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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997 COMMISSION FILE NUMBER: 0-26968
ETEC SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 94-3094580
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
26460 CORPORATE AVENUE, HAYWARD, CALIFORNIA 94545
(Address and Zip Code of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (510)783-9210
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK,
$0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on October 15, 1997 (based upon the average of the high and low
sales prices of such stock as of such date) was approximately $1.2 million.
As of October 15, 1997, 21,875,934 shares of the Registrant's Common Stock
were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement for the Annual Meeting of
Stockholders to be held on December 2, 1997 (the "Proxy Statement") is
incorporated by reference in Part III of this Form 10-K to the extent stated
herein.
This report, including exhibits, consists of 78 pages. The Index of Exhibits
is found on page 50.
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ETEC SYSTEMS, INC.
FOR THE YEAR ENDED JULY 31, 1997
PART I
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<S> <C> <C>
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 12
Item 3. Legal Proceedings..................................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders................................... 12
Executive Officers of the Registrant.................................................. 13
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters.................. 15
Item 6. Selected Consolidated Financial Data.................................................. 16
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 18
Item 8. Financial Statements and Supplementary Data........................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 48
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 49
Item 11. Executive Compensation................................................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 49
Item 13. Certain Relationships and Related Transactions........................................ 49
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K ..................... 50
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MEBES(R), CORE(R), Etec(R), the Etec logo, Polyscan(TM), and ALTA(R) are
trademarks of the Company. This Annual Report also includes trademarks and
trade names of other companies.
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PART I
ITEM 1. BUSINESS
This item 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. In addition to other
risks and uncertainties described in this document, certain risks and
uncertainties that could affect the Company's financial results include the
following: potential delays in shipments; cyclicity of the maskmaking and
semiconductor equipment industries; the capital spending decisions of
customers and potential customers; the development, market acceptance and
successful production of new products and enhancements; competitors' product
introductions and enhancements; risks associated with acquisitions, including
the Company's ability to successfully integrate acquired businesses, products,
or technologies; risks associated with stock market volatility; risks
associated with a reduction in cooperative development funding; and risks
associated with foreign operations, such as foreign exchange risk, import-
export controls, and political risks.
GENERAL DEVELOPMENT OF BUSINESS
Etec Systems, Inc. ("Etec" or the "Company") is a world leader in the
production of photomask ("mask") pattern generation equipment for the
semiconductor industry. Etec designs, develops, manufactures and markets
equipment that produces high precision photomasks, which are used to print
circuit patterns onto semiconductor wafers.
Etec was incorporated in 1989 to effect a leveraged buyout in 1990 of the
former Electron Beam Technology Division of The Perkin-Elmer Corporation,
which was itself the continuation of a business commenced in 1970.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about industry segments is set forth in Note 11 to the
Consolidated Financial Statements titled "Geographic Reporting and Customer
Concentration" in Part II, Item 8.
NARRATIVE DESCRIPTION OF BUSINESS
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 production 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. Etec sells its MEBES electron beam systems and its ALTA laser beam
systems at prices currently ranging from approximately $3.0 million to
approximately $11.7 million each, and accessories and upgrades at prices
currently ranging from less than $0.4 million to approximately $7.2 million
each. The Company also derives significant revenues from service and support
of its installed base of systems. The Company believes that over 280
commercial electron beam and laser beam mask pattern generation systems are
currently installed worldwide, of which approximately 190 have been produced
by Etec.
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.
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The Company also 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, MEBES
4500, or MEBES 4500S 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 $0.4 million, and upgrades
currently range in price from approximately $1.2 million to $7.2 million. From
time to time, the Company also repurchases, refurbishes, and resells a limited
number of systems.
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 130 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 $34.4 million, $32.7 million, and $31.5 million,
in fiscal 1997, fiscal 1996, and fiscal 1995, respectively.
Customers
The Company's customers include both captive and commercial (or "merchant")
mask shops. Semiconductor manufacturers employ their captive capabilities
largely to supply portions of 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 approximately 190 systems represents a significant competitive advantage.
Historically, the Company has sold a significant proportion of its systems
to a limited number of customers. Financial information about customer
concentration is set forth in Note 11 of Notes to the Consolidated Financial
Statements in Part II, Item 8. 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.
Sales and Marketing
Etec markets and distributes its products directly into its primary markets
which consist of North America, Japan, South Korea, Taiwan and Europe. The
Company maintains sales offices in California, Japan, France, South Korea and
Taiwan. 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 cycle 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. Installing and
integrating maskmaking equipment requires a substantial investment by a
customer. 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.
Backlog
The Company's backlog for products was approximately $158.6 million, $147.6
million, and $65.2 million at July 31, 1997, 1996, and 1995, respectively.
Etec defines backlog to include only those systems, accessories,
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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
at some time during the next twelve months. Cancellations prior to 30 days
before estimated shipment generally require payments of up to 50% of the
purchase price. Cancellation within the 30 days prior to the estimated shipment
date are generally not permitted. However, orders have occasionally been
rescheduled by the customer without compensatory payments. 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 $34.4 million, $17.4 million, and $10.5 million, in fiscal
1997, fiscal 1996, and fiscal 1995, respectively, representing 14%, 12%, and
13% of revenues, respectively.
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 Advanced Research
Projects Agency ("DARPA") 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 1997,
due to the completion of major development projects. For the years ended July
31, 1997 and 1996, $2.0 million and $0.7 million, respectively, of funds
received under cooperative development agreements were applied against
research, development and engineering expenses. Included in the $2.0 million
during fiscal 1997 is $1.5 million of funding which was recognized in the
fourth quarter of fiscal 1997 following completion of the first milestone under
a multi-million dollar research and development agreement. Excluding these cost
reimbursements, gross research, development and engineering spending was $36.4
million and $18.1 million in the years ended July 31, 1997 and 1996,
respectively. The increase primarily reflects the Company's increased
commitment to product development. Due to the Company's commitment to product
development, research, development and engineering expenses, net of third-party
funding, are expected to increase in future periods.
Supply of Materials and Purchased Components
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. The
Company's systems are designed to provide a low cost of production through high
performance, reliability, and ease of maintenance. To date, the Company has
generally been able to obtain adequate, timely delivery of critical
subassemblies and components, although it has experienced occasional delays.
The manufacture of certain components and subassemblies is very complex and
requires long lead times. Any inability to obtain adequate, timely deliveries
of subassemblies and components could prevent the Company from meeting
scheduled shipment dates, which could damage relationships with current and
prospective customers and, as a result, materially adversely affect the
Company's business, financial condition, and results of operations.
Competition
The maskmaking equipment industry is highly competitive. The Company believes
that the principal competitive factors in this industry are product
performance, service, and technical support, including system price, speed,
reliability, ease of upgrade, and the customer's cost of production as a result
of these and other factors. The Company believes that it presently competes
favorably with respect to each of these factors.
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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' desires for compatible mask layers and data
formats. However, the Company believes that to remain competitive, it will
require significant financial resources to invest in new product development,
to introduce next-generation systems on a timely basis, to expand and upgrade
its manufacturing capacity and to maintain customer service and support centers
worldwide.
The Company currently experiences competition worldwide from a number of
foreign and domestic manufacturers, including Hitachi, Ltd. and JOEL, Ltd.
("Japan Electron Optical Laboratory"). 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. 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.
Patents and Other Proprietary Rights
Etec holds over 50 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
measurement 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 16 pending U.S. patent applications and over 45 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 five 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.
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.
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 as well as, for Europe, certain
packaging or take-back packaging requirements. 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 at its Hayward, California campus. However, it has
discontinued monitoring due to the concurrence of the California Regional Water
Quality Board with the Company's proposal to cease groundwater monitoring at
the site.
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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 Conformite Europeenne("CE") mark
certification for shipments of electronic products to Europe. This includes
shipments of laser beam and electron beam products into the 15 European Union
countries. The Company's existing products require modification to meet
current and prospective EU regulations.
The Company is currently pursuing product design activities to obtain CE
certification, without any exception, on the CORE and ALTA laser beam product
lines. The Company is also actively pursuing the CE certification for its
current MEBES product lines. 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 could be barred from selling its products directly or
through its customers to users located in member countries of the EU. A
disruption in or loss of sales to the Company's European customers could
adversely affect the Company's overall 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 scope of future 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.
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.
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.
Employees
As of September 30, 1997, Etec had 902 full-time employees. None of the
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.
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FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Financial information regarding geographic operations is set forth in Note
11 of Notes to the Consolidated Financial Statements in Part II, Item 8.
ADDITIONAL RISK FACTORS
Cyclicity 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 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, the demand for maskmaking
equipment has at times been depressed while the demand for semiconductor
devices has remained strong. A downturn in demand for maskmaking equipment
would have a material adverse effect on the Company's business, financial
condition, and results of operations.
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
$3.0 million to $11.7 million each for systems, and from approximately $1.2
million to $7.2 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 first quarter of fiscal
1997 was delayed due to additional calibration and testing and was shipped in
the second quarter causing the Company to miss its revenue and earnings plan
for the first quarter of fiscal 1997.
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 cyclicity 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 different times.
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 shipment of its MEBES 4500S
in April 1997 and its ALTA 3500 system in October 1997. The MEBES 4500S is a
new 0.25 micron pattern generation ("PG") tool. The MEBES 4500S offers
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significant performance improvements over its predecessor, the MEBES 4500
(which was the most advanced PG tool in the world) such as higher throughput
and improved printing quality. The ALTA 3500 system is the next generation of
scanned-laser systems to produce masks for production of 0.25 micron devices.
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 4500S, MEBES 4500, ALTA 3500, and
ALTA 3000 systems. 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. During fiscal 1997 and 1998, the Company has invested
and will be investing heavily in research and development of new products which
could become the principal generators of the Company's revenues. Accordingly,
any technical or manufacturing difficulties with newly introduced systems would
have a material adverse effect on the Company's business, financial condition,
and results of operations.
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. 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.
There can be no assurance that the Company will continue to 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 could damage relationships with current and prospective
customers and, as a result, 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
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production, or to alter product designs, which could have a material adverse
effect on the Company's business or operations.
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, facility constraints, the lengthy lead time necessary to obtain
critical components and the need for highly skilled personnel. The failure of
the Company to keep pace with customer demand could lead to extensions of
delivery times, which could deter customers from placing additional orders,
and could adversely affect product quality. In an effort to keep pace with
customer demand and to shorten delivery times, the Company is outsourcing
significant subassemblies, 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 and Beaverton, Oregon. The Company's Hayward
campus is located in a seismically active area. Although the Company maintains
business interruption insurance, a major catastrophe (such as an earthquake or
other natural disaster) at the Hayward or Beaverton sites could result in a
prolonged interruption of the Company's business. All of the Company's
electron beam systems are produced in Hayward, and all of its ALTA laser beam
systems are produced in Beaverton. Neither facility is equipped to produce the
type of system produced by the other.
Dependence on Key Employees
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
to its competitors.
Acquisitions
The Company's business strategy includes expanding its product lines and
markets through internal product development or acquisitions. 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.
In March 1997, the Company's wholly-owned subsidiary, Etec Holding Co. GmbH,
acquired substantially all of the assets, properties, and business of Ebetech
Electron Beam Technology GmbH ("Ebetech") from VCB (the Venture Capital
Company of Siemens AG), MRS Technology, Inc. and a group of founding employees
in exchange for $4.7 million, net of cash acquired, and the issuance of a note
payable of $0.5 million. Ebetech (renamed "Etec EBT") is engaged in the
development and production of focused electron-beam test systems for
components such as printed circuit boards and multichip modules.
10
<PAGE>
In February 1996, Etec Polyscan, Inc. ("Etec Polyscan"), a wholly-owned
subsidiary of the Company, acquired substantially all of the assets and
assumed certain liabilities of Polyscan, Inc. ("Polyscan") a development-stage
company based in Tucson, Arizona that designs and develops laser direct
imaging systems for printed circuit board and multichip module applications,
for 350,000 shares of the Company's Common Stock. Etec Polyscan has received
orders for systems, but has not yet shipped a product, and has incurred losses
since its inception. The Company expects that Etec Polyscan will continue to
incur losses for the foreseeable future. The Company has never operated in the
market segments targeted by Etec Polyscan.
