interest Period plus the Applicable Margin therefor, such rate to
----
change from time to time during such Interest Period as the Applicable
Margin shall change.
All Revolving Loans in each Revolving Loan Borrowing shall, at any given
time prior to maturity, bear interest at one, and only one, of the above
rates. The number of Revolving Loan Borrowings consisting of Revolving
LIBOR Loans shall not exceed four (4) at any time.
(d) Conversion of Revolving Loans. Borrower may convert any Revolving
-----------------------------
Loan Borrowing from one Type of Revolving Loan Borrowing to the other Type;
provided, however, that any conversion of a Revolving Loan Borrowing
-------- -------
consisting of Revolving LIBOR Loans into a Revolving Loan Borrowing
consisting of Revolving Base Rate Loans shall be made on, and only on, the
last day of an Interest Period for such Revolving LIBOR Loans. Borrower
shall request such a conversion by an irrevocable written notice to Agent
in the form of Exhibit B, appropriately completed (a "Notice of Revolving
--------- -------------------
Loan Conversion"), which specifies, among other things:
---------------
(i) The Revolving Loan Borrowing which is to be converted;
(ii) The Type of Revolving Loan Borrowing into which such
Revolving Loan Borrowing is to be converted;
(iii) If such Revolving Loan Borrowing is to be converted into a
Revolving Loan Borrowing consisting of Revolving LIBOR Loans, the
initial Interest Period selected by Borrower for such Revolving Loans
in accordance with Subparagraph 2.01(e); and
--------------------
(iv) The date of the requested conversion, which shall be a
Business Day.
24
<PAGE>
Borrower shall give each Notice of Revolving Loan Conversion to Agent at
least three (3) Business Days before the date of the requested conversion
in the case of a conversion into a Revolving Loan Borrowing consisting of
Revolving LIBOR Loans and at least one (1) Business Day before the date of
the requested conversion in the case of a conversion into a Revolving Loan
Borrowing consisting of Revolving Base Rate Loans. Each Notice of
Revolving Loan Conversion shall be delivered by first-class mail or
facsimile to Agent at the office or to the facsimile number and during the
hours specified in Paragraph 8.01; provided, however, that Borrower shall
-------------- -------- -------
promptly deliver to Agent the original of any Notice of Revolving Loan
Conversion initially delivered by facsimile. Agent shall promptly notify
each Lender of the contents of each Notice of Revolving Loan Conversion.
(e) Revolving LIBOR Loan Interest Periods.
-------------------------------------
(i) The initial and each subsequent Interest Period selected by
Borrower for a Revolving LIBOR Loan shall be one (1), two (2), three
(3) or six (6) months; provided, however, that (A) any Interest Period
-------- -------
which would otherwise end on a day which is not a Business Day shall
be extended to the next succeeding Business Day unless such next
Business Day falls in another calendar month, in which case such
Interest Period shall end on the immediately preceding Business Day;
(B) any Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall end on the last Business Day of a calendar month; and
(C) no such Interest Period shall end after the Revolving Loan
Maturity Date.
(ii) Borrower shall notify Agent by an irrevocable written notice
in the form of Exhibit C, appropriately completed (a "Notice of
--------- ---------
Revolving Loan Interest Period Selection"), at least three (3)
----------------------------------------
Business Days prior to the last day of each Interest Period for
Revolving LIBOR Loans of the Interest Period selected by Borrower for
the next succeeding Interest Period for such Revolving Loans. Each
Notice of Revolving Loan Interest Period Selection shall be given by
first-class mail or facsimile to the office or the facsimile number
and during the hours specified in Paragraph 8.01; provided, however,
-------------- -------- -------
that Borrower shall promptly deliver to Agent the original of any
Notice of Revolving Loan Interest Period Selection initially delivered
by facsimile. If Borrower fails to notify Agent of the next Interest
Period for Revolving LIBOR Loans in accordance with this Subparagraph
------------
2.01(e), such
-------
25
<PAGE>
Revolving Loans shall automatically convert to Revolving Base Rate
Loans on the last day of the current Interest Period therefor.
(f) Scheduled Revolving Loan Payments. Borrower shall repay the
---------------------------------
principal amount of the Revolving Loans on the Revolving Loan Maturity
Date. Borrower shall pay accrued interest on the unpaid principal amount
of each Revolving Loan in arrears (A) in the case of a Revolving Base Rate
Loan, on the last day in each February, May, August and November, (B) in
the case of a Revolving LIBOR Loan, on the last day of each Interest Period
therefor (and, if any such Interest Period is longer than three (3) months,
every three (3) months after the first day of such Interest Period); and
(C) in the case of all Revolving Loans, upon prepayment (to the extent
thereof) and at maturity.
(g) Purpose. Borrower shall use the proceeds of the Revolving Loans
-------
for Borrower's general corporate needs.
2.02. Term Loan Facility.
------------------
(a) Term Loan Availability. Subject to the terms and conditions of
----------------------
this Agreement, each Lender severally agrees to advance to Borrower under
this Paragraph 2.02, on or prior to June 7, 1996, a term loan in the
--------------
principal amount of such Lender's Term Loan Commitment (individually, a
"Term Loan"); provided, however, that the aggregate principal amount of all
---------- -------- -------
Term Loans made by all Lenders shall not exceed the Total Term Loan
Commitment. The Term Loans shall be made on a pro rata basis by the
Lenders in accordance with their respective Proportionate Shares, with the
Term Loan Borrowing to be comprised of a Term Loan by each Lender equal to
such Lender's Proportionate Share of the Term Loan Borrowing. Each Lender
shall advance its Term Loan in a single advance. Borrower may not reborrow
the principal amount of a Term Loan after repayment or prepayment thereof.
(b) Notice of Term Loan Borrowing. Borrower shall request the Term
-----------------------------
Loan Borrowing by delivering to Agent an irrevocable written notice in the
form of Exhibit D, appropriately completed (a "Notice of Term Loan
--------- -------------------
Borrowing"), which specifies, among other things:
---------
(i) The initial Interest Period selected by Borrower for the Term
Loans in accordance with Subparagraph 2.02(e); and
--------------------
(ii) The date of the Term Loan Borrowing, which shall be a
Business day on or prior to June 7, 1996.
26
<PAGE>
Borrower shall give the Notice of Term Loan Borrowing to Agent at least
three (3) Business Days before the date on which the Term Loans are to be
made. The Notice of Term Loan Borrowing shall be delivered by first-class
mail or facsimile to Agent at the office or facsimile number and during the
hours specified in Paragraph 8.01; provided, however, that Borrower shall
-------------- -------- -------
promptly deliver to Agent the original of the Notice of Term Loan Borrowing
if initially delivered by facsimile. Agent shall promptly notify each
Lender of the contents of the Notice of Term Loan Borrowing.
(c) Term Loan Interest Rates. Borrower shall pay interest on the
------------------------
unpaid principal amount of each Term Loan from the date of such Term Loan
until the maturity thereof, at a rate per annum equal at all times during
each Interest Period for such Term Loan to the LIBO Rate for such Interest
Period plus the Applicable Margin therefor, such rate to change from time
----
to time as the Applicable Margin shall change.
(d) Term Loan Interest Periods.
--------------------------
(i) The initial and each subsequent Interest Period selected by
Borrower for the Term Loans shall be one (1), two (2) or three (3)
months; provided, however, that (A) any Interest Period which would
-------- -------
otherwise end on a day which is not a Business Day shall be extended
to the next succeeding Business Day unless such next Business Day
falls in another calendar month, in which case such Interest Period
shall end on the immediately preceding Business Day; (B) any Interest
Period which begins on the last Business Day of a calendar month (or
on a day for which there is no numerically corresponding day in the
calendar month at the end of such Interest Period) shall end on the
last Business Day of a calendar month; (C) no Interest Period shall
end after the next succeeding Term Loan Installment Date; and (D) no
Interest Period shall end after the Term Loan Maturity Date.
(ii) Borrower shall notify Agent by an irrevocable written notice
in the form of Exhibit E, appropriately completed (a "Notice of Term
--------- --------------
Loan Interest Period Selection"), at least three (3) Business Days
------------------------------
prior to the last day of each Interest Period for the Term Loans of
the Interest Period selected by Borrower for the next succeeding
Interest Period therefor. Each Notice of Term Loan Interest Period
Selection shall be given by first-class mail or facsimile to the
office or the facsimile number and during the hours specified in
Paragraph 8.01; provided, however, that Borrower shall promptly
-------------- -------- -------
deliver to Agent the original of any Notice of
27
<PAGE>
Term Loan Interest Period Selection initially delivered by facsimile.
If Borrower fails to notify Agent of the next Interest Period for the
Term Loans in accordance with this Subparagraph 2.02(e), the next
--------------------
Interest Period shall be one (1) month.
(e) Scheduled Term Loan Payments. Borrower shall repay the principal
----------------------------
amount of the Term Loans in twelve (12) installments of $833,333.33 each,
payable on each Term Loan Installment Date; provided, however, that the
-------- -------
principal payment due on the Term Loan Maturity Date shall be in the amount
necessary to pay all remaining unpaid principal on the Term Loans.
Borrower shall pay accrued interest on the unpaid principal amount of each
Term Loan in arrears on the last day of each Interest Period (and if any
such Interest Period is equal to or longer than three (3) months, every
three (3) months after the first day of such Interest Period), upon
prepayment (to the extent thereof) and at maturity.
(f) Purpose. Borrower shall use the proceeds of the Term Loans,
-------
first, to repay on the Closing Date all indebtedness outstanding under the
Senior Secured Note Purchase Agreement dated as of November 15, 1991
between Borrower and Cigna Investments, Inc., as amended from time to time
prior to the date hereof (as so amended, the "Prior Credit Agreement") and,
----------------------
thereafter, for Borrower's general corporate needs.
2.03. Commitment Reductions, Etc.
---------------------------
(a) Reduction or Cancellation of Commitments. Borrower may, upon
----------------------------------------
three (3) Business Days written notice to Agent, permanently reduce the
Total Revolving Loan Commitment by the amount of one million Dollars
($1,000,000) or an integral multiple of five hundred thousand Dollars
($500,000) in excess thereof or cancel the Total Revolving Loan Commitment
in its entirety; provided, however, that:
-------- -------
(i) Borrower may not reduce the Total Revolving Loan Commitment
prior to the Revolving Loan Maturity Date, if, after giving effect to
such reduction, the aggregate principal amount of all Revolving Loans
then outstanding would exceed the Total Revolving Loan Commitment; and
(ii) Borrower may not cancel the Total Revolving Loan Commitment
prior to the Revolving Loan Maturity Date, if, after giving effect to
such cancellation, any Revolving Loans would then remain outstanding.
28
<PAGE>
(b) Effect of Commitment Reductions. From the effective date of any
-------------------------------
reduction of the Total Revolving Loan Commitment, the Commitment Fees
payable pursuant to Subparagraph 2.04(b) shall be computed on the basis of
--------------------
the Total Revolving Loan Commitment as so reduced. Once reduced or
cancelled, the Total Revolving Loan Commitment may not be increased or
reinstated without the prior written consent of all Lenders. Any reduction
of the Total Revolving Loan Commitment pursuant to Subparagraph 2.03(a)
--------------------
shall be applied ratably to reduce each Lender's Revolving Loan Commitment
in accordance with clause (i) of Subparagraph 2.09(a).
----------------------------------
2.04. Fees.
----
(a) Agent's Fee. Borrower shall pay to Agent, for its own account,
-----------
agent's fees and other compensation in the amounts and at the times set
forth in the Agent's Fee Letter.
(b) Commitment Fees. Borrower shall pay to Agent, for the ratable
---------------
benefit of the Lenders as provided in clause (iii) of Subparagraph 2.09(a),
------------------------------------
commitment fees (the "Commitment Fees") of three-eights of one percent
---------------
(0.375%) per annum on the daily average Unused Commitment for the period
beginning on the date of this Agreement and ending on the Revolving Loan
Maturity Date. Borrower shall pay the Commitment Fees in arrears on the
last Business Day in each February, May, August and November (commencing
August 30, 1996) and on the Revolving Loan Maturity Date (or if the Total
Commitment is cancelled on a date prior to the Revolving Loan Maturity
Date, on such prior date).
2.05. Prepayments.
-----------
(a) Terms of all Prepayments. Upon the prepayment of any Loan
------------------------
(whether such prepayment is an optional prepayment under Subparagraph
------------
2.05(b), a mandatory prepayment required by Subparagraph 2.05(c) or a
------- --------------------
mandatory prepayment required by any other provision of this Agreement or
the other Credit Documents, including, without limitation, a prepayment
upon acceleration), Borrower shall pay to the Lender which made such Loan
(i) all accrued interest to the date of such prepayment on the amount
prepaid and (ii) if such prepayment is the prepayment of a Revolving LIBOR
Loan or of a Term Loan on a day other than the last day of an Interest
Period for such Revolving LIBOR Loan or such Term Loan, all amounts payable
to such Lender pursuant to Paragraph 2.12.
--------------
(b) Optional Prepayments. At its option, Borrower may, upon three (3)
--------------------
Business Days notice to Agent, prepay the Revolving Loans in any Revolving
Loan Borrowing in part, in an aggregate principal amount of $1,000,000 or
more, or
29
<PAGE>
in whole. At its option, Borrower may, upon five (5) Business Days notice
to Agent, prepay the Term Loans in part, in an aggregate principal amount
of $1,000,000 or more, or in whole.
(c) Mandatory Prepayments. If, at any time, the aggregate principal
---------------------
amount of all Revolving Loans then outstanding exceeds the Total Revolving
Loan Commitment at such time, Borrower shall immediately prepay Revolving
Loans in an aggregate principal amount equal to such excess.
(d) Application of Term Loan Prepayments. All prepayments which are
------------------------------------
applied to reduce the principal amount of the Term Loans shall reduce the
aggregate principal amount payable by Borrower on the then remaining Term
Loan Installment Dates in inverse order commencing with the Term Loan
Maturity Date.
2.06. Other Payment Terms.
-------------------
(a) Place and Manner. Borrower shall make all payments due to each
----------------
Lender or Agent hereunder by payments to Agent at Agent's office located at
the address specified in Paragraph 8.01, with each payment due to a Lender
--------------
to be for the account of such Lender and such Lender's Applicable Lending
Office. Borrower shall make all payments hereunder in lawful money of the
United States and in same day or immediately available funds not later than
12:00 noon on the date due. Agent shall promptly disburse to each Lender
each payment received by Agent for the account of such Lender.