There can be no assurance that the Company will be able to integrate Etec
Polyscan or Etec EBT into its current business operations, or will be able to
integrate either subsidiary's technology into the Company's product
development strategy or to market and sell their products successfully, or
that their businesses will ever become profitable. There can be no assurance
of the effect of any future acquisition on the Company's business or operating
results.
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 $69.125. 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, has experienced extreme price
fluctuations that 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.
International Sales and Operations
Sales to customers in countries other than the United States accounted for
36%, 45%, and 44% of revenues in fiscal 1997, fiscal 1996, and fiscal 1995,
respectively, with an additional 36%, 21%, and 16% of revenues, respectively,
attributable to sales in the United States for shipment abroad. See Note 11 of
Notes to Consolidated Financial Statements for segment information. The
Company anticipates that international sales will continue to account for a
significant portion of revenues for the foreseeable future. Sales and
operations outside of the United States are subject to certain inherent risks,
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.
11
<PAGE>
ITEM 2. PROPERTIES
The Company currently leases the major facilities described below:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FOOTAGE USE
-------- -------------- ---
<C> <S> <C>
Hayward, California..... 210,000 Design, development and manufacture of electron beam systems;
corporate offices.
Beaverton, Oregon....... 70,000 Design, development and manufacture of laser systems.
Tucson, Arizona......... 44,000 Design and development of ultraviolet laser direct imaging systems.
Munich, Germany......... 16,000 Office, warehouse and manufacturing space for Etec EBT
(development of electron beam test systems) and offices for
sales and service operations in Germany.
</TABLE>
The Company also leases sales and service offices in France, Japan, South
Korea, and Taiwan. The Company has entered into an agreement to purchase
additional land in Oregon where it plans to construct a new facility to meet
development and manufacturing requirements for its advanced laser mask pattern
generation products. The Company also intends to expand the Hayward facility
to increase manufacturing capacity.
ITEM 3. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of fiscal 1997.
12
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the names, ages and positions held with the
Company of all executive officers of the Company. There are no family
relationships between any director or executive officer and any other director
or executive officer of the Company.
The executive officers of the Company, who are elected by and serve at the
discretion of the Board of Directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Stephen E. Cooper....... 51 Chairman of the Board, President and Chief Executive Officer
Frank E. Abboud......... 37 Vice President, Product Development
William D. Cole......... 42 Vice President, Worldwide Sales and Customer Support
Trisha A. Dohren........ 51 Vice President, Corporate Services
Mark A. Gesley.......... 42 Vice President, Technology Development
William D. Snyder....... 53 Vice President, Chief Financial Officer
Takeshi (John) Suzuki... 59 President, Etec Japan and Director
Paul A. Warkentin....... 44 Senior Vice President, Chief Operating Officer
</TABLE>
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 on a start-up team
for Forecast Systems, a software developer, from 1990 to 1992. From 1987 to
1990, Mr. Cooper served as President and Chief Executive Officer of Bipolar
Integrated Technology, a manufacturer of bipolar emitter coupled logic
semiconductors. 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 has been Vice President, Product Development since August 1996.
From June 1994 to July 1996, Mr. Abboud served as Vice President, Customer
Support. He served as manager of electron beam raster scan programs from
August 1991 to June 1994. During that time, he led several critical product
development programs and contracts with SEMATECH for the development of the
MEBES IV and MEBES 4000 products. Mr. Abboud holds a B.S.E.E. from California
State University at Sacramento and an M.S.E.E. from Santa Clara University.
Mr. Cole joined Etec as Vice President, Sales and Customer Support in July
1996. From 1993 to 1996, Mr. Cole served as Vice President, Sales for Genus,
Inc. a manufacturer of ion implementation and chemical vapor deposition
systems. Prior to Genus, Mr. Cole was National Sales Manager at Teradyne,
Inc., a world leader in automatic test equipment, telecommunications test, and
backplane connection systems, where he had responsibility for sales and
service for the Western United States. Mr. Cole holds a B.S. in
Economics/Statistics from the University of California at Berkeley.
Ms. Dohren, Vice President, Corporate Services since September 1997, 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. Ms. Dohren attended San Jose State University.
Dr. Gesley, Vice President, Technology Development, joined Etec in 1988 as
the electron optics task leader for the MEBES IV product. He holds five
patents related to the MEBES thermal field emission column. Before joining
Etec, Dr. Gesley was with the electron-beam lithography group at the IBM
Thomas L. Watson Research
13
<PAGE>
Center in Yorktown Heights, New York. 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. Snyder, Vice President, Chief Financial Officer, joined Etec in August
1997. From 1990 to 1997, Mr. Snyder was Chief Financial Officer of Integrated
Device Technology. Mr. Snyder has over 25 years of electronics industry
experience with TTX, Inc., Actrix Computer Corporation, Zilog, Inc., Digital
Equipment Corporation, and Motorola. Mr. Snyder holds an M.B.A. from the
University of Arizona, and a B.S. and a M.S. from the University of Illinois.
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 Systems
Japan in 1977. Mr. Suzuki has worked in the electronics industry since 1962
and has extensive international trade experience.
Dr. Warkentin was appointed Vice President, Chief Operating Officer, in
September 1997. From July 1995 to August 1997, he was Vice President,
Marketing. From 1993 to 1995, he was 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 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.
14
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 1997 HIGH LOW
----------- ------- -------
<S> <C> <C>
First Quarter............................................. $38.250 $23.125
Second Quarter............................................ 44.750 25.407
Third Quarter............................................. 45.125 27.500
Fourth Quarter............................................ 54.250 33.375
<CAPTION>
FISCAL 1996 HIGH LOW
----------- ------- -------
<S> <C> <C>
First Quarter (from October 24, 1995)..................... $11.000 $10.000
Second Quarter............................................ 13.750 8.000
Third Quarter............................................. 24.750 10.750
Fourth Quarter............................................ 37.000 17.250
</TABLE>
As of October 15, 1997, there were 248 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 $50.0 million financing facility.
In addition, the lease of the Company's Hayward, California property restricts
the Company from paying cash dividends under certain conditions.
15
<PAGE>
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------------------------------
1997 1996 1995 1994 1993
-------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Products...................... $206,561 $112,940 $51,395 $40,731 $ 31,650
Services...................... 34,353 32,705 31,521 27,979 26,932
-------- -------- ------- ------- --------
240,914 145,645 82,916 68,710 58,582
-------- -------- ------- ------- --------
Cost of revenue:
Cost of products.............. 98,416 56,632 27,015 25,559 25,450
Cost of services.............. 25,871 23,410 20,604 17,670 16,488
-------- -------- ------- ------- --------
124,287 80,042 47,619 43,229 41,938
-------- -------- ------- ------- --------
Gross profit................... 116,627 65,603 35,297 25,481 16,644
-------- -------- ------- ------- --------
Operating expenses:
Research, development and
engineering.................. 34,373 17,402 10,497 5,102 11,034
Selling, general and
administrative............... 27,939 21,269 13,397 10,803 10,049
Write-off of in-process
technology acquired.......... 3,874 6,269 -- -- --
-------- -------- ------- ------- --------
66,186 44,940 23,894 15,905 21,083
-------- -------- ------- ------- --------
Income (loss) from operations.. 50,441 20,663 11,403 9,576 (4,439)
Interest expense............... (988) (1,824) (4,238) (5,115) (5,880)
Other income (expense), net.... 3,821 2,669 (352) (533) 410
-------- -------- ------- ------- --------
Income (loss) before income tax
(benefit) provision and
extraordinary items........... 53,274 21,508 6,813 3,928 (9,909)
Income tax (benefit) provision. 18,835 (16,283) 2,289 2,316 1,500
-------- -------- ------- ------- --------
Income (loss) before extraordi-
nary items.................... 34,439 37,791 4,524 1,612 (11,409)
Extraordinary (loss) gain on
early extinguishment of debt.. -- (930) 5,412 -- --
-------- -------- ------- ------- --------
Net income (loss).............. 34,439 36,861 9,936 1,612 (11,409)
Accretion of mandatorily
redeemable convertible
preferred stock............... -- 1,078 3,092 2,946 2,740
-------- -------- ------- ------- --------
Net income (loss) attributable
to Common Stockholders........ $ 34,439 $ 35,783 $ 6,844 $(1,334) $(14,149)
======== ======== ======= ======= ========
PER SHARE DATA:
Income (loss) before
extraordinary items.......... $ 1.57 $ 2.07 $ 0.31 $ 0.12 $ (0.94)
Extraordinary items........... -- (0.05) 0.37 -- --
-------- -------- ------- ------- --------
Net income (loss)............. $ 1.57 $ 2.02 $ 0.68 $ 0.12 $ (0.94)
======== ======== ======= ======= ========
Weighted average common
shares(1)..................... 22,003 18,296 14,594 14,008 12,168
======== ======== ======= ======= ========
</TABLE>
(1) Computed on the basis described in Note 1 of Notes to Consolidated
Financial Statements.
(See unaudited quarterly data at page 24 of Management's Discussion and
Analysis of Financial Condition and Results of Operations.)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
-------- -------- ------- ------- -------
BALANCE SHEET DATA: (IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total assets......................... $284,543 $208,871 $85,984 $62,782 $66,151
Mandatorily redeemable convertible
preferred stock..................... $ -- $ -- $76,397 $54,362 $44,317
Long-term debt, including capital
lease obligations................... $ -- $ 6,939 $16,866 $31,251 $46,573
</TABLE>
The Company has not declared dividends.
16
<PAGE>
FACTORS AFFECTING COMPARABILITY
Fiscal 1997 net income
. reflects the inclusion of a $1.2 million discrete release of a valuation
allowance previously recorded against deferred tax assets. See Note 6 of
Notes to Consolidated Financial Statements.
. reflects the write-off of $3.9 million of in-process technology acquired.
See Note 12 of Notes to Consolidated Financial Statements.
Fiscal 1996 net income
. reflects the inclusion of an extraordinary loss of $0.9 million recorded as
a result of the early extinguishment of debt. See Note 3 of Notes to
Consolidated Financial Statements.
. reflects the write-off of $6.3 million of in-process technology acquired.
See Note 12 of Notes to Consolidated Financial Statements.
. reflects a $23.0 million tax benefit realized as a result of the discrete
release of a portion of the valuation allowance previously recorded against
deferred tax assets. See Note 6 of Notes to Consolidated Financial
Statements.
Fiscal 1995 net income
. 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.
17
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This item 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. A description of these
statements appears at the end of this Item and factors that may affect future
results are also discussed in Item 1.
RESULTS OF OPERATIONS
Years Ended July 31, 1997 and July 31, 1996
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 83% to $206.6
million from $112.9 million for the years ended July 31, 1997 and 1996,
respectively. This increase reflects the sale of 13 additional systems, higher
average selling prices, changes in product mix, and an increase in the sales
of accessories and upgrades.
Service revenue increased 5% to $34.4 million from $32.7 million for the
years ended July 31, 1997 and 1996, respectively. This increase primarily
reflects generally higher service activity caused by an increase in the number
of systems under service contracts.
Gross Profit. The Company's gross profit on product revenue increased 92% to
$108.1 million from $56.3 million for the years ended July 31, 1997 and 1996,
respectively.
The increase in gross profit on product revenue was due both to increased
product shipments and a higher gross profit margin on product revenue, which
increased to 52% from 50% for the years ended July 31, 1997 and 1996,
respectively. The increase in product gross margin is primarily attributable
to generally higher average selling prices for the Company's products and an
increase in the level of sales of accessories (which tend to have higher gross
margins), as well as efficiencies resulting from improvements in
manufacturing. There can be no assurance that the Company will be able to
maintain the increase in gross margin on product revenue in future periods.
The Company's gross profit on service revenue decreased 9% to $8.5 million
from $9.3 million for the years ended July 31, 1997 and 1996, respectively.
Gross margin on service revenue was 25% and 28% for the years ended July 31,
1997 and 1996, respectively. The decreases in gross profit and gross margin
reflect an investment in service personnel and training to support the
increasing number of systems serviced. The Company expects that such costs
will continue to increase with the result being a further decline in service
margins for fiscal 1998.
Research, Development and Engineering. Research, development, and
engineering expenses, net of third-party funding under cooperative development
agreements, increased 98% to $34.4 million, representing 14% of revenue, from
$17.4 million, representing 12% of revenue, for the years ended July 31, 1997
and 1996, respectively.