(b) Date. Whenever any payment due hereunder shall fall due on a day
----
other than a Business Day, such payment shall be made on the next
succeeding Business Day, and such extension of time shall be included in
the computation of interest or fees, as the case may be.
(c) Late Payments. If any amounts required to be paid by Borrower
-------------
under this Agreement or the other Credit Documents (including, without
limitation, principal or interest payable on any Loan, any fees or other
amounts) remain unpaid after such amounts are due, Borrower shall pay
interest on the aggregate, outstanding balance of such amounts from the
date due until those amounts are paid in full at a per annum rate equal to
the Base Rate plus two percent (2.00%), such rate to change from time to
----
time as the Base Rate shall change.
(d) Application of Payments. All payments hereunder shall be applied
-----------------------
first to unpaid fees, costs and expenses then due and payable under this
Agreement or the other Credit Documents, second to accrued interest then
due and
30
<PAGE>
payable under this Agreement or the other Credit Documents and finally to
reduce the principal amount of outstanding Loans.
(e) Failure to Pay Agent. Unless Agent shall have received notice
--------------------
from Borrower at least one (1) Business Day prior to the date on which any
payment is due to the Lenders hereunder that Borrower will not make such
payment in full, Agent shall be entitled to assume that Borrower has made
or will make such payment in full to Agent on such date and Agent may, in
reliance upon such assumption, cause to be paid to the Lenders on such due
date an amount equal to the amount then due such Lenders. If and to the
extent Borrower shall not have so made such payment in full to Agent, each
such Lender shall repay to Agent forthwith on demand such amount
distributed to such Lender together with interest thereon, for each day
from the date such amount is distributed to such Lender until the date such
Lender repays such amount to Agent, at (i) the Federal Funds Rate for the
first three (3) days and (ii) the per annum rate applicable to Revolving
Base Rate Loans thereafter. A certificate of Agent submitted to any Lender
with respect to any amounts owing by such Lender under this Subparagraph
------------
2.06(e) shall be conclusive absent manifest error.
-------
2.07. Notes and Interest Account.
--------------------------
(a) Revolving Loan Notes. The obligation of Borrower to repay the
--------------------
Revolving Loans made by each Lender and to pay interest thereon at the
rates provided herein shall be evidenced by a promissory note in the form
of Exhibit F (individually, a "Revolving Loan Note") which note shall be
--------- -------------------
(i) payable to the order of such Lender, (ii) in the amount of such
Lender's Revolving Loan Commitment, (iii) dated the Closing Date and (iv)
otherwise appropriately completed. Borrower authorizes each Lender to
record on the schedule annexed to such Lender's Revolving Loan Note the
date and amount of each Revolving Loan made by such Lender and of each
payment or prepayment of principal thereon made by Borrower, and agrees
that all such notations shall constitute prima facie evidence of the
matters noted; provided, however, that any failure by a Lender to make any
-------- -------
such notation shall not affect the Obligations. Borrower further
authorizes each Lender to attach to and make a part of such Lender's
Revolving Loan Note continuations of the schedule attached thereto as
necessary.
(b) Term Loan Notes. The obligation of Borrower to repay the Term
---------------
Loan made by each Lender and to pay interest thereon at the rates provided
herein shall be evidenced by a promissory note in the form of Exhibit G
---------
(individually, a "Term Loan Note") which note shall be (i) payable to the
--------------
31
<PAGE>
order of such Lender, (ii) in the amount of such Lender's Term Loan, (iii)
dated the Closing Date and (iv) otherwise appropriately completed.
(c) Interest Account. Borrower authorizes Agent to record in an
----------------
account or accounts maintained by Agent on its books (the "Interest
--------
Account") (i) the interest rates applicable to all Loans and the effective
dates of all changes thereto, (ii) the Interest Period for each Revolving
LIBOR Loan and Term Loan, (iii) the date and amount of each principal and
interest payment on each Loan and (iv) such other information as Agent may
determine is necessary for the computation of interest payable by Borrower
hereunder.
2.08. Loan Funding.
------------
(a) Lender Funding and Disbursement to Borrower. Each Lender shall,
-------------------------------------------
before 11:00 a.m. on the date of each Borrowing, make available to Agent at
Agent's office specified in Paragraph 8.01, in same day or immediately
--------------
available funds, such Lender's Proportionate Share of such Borrowing.
After Agent's receipt of such funds and upon satisfaction of the applicable
conditions set forth in Section III, Agent shall promptly disburse such
-----------
funds to Borrower in same day or immediately available funds. Unless
otherwise directed by Borrower, Agent shall disburse the proceeds of each
Revolving Loan Borrowing by disbursement to the account or accounts
specified in the applicable Notice of Borrowing.
(b) Lender Failure to Fund. Unless Agent shall have received notice
----------------------
from a Lender prior to the date of any Borrowing that such Lender will not
make available to Agent such Lender's Proportionate Share of such
Borrowing, Agent shall be entitled to assume that such Lender has made or
will make such portion available to Agent on the date of such Borrowing in
accordance with Subparagraph 2.08(a), and Agent may on such date, in
--------------------
reliance upon such assumption, disburse or otherwise credit to Borrower a
corresponding amount. If any Lender does not make the amount of its
Proportionate Share of any Borrowing available to Agent on or prior to the
date of such Borrowing, such Lender shall pay to Agent, on demand, interest
which shall accrue on such amount from the date of such Borrowing until
such amount is paid to Agent at rates equal to (i) the daily Federal Funds
Rate during the period from the date of such Borrowing through the third
Business Day thereafter and (ii) the rate applicable to Revolving Base Rate
Loans thereafter. A certificate of Agent submitted to any Lender with
respect to any amounts owing under this Subparagraph 2.08(b) shall be
--------------------
conclusive absent manifest error. If the amount of any Lender's
Proportionate Share of any Borrowing is not paid to
32
<PAGE>
Agent by such Lender within three (3) Business Days after the date of such
Borrowing, Borrower shall repay such amount to Agent, on demand, together
with interest thereon, for each day from the date such amount was disbursed
to Borrower until the date such amount is repaid to Agent, at the interest
rate applicable at the time to the Loans comprising such Borrowing.
(c) Lenders' Obligations Several. The failure of any Lender to make
----------------------------
the Loan to be made by it as part of any Borrowing shall not relieve any
other Lender of its obligation hereunder to make its Loan on the date of
such Borrowing, but no Lender shall be obligated in any way to make any
Loan which another Lender has failed or refused to make or otherwise be in
any way responsible for the failure or refusal of any other Lender to make
any Loan required to be made by such other Lender on the date of any
Borrowing.
2.09. Pro Rata Treatment.
------------------
(a) Borrowings, Commitment Reductions, Etc. Except as otherwise
---------------------------------------
provided herein:
(i) Each Borrowing and reduction of the Total Revolving Loan
Commitment shall be made or shared among the Lenders pro rata
according to their respective Proportionate Shares;
(ii) Each payment of principal of Loans in any Borrowing shall be
shared among the Lenders which made or funded the Loans in such
Borrowing pro rata according to the respective unpaid principal
amounts of such Loans so made or funded by such Lenders;
(iii) Each payment of interest on Loans in any Borrowing shall be
shared among the Lenders which made or funded the Loans in such
Borrowing pro rata according to (A) the respective unpaid principal
amounts of such Loans so made or funded by such Lenders and (B) the
dates on which such Lenders so made or funded such Loans;
(iv) Each payment of Commitment Fees shall be shared among the
Lenders (except for Defaulting Lenders) pro rata according to (A)
their respective Proportionate Shares and (B) in the case of each
Lender which becomes a Lender hereunder after the date hereof, the
date upon which such Lender so became a Lender;
(v) Each payment of interest (other than interest on Loans) shall
be shared among the Lenders and Agent owed the amount upon which such
interest accrues pro
33
<PAGE>
rata according to (A) the respective amounts so owed such Lenders and
Agent and (B) the dates on which such amounts became owing to such
Lenders and Agent; and
(vi) All other payments under this Agreement and the other Credit
Documents shall be for the benefit of the Person or Persons specified.
(b) Sharing of Payments, Etc. If any Lender shall obtain any payment
-------------------------
(whether voluntary, involuntary, through the exercise of any right of
setoff, or otherwise) on account of Loans owed to it in excess of its
ratable share of payments on account of such Loans obtained by all Lenders
entitled to such payments, such Lender shall forthwith purchase from the
other Lenders such participations in the Loans as shall be necessary to
cause such purchasing Lender to share the excess payment ratably with each
of them; provided, however, that if all or any portion of such excess
-------- -------
payment is thereafter recovered from such purchasing Lender, such purchase
shall be rescinded and each other Lender shall repay to the purchasing
Lender the purchase price to the extent of such recovery together with an
amount equal to such other Lender's ratable share (according to the
proportion of (i) the amount of such other Lender's required repayment to
(ii) the total amount so recovered from the purchasing Lender) of any
interest or other amount paid or payable by the purchasing Lender in
respect of the total amount so recovered. Borrower agrees that any Lender
so purchasing a participation from another Lender pursuant to this
Subparagraph 2.09(b) may, to the fullest extent permitted by law, exercise
--------------------
all its rights of payment (including the right of setoff) with respect to
such participation as fully as if such Lender were the direct creditor of
Borrower in the amount of such participation.
2.10. Change of Circumstances.
-----------------------
(a) Inability to Determine Rates. If, on or before the first day of
----------------------------
any Interest Period for any Revolving LIBOR Loan or Term Loan, (i) any
Lender shall advise Agent that the LIBO Rate for such Interest Period
cannot be adequately and reasonably determined due to the unavailability of
funds in or other circumstances affecting the London interbank market or
(ii) any Lender shall advise Agent that the rate of interest for such Loan
does not adequately and fairly reflect the cost to such Lender of making or
maintaining such Revolving LIBOR Loan or Term Loan, Agent shall immediately
give notice of such condition to Borrower and the other Lenders. After the
giving of any such notice and until Agent shall otherwise notify Borrower
that the circumstances giving rise to such condition no longer exist,
Borrower's right to request the making of or conversion to,
34
<PAGE>
and the Lenders' obligations to make or convert to Revolving LIBOR Loans
shall be suspended. If any Revolving LIBOR Loans are outstanding at the
commencement of any such suspension, such Revolving Loans shall be
converted into Revolving Base Rate Loans at the end of the then current
Interest Period for such Revolving LIBOR Loans, unless such suspension has
then ended. If the Term Loans are outstanding at the commencement of any
such suspension, Borrower shall, during the period beginning on the last
day of the current Interest Period for the Term Loans (unless such
suspension has then ended) and ending on the date Agent notifies Borrower
that the circumstances giving rise to such suspension no longer exist, pay
interest on the Term Loans at the rates and on the dates specified herein
for Revolving Base Rate Loans.
(b) Illegality. If, after the date of this Agreement, the adoption of
----------
any Governmental Rule, any change in any Governmental Rule or the
application or requirements thereof (whether such change occurs in
accordance with the terms of such Governmental Rule as enacted, as a result
of amendment or otherwise), any change in the interpretation or
administration of any Governmental Rule by any Governmental Authority, or
compliance by any Lender with any request or directive (whether or not
having the force of law) of any Governmental Authority (a "Change of Law")
-------------
shall make it unlawful or impossible for any Lender to make or maintain any
Revolving LIBOR Loan or Term Loan, such Lender shall immediately notify
Agent and Borrower of such Change of Law. Upon receipt of such notice:
(i) Borrower's right to request such Lender to make Revolving
LIBOR Loans or convert Revolving Base Rate Loans into Revolving LIBOR
Loans, and such Lender's obligation to make such Loans or conversions,
shall be terminated;
(ii) Borrower shall, at the request of such Lender if any
Revolving Loans made by such Lender are then outstanding, either
prepay such Loans or convert such Loans into Revolving Base Rate
Loans; and
(iii) Borrower shall, at the request of such Lender if the Term
Loan made by such Lender is then outstanding, either prepay such Loan
or pay on such Loan at the rates and on the dates specified herein for
Revolving Base Rate Loans.
If Borrower is required to prepay, convert or begin paying Revolving Base
Rate Interest on any Loans pursuant to clause (ii) or (iii) above, Borrower
--------------------
shall make such prepayment or conversion or begin paying such interest at
the end of the
35
<PAGE>
current Interest Periods for any applicable Loans then outstanding, unless
the affected Lender has notified Borrower that such Lender may not lawfully
continue to fund and maintain such Loans, in which case Borrower shall make
such prepayment or conversion or begin paying such interest immediately. If
Borrower makes any such prepayment or conversion or so begins paying such
interest pursuant to the preceding sentence prior to the last day of an
Interest Period for any Revolving LIBOR Loan or Term Loan, such event shall
be deemed a prepayment thereof for purposes of Paragraph 2.12. After any
--------------
Lender notifies Agent and Borrower of such a Change of Law and until such
Lender notifies Agent and Borrower that it is no longer unlawful or
impossible for such Lender to make or maintain a Revolving LIBOR Loan or
its Term Loan priced on the basis of LIBOR, all Revolving Loans made by
such Lender shall be Revolving Base Rate Loans and Borrower shall pay
interest on such Lender's Term Loan at the rates and at the times specified
herein for Revolving Base Rate Loans.
(c) Increased Costs. If, after the date of this Agreement, any Change
---------------
of Law:
(i) Shall subject any Lender to any tax, duty or other charge
with respect to any Revolving LIBOR Loan or Term Loan, or shall change
the basis of taxation of payments by Borrower to any Lender on such a
Revolving LIBOR Loan or Term Loan or in respect to such a Revolving
LIBOR Loan or Term Loan under this Agreement (except for changes in
the rate of taxation on the overall net income of any Lender imposed
by its jurisdiction of incorporation or the jurisdiction in which its
Applicable Lending Office is located); or
(ii) Shall impose, modify or hold applicable any reserve
(excluding any Reserve Requirement or other reserve to the extent
included in the calculation of the LIBO Rate for any Loans), special
deposit or similar requirement against assets held by, deposits or
other liabilities in or for the account of, advances or loans by, or
any other acquisition of funds by any Lender for any Revolving LIBOR
Loan or Term Loan; or
(iii) Shall impose on any Lender any other condition related to
any Revolving LIBOR Loan or Term Loan or such Lender's Commitments;
And the effect of any of the foregoing is to increase the cost to such
Lender of making, renewing or maintaining any such Revolving LIBOR Loan or
Term Loan or its Commitment or to reduce any amount receivable by such
Lender hereunder; then Borrower shall from time to time, within five (5)
days
36
<PAGE>
after demand by such Lender, pay to such Lender additional amounts
sufficient to reimburse such Lender for such increased costs or to
compensate such Lender for such reduced amounts. Borrower shall not be
obligated to make a payment to a Lender under this Subparagraph 2.10(c) on
--------------------
account of any such increased costs or reduced amounts unless such Lender
makes demand for such payment not later than six (6) months after the date
on which such increased costs were incurred or such reduced amounts were
received by such Lender. A certificate as to the amount of such increased
costs or reduced amounts, submitted by such Lender to Borrower shall, in
the absence of manifest error, be conclusive and binding on Borrower for
all purposes. The obligations of Borrower under this Subparagraph 2.10(c)
--------------------
shall survive the payment and performance of the Obligations and the
termination of this Agreement.