For the years ended July 31, 1997 and 1996, $2.0 million and $0.7 million,
respectively, of funds received under cooperative development agreements were
applied against research, development and engineering expenses. Included in
the $2.0 million during fiscal 1997 is $1.5 million of funding which was
recognized in the fourth quarter of fiscal 1997 following completion of the
first milestone under a multi-million dollar research and development
agreement (described below). Excluding these cost reimbursements, gross
research, development and engineering spending was $36.4 million and $18.1
million in the years ended July 31, 1997 and 1996, respectively. The increase
primarily reflects the Company's increased commitment to product development.
Due to the Company's commitment to product development, research, development,
and engineering expenses, net of third party funding, are expected to increase
in future periods.
In July 1997, the Company signed a multi-million dollar agreement with a
private consortium to develop a maskmaking system for 0.15 micron device
generation production and 0.13 micron device development. In
18
<PAGE>
addition, in June 1997, the Company entered into a cost-reimbursement research
and development agreement with the United States Department of Defense
Advanced Research Projects Agency ("DARPA"). No funding was recognized under
the DARPA agreement during fiscal 1997.
The Company's success in developing and selling new and enhanced products
depends upon a variety of factors, including accurate prediction of future
customer requirements three or more years in advance of sales, introduction of
new products on schedule, cost-effective manufacturing, and product
performance in the field. There can be no assurance that the Company will be
successful in selecting, developing, manufacturing, and marketing new products
or enhancements of existing products.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased to $27.9 million, representing 12% of revenue, from $21.3
million, representing 15% of revenue, for the years ended July 31, 1997 and
1996, respectively. The increase in selling, general, and administrative
expenses was primarily due to market development fees on certain laser beam
systems sold in Asia, costs resulting from an increase in staffing, increased
rent resulting from the Company's new administrative facility and increased
profit sharing expense.
Write-Off of In-Process Technology Acquired. In the third quarter of fiscal
1997, the Company acquired all of the shares of Ebetech Electron Beam
Technology GmbH ("Ebetech") from VCB (the Venture Capital Company of Siemens
AG), MRS Technology, Inc. and a group of founding employees for $4.7 million,
net of cash acquired, and the issuance of a note payable of $0.5 million.
Approximately $3.9 million of the excess of the purchase price over the fair
value of the net assets acquired was allocated to in-process technology and
was written off in the third quarter of fiscal 1997 because of the uncertainty
as to realization. In the third quarter of fiscal 1996, the Company acquired
substantially all of the assets and assumed certain specified liabilities of
Polyscan, Inc. in exchange for 350,000 shares of the Company's Common Stock.
The excess of the purchase price over the fair value of the net assets of $6.3
million was allocated to in-process technology acquired, which because of the
uncertainty as to realization, the Company wrote off in the third quarter of
fiscal 1996.
Interest Expense. Interest expense for the years ended July 31, 1997 and
1996 was $1.0 million and $1.8 million, respectively. The decrease in interest
expense is attributable to the reduction and refinancing of debt during the
fourth quarter of fiscal 1996 and to the early repayment, in May 1997, of the
$7.5 million balance outstanding on a term note.
Other Income (Expense), Net. Other income was $3.8 million for the year
ended July 31, 1997 compared with $2.7 million in the year ended July 31,
1996. Included in other income for the year ended July 31, 1997 is $3.3
million of interest income generated by the Company's investment portfolio.
Included in other income for the year ended July 31, 1996 is approximately
$1.8 million of interest earned on the investment of the proceeds from Etec's
initial public offering (the "IPO"), as well as $0.8 million of transaction
gains on the redemption of the minority interest in Etec Systems Japan.
Income Tax Provision (Benefit). During the year ended July 31, 1997, the
Company recorded an income tax provision of $18.8 million. During the year
ended July 31, 1996, the Company recorded an income tax benefit of $16.3
million. Reflected in the provision (benefit) for the years ended July 31,
1997 and 1996, respectively, are the discrete releases of $1.2 million and
$23.0 million of income tax benefits recorded as a result of releasing a
portion of the valuation allowance previously recorded against the Company's
deferred tax assets. Management's evaluation of the recoverability of the
Company's deferred tax assets is based in part upon the current product
backlog and the Company's presumed ability to increase manufacturing capacity.
Management has fully reserved deferred tax assets that would (if at all) be
realized more than one year in the future. Because of the uncertainty of
realization, management will continue to evaluate the recoverability of the
Company's deferred tax assets. The Company's provision for income taxes for
the year ended July 31, 1997 reflects the discrete release of valuation
allowances, the utilization of tax credits and tax benefits from the use of a
foreign sales corporation, partially offset by foreign earnings taxed at
higher rates and the write-off of in-process technology related to the
acquisition of Ebetech for which the Company will not receive a tax benefit.
The benefit
19
<PAGE>
for income taxes for the year ended July 31, 1996 primarily reflects taxes
payable by the Company's foreign subsidiaries offset by a change in the
valuation allowance.
Years Ended July 31, 1996 and July 31, 1995
Revenue. Product revenue increased 120% to $112.9 million from $51.4 million
for the years ended July 31, 1996 and 1995, respectively. This increase
reflects the sale of 11 additional systems, higher average selling prices, and
changes in product mix toward a higher-priced new product (the MEBES 4500)
introduced in the fourth quarter of fiscal 1995, offset by a reduction in the
sales of upgrades and accessories.
Service revenue increased 4% to $32.7 million from $31.5 million for the
years ended July 31, 1996 and 1995, respectively, due primarily to price
increases on service contracts and an increase in the number of systems
serviced.
Gross Profit. The Company's gross profit on product revenue increased 131%
to $56.3 million from $24.4 million for the years ended July 31, 1996 and
1995, respectively.
Product gross margins increased to 50% at July 31, 1996 from 47% at July 31,
1995. Increased gross profit and the accompanying increased gross margin
percentages were due to an increase in volume, which includes a shift towards
shipments with generally higher average selling prices as well as efficiencies
from improvements in manufacturing.
The Company's gross profit on service revenue decreased 15% to $9.3 million
from $10.9 million for the years ended July 31, 1996 and 1995, respectively.
Gross margin on service revenue was 29% and 35% for the years ended July 31,
1996 and 1995, respectively. The decrease in margin reflects increased costs
of training service personnel to support the increasing number of systems
serviced by the Company.
Research, Development, and Engineering. Research, development, and
engineering expenses, net of third-party funding under cooperative development
agreements, increased to $17.4 million, representing 12% of revenue, from
$10.5 million, representing 13% of revenue, for the years ended July 31, 1996
and 1995, respectively. This increase primarily reflects a reduction in third-
party funding. For the years ended July 31, 1996 and 1995, $0.7 million and
$6.1 million, respectively, of funds received under the cooperative
development agreements were applied against research, development, and
engineering expenses. Excluding these cost reimbursements, gross research,
development, and engineering spending was $18.1 million and $16.6 million in
each of the years ended July 31, 1996 and 1995, respectively. The increase in
gross spending is primarily attributable to the advanced procurement of
materials for the Company's current development projects.
Selling, General, and Administrative. Selling, general, and administrative
expenses increased to $21.3 million, representing 15% of revenue, from $13.4
million, representing 16% of revenue, for the years ended July 31, 1996 and
1995, respectively. The increase in selling, general, and administrative
expenses was partially due to rent associated with the leaseback of facilities
previously owned, market development fees on certain laser beam systems sold
in Asia, additional costs associated with becoming a public company, increased
profit sharing expense, and costs resulting from an increase in staffing.
The Company was party to certain cooperative development agreements that
provided partial funding of general and administrative costs associated with
research and development projects. For the year ended July 31, 1995, $1.2
million of the funding received under these agreements was offset against
selling, general, and administrative expenses. Excluding these cost
reimbursements, gross selling, general, and administrative spending was $14.6
million for the year ended July 31, 1995. No such funding was offset against
selling, general, and administrative expenses for the year ended July 31,
1996.
Write-Off of In-Process Technology Acquired. In the third quarter of fiscal
1996, the Company acquired substantially all of the assets and assumed certain
specified liabilities of Polyscan, Inc. in exchange for 350,000 shares of the
Company's Common Stock. The excess of the purchase price over the fair value
of the net assets
20
<PAGE>
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.
Interest Expense. Interest expense for the years ended July 31, 1996 and
1995 was $1.8 million and $4.2 million, respectively. This decrease in
interest expense reflects the following: (i) the repayment during the second
half of fiscal 1995 of approximately $6.0 million of senior secured debt; (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); (iii) the repayment of approximately $9.3 million
of senior secured notes during the first half of fiscal 1996; and (iv) the
repayment of the remaining senior secured notes during the fourth quarter of
fiscal 1996.
Other Income (Expense), Net. Other income was $2.7 million for the year
ended July 31, 1996. Included in other income is approximately $1.8 million of
interest earned on the investment of the proceeds from the IPO, as well as
$0.8 million of transaction gains on the redemption of the minority interest
in Etec Systems Japan in the first quarter of fiscal 1996. This represented
gains based on foreign exchange fluctuations because the minority interest had
been denominated in Japanese yen.
Income Tax (Benefit) Provision. During the year ended July 31, 1996, the
Company recognized a $23.0 million income tax benefit as a result of the
discrete release of a portion of the valuation allowance previously recorded
against its deferred tax assets. The Company recorded a benefit for income
taxes for the year ended July 31, 1996 of $16.3 million and a provision for
income taxes for the year ended July 31, 1995 of $2.3 million, primarily
reflecting taxes payable by the Company's foreign subsidiaries and the $23.0
million income tax benefit in fiscal 1996.
Extraordinary Loss on Early Extinguishment of Debt. During the year ended
July 31, 1996, the Company paid $18.7 million of its senior secured notes
before their due dates. As a result of this repayment of the senior secured
notes in full, the Company recorded an extraordinary loss of approximately
$0.9 million related to unamortized debt issuance costs. During the year ended
July 31, 1995, the Company paid $19.7 million of subordinated notes payable
and accrued interest before their due dates. As a result of this repayment,
the Company recorded an extraordinary gain of approximately $5.4 million.
Liquidity and Capital Resources
In addition to its operational cash flows, in fiscal 1997 and fiscal 1996,
the Company raised approximately $108.0 million from the IPO, two additional
public offerings, and a private placement. In fiscal 1997 and fiscal 1995, the
Company received proceeds of $5.0 million and $11.0 million, respectively,
from the sale and leaseback financings of its headquarters campus.
The Company has spent approximately $27.1 million for net capital
expenditures in fiscal 1997 primarily to purchase testing, process lab, and
other equipment, upgrade its manufacturing facilities, and implement an
enterprise-wide business software system. The Company has budgeted capital
expenditures of approximately $80.0 million for fiscal 1998, approximately
$40.0 million of which the Company intends to finance through various
financing mechanisms. In October 1997, the Company purchased approximately 4.2
acres of land in Hayward, California. This site provides the Company
flexibility for future expansion of its Hayward-based operations. In addition,
in August 1997, the Company entered into an agreement to purchase
approximately 15.2 acres of land in Hillsboro, Oregon. The Company plans to
construct a new facility on the site to meet development and manufacturing
requirements for its advanced laser mask pattern generation products.
As of July 31, 1997, the Company had cash and cash equivalents and
marketable securities of $90.2 million. The Company believes that existing
cash balances (including cash equivalents and marketable securities), together
with existing sources of liquidity, including cash flows from operating
activities and amounts available under the existing $50.0 million revolving
line of credit, will provide adequate cash to fund its operations for at least
the next twelve months. The Company also believes that success in its industry
requires substantial capital
21
<PAGE>
in order to maintain the flexibility to take advantage of opportunities as
they arise. As such, the Company may effect additional equity or debt
financings to fund such activities.
Operating Activities
Net cash provided by operating activities for the fiscal years ended July
31, 1997, 1996, and 1995 was $19.0 million, $3.5 million, and $9.1 million,
respectively.
Cash flows from operating activities in fiscal 1997 primarily reflected net
income of $34.4 million, adjusted by noncash items (which include $2.1 million
of deferred taxes, the write-off of in-process technology acquired of $3.9
million, and depreciation and amortization of $4.6 million); increases in
accounts receivable of $18.5 million, inventory of $14.9 million and accounts
payable and accrued and other liabilities of $9.5 million.
Cash flows from operating activities in fiscal 1996 primarily reflected net
income of $36.9 million, adjusted by noncash items (which include $23.6
million of deferred taxes, partially offset by an extraordinary loss on early
extinguishment of debt of $0.9 million, the write-off of in-process technology
acquired of $6.3 million, and depreciation and amortization of $1.6 million);
and increases in accounts receivable of $15.7 million, inventory of $25.4
million and accounts payable and accrued and other liabilities of $23.1
million.
Cash flows from operating activities in fiscal 1995 primarily reflected net
income of $9.9 million, adjusted by noncash items (which include an
extraordinary gain of $5.4 million, partially offset by depreciation and
amortization of $3.0 million), increases in accounts receivable, inventory,
other assets, and accrued and other liabilities of $14.7 million; and
decreases in accounts payable of $1.2 million.
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, the increase in unit shipments, customer requested
delivery dates, the discounting of accounts receivable and the timing of
payments to vendors. The significant increase in inventory during fiscal 1997
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
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 and installed. Therefore, the amount of customer
advances at each reporting period fluctuates based on the number of systems
that are on order, the timing of when orders are received, and each system's
status within the manufacturing cycle. Advances from customers decreased to
$11.5 million at July 31, 1997 from $24.1 million at July 31, 1996; these
advances are included in accrued and other liabilities on the Company's
balance sheet. The backlog for products increased to $158.6 million at
July 31, 1997 from $147.6 million at July 31, 1996.
Investing Activities
Net cash used in investing activities was $40.4 million and $37.9 million
for the years ended July 31, 1997 and 1996, respectively. Net cash provided by
investing activities was $7.2 million for the year ended July 31, 1995. Net
cash used in investing activities for the fiscal year ended July 31, 1997
primarily reflected net capital expenditures of $27.1 million, net purchases
of marketable securities of $10.1 million, and payment for the purchase of
Ebetech, net of cash acquired, of $4.7 million. Cash used in investing
activities for the fiscal year ended July 31, 1996 primarily reflected net
capital expenditures of $11.7 million and net purchases of marketable
securities of $24.2 million. Cash provided by investing activities for the
fiscal year ended July 31, 1995 primarily reflects the sale of the Company's
headquarters campus.
As discussed above, in fiscal 1997, the Company purchased all of the shares
of Ebetech for $4.7 million, net of cash acquired, and assumed a $0.5 million
note payable. During fiscal 1997, the Company completed construction of a new
administrative building at a cost of $5.0 million. Pursuant to an August 1996
financing
22
<PAGE>
commitment, the Company sold the building to its existing landlord for the
$5.0 million cost of the building and leased back the property for 15 years
with options to renew the lease for four five-year periods. Concurrent with
the August 1996 financing commitment, the Company also agreed to amend the
existing warrant agreements with the landlord and the landlord's bank. The
landlord of the property surrendered its warrant to acquire 159,314 shares of
the Company stock in exchange for a new warrant to acquire 68,768 shares of
the Company stock at the same exercise price per share. The new warrant was
exercised in September 1997. In addition, the landlord's bank surrendered its
warrant to acquire 53,104 shares of Company stock in exchange for 22,461
shares of Common Stock. This amendment provided for a refund to the landlord
of $2.6 million of the purchase price related to the sale and leaseback
transaction of the Company's headquarters campus which the Company had
concluded in fiscal 1995. The Company has accounted for the $2.6 million
refund payment as a reduction in the deferred gain on sale of asset. During
fiscal 1995, the Company had previously sold its headquarters campus for
approximately $11.0 million and leased the property back for an initial term
of fifteen years.
Financing Activities
Net cash provided by financing activities for the years ended July 31, 1997,
1996, and 1995 was $33.5 million, $56.2 million, and $0.2 million,
respectively. Net cash provided by financing activities for the year ended
July 31, 1997 of $33.5 million primarily reflected cash inflows from proceeds
of approximately $39.3 million from the Company's December 1996 public
offering and $3.8 million of financing from an intermediary, net of
repayments. These cash inflows were primarily offset by the early repayment of
the Company's $10.0 million term note during fiscal 1997 and the repurchase of
warrants from the lessor of the Company's headquarters campus for $2.6
million.
In April 1997, the Company increased its existing $20.0 million revolving
line of credit to a $50.0 million line of credit and also extended the term of
the line for an additional year to May 1999. The credit facility, which
currently remains unused, bears interest at the London Interbank Offered Rate
(5.8% on July 31, 1997) plus 1.25%. The terms of the financing facility
require the Company to comply with certain financial and restrictive
covenants, including maintenance of certain financial ratios and minimum net
worth criteria, restrictions on the incurrence of indebtedness and certain
dividend restrictions. The Company is in compliance with these covenants.
During fiscal 1996, the Company repaid $18.7 million of its senior secured
indebtedness, $8.8 million of which was extinguished with $10.0 million of
unsecured replacement financing from another lender, and repaid $3.6 million
of senior subordinated notes out of the proceeds of the IPO. During fiscal
1995, the Company repaid $6.0 million of its senior secured notes. During
fiscal 1997, fiscal 1996, and fiscal 1995, the Company received interim
financing on foreign sales, net of repayments, of $3.8 million, $0.2 million,
and $6.2 million, respectively.
23
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA
The following tables present certain unaudited quarterly data for the eight
quarters ended July 31, 1997, and such data expressed as a percentage of total
revenue and the gross margin data for products and services for such quarters.
In the opinion of management, this information has been presented on the same
basis as the audited consolidated financial statements appearing elsewhere in
this Annual Report on Form 10-K, and all necessary adjustments have been
included in the amounts stated below to present fairly the unaudited quarterly
results when read in conjunction with the audited consolidated financial
statements of the Company. Results of operations for any quarter are not
necessarily indicative of the results to be expected for the entire fiscal
year or for any future period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------------------------------------
JULY JAN. OCT. JULY JAN. OCT.
31, APRIL 30, 31, 31, 31, APRIL 30, 31, 31,
1997 1997 1997 1996 1996 1996 1996 1995
------- --------- ------- ------- ------- --------- ------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products.............. $63,133 $61,717 $45,309 $36,402 $38,957 $33,358 $23,522 $17,103
Services.............. 9,513 7,984 8,371 8,485 8,653 8,364 8,083 7,605
------- ------- ------- ------- ------- ------- ------- -------
72,646 69,701 53,680 44,887 47,610 41,722 31,605 24,708
------- ------- ------- ------- ------- ------- ------- -------
Cost of revenue:
Products.............. 30,314 28,827 21,723 17,552 19,026 16,399 12,826 8,381
Services.............. 6,528 6,149 6,642 6,552 6,616 5,875 5,548 5,371
------- ------- ------- ------- ------- ------- ------- -------
36,842 34,976 28,365 24,104 25,642 22,274 18,374 13,752
------- ------- ------- ------- ------- ------- ------- -------
Gross profit:
Products.............. 32,819 32,890 23,586 18,850 19,931 16,959 10,696 8,722
Services.............. 2,985 1,835 1,729 1,933 2,037 2,489 2,535 2,234
------- ------- ------- ------- ------- ------- ------- -------
35,804 34,725 25,315 20,783 21,968 19,448 13,231 10,956
------- ------- ------- ------- ------- ------- ------- -------
Operating expenses:
Research, development,
and engineering...... 10,307 9,470 8,115 6,481 5,411 5,152 3,568 3,271
Selling, general, and
administrative....... 7,467 8,287 6,290 5,895 6,296 5,749 4,771 4,453
Write-off of in-
process technology
acquired............. -- 3,874 -- -- -- 6,269 -- --
------- ------- ------- ------- ------- ------- ------- -------
17,774 21,631 14,405 12,376 11,707 17,170 8,339 7,724
------- ------- ------- ------- ------- ------- ------- -------
Income from operations.. 18,030 13,094 10,910 8,407 10,261 2,278 4,892 3,232
Interest expense........ (191) (287) (266) (244) (362) (338) (512) (612)
Other income (expense),
net.................... 1,019 981 1,027 794 526 543 671 929
------- ------- ------- ------- ------- ------- ------- -------
Income before income tax
(benefit) provision and
extraordinary
items.................. 18,858 13,788 11,671 8,957 10,425 2,483 5,051 3,549
Income tax (benefit)
provision.............. 6,595 6,182 4,085 1,973 (5,220) (13,213) 1,263 887
------- ------- ------- ------- ------- ------- ------- -------
Income before
extraordinary
items.................. 12,263 7,606 7,586 6,984 15,645 15,696 3,788 2,662
Extraordinary loss on
early extinguishment of
debt................... -- -- -- -- (630) -- (300) --
------- ------- ------- ------- ------- ------- ------- -------
Net income.............. $12,263 $ 7,606 $ 7,586 $ 6,984 $15,015 $15,696 $ 3,488 $ 2,662
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Fiscal 1997 results
. Third quarter fiscal 1997 net income reflects the inclusion of a $1.2
million discrete release of a valuation allowance previously recorded
against deferred tax assets. See Note 6 of Notes to Consolidated Financial
Statements.
. Third quarter fiscal 1997 net income reflects the write-off of in-process
technology acquired of $3.9 million. See Note 12 of Notes to Consolidated
Financial Statements.
24
<PAGE>
Fiscal 1996 results
. Fourth quarter fiscal 1996 net income reflects the inclusion of an
extraordinary loss of $0.6 million recorded as a result of the early
extinguishment of debt. See Note 3 of Notes to Consolidated Financial
Statements.
. Third quarter fiscal 1996 net income reflects the inclusion of an
extraordinary loss of $0.3 million recorded as a result of the early
extinguishment of debt. See Note 3 of Notes to Consolidated Financial
Statements.
. Third quarter fiscal 1996 net income reflects the write-off of in-process
technology acquired of $6.3 million. Reflected in the fourth and third
quarters of fiscal 1996 are $7.6 million and $15.4 million discrete
releases, respectively, of valuation allowances previously recorded against
deferred tax assets. See Notes 12 and 6, respectively, of Notes to
Consolidated Financial Statements.
Fiscal 1995 results
. Fourth quarter fiscal 1995 net income reflects the inclusion of an
extraordinary gain of $5.4 million recorded as a result of the early
extinguishment of $19.7 million of senior subordinated notes payable and
accrued interest. See Note 3 of Notes to Consolidated Financial Statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
JULY 31, APRIL 30, JAN. 31, OCT. 31, JULY 31, APRIL 30, JAN. 31, OCT. 31,
1997 1997 1997 1996 1996 1996 1996 1995
-------- --------- -------- -------- -------- --------- -------- --------
PERCENTAGE OF REVENUE:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Products............... 87% 89% 84% 81% 82% 80% 74% 69%
Services............... 13 11 16 19 18 20 26 31
--- --- --- --- --- --- --- ---
100% 100% 100% 100% 100% 100% 100% 100%
=== === === === === === === ===
Gross margin:
Products............... 45% 47% 44% 42% 42% 41% 34% 35%
Services............... 4 3 3 4 4 6 8 9
--- --- --- --- --- --- --- ---
49 50 47 46 46 47 42 44
--- --- --- --- --- --- --- ---
Operating expenses:
Research, development,
and engineering....... 14 14 15 14 11 12 11 13
Selling, general and
administrative........ 10 12 12 13 13 14 15 18
Write-off of in-process
technology acquired... -- 5 -- -- -- 15 -- --
--- --- --- --- --- --- --- ---
24 31 27 27 24 41 26 31
--- --- --- --- --- --- --- ---
Income from operations.. 25 19 20 19 22 6 16 13
Interest expense........ -- -- -- (1) (1) (1) (2) (3)
Other income (expense),
net.................... 1 1 2 2 1 1 2 4
--- --- --- --- --- --- --- ---
Income before income tax
(benefit) provision and
extraordinary items.... 26 20 22 20 22 6 16 14
Income tax (benefit)
provision.............. 9 9 8 4 (11) (32) 4 4
--- --- --- --- --- --- --- ---
Income before
extraordinary
items.................. 17 11 14 16 33 38 12 10
Extraordinary loss on
early extinguishment of
debt................... -- -- -- -- (1) -- (1) --
--- --- --- --- --- --- --- ---
Net income.............. 17% 11% 14% 16% 32% 38% 11% 10%
=== === === === === === === ===
</TABLE>
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
Statements in this report which are prefaced with words such as "expects",
"anticipates", "believes", and similar words and other statements of similar
sense, are forward-looking statements. These statements are based on the
Company's current expectations and estimates as to prospective events and
circumstances which may or may not be within the Company's control and as to
which there can be no firm assurances given. These forward-looking statements,
like any other forward-looking statements, involve risks and uncertainties
that could cause actual results to differ materially from those projected or
anticipated.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ETEC SYSTEMS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants......................................... 27
Consolidated Balance Sheets at July 31, 1997 and 1996..................... 28
Consolidated Statements of Income for the years ended July 31, 1997, 1996,
and 1995................................................................. 29
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended July 31, 1997, 1996, and 1995...................................... 30
Consolidated Statements of Cash Flows for the years ended July 31, 1997,
1996, and 1995........................................................... 31
Notes to Consolidated Financial Statements................................ 32
</TABLE>
All other schedules are omitted because they are not required, are not
applicable, or the information is included in the financial statements or notes
thereto.