(d) Capital Requirements. If, after the date of this Agreement, any
--------------------
Lender determines that (i) any Change of Law affects the amount of capital
required or expected to be maintained by such Lender or any Person
controlling such Lender (a "Capital Adequacy Requirement") and (ii) the
----------------------------
amount of capital maintained by such Lender or such Person which is
attributable to or based upon the Loans, the Commitments or this Agreement
must be increased as a result of such Capital Adequacy Requirement (taking
into account such Lender's or such Person's policies with respect to
capital adequacy), Borrower shall pay to such Lender or such Person, within
five (5) days after demand of such Lender, such amounts as such Lender or
such Person shall determine are necessary to compensate such Lender or such
Person for the increased costs to such Lender or such Person of such
increased capital. Borrower shall not be obligated to make a payment to a
Lender or a Person controlling such Lender under this Subparagraph 2.10(d)
--------------------
on account of any increased capital unless such Lender makes demand for
such payment not later than six (6) months after the date on which such
Lender or Person increased its capital. A certificate of any Lender
setting forth in reasonable detail the computation of any such increased
costs, delivered by such Lender to Borrower shall, in the absence of
manifest error, be conclusive and binding on Borrower for all purposes.
The obligations of Borrower under this Subparagraph 2.10(d) shall survive
--------------------
the payment and performance of the Obligations and the termination of this
Agreement.
(e) Mitigation. Any Lender which becomes aware of (i) any Change of
----------
Law which will make it unlawful or impossible for such Lender to make or
maintain any Revolving LIBOR Loan or its Term Loan or (ii) any Change of
Law or other event or condition which will obligate Borrower to pay any
amount pursuant to Subparagraph 2.10(c) or Subparagraph
-------------------- ------------
37
<PAGE>
2.10(d) shall notify Borrower and Agent thereof as promptly as practical.
-------
If any Lender has given notice of any such Change of Law or other event or
condition and thereafter becomes aware that such Change of Law or other
event or condition has ceased to exist, such Lender shall notify Borrower
and Agent thereof as promptly as practical. Each Lender affected by any
Change of Law which makes it unlawful or impossible for such Lender to make
or maintain any Revolving LIBOR Loan or Term Loan or to which Borrower is
obligated to pay any amount pursuant to Subparagraph 2.10(c) or
--------------------
Subparagraph 2.10(d) shall use reasonable commercial efforts (including
--------------------
changing the jurisdiction of its Applicable Lending Office) to avoid the
effect of such Change of Law or to avoid or materially reduce any amounts
which Borrower is obligated to pay pursuant to Subparagraph 2.10(c) or
--------------------
Subparagraph 2.10(d) if, in the reasonable opinion of such Lender, such
--------------------
efforts would not be disadvantageous to such Lender or contrary to such
Lender's normal banking practices.
2.11. Taxes on Payments.
-----------------
(a) Payments Free of Taxes. All payments made by Borrower under this
----------------------
Agreement and the other Credit Documents shall be made free and clear of,
and without deduction or withholding for or on account of, any present or
future income, stamp or other taxes, levies, imposts, duties, charges,
fees, deductions or withholdings, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority (except net
income taxes and franchise taxes in lieu of net income taxes imposed on
Agent or any Lender by its jurisdiction of incorporation or the
jurisdiction in which its Applicable Lending Office is located) (all such
non-excluded taxes, levies, imposts, duties, charges, fees, deductions and
withholdings being hereinafter called "Taxes"). If any Taxes are required
-----
to be withheld from any amounts payable to Agent or any Lender hereunder or
under the other Credit Documents, the amounts so payable to Agent or such
Lender shall be increased to the extent necessary to yield to Agent or such
Lender (after payment of all Taxes) interest or any such other amounts
payable hereunder at the rates or in the amounts specified in this
Agreement and the other Credit Documents. Whenever any Taxes are payable
by Borrower, as promptly as possible thereafter, Borrower shall send to
Agent for its own account or for the account of such Lender, as the case
may be, a certified copy of an original official receipt received by
Borrower showing payment thereof. If Borrower fails to pay any Taxes when
due to the appropriate taxing authority or fails to remit to Agent the
required receipts or other required documentary evidence, Borrower shall
indemnify Agent and the Lenders for any incremental taxes, interest or
38
<PAGE>
penalties that may become payable by Agent or any Lender as a result of any
such failure. The obligations of Borrower under this Subparagraph 2.11(a)
--------------------
shall survive the payment and performance of the Obligations and the
termination of this Agreement.
(b) Withholding Exemption Certificates. On or prior to the date of
----------------------------------
the initial Borrowing or, if such date does not occur within thirty (30)
days after the date of this Agreement, by the end of such 30-day period,
each Lender which is not organized under the laws of the United States of
America or a state thereof shall deliver to Borrower and Agent two duly
completed copies of United States Internal Revenue Service Form 1001 or
4224 (or successor applicable form), as the case may be, certifying in each
case that such Lender is entitled to receive payments under this Agreement
without deduction or withholding of any United States federal income taxes.
Each Lender which delivers to Borrower and Agent a Form 1001 or 4224
pursuant to the immediately preceding sentence further undertakes to
deliver to Borrower and Agent two further copies of Form 1001 or 4224 (or
successor applicable forms), as the case may be, on or before the date that
any such form expires or becomes obsolete or after the occurrence of any
event requiring a change in the most recent form previously delivered by
such Lender to Borrower and Agent, certifying that such Lender is entitled
to receive payments under this Agreement without deduction or withholding
of any United States federal income taxes. Each Lender which is not
organized under the laws of the United States of America or a state thereof
further agrees (i) promptly to notify Agent and Borrower of any change of
circumstances (including without limitation any change in any treaty, law
or regulation) which would prevent such Lender from receiving payments
hereunder without any deduction or withholding of United States federal
income tax and (ii) to furnish to Agent and Borrower any other manner of
certification as Agent or Borrower may reasonably request to establish the
right of such Lender to receive payments hereunder without any deduction or
withholding of United States federal income tax.
(c) Mitigation. If Agent or any Lender claims any additional amounts
----------
to be payable to it pursuant to this Paragraph 2.11, such Person shall use
--------------
reasonable commercial efforts to file any certificate or document requested
in writing by Borrower (including without limitation copies of Internal
Revenue Service Form 1001 (or successor forms) reflecting a reduced rate of
withholding) or to change the jurisdiction of its Applicable Lending Office
if the making of such a filing or such change in the jurisdiction of its
Applicable Lending Office would avoid the need for or materially reduce the
amount of any such additional amounts
39
<PAGE>
which may thereafter accrue and if, in the reasonable opinion of such
Person, in the case of a change in the jurisdiction of its Applicable
Lending Office, such change would not be disadvantageous to such Person or
contrary to such Person's normal banking practices.
(d) Tax Returns. Nothing contained in this Paragraph 2.11 shall
----------- --------------
require Agent or any Lender to make available any of its tax returns (or
any other information relating to its taxes which it deems to be
confidential).
2.12. Funding Loss Indemnification. If Borrower shall (a) repay,
----------------------------
prepay or convert any Revolving LIBOR Loan or Term Loan on any day other than
the last day of an Interest Period therefor (whether a scheduled payment, an
optional prepayment or conversion, a mandatory prepayment or conversion, a
payment upon acceleration or otherwise), (b) fail to borrow any Revolving LIBOR
Loan or Term Loan for which a Notice of Borrowing has been delivered to Agent
(whether as a result of the failure to satisfy any applicable conditions or
otherwise), or (c) fail to convert any Revolving Loans into Revolving LIBOR
Loans in accordance with a Notice of Revolving Loan Conversion delivered to
Agent (whether as a result of the failure to satisfy any applicable conditions
or otherwise); Borrower shall, upon demand by any Lender, reimburse such Lender
for and hold such Lender harmless from all costs and losses incurred by such
Lender as a result of such repayment, prepayment, conversion or failure.
Borrower understands that such costs and losses may include, without limitation,
losses incurred by a Lender as a result of funding and other contracts entered
into by such Lender to fund a Revolving LIBOR Loan or Term Loan. Borrower shall
not be obligated to make a payment to a Lender under this Paragraph 2.12 on
--------------
account of any such repayment, prepayment, conversion or failure referred to in
clause (a), (b) or (c) above unless such Lender makes demand for such payment
- ----------------------
not later than six (6) months after the last day of the Interest Period for (i)
the Loan which is repaid, prepaid or converted in the case of clause (a), (ii)
----------
the Loan which is not borrowed in the case of clause (b) or (iii) the Loan which
----------
is not converted in the case of clause (c). Each Lender demanding payment under
----------
this Paragraph 2.12 shall deliver to Borrower, with a copy to Agent, a
--------------
certificate setting forth the amount of costs and losses for which demand is
made, which certificate shall set forth in reasonable detail the calculation of
the amount demanded. Such a certificate so delivered to Borrower shall
constitute prima facie evidence of such costs and losses. The obligations of
----- -----
Borrower under this Paragraph 2.12 shall survive the payment and performance of
--------------
the Obligations and the termination of this Agreement.
2.13. Replacement of Lenders. If any Lender shall (a) become a
----------------------
Defaulting Lender two (2) or more times in a period of twelve (12) consecutive
months, (b) continue as a Defaulting
40
<PAGE>
Lender for more than three (3) Business Days at any time, (c) suspend its
obligation to make or maintain Revolving LIBOR Loans or its Term Loan at pricing
based upon the LIBO Rate pursuant to Subparagraph 2.10(b) for a reason which is
--------------------
not applicable to any other Lender or (d) demand any payment under Subparagraph
------------
2.10(c), 2.10(d) or 2.11(a) for a reason which is not applicable to any other
- ---------------------------
Lender, then Agent may (or upon the written request of Borrower, shall) replace
such Lender (the "affected Lender"), or cause such affected Lender to be
replaced, with another lender (the "replacement Lender") satisfying the
requirements of an Assignee Lender under Subparagraph 8.05(c), by having the
--------------------
affected Lender sell and assign all of its rights and obligations under this
Agreement and the other Credit Documents to the replacement Lender pursuant to
Subparagraph 8.05(c); provided, however, that if Borrower seeks to exercise such
- -------------------- -------- -------
right, it must do so within sixty (60) days after it first knows or should have
known of the occurrence of the event or events giving rise to such right, and
neither Agent nor any Lender shall have any obligation to identify or locate a
replacement Lender for Borrower. Upon receipt by any affected Lender of a
written notice from Agent stating that Agent is exercising the replacement right
set forth in this Paragraph 2.14, such affected Lender shall sell and assign all
--------------
of its rights and obligations under this Agreement and the other Credit
Documents to the replacement Lender pursuant to an Assignment Agreement and
Subparagraph 8.05(c) for a purchase price equal to the sum of the principal
- --------------------
amount of the affected Lender's Loans so sold and assigned, all accrued and
unpaid interest thereon and its ratable share of all fees to which it is
entitled.
SECTION III. CONDITIONS PRECEDENT.
--------------------
3.01. Initial Conditions Precedent. The obligations of the Lenders to
----------------------------
make the Term Loans or the Revolving Loans comprising the initial Revolving Loan
Borrowing are subject to receipt by Agent, on or prior to the Closing Date, of
each item listed in Schedule 3.01, each in form and substance satisfactory to
-------------
Agent and each Lender, and with sufficient copies for, Agent and each Lender.
3.02. Conditions Precedent to Each Credit Event. The occurrence of
-----------------------------------------
each Credit Event (including the initial Borrowing) is subject to the further
conditions that:
(a) Borrower shall have delivered to Agent the Notice of Borrowing,
Notice of Revolving Loan Conversion or Notice of Interest Period Selection,
as the case may be, for such Credit Event in accordance with this
Agreement; and
41
<PAGE>
(b) On the date such Credit Event is to occur and after giving effect
to such Credit Event, the following shall be true and correct:
(i) The representations and warranties of Borrower and its
Subsidiaries set forth in Paragraph 4.01 and in the other Credit
--------------
Documents are true and correct in all material respects as if made on
such date (except for representations and warranties expressly made as
of a specified date, which shall be true as of such date); and
(ii) No Default or Event of Default has occurred and is continuing
or will result from such Credit Event; and
(iii) All of the Credit Documents are in full force and effect.
The submission by Borrower to Agent of each Notice of Borrowing, each
Notice of Revolving Loan Conversion (other than a notice for a conversion
to a Revolving Base Rate Loan) and each Notice of Interest Period Selection
shall be deemed to be a representation and warranty by Borrower that each
of the statements set forth above in this Subparagraph 3.03(b) is true and
--------------------
correct as of the date of such notice.
3.03. Covenant to Deliver. Borrower agrees (not as a condition but as
-------------------
a covenant) to deliver to Agent each item required to be delivered to Agent as a
condition to the occurrence of any Credit Event if such Credit Event occurs.
Borrower expressly agrees that the occurrence of any such Credit Event prior to
the receipt by Agent of any such item shall not constitute a waiver by Agent or
any Lender of Borrower's obligation to deliver such item.
SECTION IV. REPRESENTATIONS AND WARRANTIES.
------------------------------
4.01. Borrower's Representations and Warranties. In order to induce
-----------------------------------------
Agent and the Lenders to enter into this Agreement, Borrower hereby represents
and warranties to Agent and the Lenders as follows:
(a) Due Incorporation, Qualification, etc. Each of Borrower and
--------------------------------------
Borrower's Subsidiaries (i) is a corporation duly organized, validly
existing and in good standing under the laws of its state of incorporation;
(ii) has the power and authority to own, lease and operate its properties
and carry on its business as now conducted; and (iii) is duly qualified,
licensed to do business and in good standing as a foreign corporation in
each jurisdiction where the failure
42
<PAGE>
to be so qualified or licensed is reasonably likely to have a Material
Adverse Effect.