26
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Etec Systems, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing under Item 14(a) on page 50 present fairly, in all material
respects, the financial position of Etec Systems, Inc. and its subsidiaries at
July 31, 1997, and July 31, 1996, and the results of their operations and
their cash flows for each of the three years in the period ended July 31, 1997
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.
/s/ Price Waterhouse LLP
Price Waterhouse LLP
San Jose, California
August 27, 1997
27
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31,
------------------
1997 1996
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 55,975 $ 44,472
Marketable securities.................................... 34,262 24,153
Accounts receivable, less allowance for doubtful accounts
of $1,136 and $1,073.................................... 54,879 37,316
Inventory................................................ 67,202 52,135
Deferred tax assets...................................... 22,822 24,508
Other current assets..................................... 3,322 3,042
-------- --------
Total current assets................................... 238,462 185,626
Property, plant, and equipment, net........................ 42,013 19,381
Other assets............................................... 4,068 3,864
-------- --------
$284,543 $208,871
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt..................... $ -- $ 3,333
Accounts payable......................................... 20,830 14,184
Accrued and other liabilities............................ 53,028 51,084
Taxes payable............................................ 8,301 5,826
-------- --------
Total current liabilities.............................. 82,159 74,427
Long-term debt, less current portion....................... -- 6,667
Deferred gain on sale of asset............................. 2,871 5,571
Other liabilities.......................................... 1,872 6,329
-------- --------
Total liabilities...................................... 86,902 92,994
-------- --------
Commitments and Contingencies
Stockholders' equity:
Preferred Stock, par value $0.01 per share; 10,000,000
shares authorized; none issued and outstanding.......... -- --
Common Stock, par value $0.01 per share; 40,000,000 and
30,000,000 shares authorized; 21,679,636 and 19,610,964
issued and outstanding.................................. 217 196
Warrants................................................. 631 1,096
Additional paid-in capital............................... 198,758 149,875
Notes receivable from stockholders....................... (201) (17)
Cumulative translation adjustments....................... (719) 211
Accumulated deficit...................................... (1,045) (35,484)
-------- --------
Total stockholders' equity............................. 197,641 115,877
-------- --------
$284,543 $208,871
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
28
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
---------------------------
1997 1996 1995
-------- -------- -------
<S> <C> <C> <C>
Revenue:
Products........................................ $206,561 $112,940 $51,395
Services........................................ 34,353 32,705 31,521
-------- -------- -------
240,914 145,645 82,916
-------- -------- -------
Cost of revenue:
Cost of products................................ 98,416 56,632 27,015
Cost of services................................ 25,871 23,410 20,604
-------- -------- -------
124,287 80,042 47,619
-------- -------- -------
Gross profit...................................... 116,627 65,603 35,297
-------- -------- -------
Operating expenses:
Research, development, and engineering.......... 34,373 17,402 10,497
Selling, general, and administrative............ 27,939 21,269 13,397
Write-off of in-process technology acquired..... 3,874 6,269 --
-------- -------- -------
66,186 44,940 23,894
-------- -------- -------
Income from operations............................ 50,441 20,663 11,403
Interest expense.................................. (988) (1,824) (4,238)
Other income (expense), net....................... 3,821 2,669 (352)
-------- -------- -------
Income before income tax provision (benefit) and
extraordinary items.............................. 53,274 21,508 6,813
Income tax (benefit) provision.................... 18,835 (16,283) 2,289
-------- -------- -------
Income before extraordinary items................. 34,439 37,791 4,524
Extraordinary (loss) gain on early extinguishment
of debt.......................................... -- (930) 5,412
-------- -------- -------
Net income........................................ 34,439 36,861 9,936
Accretion of mandatorily redeemable convertible
preferred stock.................................. -- 1,078 3,092
-------- -------- -------
Net income attributable to Common Stockholders.... $ 34,439 $ 35,783 $ 6,844
======== ======== =======
Per share data:
Income before extraordinary items............... $ 1.57 $ 2.07 $ 0.31
Extraordinary (loss) gain....................... -- (0.05) 0.37
-------- -------- -------
Net income...................................... $ 1.57 $ 2.02 $ 0.68
======== ======== =======
Weighted average common shares.................... 22,003 18,296 14,594
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
29
<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 ADJUSTMENTS DEFICIT TOTAL
---------- ------ -------- ---------- ---------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
adjustments............ -- -- -- -- -- 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 offerings......... 5,374,167 54 -- 56,903 -- -- -- 56,957
Shares and warrants
issued to equity
investor............... 500,000 5 600 9,895 -- -- -- 10,500
Shares issued in
connection with the
Polyscan acquisition... 350,000 4 -- 3,496 -- -- -- 3,500
Issuance of warrants.... -- -- 1,031 -- -- -- -- 1,031
Exchange of ATEQ stock
for Common Stock....... 66,915 -- -- -- -- -- -- --
Accretion of Mandatorily
Redeemable Convertible
Preferred Stock
redemption value....... -- -- -- -- -- -- (1,078) (1,078)
Conversion of
Mandatorily Redeemable
Convertible Preferred
Stock.................. 11,747,057 118 -- 77,357 -- -- -- 77,475
Payments on notes
receivable............. -- -- -- -- 38 -- -- 38
Issuance under stock
plans.................. 227,415 2 -- 731 -- -- -- 733
Exercise of warrants.... 435,008 4 (1,097) 1,093 -- -- -- --
Cumulative translation
adjustments............ -- -- -- -- -- (2,725) -- (2,725)
Net income.............. -- -- -- -- -- -- 36,861 36,861
---------- ---- ------ -------- ----- ------ -------- --------
Balance at July 31,
1996................... 19,610,964 196 1,096 149,875 (17) 211 (35,484) 115,877
Stock offering.......... 1,254,487 13 -- 39,264 -- -- -- 39,277
Payments on notes
receivable............. -- -- -- -- 116 -- -- 116
Issuance of notes
receivable............. -- -- -- -- (300) -- -- (300)
Issuance under stock
plans.................. 633,921 6 -- 2,908 -- -- -- 2,914
Exercise of warrants.... 180,264 2 (465) 683 -- -- -- 220
Tax benefit of stock
option transactions.... -- -- -- 6,028 -- -- -- 6,028
Cumulative translation
adjustments............ -- -- -- -- -- (930) -- (930)
Net income.............. -- -- -- -- -- -- 34,439 34,439
---------- ---- ------ -------- ----- ------ -------- --------
Balance at July 31,
1997................... 21,679,636 $217 $ 631 $198,758 $(201) $ (719) $ (1,045) $197,641
========== ==== ====== ======== ===== ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
30
<PAGE>
ETEC SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $34,439 $36,861 $ 9,936
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss (gain) on early
extinguishment of debt......................... -- 930 (5,412)
Write-off of in-process technology acquired..... 3,874 6,269 --
Depreciation and amortization................... 4,632 1,629 2,951
Deferred taxes.................................. 2,103 (23,564) (442)
Other noncash charges........................... -- -- 527
Changes in assets and liabilities:
Accounts receivable........................... (18,502) (15,743) (2,745)
Inventory..................................... (14,911) (25,393) (3,217)
Other assets.................................. (2,139) (579) (18)
Accounts payable.............................. 6,772 7,724 (1,178)
Accrued and other liabilities................. 2,712 15,348 8,697
------- ------- -------
Net cash provided by operating activities......... 18,980 3,482 9,099
------- ------- -------
Cash flows from investing activities:
Capital expenditures for property and equipment,
net.............................................. (27,075) (11,673) (2,915)
New building construction costs................... (3,555) (1,445) --
Purchase of marketable securities, net............ (10,109) (24,153) --
Loan to Polyscan, Inc., net and other............. -- (637) (825)
Payment for purchase of Ebetech, net of cash
acquired......................................... (4,682) -- --
Proceeds from sale of facilities.................. 5,000 -- 10,969
------- ------- -------
Net cash (used in) provided by investing
activities....................................... (40,421) (37,908) 7,229
------- ------- -------
Cash flows from financing activities:
Repayment of debt and capital leases.............. (10,171) (21,631) (6,169)
Issuance of long-term debt........................ -- 10,000 --
Financing from intermediary, net of repayments.... 3,796 159 6,219
Repurchase of warrants............................ (2,633) -- --
Issuance of notes payable......................... 500 -- --
Issuance of notes receivable to stockholders...... (300) -- --
Payments on notes receivable to stockholders...... 116 -- --
Proceeds from issuance of Common Stock............ 42,171 67,628 112
------- ------- -------
Net cash provided by financing activities......... 33,479 56,156 162
------- ------- -------
Effect of exchange rate changes on cash........... (535) (896) 577
------- ------- -------
Net change in cash and cash equivalents........... 11,503 20,834 17,067
Cash and cash equivalents at beginning of the
year............................................. 44,472 23,638 6,571
------- ------- -------
Cash and cash equivalents at the end of the year.. $55,975 $44,472 $23,638
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the period for interest.......... $ 982 $ 2,001 $ 3,342
======= ======= =======
Cash paid during the period for income taxes...... $ 8,229 $ 2,972 $ 2,831
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
31
<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, Taiwan, Germany, and France. The Company operates in one
industry segment.
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries. Intercompany transactions and balances are
eliminated in consolidation. Accounts denominated in foreign currencies are
translated using the foreign currencies as the functional currencies. Assets
and liabilities of foreign operations are translated to U.S. dollars at
current rates of exchange; revenues and expenses are translated using weighted
average rates. Gains and losses from foreign currency translation are included
as a separate component of stockholders' equity. Foreign currency transaction
gains and losses are included as a component of other income (expense), net.
For the year ended July 31, 1996, the Company recorded approximately $0.8
million of transaction gains on the settlement of accounts denominated in yen
related to the redemption of the minority interest in Etec Systems Japan. For
all other periods, such gains and losses have not been significant.
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
Recent Accounting Pronouncement
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share." This
statement is effective for all periods ending after December 15, 1997. The
Statement redefines earnings per share under generally accepted accounting
principles. Under the new standard, primary earnings per share is replaced by
basic earnings per share, and fully diluted earnings per share is replaced by
diluted earnings per share. If the Company had adopted this Statement as of
the beginning of fiscal 1995, pro forma earnings per share for the years ended
July 31, 1997, 1996, and 1995, respectively, would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED JULY 31,
-----------------------
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income from operations before extraordinary items..... $ 1.66 $ 2.28 $ 5.39
Extraordinary items................................... -- (0.06) 6.45
------ ------- -------
Net income............................................ $ 1.66 $ 2.22 $ 11.84
====== ======= =======
DILUTED EARNINGS PER SHARE
Income from operations before extraordinary items..... $ 1.57 $ 2.07 $ 0.31
Extraordinary items................................... -- (0.05) 0.37
------ ------- -------
Net income............................................ $ 1.57 $ 2.02 $ 0.68
====== ======= =======
</TABLE>
32
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
Product revenue is generally recognized upon shipment. A provision for
installation costs and estimated future warranty costs is recorded at the time
revenue is recognized. Revenue associated with retrofitting certain models is
recognized upon completion of the retrofit. Service revenue is deferred and is
recognized on a straight-line basis over the period of service.
Cash Equivalents and Marketable Securities
The Company considers all highly liquid debt instruments having a maturity
of three months or less on the date of purchase to be cash equivalents.
The Company has classified all investments as available for sale.
Investments classified as available for sale are recorded at fair value and
any temporary difference between an investment's cost and fair value is
recorded as a separate component of stockholders' equity. Temporary
differences between cost and fair value for the year ended July 31, 1997 and
July 31, 1996 were not material.
At July 31, 1997 and July 31, 1996, approximately $31.0 million and $37.3
million, respectively, of investments are classified as cash and cash
equivalents on the balance sheet. The investment portfolio at July 31, 1997 is
comprised of money market funds, corporate debentures, asset-backed
obligations, U.S. Government agency securities, certificates of deposit,
commercial paper, auction-rate preferreds, and municipal obligations.
The Company manages its cash equivalents and short-term investments in a
single portfolio of highly marketable securities, all of which are intended to
be available to meet the Company's current cash requirements.
Inventory
Inventory is stated at the lower of cost or market, with cost being
determined under the first-in, first-out method.
Depreciation and Amortization
Property, plant, and equipment are stated at cost less accumulated
depreciation. Depreciation is calculated using the straight-line method over
the estimated useful lives of the assets, which range from three to ten years
for machinery and equipment. Assets held under capital leases are amortized
using the straight-line method over the shorter of the lease term or the
estimated useful lives of the assets of three to five years. Leasehold
improvements are amortized using the straight-line method over the shorter of
the lease term or the estimated useful life of the improvement.
Capitalization of Internal Use Software
The Company capitalizes certain costs related to the purchase of software
for internal use and its implementation, which include purchased software,
consulting fees, and the use of certain specified Company resources. As of
July 31, 1997, $9.8 million of costs (net of accumulated depreciation)
associated with internal use software had been capitalized. In the fourth
quarter of fiscal 1997, the Company implemented its new software and began
depreciating this asset using an estimated life of seven years.
33
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Research, Development and Engineering
Research, development, and engineering costs are expensed as incurred. As
more fully described in Note 7, the Company is party to certain research and
development contracts that provide for partial funding of certain research,
development, and engineering costs. Amounts funded under these contracts,
which are generally best efforts contracts, are recognized as costs are
incurred.
Off-Balance Sheet Risk and Concentrations of Credit Risk
Financial instruments that 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 United States, Europe, and the Far East. The Company
performs ongoing credit evaluations of its customers. Additionally, prior to
shipment of systems, the Company receives payment for a portion of the system
sales price. Write-offs during the periods presented have been insignificant.
Sales to the Company's ten largest customers accounted for approximately
62%, 76% and 74% of revenues in fiscal 1997, fiscal 1996 and fiscal 1995,
respectively.
At July 31, 1997, outstanding receivables from four customers represented
22%, 17%, 14% and 11%, respectively, of the Company's accounts receivable. At
July 31, 1996, outstanding receivables from four customers represented 16%,
14%, 11% and 10%, respectively, of the Company's accounts receivable.
The Company's Japanese subsidiary has an agreement with a local bank to
discount the promissory notes associated with certain of its trade
receivables. The yen equivalent of approximately $12.9 million of receivables
outstanding at July 31, 1997 was discounted under this arrangement. The
Company has accounted for the sale of these receivables as an off-balance
sheet financing arrangement. The Company does not believe it is materially at
risk for any losses as a result of this agreement.
Net Income Per Share
Net income per share is computed using the weighted average number of common
and common equivalent shares outstanding during the periods ended July 31,
1997, July 31, 1996, and July 31, 1995. Common equivalent shares for fiscal
1997 and fiscal 1996 consist of stock options and warrants using the treasury
stock method, except when antidilutive. Common equivalent shares for the year
ended July 31, 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 "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 "if converted" method, issued subsequent
to July 31, 1994 through the initial public offering ("IPO") date, are
included in the computation of net income per share for the year ended July
31, 1995 as if they were outstanding for the entire period.
Stock-Based Compensation
The Company has elected to follow Accounting Principles Boards Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options and stock
purchase plan. Pro forma information regarding net income and net income per
share is disclosed as required by the Statement of Financial Accounting
Standards Statement No. 123 "Accounting for Stock-Based Compensation" (SFAS
123), which also requires that the information be determined as if the Company
accounted for its stock-based compensation subsequent to July 31, 1995 under
the fair value method of that Statement (See Note 8--Benefit Plans).
34
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2--CERTAIN BALANCE SHEET COMPONENTS:
<TABLE>
<CAPTION>
JULY 31,
------------------
1997 1996
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Accounts receivable:
Accounts receivable....................................... $ 46,421 $ 32,638
Financed receivables*..................................... 8,458 4,678
-------- --------
$ 54,879 $ 37,316
======== ========
Inventory:
Purchased parts........................................... $ 20,325 $ 16,861
Work-in-process........................................... 35,972 25,380
Spares.................................................... 10,905 9,894
-------- --------
$ 67,202 $ 52,135
======== ========
Property, plant, and equipment:
Buildings................................................. $ 8,142 $ 2,339
Machinery and equipment................................... 48,599 27,375
-------- --------
56,741 29,714
Less accumulated depreciation............................... (14,728) (10,333)
-------- --------
$ 42,013 $ 19,381
======== ========
Accrued and other liabilities:
Customer advances......................................... $ 11,451 $ 24,061
Accrued employee costs.................................... 9,133 5,594
Accrued warranty and installation......................... 11,121 6,405
Payable to financing intermediary......................... 8,458 4,678
Other accrued liabilities................................. 12,865 10,346
-------- --------
$ 53,028 $ 51,084
======== ========
</TABLE>
- --------
* Accounts receivable, net, at July 31, 1997 and July 31, 1996 has been offset
by a liability of $8,458 and $4,678, respectively, which is due to a trading
partner as a result of third-party financing of receivables. (See Note 9--
Related Party Transactions.)
NOTE 3--LONG-TERM DEBT:
Unsecured Term Note Payable and Revolving Line of Credit
In April 1997, the Company increased its $20.0 million revolving line of
credit to a $50.0 million revolving line of credit and extended the term of
the line for an additional year to May 1999. No amounts have been drawn under
this line of credit. Indebtedness under the revolving line of credit is
unsecured and bears interest at the London Interbank Offered Rate (5.8% on
July 31, 1997) plus 1.25%. The terms of the financing facility require the
Company to comply with certain financial and restrictive covenants, including
maintenance of certain financial ratios and minimum net worth criteria,
restrictions on the incurrence of indebtedness, and repurchase of Company
stock, and certain dividend restrictions. At July 31, 1997, the Company was in
compliance with all covenants. The $10.0 million term note which was
outstanding at July 31, 1996 was repaid during fiscal 1997.
35
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Secured Notes Payable
During the year ended July 31, 1996, the Company repaid the remaining unpaid
principal balance of $18.7 million under its 10.65% senior secured notes. As a
result of this repayment, the Company recorded an extraordinary loss of
approximately $0.9 million related to unamortized debt issuance costs.
Senior Subordinated Notes Payable
In July 1995, IBM and Perkin-Elmer, holders of the Company's senior
subordinated notes payable and mandatorily redeemable convertible preferred
stock, exchanged approximately $7.1 million and $12.6 million of their senior
subordinated notes and accrued interest for 40,251 and 65,390 shares,
respectively, of Series B mandatorily redeemable convertible preferred stock
and approximately $1.6 million and $2.0 million, respectively, of senior
subordinated notes payable. Upon the closing of the IPO on October 24, 1995,
the Series B mandatorily redeemable convertible preferred stock held by IBM
and Perkin-Elmer was converted into 825,660 and 1,341,331 shares of Common
Stock, respectively. The senior subordinated notes payable totaling
approximately $3.6 million were repaid in October 1995.
NOTE 4--MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK:
Upon completion of the Company's IPO on October 24, 1995, all series of the
Company's mandatorily redeemable convertible preferred stock were converted
into 11,747,057 shares of Common Stock.
NOTE 5--STOCKHOLDERS' EQUITY:
Common and Preferred Stock
In October 1995, the Company completed an IPO of 4,200,000 shares of Common
Stock, of which 3,841,667 shares were issued and sold by the Company and
358,333 shares were sold by stockholders. The IPO raised approximately $35.7
million before deducting offering expenses. In November 1995, the underwriters
exercised their option to purchase an additional 630,000 shares of Common
Stock from the Company at $10.00 per share before deducting underwriting
discounts and commissions. Net proceeds to the Company in connection with this
purchase totaled approximately $5.9 million.
In June 1996, the Company completed an additional public offering of
4,350,000 shares of Common Stock, of which 250,000 shares were issued and sold
by the Company and 4,100,000 shares were sold by stockholders. The offering
raised approximately $5.0 million before deducting offering expenses. In July
1996, in connection with this offering, the underwriters exercised their
option to purchase an additional 652,500 shares of Common Stock from the
Company at $20.00 per share before deducting underwriting discounts and
commissions. Net proceeds to the Company in connection with this purchase
totaled approximately $12.4 million.
In June 1996, the Company entered into an equity investment agreement
whereby, in exchange for $10.0 million, the Company issued 500,000 shares of
Common Stock plus the warrants described below under "Warrants".
In December 1996, the Company completed a public offering of 5,029,916
shares of Common Stock, of which 500,000 shares were issued and sold by the
Company and 4,529,916 shares were sold by stockholders. In December 1996, the
underwriters of the public offering exercised their option to purchase an
additional 754,487 shares of Common Stock from the Company. All of these
shares were sold at $33.25 per share before deducting underwriting discounts
and commissions. Net proceeds to the Company from the offering totaled
approximately $39.3 million, after deducting underwriting discounts and
estimated offering expenses.
36
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In January 1997, the Board of Directors adopted a shareholder rights plan.
Under the plan, the Board of Directors issued rights to acquire Series A
Participating Preferred Stock. The number of shares constituting such series
is equal to the number of shares of authorized Common Stock divided by 100.
The holders of the Series A Participating Preferred Stock would have 100 votes
for each share held by them. Holders of the Series A Participating Preferred
Stock would be entitled to receive, when and as declared by the Board of
Directors of the Registrant, commencing after the close of business on January
31, 1997, a dividend of $1,600 per share. No shares of Series A Participating
Preferred Stock have yet been issued, as the conditions necessary for the
exercise of rights have not yet occurred.
The Company's Articles of Incorporation were amended on January 30, 1997 to
authorize the issuance of 50,000,000 shares of stock. Such shares include
40,000,000 shares of Common Stock with a par value of $0.01 per share and
10,000,000 shares of Preferred Stock with a par value of $0.01 per share.
Warrants
In fiscal 1997, the landlord of the Company's headquarters campus
surrendered its warrant to acquire 159,314 shares of the Company's Common
Stock in exchange for a warrant to acquire 68,768 shares of the Common Stock
at the same exercise price per share. In addition, the landlord's bank
surrendered its warrant to acquire 53,104 shares of Common Stock in exchange
for 22,461 shares of Common Stock. In September 1997, the landlord exercised
its warrant to acquire 68,768 shares of Common Stock(See Note 10-Commitments
and Contingencies and Note 13-Subsequent Event.).
In June 1996, the Company issued warrants to the equity investor discussed
above to purchase 75,000 shares of Common Stock at an exercise price equal to
$20.00 per share, which was the price of the 500,000 common shares purchased.
Such warrants only become exercisable if the investor purchases products and
services from the Company in amounts that exceed certain thresholds over the
succeeding four years, or upon the occurrence of certain other conditions. The
estimated fair value of the warrants, included in "Other assets", is
approximately $0.6 million and is being amortized to cost of sales as product
purchases are made by the investor in future periods. The warrants expire in
fiscal 2001.