(b) Authority. The execution, delivery and performance by Borrower of
---------
each Credit Document executed, or to be executed, by Borrower and the
consummation of the transactions contemplated thereby (i) are within the
power of Borrower and (ii) have been duly authorized by all necessary
actions on the part of Borrower.
(c) Enforceability. Each Credit Document executed, or to be executed,
--------------
by Borrower has been, or will be, duly executed and delivered by Borrower
and constitutes, or will constitute, a legal, valid and binding obligation
of Borrower, enforceable against Borrower in accordance with its terms,
except as limited by bankruptcy, insolvency or other laws of general
application relating to or affecting the enforcement of creditors' rights
generally and general principles of equity.
(d) Non-Contravention. The execution and delivery by Borrower of the
-----------------
Credit Documents executed by Borrower and the performance and consummation
of the transactions contemplated thereby do not (i) violate any Requirement
of Law applicable to Borrower; (ii) violate any provision of, or result in
the breach or the acceleration of, or entitle any other Person to
accelerate (whether after the giving of notice or lapse of time or both),
any Contractual Obligation of Borrower; or (iii) result in the creation or
imposition of any Lien (or the obligation to create or impose any Lien)
upon any property, asset or revenue of Borrower (except such Liens as may
be created in favor of Agent pursuant to this Agreement or the other Credit
Documents).
(e) Approvals. No consent, approval, order or authorization of, or
---------
registration, declaration or filing with, any Governmental Authority or
other Person (including, without limitation, the shareholders of any
Person) is required in connection with the execution and delivery of the
Credit Documents executed by Borrower and the performance and consummation
of the transactions contemplated thereby, except such as have been made or
obtained and are in full force and effect.
(f) No Violation or Default. Neither Borrower nor any of its
-----------------------
Subsidiaries is in violation of or in default with respect to (i) any
Requirement of Law applicable to such Person; (ii) any Contractual
Obligation of such Person (nor is there any waiver in effect which, if not
in effect, would result in such a violation or default), where, in each
case, such violation or default is reasonably likely to have a Material
Adverse Effect. Without limiting the generality of
43
<PAGE>
the foregoing, neither Borrower nor any of its Subsidiaries (A) has
violated any Environmental Laws, (B) has any liability under any
Environmental Laws or (C) has received notice or other communication of an
investigation or is under investigation by any Governmental Authority
having authority to enforce Environmental Laws, where such violation,
liability or investigation is reasonably likely to have a Material Adverse
Effect. No Event of Default or Default has occurred and is continuing.
(g) Litigation. No actions (including, without limitation, derivative
----------
actions), suits, proceedings or investigations are pending or, to the
knowledge of Borrower, threatened against Borrower or any of its
Subsidiaries at law or in equity in any court or before any other
Governmental Authority which (i) is reasonably likely (alone or in the
aggregate) to have a Material Adverse Effect or (ii) seeks to enjoin,
either directly or indirectly, the execution, delivery or performance by
Borrower of the Credit Documents or the transactions contemplated thereby.
(h) Title; Possession Under Leases. Borrower and its Subsidiaries own
------------------------------
and have good and marketable title, or a valid leasehold interest in, all
their respective properties and assets as reflected in the most recent
Financial Statements delivered to Agent (except those assets and properties
disposed of in the ordinary course of business or otherwise in compliance
with this Agreement since the date of such Financial Statements) and all
respective assets and properties acquired by Borrower and its Subsidiaries
since such date (except those disposed of in the ordinary course of
business or otherwise in compliance with this Agreement). Such assets and
properties are subject to no Lien, except for Permitted Liens. Each of
Borrower and its Subsidiaries has complied with all material obligations
under all material leases to which it is a party and all such leases are in
full force and effect. Each of Borrower and its Subsidiaries enjoys
peaceful and undisturbed possession under such leases.
(i) Financial Statements. The Financial Statements of Borrower and
--------------------
its Subsidiaries which have been delivered to Agent, (i) are in accordance
with the books and records of Borrower and its Subsidiaries, which have
been maintained in accordance with good business practice; (ii) have been
prepared in conformity with GAAP; and (iii) fairly present the financial
conditions and results of operations of Borrower and its Subsidiaries as of
the date thereof and for the period covered thereby. Neither Borrower nor
any of its Subsidiaries has any contingent obligations, liability for taxes
or other outstanding obligations which are material in the aggregate,
except as disclosed in the audited Financial
44
<PAGE>
Statements dated July 31, 1995, furnished by Borrower to Agent prior to the
date hereof, or in the Financial Statements delivered to Agent pursuant to
Subparagraph 5.01(a)(i) or (ii).
-------------------------------
(j) Equity Securities. All outstanding Equity Securities of Borrower
-----------------
are duly authorized, validly issued, fully paid and non-assessable. Except
as set forth in Schedule 4.01(j), there are on the date of this Agreement
----------------
no outstanding subscriptions, options, conversion rights, warrants or other
agreements or commitments of any nature whatsoever (firm or conditional)
obligating Borrower to issue, deliver or sell, or cause to be issued,
delivered or sold, any additional Equity Securities of Borrower, or
obligating Borrower to grant, extend or enter into any such agreement or
commitment. All Equity Securities of Borrower have been offered and sold
in compliance with all federal and state securities laws and all other
Requirements of Law.
(k) No Agreements to Sell Assets; Etc. Neither Borrower nor any of
---------------------------------
its Subsidiaries has any legal obligation, absolute or contingent, to any
Person to sell the assets of Borrower or any of its Subsidiaries (other
than sales in the ordinary course of business), or to effect any merger,
consolidation or other reorganization of Borrower or any of its
Subsidiaries or to enter into any agreement with respect thereto.
(l) Employee Benefit Plans.
----------------------
(i) Based upon the latest valuation of each Employee Benefit Plan
that either Borrower or any ERISA Affiliate maintains or contributes
to, or has any obligation under (which occurred within twelve months
of the date of this representation), the aggregate benefit liabilities
of such plan within the meaning of (S) 4001 of ERISA did not exceed
the aggregate value of the assets of such plan. Neither Borrower nor
any ERISA Affiliate has any liability with respect to any post-
retirement benefit under any Employee Benefit Plan which is a welfare
plan (as defined in section 3(1) of ERISA), other than liability for
health plan continuation coverage described in Part 6 of Title I(B) of
ERISA, which liability for health plan contribution coverage is not
reasonably likely to have a Material Adverse Effect.
(ii) Each Employee Benefit Plan complies, in both form and
operation, in all material respects, with its terms, ERISA and the
Code, and no condition exists or event has occurred with respect to
any such plan which would result in the incurrence by either Borrower
or
45
<PAGE>
any ERISA Affiliate of any material liability, fine or penalty. Each
Employee Benefit Plan, related trust agreement, arrangement and
commitment of Borrower or any ERISA Affiliate is legally valid and
binding and in full force and effect. No Employee Benefit Plan is
being audited or investigated by any government agency or is subject
to any pending or threatened claim or suit. Neither Borrower nor any
ERISA Affiliate nor any fiduciary of any Employee Benefit Plan has
engaged in a prohibited transaction under section 406 of ERISA or
section 4975 of the Code.
(iii) Neither Borrower nor any ERISA Affiliate contributes to or
has any material contingent obligations to any Multiemployer Plan.
Neither Borrower nor any ERISA Affiliate has incurred any material
liability (including secondary liability) to any Multiemployer Plan as
a result of a complete or partial withdrawal from such Multiemployer
Plan under Section 4201 of ERISA or as a result of a sale of assets
described in Section 4204 of ERISA. Neither Borrower nor any ERISA
Affiliate has been notified that any Multiemployer Plan is in
reorganization or insolvent under and within the meaning of Section
4241 or Section 4245 of ERISA or that any Multiemployer Plan intends
to terminate or has been terminated under Section 4041A of ERISA.
(m) Other Regulations. Borrower is not subject to regulation under
-----------------
the Investment Company Act of 1940, the Public Utility Holding Company Act
of 1935, the Federal Power Act, the Interstate Commerce Act, any state
public utilities code or to any other Governmental Rule limiting its
ability to incur indebtedness.
(n) Patent and Other Rights. Borrower and its Subsidiaries own or
-----------------------
license under validly existing agreements all patents, licenses,
trademarks, trade names, trade secrets, service marks, copyrights and all
rights with respect thereto, which are required to conduct their businesses
as now conducted.
(o) Governmental Charges and Other Indebtedness. Borrower and its
-------------------------------------------
Subsidiaries have filed or caused to be filed all tax returns which are
required to be filed by them. Borrower and its Subsidiaries have paid, or
made provision for the payment of, all taxes and other Governmental Charges
which have or may have become due pursuant to said returns or otherwise and
all other indebtedness, except such Governmental Charges or indebtedness,
if any, which are being contested in good faith and as to which adequate
reserves (determined in
46
<PAGE>
accordance with GAAP) have been provided or which are not reasonably likely
to have a Material Adverse Effect if unpaid.
(p) Margin Stock. Borrower owns no Margin Stock which, in the
------------
aggregate, would constitute a substantial part of the assets of Borrower,
and no proceeds of any Loan will be used to purchase or carry, directly or
indirectly, any Margin Stock or to extend credit, directly or indirectly,
to any Person for the purpose of purchasing or carrying any Margin Stock.
(q) Subsidiaries, etc. Set forth in Schedule 4.01(q) (as supplemented
------------------ ----------------
by Borrower from time to time in a written notice to Agent) is a complete
list of all of Borrower's Subsidiaries, the jurisdiction of incorporation
of each, the classes of Equity Securities of each and the number of shares
and percentages of shares of each such class owned directly or indirectly
by Borrower. Except for such Subsidiaries, Borrower has no Subsidiaries,
is not a partner in any partnership or a joint venturer in any joint
venture.
(r) Catastrophic Events. Neither Borrower nor any of its Subsidiaries
-------------------
and none of their properties is or has been affected by any fire,
explosion, accident, strike, lockout or other labor dispute, drought,
storm, hail, earthquake, embargo, act of God or other casualty that is
reasonably likely to have a Material Adverse Effect. There are no disputes
presently subject to grievance procedure, arbitration or litigation under
any of the collective bargaining agreements, employment contracts or
employee welfare or incentive plans to which Borrower or any of its
Subsidiaries is a party, and there are no strikes, lockouts, work stoppages
or slowdowns, or, to the best knowledge of Borrower, jurisdictional
disputes or organizing activities occurring or threatened which alone or in
the aggregate are reasonably likely to have a Material Adverse Effect.
(s) Burdensome Contractual Obligations, Etc. Neither Borrower nor any
---------------------------------------
of its Subsidiaries and none of their properties is subject to any
Contractual Obligation or Requirement of Law which is reasonably likely to
have a Material Adverse Effect.
(t) No Material Adverse Effect. No event has occurred and no
--------------------------
condition exists which is reasonably likely to have a Material Adverse
Effect.
(u) Accuracy of Information Furnished. None of the Credit Documents
---------------------------------
and none of the other certificates, statements or information furnished to
Agent or any Lender by or on behalf of Borrower or any of its Subsidiaries
in
47
<PAGE>
connection with the Credit Documents or the transactions contemplated
thereby contains or will contain any untrue statement of a material fact or
omits or will omit to state a material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
4.02. Reaffirmation. Borrower shall be deemed to have reaffirmed, for
-------------
the benefit of the Lenders and Agent, each representation and warranty contained
in Paragraph 4.01 on and as of the date of each Credit Event (except for
--------------
representations and warranties expressly made as of a specified date, which
shall be true as of such date).
SECTION V. COVENANTS.
----------
5.01. Affirmative Covenants. Until the termination of this Agreement
---------------------
and the satisfaction in full by Borrower of all Obligations, Borrower will
comply, and will cause compliance, with the following affirmative covenants,
unless Required Lenders shall otherwise consent in writing:
(a) Financial Statements, Reports, etc. Borrower shall furnish to
-----------------------------------
Agent, with sufficient copies for each Lender, the following, each in such
form and such detail as Agent or the Required Lenders shall reasonably
request:
(i) As soon as available and in no event later than sixty (60)
days after the last day of each fiscal quarter of Borrower (other than
the last quarter of each fiscal year), a copy of the Financial
Statements of Borrower and its Subsidiaries (prepared on a
consolidated basis) for such quarter and for the fiscal year to date,
certified by the president or chief financial officer of Borrower to
present fairly the financial condition, results of operations and
other information reflected therein and to have been prepared in
accordance with GAAP (subject to normal year-end audit adjustments);
(ii) As soon as available and in no event later than one hundred,
twenty (120) days after the close of each fiscal year of Borrower, (A)
copies of the audited Financial Statements of Borrower and its
Subsidiaries (prepared on a consolidated basis) for such year,
prepared by independent certified public accountants of recognized
national standing acceptable to Agent and Required Lenders, (B) copies
of the unqualified opinions (or qualified opinions reasonably
acceptable to Agent and Required Lenders) and management letters
delivered by such accountants in connection with all
48
<PAGE>
such Financial Statements and (C) certificates of such accountants to
Agent stating that in making the examination necessary for their
opinion they have reviewed Paragraph 5.03 and have obtained no
--------------
knowledge of any violation by Borrower and its Subsidiaries of the
covenants set forth therein, or if, in the opinion of such
accountants, any such violation has occurred, a statement as to the
nature thereof;
(iii) Contemporaneously with the quarterly and year-end Financial
Statements required by the foregoing clauses (i) and (ii), a
--------------------
compliance certificate of the president or chief financial officer of
Borrower (a "Compliance Certificate") which (A) states that no Event
----------------------
of Default and no Default has occurred and is continuing, or, if any
such Event of Default or Default has occurred and is continuing, a
statement as to the nature thereof and what action Borrower proposes
to take with respect thereto and (B) sets forth, for the quarter or
year covered by such Financial Statements or as of the last day of
such quarter or year (as the case may be), the calculation of the
financial ratios and tests provided in Paragraph 5.03;
--------------
(iv) As soon as possible and in no event later than five (5)
Business Days after any officer of Borrower knows of the occurrence or
existence of (A) any Reportable Event under any Employee Benefit Plan
or Multiemployer Plan; (B) any actual or threatened litigation, suits,
claims or disputes against Borrower or any of its Subsidiaries
involving potential monetary damages payable by Borrower or its
Subsidiaries of $3,500,000 or more (alone or in the aggregate); (C)
any other event or condition which is reasonably likely to have a
Material Adverse Effect; or (D) any Default or Event of Default; the
statement of the president or chief financial officer of Borrower
setting forth details of such event, condition, Default or Event of
Default and the action which Borrower proposes to take with respect
thereto;
(v) As soon as available and in no event later than five (5)
Business Days after they are sent, made available or filed, copies of
(A) all registration statements and reports filed by Borrower or any
of its Subsidiaries with any securities exchange or the Securities and
Exchange Commission (including, without limitation, all 10-Q, 10-K and
8-Q reports); (B) all reports, proxy statements and financial
statements sent or made available by Borrower or any of its
Subsidiaries to its security holders; and (C) all press releases and
other similar public concerning any
49
<PAGE>
material developments in the business of Borrower or any of its
Subsidiaries made available by Borrower or any of its Subsidiaries to
the public generally;
(vi) As soon as available and in no event later than thirty (30)
days before the first day of each fiscal year of Borrower, the
consolidated plan and forecast of Borrower and its Subsidiaries for
such fiscal year, including quarterly cash flow projections; and
(vii) Such other instruments, agreements, certificates, opinions,
statements, documents and information relating to the operations or
condition (financial or otherwise) of Borrower or its Subsidiaries,
and compliance by Borrower with the terms of this Agreement and the
other Credit Documents as Agent may from time to time reasonably
request.
(b) Books and Records. Borrower and its Subsidiaries shall at all
-----------------
times keep proper books of record and account in which full, true and
correct entries will be made of their transactions in accordance with GAAP.
(c) Inspections. Borrower and its Subsidiaries shall permit any
-----------
Person designated by any Lender, upon reasonable notice and during normal
business hours, to visit and inspect any of the properties and offices of
Borrower and its Subsidiaries, to examine the books and records of Borrower
and its Subsidiaries and make copies thereof and to discuss the affairs,
finances and business of Borrower and its Subsidiaries with, and to be
advised as to the same by, their officers, auditors and accountants, all at
such times and intervals as any Lender may reasonably request; provided,
--------
however, that, if no Default or Event of Default has occurred and is
-------
continuing, Borrower shall not be required to permit more than four (4)
such visits for inspection and examination in any fiscal year.
(d) Insurance. Borrower and its Subsidiaries shall:
---------
(i) Carry and maintain insurance of the types and in the amounts
customarily carried from time to time during the term of this
Agreement by others engaged in substantially the same business as such
Person and operating in the same geographic area as such Person,
including, but not limited to, fire, public liability, property damage
and worker's compensation;
(ii) Carry and maintain each policy for such insurance with (A) a
company which is rated A or better by A.M. Best and Company at the
time such policy is
50
<PAGE>
placed and at the time of each annual renewal thereof or (B) any other
insurer which is reasonably satisfactory to Agent; and
(iii) Deliver to Agent from time to time, as Agent may request,
schedules setting forth all insurance then in effect.
(e) Governmental Charges and Other Indebtedness. Borrower and its
-------------------------------------------
Subsidiaries shall promptly pay and discharge when due (i) all taxes and
other Governmental Charges prior to the date upon which penalties accrue
thereon, (ii) all indebtedness which, if unpaid, could become a Lien upon
the property of Borrower or its Subsidiaries and (iii) all other
indebtedness which, if unpaid, is reasonably likely to have a Material
Adverse Effect, except such Indebtedness as may in good faith be contested
or disputed, or for which arrangements for deferred payment have been made,
provided that in each such case appropriate reserves are maintained to the
reasonable satisfaction of Agent.
(f) Use of Proceeds. Borrower shall use the proceeds of the Loans
---------------
only for the respective purposes set forth in Subparagraph 2.01(g) and
--------------------
Subparagraph 2.02(f). Borrower shall not use any part of the proceeds of
--------------------
any Loan, directly or indirectly, for the purpose of purchasing or carrying
any Margin Stock or for the purpose of purchasing or carrying or trading in
any securities under such circumstances as to involve Borrower, any Lender
or Agent in a violation of Regulations G, T, U or X issued by the Federal
Reserve Board.
(g) General Business Operations. Each of Borrower and its
---------------------------
Subsidiaries shall (i) preserve and maintain its corporate existence and
all of its rights, privileges and franchises reasonably necessary to the
conduct of its business, (ii) conduct its business activities in compliance
with all Requirements of Law and Contractual Obligations applicable to such
Person, the violation of which is reasonably likely to have a Material
Adverse Effect and (iii) keep all property useful and necessary in its
business in good working order and condition, ordinary wear and tear
excepted. Borrower shall maintain its chief executive office and principal
place of business in the United States and shall not relocate its chief
executive office or principal place of business outside of California
except upon not less than ninety (90) days prior written notice to Agent.
(h) Pari Passu Ranking. Borrower shall take, or cause to be taken,
------------------
all actions necessary to ensure that the
51
<PAGE>
Obligations of Borrower are and continue to rank at least pari passu in
---- -----
right of payment with all other unsecured Indebtedness of Borrower.
5.02. Negative Covenants. Until the termination of this Agreement and
------------------
the satisfaction in full by Borrower of all Obligations, Borrower will comply,
and will cause compliance, with the following negative covenants, unless
Required Lenders shall otherwise consent in writing:
(a) Indebtedness. Neither Borrower nor any of its Subsidiaries shall
------------
create, incur, assume or permit to exist any Indebtedness or any Guaranty
Obligations except for the following ("Permitted Indebtedness"):
----------------------
(i) The Obligations of Borrower under the Credit Documents;
(ii) Indebtedness of Borrower and its Subsidiaries listed in
Schedule 5.02(a) and existing on the date of this Agreement;
----------------
(iii) Indebtedness of Borrower and its Subsidiaries arising from
the endorsement of instruments for collection in the ordinary course
of Borrower's or a Subsidiary's business;
(iv) Indebtedness of Borrower and its Subsidiaries for trade
accounts payable, provided that (A) such accounts arise in the
ordinary course of business and (B) no material part of such account
is more than ninety (90) days past due (unless subject to a bona fide
dispute and for which adequate reserves have been established);
(v) Indebtedness of Borrower and its Subsidiaries under Rate
Contracts, provided that all such arrangements are entered into in
connection with bona fide hedging operations and not for speculation;
(vi) Indebtedness of Borrower and its Subsidiaries under purchase
money loans and Capital Leases incurred by Borrower or any of its
Subsidiaries to finance the acquisition by such Person of real
property, fixtures or equipment provided that in each case, (A) such
Indebtedness is incurred by such Person at the time of, or not later
than forty-five (45) days after, the acquisition by such Person of the
property so financed and (B) such Indebtedness does not exceed the
purchase price of the property so financed;
52
<PAGE>
(vii) Subordinated Indebtedness of Borrower and its Subsidiaries;
(viii) Indebtedness of Borrower and its Subsidiaries under initial
or successive refinancings of any Indebtedness permitted by clause
------
(ii) above, provided that (A) the principal amount of any such
----
refinancing does not exceed the principal amount of the Indebtedness
being refinanced and (B) the material terms and provisions of any such
refinancing (including maturity, redemption, prepayment, default and
subordination provisions) are no less favorable to the Lenders than
the Indebtedness being refinanced;
(ix) Indebtedness of Borrower and its Subsidiaries with respect to
Surety Instruments incurred in the ordinary course of business;
(x) Guaranty Obligations of Borrower in respect of Permitted
Indebtedness of its Subsidiaries;
(xi) Indebtedness of Borrower to any of its Subsidiaries,
Indebtedness of any of Borrower's Subsidiaries to Borrower or
Indebtedness of any of Borrower's Subsidiaries to any of Borrower's
other Subsidiaries, provided that (A) any Indebtedness of Borrower to
any of its Subsidiaries and any Indebtedness of any of Borrower's
Subsidiaries to Borrower shall be subject to Subparagraph 5.02(j) and
--------------------
(B) any Indebtedness of Borrower to any of its Subsidiaries is
Subordinated Indebtedness; and
(xii) Indebtedness of Borrower's Japanese Subsidiary with respect
to the sale, transfer or assignment of accounts receivable of such
Subsidiary and certain rights and property related to the collection
of or constituting proceeds of such accounts receivable, provided that
such sale, assignment or transfer is (A) in the ordinary course of
business, (B) for cash, (C) with recourse to such Subsidiary in an
amount not to exceed the aggregate face amount of the accounts
receivable sold and certain additional interest charges with respect
to such Indebtedness, (D) otherwise permitted under Subparagraph
------------
5.02(c)(vii), and (E) both immediately before and after giving effect
------------
to such Indebtedness, no Default or Event of Default shall have
occurred and be continuing.
(b) Liens. Neither Borrower nor any of its Subsidiaries shall create,
-----
incur, assume or permit to exist any Lien on or with respect to any of its
assets or property
53
<PAGE>
of any character, whether now owned or hereafter acquired, except for the
following ("Permitted Liens"):
---------------
(i) Liens in favor of Agent or any Lender securing the
Obligations;
(ii) Liens listed in Schedule 5.02(b) and existing on the date of
----------------
this Agreement;
(iii) Liens for taxes or other Governmental Charges not at the
time delinquent or thereafter payable without penalty or being
contested in good faith, provided that adequate reserves for the
payment thereof have been established in accordance with GAAP;
(iv) Liens of carriers, warehousemen, mechanics, materialmen,
vendors, and landlords and other similar Liens imposed by law incurred
in the ordinary course of business for sums not overdue or being
contested in good faith, provided that adequate reserves for the
payment thereof have been established in accordance with GAAP;
(v) Deposits under workers' compensation, unemployment insurance
and social security laws or to secure the performance of bids,
tenders, contracts (other than for the repayment of borrowed money) or
leases, or to secure statutory obligations of surety or appeal bonds
or to secure indemnity, performance or other similar bonds in the
ordinary course of business;
(vi) Zoning restrictions, easements, rights-of-way, title
irregularities and other similar encumbrances, which alone or in the
aggregate are not substantial in amount and do not materially detract
from the value of the property subject thereto or interfere with the
ordinary conduct of the business of Borrower or any of its
Subsidiaries;
(vii) Banker's Liens and similar Liens (including set-off rights)
in respect of bank deposits;
(viii) Liens on property or assets of any corporation which becomes
a Subsidiary of Borrower after the date of this Agreement, provided
that (A) such Liens exist at the time the stock of such corporation is
acquired by Borrower and (B) such Liens were not created in
contemplation of such acquisition by Borrower;
(ix) Judgement Liens, provided that such Liens do not have a value
in excess of $5,000,000 or such Liens
54
<PAGE>
are released, stayed, vacated or otherwise dismissed within thirty
(30) days after issue or levy and, if so stayed, such stay is not
thereafter removed;
(x) Rights of (A) vendors or lessors under conditional sale
agreements, Capital Leases or other title retention agreements,
provided that, in each case, (1) such rights secure or otherwise
relate to Permitted Indebtedness, (2) such rights do not extend to any
property other than property acquired with the proceeds of such
Permitted Indebtedness and (3) such rights do not secure any
Indebtedness other than such Permitted Indebtedness and (B) lessors
under operating leases;
(xi) Liens in favor of customs and revenue authorities arising as
a matter of law to secure payment of customs duties and in connection
with the importation of goods in the ordinary course of Borrower's and
its Subsidiaries' businesses;
(xii) Liens securing Indebtedness which constitutes Permitted
Indebtedness under clause (vi) of Subparagraph 5.02(a) provided that,
-----------------------------------
in each case, such Lien (A) covers only those assets, the acquisition
of which was financed by such Permitted Indebtedness, and (B) secures
only such Permitted Indebtedness;
(xiii) Liens securing Indebtedness which constitutes Permitted
Indebtedness under clause (xii) of Subparagraph 5.02(a) provided that,
------------------------------------
in each case, such Lien (A) secures only such Permitted Indebtedness,
and (B) such Liens do not extend to any assets or property other than
the assets or property sold (other than cash pledged under certain
circumstances to secure such Permitted Indebtedness in an aggregate
amount not to exceed $7,500,000 in the aggregate during the term of
this Agreement, provided that both immediately before and after giving
effect to any such cash collateralization, Borrower shall be in
compliance with the financial covenants set forth in Paragraph 5.03
--------------
and no other Default or Event of Default shall have occurred and be
continuing);
(xiv) Liens on the property or assets of any Subsidiary of
Borrower in favor of Borrower or any other Subsidiary of Borrower;
(xv) Liens incurred in connection with the extension, renewal or
refinancing of the Indebtedness secured by the Liens described in
clause (ii) or (xii) above, provided that any extension, renewal or
--------------------
55
<PAGE>
replacement Lien (A) is limited to the property covered by the
existing Lien and (B) secures Indebtedness which is no greater in
amount and has material terms no less favorable to the Lenders than
the Indebtedness secured by the existing Lien;
(xvi) Liens on insurance proceeds in favor of insurance companies
with respect to the financing of insurance premiums; and
(xvii) Liens in inventory of Borrower in favor of Kanematsu USA,
Inc. or Kanematsu Corporation (collectively, "Kanematsu") to secure
deposits made by Kanematsu with Borrower on the purchase prices of
semiconductor pattern generation equipment ordered by Kanematsu from
Borrower, provided that each such Lien (A) covers only (1) the
equipment ordered by Kanematsu pursuant to a purchase order which has
been delivered to Borrower and (2) the parts and other inventory of
Borrower which will be used to build such equipment, (B) secures only
the deposit on the purchase price for such equipment which has been
delivered to Borrower and (C) terminates upon the delivery of such
equipment to Kanematsu or the ultimate purchaser thereof or the return
to Kanematsu of such deposit.