NOTE 6--INCOME TAXES
The components of income before income tax provision (benefit) and
extraordinary items are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------
1997 1996 1995
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Domestic........................................... $49,604 $15,870 $3,401
Foreign............................................ 3,670 5,638 3,412
------- ------- ------
$53,274 $21,508 $6,813
======= ======= ======
</TABLE>
37
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
-------------------------
1997 1996 1995
------- -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................ $ 9,907 $ 2,179 $ 200
State.............................................. 1,869 1,187 50
Foreign............................................ 4,957 3,915 2,481
------- -------- ------
16,733 7,281 2,731
------- -------- ------
Deferred:
Federal............................................ 2,441 (20,623) --
State.............................................. 267 (2,357) --
Foreign............................................ (605) (584) (442)
------- -------- ------
2,103 (23,564) (442)
------- -------- ------
Income tax provision (benefit)....................... $18,836 $(16,283) $2,289
======= ======== ======
</TABLE>
The income tax provision (benefit) differs from the amount computed by
applying the statutory U.S. federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
--------------------------
1997 1996 1995
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax provision at U.S. statutory rate........ $18,646 $ 7,563 $ 2,496
State income taxes, net of federal income tax
benefit........................................... 1,389 1,187 33
Purchase accounting non-taxable write-offs......... 2,014 2,194 --
Foreign earnings taxed at higher rates............. 2,323 2,103 700
Foreign sales corporation.......................... (1,370) -- --
Alternative minimum tax and other.................. (245) 810 242
Realized deferred tax assets previously reserved... -- (7,160) --
Change in the valuation allowance.................. (3,921) (22,980) (1,182)
------- -------- -------
Total............................................ $18,836 $(16,283) $ 2,289
======= ======== =======
</TABLE>
The Company recorded a provision for income taxes for the year ended July
31, 1997 of $18.8 million. For the year ended July 31, 1996, the Company
recorded an income tax benefit of $16.3 million. Reflected in the provisions
for the years ended July 31, 1997 and 1996, respectively, are $1.2 million and
$23.0 million income tax benefits recorded as a result of the discrete
releases of portions of the valuation allowance previously recorded against
the Company's deferred tax assets. Management's evaluation of the
recoverability of the Company's deferred tax assets is based in part upon the
current product backlog and the Company's presumed ability to increase
manufacturing capacity. Management has fully reserved deferred tax assets that
would be realized, if at all, more than one year in the future. Because of the
uncertainty as to realization, management will continue to evaluate the
recoverability of the Company's deferred tax assets.
38
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of deferred taxes are as follows:
<TABLE>
<CAPTION>
JULY 31,
----------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Current:
Nondeductible accruals and reserves........................ $17,865 $15,624
Uniform capitalization adjustment to inventory............. 1,892 1,996
Revenue recognized for tax return purposes and deferred for
financial statements...................................... -- 366
Net operating loss carryforwards........................... 2,297 6,650
Other...................................................... 768 977
Valuation allowance........................................ -- (1,105)
------- -------
Net current deferred tax asset............................. 22,822 24,508
------- -------
Noncurrent:
Book depreciation in excess of tax depreciation............ -- 928
Deferred gain on sale of asset............................. 1,213 1,366
Net operating loss carryforwards........................... -- 1,735
Other...................................................... 138 555
Valuation allowance........................................ (1,213) (4,029)
------- -------
Net noncurrent deferred tax asset.......................... 138 555
------- -------
Net deferred tax asset..................................... $22,960 $25,063
======= =======
</TABLE>
At July 31, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $6.6 million. These
carryforwards, if not utilized to offset future taxable income and income
taxes payable, will expire at various dates through the year 2009.
NOTE 7--RESEARCH, DEVELOPMENT AND ENGINEERING CONTRACTS:
The Company has received funding for research, development, and engineering
contracts of approximately $2.0 million, $0.7 million, and $7.3 million during
the years ended July 31, 1997, 1996, and 1995, respectively. With the
exception of approximately $1.2 million which was recorded as an offset to
selling, general and administrative expenses during the year ended July 31,
1995, the Company has recorded this funding as an offset to research,
development and engineering expenses. Included in the $2.0 million during all
of fiscal 1997 is $1.5 million of funding which was recognized in the fourth
quarter of fiscal 1997 following completion of the first milestone under a
multi-million dollar research and development agreement (described below).
In July 1997, the Company entered into a multi-million dollar agreement with
a private consortium to develop a maskmaking system for 0.15 micron device
production and 0.13 micron device development. In July 1997, the Company
achieved the first milestone under the contract and received $1.5 million. In
addition, in June 1997, the Company entered into a cost-reimbursement research
and development agreement with the United States Department of Defense
Advanced Research Projects Agency ("DARPA"). No funding was recognized under
the DARPA agreement during fiscal 1997.
In November 1992, the Company entered into a cost reimbursement research and
development contract with the ARPA/NAVAIR, under which the Company was
entitled to receive approximately $22.0 million. In connection with this
contract, no funding was received during the years ended July 31, 1997 and
1996. Funding in the amount of approximately $5.7 million was recognized and
billed during the year ended July 31, 1995. Costs incurred during each of
these periods approximated billings and are included in research, development,
and engineering and selling, general, and administrative expenses.
39
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--BENEFIT PLANS:
Employee Stock Option Plans
Under the Company's 1990 Employee Stock Option Plan and 1994 Employee Stock
Option Plan, options to purchase 600,000 and 448,374 shares, respectively, of
Common Stock may be granted. These plans provide 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.
Under the 1995 Omnibus Incentive Plan, options to purchase 1,975,000 shares
of Common Stock may be granted. Options vest annually over a period not to
exceed five years and expire over terms not exceeding ten years.
In addition, options to purchase 88,503 shares of Common Stock may be
granted under certain other option agreements. A total of 11,820 options were
outstanding under these agreements at July 31, 1997.
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
Under the Company's 1995 Directors' Stock Option Plan, options to purchase
150,000 shares of Common Stock may be granted. The plan provides that options
may be granted at a price equal to the fair market value at the date of grant.
Under this plan, each non-employee director will receive a one-time grant upon
joining the Board of Directors and annual grants upon the anniversary of the
initial grant. The initial grants vest in two installments, with half of the
shares vesting six months after the grant date and the other half vesting on
the first anniversary of the grant date. Annual grants vest on the first
anniversary of the respective grant date.
401(k) Plan
On June 15, 1990, the Company adopted a 401(k) savings plan which covers all
eligible employees. The Company contributed approximately $0.4 million, $0.2
million, and $0.2 million to the Plan during the years ended July 31, 1997,
1996, and 1995, respectively.
40
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock-Based Compensation
A summary of activity for the Employee, Executive, and Directors Stock
Option Plans follows showing the weighted average exercise price within each
transaction type for each of the years ended July 31, 1997, 1996, and 1995:
<TABLE>
<CAPTION>
WEIGHTED
OPTIONS AVERAGE
OUTSTANDING EXERCISE PRICE
----------- --------------
<S> <C> <C>
Outstanding, July 31, 1994..................... 957,692 $ 0.45
Granted...................................... 565,406 $ 2.63
Canceled..................................... (71,520) $ 0.49
Exercised.................................... (306,646) $ 0.44
---------
Outstanding, July 31, 1995..................... 1,144,932 $ 1.53
Granted...................................... 760,382 $15.52
Canceled..................................... (19,409) $ 3.18
Exercised.................................... (165,695) $ 0.47
---------
Outstanding, July 31, 1996..................... 1,720,210 $ 7.71
Granted...................................... 888,964 $38.61
Canceled..................................... (148,637) $ 9.15
Exercised.................................... (565,854) $ 2.59
---------
Outstanding, July 31, 1997..................... 1,894,683 $23.30
=========
</TABLE>
At July 31, 1997, 1996, and 1995, options exercisable totaled 345,773,
508,376, and 412,426, respectively.
Significant option groups outstanding at July 31, 1997, related weighted
average exercise price of options granted and contractual life information are
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------- ----------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE CONTRACTUAL EXERCISE EXERCISE
PRICES LIFE (YEARS) SHARES PRICE SHARES PRICE
-------- ------------ --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.01--$ 4.00 7.19 459,355 $ 2.16 234,077 $ 1.81
$ 4.88--$11.50 8.41 235,020 9.37 16,671 9.95
$11.88--$30.50 8.99 420,534 23.29 87,238 22.30
$30.63--$40.00 9.52 288,662 35.67 7,787 35.51
$40.13--$52.50 9.84 491,112 42.48 -- --
--------- ----------
TOTAL 1,894,683 345,773
========= ==========
</TABLE>
As described in Note 1, the Company has adopted the disclosure provisions as
required by SFAS 123. Accordingly, no compensation cost has been recognized in
the Company's statements of operations as all options were granted at an
exercise price equal to the market value of the Company's common stock at the
date of grant.
As required by SFAS 123 for pro forma disclosure purposes only, the Company
has calculated the estimated grant date fair value using the Black-Scholes
model. The Black-Scholes model, as well as other currently
41
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
accepted option valuation models, was developed to estimate the fair value of
freely tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock option awards. These
models also require highly subjective assumptions, including future stock
price volatility and expected time until exercise, which greatly affect the
calculated grant date fair value.
The following weighted average assumptions are included in the estimated
grant date fair value calculations for the Company's stock option awards:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected life (years)......................................... 5 5
Risk-free interest rate....................................... 6.4% 6.0%
Volatility.................................................... 53% 53%
Dividend yield................................................ -- --
</TABLE>
The weighted average estimated grant date fair value, as defined by SFAS 123,
for options granted during 1997 and 1996 was $17.44 and $7.35 per option,
respectively.
Employee Stock Purchase Plan
Since July 1995, the Company has offered an Employee Stock Purchase Plan
("ESPP") under which rights are granted to purchase shares of Common Stock at
85% of the lesser of the market value of such shares at the beginning of an
18-month offering period or at the end of each six-month segment within the
offering period. Under the ESPP, the Company is authorized to grant options to
purchase up to 500,000 shares of the Company's Common Stock. During fiscal
1997 and fiscal 1996, 68,067 and 39,189 shares, respectively, were purchased
at an average price ranging from $8.57 to $17.21 per share. Shares available
for future purchase under the ESPP totaled 392,744 at July 31, 1997.
The following weighted average assumptions are included in the estimated
grant date fair value calculations under the ESPP:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected life (years)......................................... 0.5 0.5
Risk-free interest rate....................................... 6.4% 6.0%
Volatility.................................................... 53% 53%
Dividend yield................................................ -- --
</TABLE>
Compensation cost (included in pro forma net income and net income per share
amounts only) for the grant date fair value, as defined by SFAS 123, of the
purchase rights granted under the ESPP was calculated using the Black-Scholes
model. Included in the pro forma net income for fiscal 1997 and 1996, is
compensation expense related to purchase rights granted during fiscal 1997.
The weighted average estimated grant date fair value per share for rights
granted under the ESPP, as defined by SFAS 123, for stock purchased under the
ESPP during fiscal 1997 and fiscal 1996 was $6.07 and $6.68 per share,
respectively.
Pro forma results
Had the Company recorded compensation costs based on the estimated grant
date fair value (as defined by SFAS 123) for awards granted under its stock
option plans and employee stock purchase plan, the pro forma effect on net
income and net income per share takes into consideration pro forma
compensation related only to grants made after December 15, 1995.
Consequently, the pro forma effect on net income and net income per share for
fiscal 1997 and fiscal 1996 is not necessarily representative of the pro forma
effect on net income in future years.
42
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma results for fiscal 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
------- -------
(IN THOUSANDS,
EXCEPT SHARE
AMOUNTS)
<S> <C> <C>
Pro forma net income..................................... $31,447 $35,320
Pro forma net income per share........................... $ 1.43 $ 1.93
</TABLE>
NOTE 9--RELATED PARTY TRANSACTIONS:
In March 1990, the Company entered into an inventory component purchasing
agreement with one of the former holders of its Series B mandatorily
redeemable convertible preferred stock (which were converted into shares of
Common Stock in October 1995), pursuant to which the Company committed to
purchase specified quantities of components upon achieving certain sales
levels. In fiscal 1992, the Company was billed $1.4 million under this
agreement. The Company disputed the appropriateness of this billing, but paid
the related party $1.0 million in fiscal 1993. The related party continued to
maintain that the Company had not satisfied its obligations under the
agreement. In fiscal 1995, the Company entered into an agreement under which
the related party released the Company from all obligations under the 1990
inventory purchase agreement and the Company issued the related party a
warrant to purchase 150,000 shares of the Company's Common Stock at an
exercise price of $1.70 per share. This warrant was exercised during fiscal
1997.
During fiscal 1997, the Company made loans to certain of its officers.
Approximately $0.2 million of these loans were collateralized by the officers'
common stock and were repaid subsequent to year-end. Included in "Other
current assets" at July 31, 1997 is a $0.1 million receivable from an officer
which bears interest at 7.375% and matures in the year 2002. The loan is
collateralized by the officer's home.
Sales to related parties included in product and service revenue in fiscal
1996, and 1995 were approximately $21.6 million, and $13.0 million,
respectively. The Company is not aware of any related party sales during
fiscal 1997.
At July 31, 1997 and 1996, included in accrued liabilities is approximately
$8.4 million and $4.7 million, respectively, due to a party that at that time
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 Japanese prime rate (1.625% at July 31, 1997)
plus 1.25% per annum.