(c) Asset Dispositions. Neither Borrower nor any of its Subsidiaries
------------------
shall sell, lease, transfer or otherwise dispose of all or any substantial
part of its assets or property, whether now owned or hereafter acquired,
except for the following:
(i) Sales of inventory by Borrower and its Subsidiaries in the
ordinary course of their businesses;
(ii) Sales of surplus, damaged, worn or obsolete equipment or
inventory for not less than fair market value;
(iii) Sales or other dispositions of Investments permitted by
clause (i) of Subparagraph 5.02(e) for not less than fair market
----------------------------------
value;
(iv) Sales or assignments of defaulted receivables to a collection
agency in the ordinary course of business;
(v) Licenses by Borrower or its Subsidiaries of its patents,
copyrights, trademarks, trade names and service marks in the ordinary
course of its business provided that, in each case, the terms of the
56
<PAGE>
transaction are terms which then would prevail in the market for
similar transactions between unaffiliated parties dealing at arm's
length;
(vi) Sales or other dispositions of assets and property by
Borrower to any of Borrower's Subsidiaries or by any of Borrower's
Subsidiaries to Borrower or any of its other Subsidiaries, provided
that the terms of any such sales or other dispositions by or to
Borrower are terms which are no less favorable to Borrower then would
prevail in the market for similar transactions between unaffiliated
parties dealing at arm's length;
(vii) Sales, for cash, in the ordinary course of business of
accounts receivable of Borrower's Japanese Subsidiary and certain
rights and property of such Subsidiary related to the collection of or
constituting proceeds of such accounts receivable, with or without
recourse, at a discount rate not to exceed ten percent (10%); and
(viii) Other sales, leases, transfers and disposals of assets and
property, provided that the aggregate value of all such assets and
property (based upon the greater of the fair market or book value of
such assets and property) so sold, leased, transferred or otherwise
disposed of in any fiscal year does not exceed five percent (5%) of
Borrower's Tangible Net Worth on the last day of the immediately
preceding fiscal year.
(d) Mergers, Acquisitions, Etc. Neither Borrower nor any of its
---------------------------
Subsidiaries shall consolidate with or merge into any other Person or
permit any other Person to merge into it, acquire or establish any
Subsidiary or acquire all or substantially all of the assets of any other
Person, except that:
(i) Any Person may merge into Borrower, provided that (A)
Borrower is the surviving corporation and (B) no Default or Event of
Default has occurred and is continuing at the time of such merger or
will occur or exist upon the consummation of such merger; and
(ii) Any wholly-owned Subsidiary of Borrower may merge into any
other wholly-owned Subsidiary of Borrower.
(e) Investments. Neither Borrower nor any of its Subsidiaries shall
-----------
make any Investment except for Investments in the following:
(i) Investments in Cash Equivalents;
57
<PAGE>
(ii) Investments permitted by the investment policy of Borrower
set forth in Schedule 5.02(e) or, if any changes to the investment
----------------
policy of Borrower are hereafter duly approved by the Board of
Directors of Borrower, in any subsequent investment policy which is
the most recent investment policy delivered by Borrower to Agent with
a certificate of Borrower's chief financial officer to the effect that
such investment policy has been duly approved by Borrower's Board of
Directors and is then in effect;
(iii) Loans and other extensions of credit by Borrower and its
Subsidiaries to each other to the extent permitted by clause (xi) of
--------------
Subparagraph 5.02(a) and other types of Investments by Borrower and
--------------------
its Subsidiaries to each other;
(iv) Investments consisting of loans to employees, officers and
directors, provided that the aggregate principal amount of such loans
does not exceed $5,000,000 at any time;
(v) Investments of Borrower and its Subsidiaries in Rate
Contracts, provided that all such arrangements are entered into in
connection with bona fide hedging operations and not for speculation;
and
(vi) Other Investments, provided that the aggregate amount of such
other Investments does not exceed at any time ten percent (10%) of
Borrower's Tangible Net Worth at such time.
(f) Dividends, Redemptions, Etc. Neither Borrower nor any of its
----------------------------
Subsidiaries shall pay any dividends or make any distributions on its
Equity Securities; purchase, redeem, retire, defease or otherwise acquire
for value any of its Equity Securities; return any capital to any holder of
its Equity Securities as such; make any distribution of assets, Equity
Securities, obligations or securities to any holder of its Equity
Securities as such; or set apart any sum for any such purpose; except as
follows:
(i) Either Borrower or any of its Subsidiaries may pay dividends
on its capital stock payable solely in such Person's own capital
stock;
(ii) Any Subsidiary of Borrower may pay dividends to Borrower; and
(iii) Borrower may repurchase its Equity Securities, provided that
the aggregate amount of such repurchases does not exceed $5,000,000
during the
58
<PAGE>
period which begins on the date of this Agreement and ends on the date
when all of the Commitments are terminated and all of the Obligations
are repaid in full.
(g) Change in Business. Neither Borrower nor any of its Subsidiaries
------------------
shall engage, either directly or indirectly through Affiliates, in any
business that is substantially different from the semi-conductor market
(including semi-conductor capital equipment), the pattern generation market
and any strategic component parts in relation thereto.
(h) Indebtedness Payments, Etc. Neither Borrower nor any of its
--------------------------
Subsidiaries shall (i) prepay, redeem, purchase, defease or otherwise
satisfy in any manner prior to the scheduled payment thereof any
Subordinated Indebtedness or (ii) amend, modify or otherwise change any of
the subordination or other provisions of any document, instrument or
agreement evidencing Subordinated Indebtedness in a manner which adversely
affects the material rights of the Agent or Lenders.
(i) ERISA. Neither Borrower nor any ERISA Affiliate shall (i) adopt
-----
or institute any Employee Benefit Plan that is an employee pension benefit
plan within the meaning of Section 3(2) of ERISA, (ii) take any action
which will result in the partial or complete withdrawal, within the
meanings of sections 4203 and 4205 of ERISA, from a Multiemployer Plan,
(iii) engage or permit any Person to engage in any transaction prohibited
by section 406 of ERISA or section 4975 of the Code involving any Employee
Benefit Plan or Multiemployer Plan which would subject either Borrower or
any ERISA Affiliate to any tax, penalty or other liability including a
liability to indemnify, (iv) incur or allow to exist any accumulated
funding deficiency (within the meaning of section 412 of the Code or
section 302 of ERISA), (v) fail to make full payment when due of all
amounts due as contributions to any Employee Benefit Plan or Multiemployer
Plan, (vi) fail to comply with the requirements of section 4980B of the
Code or Part 6 of Title I(B) of ERISA, or (vii) adopt any amendment to any
Employee Benefit Plan which would require the posting of security pursuant
to section 401(a)(29) of the Code, where singly or cumulatively, the above
would have a Material Adverse Effect.
(j) Transactions With Affiliates. Neither Borrower nor any of its
----------------------------
Subsidiaries shall enter into any Contractual Obligation with any Affiliate
or engage in any other transaction with any Affiliate except upon terms at
least as favorable to Borrower or such Subsidiary as an arms-length
transaction with unaffiliated Persons.
59
<PAGE>
(k) Accounting Changes. Neither Borrower nor any of its Subsidiaries
------------------
shall (i) change its fiscal year (currently August 1 through July 31) or
(ii) except as required by GAAP, change its accounting practices in any
manner which would affect Borrower's compliance with Paragraph 5.03.
--------------
5.03. Financial Covenants. Until the termination of this Agreement and
-------------------
the satisfaction in full by Borrower of all Obligations, Borrower will comply,
and will cause compliance, with the following financial covenants, unless
Required Lenders shall otherwise consent in writing:
(a) Leverage Ratio. Borrower shall not permit the Leverage Ratio of
--------------
Borrower and its Subsidiaries on the last day of any fiscal quarter set
forth below to be greater than the ratio set forth opposite such quarter
below:
Quarters ending on
July 31, 1996 &
October 31, 1996 0.30 to 1.00;
Each quarter thereafter 0.25 to 1.00.
(b) Current Ratio. Borrower shall not permit the Current Ratio of
-------------
Borrower and its Subsidiaries to be less than 1.25 to 1.00 on the last day
of any fiscal quarter.
(c) Net Worth. Borrower shall not permit the net worth of Borrower
---------
and its Subsidiaries on the last day of any fiscal quarter (such day to be
referred to herein as a "determination date") which commences after April
30, 1996 (such date to be referred to herein as the "base date") to be less
than the sum on such determination date of the following:
(i) $50,000,000;
(ii) Seventy-five percent (75%) of the sum of the consolidated
quarterly Adjusted Net Income (ignoring any quarterly losses) of
Borrower and its Subsidiaries for each quarter after the base date
through and including the quarter ending on the determination date;
and
(iii) Fifty percent (50%) of the Net Proceeds realized by Borrower
and its Subsidiaries from the issuance of Equity Securities during the
period commencing on the base date and ending on the determination
date.
60
<PAGE>
(d) Cash Balances. Borrower shall not permit the Cash Balances of
-------------
Borrower and its Subsidiaries to be less than $25,000,000 on the last day
of any fiscal quarter.
(e) Debt Service Coverage Ratio. Borrower shall not permit the Debt
---------------------------
Service Coverage Ratio of Borrower and its Subsidiaries for any consecutive
four-quarter period ending on any date set forth below to be greater than
the ratio set forth opposite such date:
<TABLE>
<CAPTION>
<S> <C>
July 31, 1996.......................2.00 to 1.00;
October 31, 1996....................2.00 to 1.00;
January 31, 1997....................3.00 to 1.00;
April 30, 1997......................4.00 to 1.00;
July 31, 1997.......................4.00 to 1.00;
The last day of each fiscal quarter
ending thereafter...........5.00 to 1.00.
</TABLE>
(f) Profitability. Borrower shall not permit:
-------------
(i) The Adjusted Net Income or Operating Income of Borrower and
its Subsidiaries for more than one quarter in any consecutive four-
quarter period to be a loss or for any such loss to exceed $5,000,000;
or
(ii) The cumulative Adjusted Net Income of Borrower and its
Subsidiaries for any consecutive four-quarter period to be less than
$1.00.
SECTION VI. DEFAULT.
-------
6.01. Events of Default. The occurrence or existence of any one or
-----------------
more of the following shall constitute an "Event of Default" hereunder:
-------- -------
(a) Non-Payment. Borrower shall (i) fail to pay when due any principal
-----------
of any Loan, (ii) fail to pay within two (2) days after the same becomes
due, any interest or fees required under the terms of this Agreement or any
of the other Credit Documents, or (iii) fail to pay within five (5) days
after the same becomes due, any other amount required under the terms of
this Agreement or any of the other Credit Documents; or
(b) Specific Defaults. Borrower or any of its Subsidiary shall fail
-----------------
to observe or perform any covenant, obligation, condition or agreement set
forth in Subparagraph 5.01(d), Paragraph 5.02 or Paragraph 5.03; or
-------------------- -------------- --------------
61
<PAGE>
(c) Other Defaults. Borrower or any of its Subsidiaries shall fail to
--------------
observe or perform any other covenant, obligation, condition or agreement
contained in this Agreement or the other Credit Documents and such failure
shall continue for thirty (30) days after the earlier of (i) the date an
officer of Borrower first knew or should have known of such failure and
(ii) the date Agent delivers to Borrower a notice of such failure; or
(d) Representations and Warranties. Any representation, warranty,
------------------------------
certificate, information or other statement (financial or otherwise) made
or furnished by or on behalf of Borrower or any of its Subsidiaries to
Agent or any Lender in or in connection with this Agreement or any of the
other Credit Documents, or as an inducement to Agent or any Lender to enter
into this Agreement, shall be false, incorrect, incomplete or misleading in
any material respect when made or furnished; or
(e) Cross-Default. Borrower or any of its Subsidiaries (i) shall fail
-------------
to make any payment when due on account of any Indebtedness or Contingent
Obligation of such Person (excluding the Obligations but including all
other Indebtedness and Contingent Obligations of Borrower or any of its
Subsidiaries to Agent or any Lender) and such failure shall continue beyond
any period of grace provided with respect thereto, if the amount of such
payment exceeds $5,000,000 or the effect of such failure is to cause, or
permit the holder or holders thereof to cause, Indebtedness and/or
Contingent Obligations in an aggregate amount exceeding $5,000,000 to
become due or (ii) shall default in the observance or performance of any
other agreement, term or condition contained in any agreement or instrument
evidencing such Indebtedness or Contingent Obligation, if the effect of
such default is to cause, or permit the holder or holders thereof to cause,
Indebtedness and/or Contingent Obligations in an aggregate amount exceeding
$5,000,000 to become due; or
(f) Insolvency, Voluntary Proceedings. Borrower or any of its
---------------------------------
Subsidiaries shall (i) apply for or consent to the appointment of a
receiver, trustee, liquidator or custodian of itself or of all or a
substantial part of its property, (ii) be unable, or admit in writing its
inability, to pay its debts generally as they mature, (iii) make a general
assignment for the benefit of its or any of its creditors, (iv) be
dissolved or liquidated in full or in part, (v) become insolvent (as such
term may be defined or interpreted under any applicable statute), (vi)
commence a voluntary case or other proceeding seeking liquidation,
reorganization or other relief with respect to itself or its debts under
any bankruptcy, insolvency or other similar law
62
<PAGE>
now or hereafter in effect or consent to any such relief or to the
appointment of or taking possession of its property by any official in an
involuntary case or other proceeding commenced against it, or (vi) take any
action for the purpose of effecting any of the foregoing; or
(g) Involuntary Proceedings. Proceedings for the appointment of a
-----------------------
receiver, trustee, liquidator or custodian of Borrower or any of its
Subsidiaries or of all or a substantial part of the property thereof, or an
involuntary case or other proceedings seeking liquidation, reorganization
or other relief with respect to Borrower or any of its Subsidiaries or the
debts thereof under any bankruptcy, insolvency or other similar law now or
hereafter in effect shall be commenced and an order for relief entered or
such proceeding shall not be dismissed or discharged within sixty (60) days
of commencement; or
(h) Judgments. (i) A final judgment or order for the payment of money
---------
in excess of $5,000,000 (exclusive of amounts covered by insurance issued
by an insurer not an Affiliate of Borrower and otherwise satisfying the
requirements set forth in Subparagraph 5.01(d)) shall be rendered against
--------------------
Borrower or any of its Subsidiaries and the same shall remain undischarged
for a period of sixty (60) days during which execution shall not be
effectively stayed or (ii) any judgment, writ, assessment, warrant of
attachment, tax lien or execution or similar process shall be issued or
levied against a substantial part of the property of Borrower or any of its
Subsidiaries and such judgment, writ, or similar process shall not be
released, stayed, vacated or otherwise dismissed within sixty (60) days
after issue or levy; or
(i) Credit Documents. Any Credit Document or any material term
----------------
thereof shall cease to be, or be asserted by Borrower or any of its
Subsidiaries not to be, a legal, valid and binding obligation of Borrower
or any of its Subsidiaries enforceable in accordance with its terms; or
(j) ERISA. Any Reportable Event which constitutes grounds for the
-----
termination of any Employee Benefit Plan by the PBGC or for the appointment
of a trustee by the PBGC to administer any Employee Benefit Plan shall
occur, or any Employee Benefit Plan shall be terminated within the meaning
of Title IV of ERISA or a trustee shall be appointed by the PBGC to
administer any Employee Benefit Plan; or
(k) Change of Control. Any Change of Control shall occur; or
-----------------
63
<PAGE>
(l) Material Adverse Effect. Any event(s) or condition(s) which has a
-----------------------
Material Adverse Effect shall occur or exist.
6.02. Remedies. At any time after the occurrence and during the
--------
continuance of any Event of Default (other than an Event of Default referred to
in Subparagraph 6.01(f) or 6.01(g)), Agent may, with the consent of the Required
-------------------- -------
Lenders, or shall, upon instructions from the Required Lenders, by written
notice to Borrower, (a) terminate the Commitments and the obligations of the
Lenders to make Loans and/or (b) declare all outstanding Obligations payable by
Borrower to be immediately due and payable without presentment, demand, protest
or any other notice of any kind, all of which are hereby expressly waived,
anything contained herein or in the Notes to the contrary notwithstanding. Upon
the occurrence or existence of any Event of Default described in Subparagraph
------------
6.01(f) or 6.01(g), immediately and without notice, (i) the Commitments and the
- ------- -------
obligations of the Lenders to make Loans shall automatically terminate and (ii)
all outstanding Obligations payable by Borrower hereunder shall automatically
become immediately due and payable, without presentment, demand, protest or any
other notice of any kind, all of which are hereby expressly waived, anything
contained herein or in the Notes to the contrary notwithstanding. In addition
to the foregoing remedies, upon the occurrence or existence of any Event of
Default, Agent may exercise any other right, power or remedy available to it
under any of the Credit Documents or otherwise by law, either by suit in equity
or by action at law, or both. Immediately after taking any action under this
Paragraph 6.02, Agent shall notify each Lender of such action.
- --------------
SECTION VII. THE AGENT AND RELATIONS AMONG LENDERS.
-------------------------------------
7.01. Appointment, Powers and Immunities. Each Lender hereby appoints
----------------------------------
and authorizes Agent to act as its agent hereunder and under the other Credit
Documents with such powers as are expressly delegated to Agent by the terms of
this Agreement and the other Credit Documents, together with such other powers
as are reasonably incidental thereto. Agent shall not have any duties or
responsibilities except those expressly set forth in this Agreement or in any
other Credit Document, be a trustee for any Lender or have any fiduciary duty to
any Lender. Notwithstanding anything to the contrary contained herein Agent
shall not be required to take any action which is contrary to this Agreement or
any other Credit Document or any applicable Governmental Rule. Neither Agent
nor any Lender shall be responsible to any other Lender for any recitals,
statements, representations or warranties made by Borrower or any of its
Subsidiaries contained in this Agreement or in any other Credit Document, for
the value, validity, effectiveness, genuineness, enforceability or sufficiency
of this Agreement or any other
64
<PAGE>
Credit Document or for any failure by Borrower or any of its Subsidiaries to
perform their respective obligations hereunder or thereunder. Agent may employ
agents and attorneys-in-fact and shall not be responsible to any Lender for the
negligence or misconduct of any such agents or attorneys-in-fact selected by it
with reasonable care. Neither Agent nor any of its directors, officers,
employees, agents or advisors shall be responsible to any Lender for any action
taken or omitted to be taken by it or them hereunder or under any other Credit
Document or in connection herewith or therewith, except for its or their own
gross negligence or wilful misconduct. Except as otherwise provided under this
Agreement, Agent shall take such action with respect to the Credit Documents as
shall be directed by the Required Lenders.
7.02. Reliance by Agent. Agent shall be entitled to rely upon any
-----------------
certificate, notice or other document (including any cable, telegram, facsimile
or telex) believed by it in good faith to be genuine and correct and to have
been signed or sent by or on behalf of the proper Person or Persons, and upon
advice and statements of legal counsel, independent accountants and other
experts selected by Agent with reasonable care. As to any other matters not
expressly provided for by this Agreement, Agent shall not be required to take
any action or exercise any discretion, but shall be required to act or to
refrain from acting upon instructions of the Required Lenders and shall in all
cases be fully protected by the Lenders in acting, or in refraining from acting,
hereunder or under any other Credit Document in accordance with the instructions
of the Required Lenders, and such instructions of the Required Lenders and any
action taken or failure to act pursuant thereto shall be binding on all of the
Lenders.
7.03. Defaults. Agent shall not be deemed to have knowledge or notice
--------
of the occurrence of any Default or Event of Default unless Agent has received a
written notice from a Lender or Borrower, referring to this Agreement,
describing such Default or Event of Default and stating that such notice is a
"Notice of Default". If Agent receives such a notice of the occurrence of a
Default or Event of Default, Agent shall give prompt notice thereof to the
Lenders. Agent shall take such action with respect to such Default or Event of
Default as shall be reasonably directed by the Required Lenders; provided,
--------
however, that until Agent shall have received such directions, Agent may (but
- -------
shall not be obligated to) take such action, or refrain from taking such action,
with respect to such Default or Event of Default as it shall deem advisable in
the best interest of the Lenders.
7.04. Indemnification. Without limiting the Obligations of Borrower
---------------
hereunder, each Lender agrees to indemnify Agent, ratably in accordance with
their Proportionate Shares, for any
65
<PAGE>
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may at any time be imposed on, incurred by or asserted against
Agent in any way relating to or arising out of this Agreement or any documents
contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or the enforcement of any of the terms hereof or
thereof; provided, however, that no Lender shall be liable for any of the
foregoing to the extent they arise from Agent's gross negligence or wilful
misconduct. Agent shall be fully justified in refusing to take or in continuing
to take any action hereunder unless it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action. The
obligations of each Lender under this Paragraph 7.04 shall survive the payment
and performance of the Obligations, the termination of this Agreement and any
Lender ceasing to be a party to this Agreement (with respect to events which
occurred prior to the time such Lender ceased to be a Lender hereunder).
7.05. Non-Reliance. Each Lender represents that it has, independently
------------
and without reliance on Agent, or any other Lender, and based on such documents
and information as it has deemed appropriate, made its own appraisal of the
business, prospects, management, financial condition and affairs of Borrower and
the Subsidiaries and its own decision to enter into this Agreement and agrees
that it will, independently and without reliance upon Agent or any other Lender,
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own appraisals and decisions in taking or not taking
action under this Agreement. Neither Agent nor any of its affiliates nor any of
their respective directors, officers, employees, agents or advisors shall (a) be
required to keep any Lender informed as to the performance or observance by
Borrower or any of its Subsidiaries of the obligations under this Agreement or
any other document referred to or provided for herein or to make inquiry of, or
to inspect the properties or books of Borrower or any of its Subsidiaries; (b)
have any duty or responsibility to provide any Lender with any credit or other
information concerning Borrower or any of its Subsidiaries which may come into
the possession of Agent, except for notices, reports and other documents and
information expressly required to be furnished to the Lenders by Agent
hereunder; or (c) be responsible to any Lender for (i) any recital, statement,
representation or warranty made by Borrower or any officer, employee or agent of
Borrower in this Agreement or in any of the other Credit Documents, (ii) the
value, validity, effectiveness, genuineness, enforceability or sufficiency of
this Agreement or any Credit Document, (iii) the value or sufficiency of any
collateral or the validity or perfection of any of the liens or security
interests intended to be created by the Credit Documents
66
<PAGE>
or (iv) any failure by Borrower to perform its obligations under this Agreement
or any other Credit Document.
7.06. Resignation or Removal of Agent. Agent may resign at any time by
-------------------------------
giving thirty (30) days prior written notice thereof to Borrower and the
Lenders, and Agent may be removed at any time with or without cause by the
Required Lenders. Upon any such resignation or removal, the Required Lenders
shall have the right to appoint a successor Agent, which Agent, if not a Lender,
shall be reasonably acceptable to Borrower; provided, however, that Borrower
-------- -------
shall have no right to approve a successor Agent if a Default or an Event of
Default has occurred and is continuing. Upon the acceptance of any appointment
as Agent hereunder by a successor Agent, such successor Agent shall thereupon
succeed to and become vested with all the rights, powers, privileges and duties
of the retiring Agent, and the retiring Agent shall be discharged from the
duties and obligations thereafter arising hereunder. After any retiring Agent's
resignation or removal hereunder as Agent, the provisions of this Section VII
-----------
shall continue in effect for its benefit in respect of any actions taken or
omitted to be taken by it while it was acting as Agent.
7.07. Authorization. Agent is hereby authorized by the Lenders to
-------------
execute, deliver and perform, each of the Credit Documents to which Agent is or
is intended to be a party and each Lender agrees to be bound by all of the
agreements of Agent contained in the Credit Documents.
7.08. Agent in its Individual Capacity. Agent and its affiliates may
--------------------------------
make loans to, accept deposits from and generally engage in any kind of banking
or other business with Borrower and its Subsidiaries and affiliates as though
Agent were not Agent hereunder. With respect to Loans, if any, made by Agent in
its capacity as a Lender, Agent in its capacity as a Lender shall have the same
rights and powers under this Agreement and the other Credit Documents as any
other Lender and may exercise the same as though it were not Agent, and the
terms "Lender" or "Lenders" shall include Agent in its capacity as a Lender.
SECTION VIII. MISCELLANEOUS.
-------------
8.01. Notices. Except as otherwise provided herein, all notices,
-------
requests, demands, consents, instructions or other communications to or upon
Borrower, any Lender or Agent under this Agreement or the other Credit Documents
shall be in writing and faxed, mailed or delivered, if to Borrower or Agent, at
its respective facsimile number or address set forth below or, if to any Lender,
at the address or facsimile number specified beneath the heading "Address for
Notices" under the name of such Lender in Schedule I (or to such other facsimile
----------
number or address for any party as indicated in any notice given by that party
to the
67
<PAGE>
other parties). All such notices and communications shall be effective (a) when
sent by Federal Express or other overnight service of recognized standing, on
the Business Day following the deposit with such service; (b) when mailed, first
class postage prepaid and addressed as aforesaid through the United States
Postal Service, upon receipt; (c) when delivered by hand, upon delivery; and (d)
when faxed, upon confirmation of receipt; provided, however, that any notice
-------- -------
delivered to Agent under Section II shall not be effective until received by
----------
Agent.
Agent: ABN AMRO Bank N.V.
101 California Street, Suite 4550
San Francisco, CA 94111-5812
Attn: Robin S. Yim
Telephone: (415) 984-3712
Fax No: (415) 362-3524
with a copy to:
ABN AMRO Bank N.V.
335 Madison Avenue
New York, NY 10017
Attn: Linda Boardman
Telephone: (212) 370-8509
Fax No: (212) 682-0364
Borrower: Etec Systems, Inc
26460 Corporate Ave.
Hayward, CA 94545
Attn: Melanie Mock
Telephone: (510) 887-3649
Fax No: (510) 732-1469
Attn: Saul Arnold
Telephone: (510) 887-3550
Fax No: (510) 732-1469
Each Notice of Borrowing, Notice of Revolving Loan Conversion and Notice of
Interest Period Selection shall be given by Borrower to Agent's office located
at the address referred to above during Agent's normal business hours; provided,
--------
however, that any such notice received by Agent after 10:00 a.m. on any Business
- -------
Day shall be deemed received by Agent on the next Business Day. In any case
where this Agreement authorizes notices, requests, demands or other
communications by Borrower to Agent or any Lender to be made by telephone or
facsimile, Agent or any Lender may conclusively presume that anyone purporting
to be a person designated in any incumbency certificate or other similar
document received by Agent or a Lender is such a person.
68
<PAGE>
8.02. Expenses. Borrower shall pay on demand, whether or not any Loan
--------
is made hereunder, (a) all reasonable fees and expenses, including reasonable
attorneys' fees and expenses, incurred by Agent in connection with the
preparation, negotiation, execution and delivery of, and the exercise of its
duties under, this Agreement and the other Credit Documents, and the
preparation, negotiation, execution and delivery of amendments and waivers
hereunder and thereunder and (b) all reasonable fees and expenses, including
reasonable attorneys' fees and expenses, incurred by Agent and the Lenders in
the enforcement or attempted enforcement of any of the Obligations or in
preserving any of Agent's or the Lenders' rights and remedies (including,
without limitation, all such fees and expenses incurred in connection with any
"workout" or restructuring affecting the Credit Documents or the Obligations or
any bankruptcy or similar proceeding involving Borrower or any of its
Subsidiaries). As used herein, the term "reasonable attorneys' fees and
expenses" shall include, without limitation, allocable costs and expenses of
Agent's and Lenders' in-house legal counsel and staff. The obligations of
Borrower under this Paragraph 8.02 shall survive the payment and performance of
--------------
the Obligations and the termination of this Agreement.
8.03. Indemnification. To the fullest extent permitted by law,
---------------
Borrower agrees to protect, indemnify, defend and hold harmless Agent, the
Lenders and their Affiliates and their respective directors, officers,
employees, agents and advisors ("Indemnitees") from and against any and all
-----------
liabilities, losses, damages or expenses of any kind or nature and from any
suits, claims or demands (including in respect of or for reasonable attorney's
fees and other expenses) arising on account of or in connection with any matter
or thing or action or failure to act by Indemnitees, or any of them, arising out
of or relating to the Credit Documents or any transaction contemplated thereby,
including without limitation any use by Borrower of any proceeds of the Loans,
except to the extent such liability arises from the willful misconduct or gross
negligence of such Indemnitee. Upon receiving knowledge of any suit, claim or
demand asserted by a third party that Agent or any Lender believes is covered by
this indemnity, Agent or such Lender shall give Borrower notice of the matter
and an opportunity to defend it, at Borrower's sole cost and expense, with legal
counsel satisfactory to Agent or such Lender, as the case may be. Agent or such
Lender may also require Borrower to defend the matter. Any failure or delay of
Agent or any Lender to notify Borrower of any such suit, claim or demand shall
not relieve Borrower of its obligations under this Paragraph 8.03 but shall
--------------
reduce such obligations to the extent of any increase in those obligations
caused solely by any such failure or delay which is unreasonable. The
obligations of Borrower under this Paragraph 8.03 shall survive the payment and
--------------
performance of the Obligations and the termination of this Agreement.
69
<PAGE>
8.04. Waivers; Amendments. Any term, covenant, agreement or condition
-------------------
of this Agreement or any other Credit Document may be amended or waived, and any
consent under this Agreement or any other Credit Document may be given, if such
amendment, waiver or consent is in writing and is signed by Borrower and the
Required Lenders (or Agent on behalf of the Required Lenders with the written
approval of the Required Lenders); provided, however that:
-------- -------
(a) Any amendment, waiver or consent which would (i) increase the
Total Revolving Loan Commitment or Total Term Loan Commitment, (ii) extend
the Revolving Loan Maturity Date or the Term Loan Maturity Date, (iii)
reduce the principal of or interest on any Loan or any fees or other
amounts payable for the account of the Lenders hereunder, (iv) extend any
scheduled principal, interest or fee payment date, (v) amend this Paragraph
---------
8.04, or (vi) amend the definition of Required Lenders, must be in writing
----
and signed or approved in writing by all Lenders;
(b) Any amendment, waiver or consent which increases or decreases the
Proportionate Share of any Lender must be in writing and signed by such
Lender; and
(c) Any amendment, waiver or consent which affects the rights or
obligations of Agent must be in writing and signed by Agent.
No failure or delay by Agent or any Lender in exercising any right under this
Agreement or any other Credit Document shall operate as a waiver thereof or of
any other right hereunder or thereunder nor shall any single or partial exercise
of any such right preclude any other further exercise thereof or of any other
right hereunder or thereunder. Unless otherwise specified in such waiver or
consent, a waiver or consent given hereunder shall be effective only in the
specific instance and for the specific purpose for which given.
8.05. Successors and Assigns.
----------------------
(a) Binding Effect. This Agreement and the other Credit Documents
--------------
shall be binding upon and inure to the benefit of Borrower, the Lenders,
Agent, all future holders of the Notes and their respective successors and
permitted assigns, except that Borrower may not assign or transfer any of
its rights or obligations under any Credit Document without the prior
written consent of Agent and each Lender. All references in this Agreement
to any Person shall be deemed to include all successors and assigns of such
Person.
(b) Participations. Any Lender may at any time sell to one or more
--------------
banks or other financial institutions
70
<PAGE>
("Participants") participating interests in any Loan owing to such Lender,
------------
any Note held by such Lender, any Commitment of such Lender or any other
interest of such Lender under this Agreement and the other Credit
Documents. In the event of any such sale by a Lender of participating
interests, such Lender's obligations under this Agreement shall remain
unchanged, such Lender shall remain solely responsible for the performance
thereof, such Lender shall remain the holder of its Notes for all purposes
under this Agreement and Borrower and Agent shall continue to deal solely
and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement. Any agreement pursuant to which any such
sale is effected may require the selling Lender to obtain the consent of
the Participant in order for such Lender to agree in writing to any
amendment, waiver or consent of a type specified in clause (i), (ii), (iii)
-----------------------
or (iv) of Subparagraph 8.04(a) but may not otherwise require the selling
-------------------------------
Lender to obtain the consent of such Participant to any other amendment,
waiver or consent hereunder. Borrower agrees that any Lender which has
transferred any participating interest in its Commitment or Loans shall,
notwithstanding any such transfer, be entitled to the full benefits
accorded such Lender under Paragraph 2.10, Paragraph 2.11, and Paragraph
-------------- -------------- ---------
2.12, as if such Lender had not made such transfer. Any Lender which sells
----
a participating interest shall notify Borrower of such sale.
(c) Assignments. Any Lender may, at any time, sell and assign to any
-----------
Lender, any affiliate of a Lender or any other bank or financial
institution (individually, an "Assignee Lender") all or a portion of its
-------- ------
rights and obligations under this Agreement and the other Credit Documents
(such a sale and assignment to be referred to herein as an "Assignment")
----------
pursuant to an assignment agreement in the form of Exhibit H (an
---------
"Assignment Agreement"), executed by each Assignee Lender and such assignor
---------------------
Lender (an "Assignor Lender") and delivered to Agent for its acceptance and
---------------
recording in the Register; provided, however, that
-------- -------
(i) Without the written consent of Borrower and Agent (which
consent of Borrower and Agent shall not be unreasonably withheld), no
Lender may make any Assignment to any Assignee Lender which is not,
immediately prior to such Assignment, a Lender hereunder or an
Affiliate thereof; or
(ii) Without the written consent of Borrower and Agent (which
consent of Borrower and Agent shall not be unreasonably withheld), no
Lender may make any Assignment to any Assignee Lender if, after giving
effect to such Assignment, the Commitment of such
71
<PAGE>
Lender or such Assignee Lender would be less than Five Million Dollars
($5,000,000) (except that a Lender may make an Assignment which
reduces its Commitment to zero without the written consent of Borrower
and Agent); or
(iii) Without the written consent of Borrower and Agent (which
consent of Borrower and Agent shall not be unreasonably withheld), no
Lender may make any Assignment which does not assign and delegate an
equal pro rata interest in such Lender's Revolving Loans, Term Loan,
Commitments and all other rights, duties and obligations of such
Lender under this Agreement and the other Credit Documents.
Upon such execution, delivery, acceptance and recording of each Assignment
Agreement, from and after the Assignment Effective Date determined pursuant
to such Assignment Agreement, (A) each Assignee Lender thereunder shall be
a Lender hereunder with a Proportionate Share as set forth on Attachment 1
------------
to such Assignment Agreement (under the caption "Proportionate Share After
----------------------------
Assignment") and shall have the rights, duties and obligations of such a
Lender under this Agreement and the other Credit Documents, and (B) the
Assignor Lender thereunder shall be a Lender with a Proportionate Share as
set forth on Attachment 1 to such Assignment Agreement (under the caption
-----------------------------------------
"Proportionate Share After Assignment"), or, if the Proportionate Share of
the Assignor Lender has been reduced to 0%, the Assignor Lender shall cease
to be a Lender and to have any obligation to make any Loan; provided,
--------
however, that any such Assignor Lender which ceases to be a Lender shall
-------
continue to be entitled to the benefits of any provision of this Agreement
which by its terms survives the termination of this Agreement. Each
Assignment Agreement shall be deemed to amend Schedule I to the extent, and
----------
only to the extent, necessary to reflect the addition of each Assignee
Lender, the deletion of each Assignor Lender which reduces its
Proportionate Share to 0% and the resulting adjustment of Proportionate
Shares arising from the purchase by each Assignee Lender of all or a
portion of the rights and obligations of an Assignor Lender under this
Agreement and the other Credit Documents. On or prior to the Assignment
Effective Date determined pursuant to each Assignment Agreement, Borrower,
at its own expense, shall execute and deliver to Agent, in exchange for the
surrendered Revolving Loan Note or Term Loan Note of the Assignor Lender
thereunder, a new Revolving Loan Note or Term Loan Note to the order of
each Assignee Lender thereunder (with each new Revolving Loan Note to be in
an amount equal to the Commitment assumed by such Assignee Lender and each
new Term Loan Note to be in the original principal amount of the Term Loan
then held by such Assignee Lender) and, if the Assignor
72
<PAGE>
Lender is continuing as a Lender hereunder, a new Revolving Loan Note or
Term Loan Note to the order of the Assignor Lender (with the new Revolving
Loan Note to be in an amount equal to the Commitment retained by it and the
new Term Loan Note to be in the original principal amount of the Term Loan
retained by it). Each such new Revolving Loan shall be dated the Closing
Date, each such new Term Loan Note shall be dated the Revolving Loan
Maturity Note, and each such new Note shall otherwise be in the form of the
Note replaced thereby. The Notes surrendered by the Assignor Lender shall
be returned by Agent to Borrower marked "replaced". Each Assignee Lender
which was not previously a Lender hereunder and which is not incorporated
under the laws of the United States of America or a state thereof shall,
within three (3) Business Days of becoming a Lender, deliver to Borrower
and Agent two duly completed copies of United States Internal Revenue
Service Form 1001 or 4224 (or successor applicable form), as the case may
be, certifying in each case that such Lender is entitled to receive
payments under this Agreement without deduction or withholding of any
United States federal income taxes.
(d) Register. Agent shall maintain at its address referred to in
--------
Paragraph 8.01 a copy of each Assignment Agreement delivered to it and a
--------------
register (the "Register") for the recordation of the names and addresses of
--------
the Lenders and the Proportionate Shares of each Lender from time to time.
The entries in the Register shall be conclusive in the absence of manifest
error, and Borrower, Agent and the Lenders may treat each Person whose name
is recorded in the Register as the owner of the Loans recorded therein for
all purposes of this Agreement. The Register shall be available for
inspection by Borrower or any Lender at any reasonable time and from time
to time upon reasonable prior notice.
(e) Registration. Upon its receipt of an Assignment Agreement
------------
executed by an Assignor Lender and an Assignee Lender (and, to the extent
required by Subparagraph 8.05(c), by Borrower and Agent) together with
--------------------
payment to Agent by Assignor Lender of a registration and processing fee of
$2,500, Agent shall (i) promptly accept such Assignment Agreement and (ii)
on the Effective Date determined pursuant thereto record the information
contained therein in the Register and give notice of such acceptance and
recordation to the Lenders and Borrower. Agent may, from time to time at
its election, prepare and deliver to the Lenders and Borrower a revised
Schedule I reflecting the names, addresses and respective Proportionate
----------
Shares of all Lenders then parties hereto.
73
<PAGE>
8.06. Setoff; Security Interest.
-------------------------
(a) Setoff. In addition to any rights and remedies of the Lenders
------
provided by law, each Lender shall have the right, with the prior consent
of Agent but without prior notice to or consent of Borrower, any such
notice and consent being expressly waived by Borrower to the extent
permitted by applicable law, upon the occurrence and during the continuance
of an Event of Default, to set-off and apply against the Obligations any
amount owing from such Lender to Borrower. The aforesaid right of set-off
may be exercised by such Lender against Borrower or against any trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
receiver or execution, judgment or attachment creditor of Borrower or
against anyone else claiming through or against Borrower or such trustee in
bankruptcy, debtor in possession, assignee for the benefit of creditors,
receiver, or execution, judgment or attachment creditor, notwithstanding
the fact that such right of set-off may not have been exercised by such
Lender at any prior time. Each Lender agrees promptly to notify Borrower
after any such set-off and application made by such Lender, provided that
--------
the failure to give such notice shall not affect the validity of such set-
off and application.
(b) Security Interest. As security for the Obligations, Borrower
-----------------
hereby grants to Agent and each Lender, for the benefit of all Lenders, a
continuing security interest in any and all deposit accounts or moneys of
Borrower now or hereafter maintained with such Lender. Each Lender shall
have all of the rights of a secured party with respect to such security
interest.
8.07. No Third Party Rights. Nothing expressed in or to be implied
---------------------
from this Agreement is intended to give, or shall be construed to give, any
Person, other than the parties hereto and their permitted successors and assigns
hereunder, any benefit or legal or equitable right, remedy or claim under or by
virtue of this Agreement or under or by virtue of any provision herein.
8.08. Partial Invalidity. If at any time any provision of this
------------------
Agreement is or becomes illegal, invalid or unenforceable in any respect under
the law or any jurisdiction, neither the legality, validity or enforceability of
the remaining provisions of this Agreement nor the legality, validity or
enforceability of such provision under the law of any other jurisdiction shall
in any way be affected or impaired thereby.
8.09. Jury Trial. EACH OF BORROWER, THE LENDERS AND AGENT, TO THE
----------
FULLEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY AS TO ANY ISSUE
74
<PAGE>
RELATING HERETO IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO ANY CREDIT DOCUMENT.
8.10. Counterparts. This Agreement may be executed in any number of
------------
identical counterparts, any set of which signed by all the parties hereto shall
be deemed to constitute a complete, executed original for all purposes.
8.11. Confidentiality. Neither Agent nor any Lender shall disclose to
---------------
any Person any information with respect to Borrower or any of its Subsidiaries
which is furnished pursuant to this Agreement, except that Agent or any Lender
may disclose any such information (a) to its own directors, officers, employees,
auditors, counsel and other advisors and to its Affiliates; (b) to any other
Lender or Agent; (c) which is otherwise available to the public; (d) if required
or appropriate in any report, statement or testimony submitted to any
Governmental Authority having or claiming to have jurisdiction over such Lender
or Agent; (e) if required or appropriate in response to any summons or subpoena
or in connection with any litigation; (f) to comply with any Requirement of Law
applicable to such Lender or Agent; (g) to any Participant or Assignee Lender or
any prospective Participant or Assignee Lender, provided that such Participant
or Assignee Lender or prospective Participant or Assignee Lender agrees to be
bound by this Paragraph 8.11; or (h) otherwise with the prior consent of
--------------
Borrower; provided, however, that any disclosure made in violation of this
-------- -------
Agreement shall not affect the obligations of Borrower and its Subsidiaries
under this Agreement and the other Credit Documents.
[The first signature page follows.]
75
<PAGE>
IN WITNESS WHEREOF, Borrower, the Lenders and Agent have caused this
Agreement to be executed as of the day and year first above written.
BORROWER: ETEC SYSTEMS, INC.
By: /s/ Melanie Mock
---------------------------
Name: Melanie Mock
----------------------
Title: Treasurer
---------------------
AGENT: ABN AMRO BANK N.V.
By ABN AMRO North America, Inc.
By: /s/ Robin S. Yim
---------------------------
Name: Robin S. Yim
----------------------
Title: VP and Director
---------------------
By: /s/ Robert N. Hartinger
---------------------------
Name: Robert N. Hartinger
----------------------
Title: GVP and Director
---------------------
LENDERS: ABN AMRO BANK N.V.
By ABN AMRO North America, Inc.
By: /s/ Robin S. Yim
---------------------------
Name: Robin S. Yim
----------------------
Title: VP and Director
---------------------
By: /s/ Robert N. Hartinger
---------------------------
Name: Robert N. Hartinger
----------------------
Title: GVP and Director
---------------------
76
<PAGE>
SCHEDULE I
----------
LENDERS
-------
<TABLE>
<CAPTION>
Proportionate
Lender Share*
- ------ -------------
<S> <C>
ABN AMRO BANK N.V. 100.00000000%
- ------------------
Applicable Lending Office:
ABN AMRO Bank N.V.
San Francisco International
Branch
101 California Street
Suite 4550
San Francisco, CA 94111-5812
Address for Notices:
ABN AMRO Bank N.V.
San Francisco International
Branch
101 California Street
Suite 4550
San Francisco, CA 94111-5812
Attn: Robin S. Yim
Telephone:(415) 984-3712
Fax: (415) 362-3524
Wiring Instructions:
ABN AMRO Bank N.V.
ABA No.: 026-009-580
Account No.: 651001054541
Account Name: ABN AMRO San
Francisco
International
Branch
Reference: Etec Systems, Inc.
</TABLE>
* To be expressed as a percentage rounded to the eighth digit to the right of
the decimal point.
I-1