NOTE 10--COMMITMENTS AND CONTINGENCIES:
During fiscal 1997, the Company completed construction of a new
administrative building at a cost of $5.0 million. The Company sold the
building to its existing landlord for the $5.0 million cost of the building
and leased back the property for 15 years with options to renew the lease for
four five-year periods. 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 for the three-year period 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 agreement
requires the Company to comply with certain financial covenants. At July 31,
1997, the Company was in compliance with these covenants.
In addition, the Company has also obtained a commitment from its landlord to
provide financing of up to $11.0 million for leasehold improvements to its
existing office and manufacturing facilities located adjacent to the new
building.
43
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Concurrent with an August 1996 commitment from its landlord to provide
financing for leasehold improvements, the Company agreed to amend the existing
warrant agreements with the landlord and the landlord's bank. This amendment
provided for a refund of $2.6 million of the purchase price related to the
sale and leaseback transaction of the Company's headquarters campus which the
Company had concluded in fiscal 1995. The Company has accounted for the $2.6
million refund payment as a reduction in the deferred gain on sale of asset.
(See Note 5--Stockholders' Equity.)
In addition to its headquarters campus discussed above, the Company leases
certain other facilities and equipment under operating lease agreements. Rent
expense under all operating leases for the years ended July 31, 1997, 1996,
and 1995, was $5.5 million, $3.5 million, and $2.6 million, respectively.
Future minimum lease commitments excluding property taxes, maintenance and
insurance under leases having initial or remaining terms in excess of one
year, are as follows (in thousands) for the fiscal year ending July 31:
<TABLE>
<S> <C>
1998.............................................................. $ 6,232
1999.............................................................. 5,811
2000.............................................................. 4,750
2001.............................................................. 4,126
2002.............................................................. 2,877
Thereafter........................................................ 18,108
-------
$41,904
=======
</TABLE>
In April 1995, the Company signed an agreement with a distributor of the
Company, under which Etec Japan assumed responsibility for sales, direct
customer service, and support for the Company's products in the Japanese
market. As part of this agreement, the Company agreed to pay the distributor a
flat fee for each CORE and ALTA system sold in the defined sales territory.
The fee is to be paid until a total of 21 systems have been sold, or five
years have passed, whichever occurs first. At July 31, 1997, the maximum total
remaining fees to be paid under this agreement will not exceed $1.5 million.
44
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 11--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 for the year
ended:
July 31, 1997
Domestic............................... $ 67,991 $ -- $ -- $ 67,991
Foreign................................ 85,840 81,043 6,040 172,923
-------- ------- ------ --------
$153,831 $81,043 $6,040 $240,914
======== ======= ====== ========
July 31, 1996
Domestic............................... $ 49,913 $ -- $ -- $ 49,913
Foreign................................ 30,360 59,788 5,584 95,732
-------- ------- ------ --------
$ 80,273 $59,788 $5,584 $145,645
======== ======= ====== ========
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
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
UNITED JAPAN AND
STATES FAR EAST EUROPE TOTAL
------- --------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Operating income (loss) for the year ended:
July 31, 1997............................. $45,430 $7,647 $(2,636) $50,441
======= ====== ======= =======
July 31, 1996............................. $15,340 $5,174 $ 149 $20,663
======= ====== ======= =======
July 31, 1995............................. $ 7,415 $3,975 $ 13 $11,403
======= ====== ======= =======
</TABLE>
<TABLE>
<CAPTION>
UNITED JAPAN AND
STATES FAR EAST EUROPE TOTAL
-------- --------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Identifiable assets at:
July 31, 1997.............................. $243,870 $39,057 $1,616 $284,543
======== ======= ====== ========
July 31, 1996.............................. $174,015 $31,878 $2,978 $208,871
======== ======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Customers comprising 10% or more of the
Company's total revenue for the periods
indicated:
A............................................. 16% 8% 14%
B............................................. 6% 13% 14%
C............................................. 14% 17% 12%
</TABLE>
45
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--ACQUISITIONS:
Ebetech
In the third quarter of fiscal 1997, the Company's wholly-owned subsidiary,
Etec Holding Co. GmbH, acquired substantially all of the assets, properties,
and business of Ebetech Electron Beam Technology GmbH ("Ebetech") from VCB
(the Venture Capital Company of Siemens AG), MRS Technology, Inc. and a group
of founding employees in exchange for $4.7 million, net of cash acquired, and
the issuance of a note payable of $0.5 million. The allocation of the
Company's purchase price to tangible and identifiable intangible assets and
liabilities assumed was as follows (in thousands):
<TABLE>
<S> <C>
Inventory......................................................... $ 368
Other current assets.............................................. 328
Other assets...................................................... 674
In-process technology............................................. 3,874
Accounts payable and accrued expenses............................. (128)
------
Total acquisition costs........................................... $5,116
======
</TABLE>
Management's estimate of the value of the in-process technology and the
existing technology was prepared using an income approach methodology that
considered the present value of the cash flows expected to be generated over
the estimated useful life of the technology. Approximately $3.9 million of the
excess of the purchase price over the fair value of the net assets acquired
was allocated to in-process technology acquired and written off in the third
quarter of fiscal 1997 because of the uncertainty as to realization.
Polyscan
In the third quarter of fiscal 1996, Etec Polyscan, Inc. ("Etec Polyscan"),
a wholly-owned subsidiary of the Company, acquired substantially all of the
assets and assumed certain specified liabilities of Polyscan, Inc.
("Polyscan") in exchange for 350,000 shares of the Company's Common Stock with
an agreed-upon market value of $3.5 million. One of the liabilities assumed by
Etec Polyscan was Polyscan's obligation to repay the outstanding loan in the
amount of approximately $1.2 million. Etec Polyscan has retained 175,000 of
the Company's common shares issued until February 5, 1998 to provide payment
for any liability of Polyscan or the Polyscan shareholders (which was not
assumed by Etec Polyscan as part of the acquisition) or any adjustment of the
purchase price. The excess of the purchase price over the fair value of the
net assets of $6.3 million was allocated to in-process technology acquired,
which because of the uncertainty as to realization, the Company wrote off in
fiscal 1996.
On June 27, 1995, the Company entered into a loan agreement with Polyscan
whereby the Company advanced $1.8 million to Polyscan. The loan bore interest
at prime plus 3% and the balance was due on January 31, 1996. During February
1996, Polyscan repaid $0.6 million to the Company.
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>
46
<PAGE>
ETEC SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma results of the acquisitions
The operating results of the acquisitions of Ebetech and Polyscan 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 Ebetech and Polyscan acquisitions
had occurred at the beginning of fiscal 1997 and fiscal 1995, respectively,
after giving effect to certain adjustments, including interest income on the
Polyscan loan and the increase in common equivalent shares outstanding.
Additionally, the fiscal 1997 and fiscal 1996 pro forma information excludes
the $3.9 million and $6.3 million write-offs of in-process technology
acquired, respectively. Ebetech's results of operations included in the pro
forma presentation for fiscal 1997 are for July 31, 1996 to July 31, 1997; no
pro forma results are presented for comparative purposes for fiscal 1996
because Ebetech did not commence operations until July 31, 1996. Polyscan's
results of operations included in the pro forma presentation for the years
ended July 31, 1996 and 1995, are for the period from July 1, 1995 through
January 31, 1996 and the twelve months ended June 30, 1995, respectively.
These pro forma results have been prepared for comparative purposes only and
do not purport to be indicative of what would have occurred had the
acquisitions taken place at the beginning of the periods presented or of the
results which may occur in the future.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
(UNAUDITED)
<S> <C> <C> <C>
Net income (in thousands)............................... $38,171 $42,207 $8,150
Net income per share.................................... $ 1.73 $ 2.28 $ 0.54
</TABLE>
NOTE 13--SUBSEQUENT EVENT:
In August 1997, the Company entered into an agreement to purchase
approximately 15.2 acres of land in Hillsboro, Oregon. Upon close of escrow
(currently scheduled for the second quarter of fiscal 1998), the Company plans
to construct a new facility on the site to meet development and manufacturing
requirements for its advanced laser mask pattern generation products.
47
<PAGE>
ETEC SYSTEMS, INC.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
PART III
Certain information required by Part III is incorporated by reference from
the Company's definitive Proxy Statement, to be filed with the Securities and
Exchange Commission in connection with the solicitation of proxies for the
Company's 1997 Annual Meeting of Stockholders (the "Proxy Statement").
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to Directors required by this section is incorporated
by reference from the information in the section entitled, "Election of
Directors--Nominees" in the Proxy Statement. Information with respect to
executive officers of the Company contained in the section entitled "Executive
Officers of the Registrant" in Part I of this Form 10-K.
Item 405 of Regulation S-K calls for disclosure of any known late filing by
an insider to file a report required by Section 16 of the Securities Exchange
Act of 1934. This disclosure is contained in the section entitled, "Compliance
with Section 16(a) of the Exchange Act" in the Proxy Statement and is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this section is incorporated herein by reference
from the information in the sections entitled "Directors' Compensation" and
"Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this section is incorporated by reference from
the information in the section entitled, "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this section is incorporated by reference from
the information in the section entitled, "Certain Relationships and Related
Transactions" in the Proxy Statement.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents were filed as part of this report:
1. Financial Statements--See Index to Consolidated Financial Statements
at page 25.
.Report of Independent Accountants, page 27
.Consolidated Balance Sheets, page 28
.Consolidated Statements of Income, page 29
.Consolidated Statements of Stockholders' Equity (Deficit), page 30
.Consolidated Statements of Cash Flows, page 31
.Notes to Consolidated Financial Statements, page 32
2. Financial Statement Schedules--All other schedules are omitted
because they are not required, are not applicable, or the
information is included in the financial statements or notes
thereto.
3. Exhibits--See Index to Exhibits at page 51 of this Form 10-K.
(b) Reports on Form 8-K--No reports on Form 8-K have been filed during the
fourth quarter of fiscal 1997.
50
<PAGE>
ETEC SYSTEMS, INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER NOTE* DESCRIPTION OF DOCUMENTS PAGE
------- ----- ------------------------ ------------
<C> <C> <S> <C>
2.1 (3) Agreement and Plan of Reorganization among the
Registrant, Etec Polyscan, Inc. Polyscan, Inc.
and the shareholders of Polyscan, Inc. dated
January 30, 1996...............................
2.2 (7) Share Purchase Agreement dated March 13/14,
1997 by and between Registrant, SXR-2
Vermogensverwaltungsgesellschaft GmbH, Ebetech
Electron-Beam Technology Vertiebs GmbH and the
Selling Shareholders named therein.............
Eighth Amended and Restated Articles of
3.1 (6) Incorporation..................................
3.2 (2) Bylaws of the Registrant, as amended...........
4.1 (6) Rights Agreement, dated as of January 15, 1997,
by and between Registrant and Bank of Boston,
Rights Agent...................................
10.1 (1) 1990 Stock Plan of Registrant..................
10.2 (1) 1990 Executive Stock Plan of Registrant........
10.3 (1) 1994 Employee Stock Option Plan of Registrant..
10.4 (1) 1995 Omnibus Incentive Plan of Registrant......
1995 Employee Stock Purchase Plan of
10.5 (1) Registrant.....................................
1995 Directors' Stock Option Plan of
10.6 (1) Registrant.....................................
10.7 (1) Senior Management Incentive Plan of Registrant.
10.8 (1) Lease Agreement between Beaverton-Redmond Tech
Properties and ATEQ Corporation dated June 18,
1985, as amended May 15, 1987 and September 20,
1989...........................................
10.9 (1) 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.....
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
10.10 (1),* 20, 1983.......................................
Consent to Assignment by AT&T to assignment by
Perkin-Elmer to Etec of the EBES Information
Agreement dated October 1, 1975 between Western
10.11 (1) Electric Company, Inc. and Etec................
10.12 (1) Agreement on OfficerOs Retirement between the
Registrant and John Suzuki dated as of January
25, 1994.......................................
10.13 (1) Form of Indemnity Agreements...................
10.14 (1) Amended and Restated Loan and Security
Agreement between the Registrant and Polyscan,
Inc. dated as of August 16, 1995...............
10.15 (4) Amendment Three dated April 3, 1996 to Lease
Agreement dated June 18, 1985 and as amended
May 15, 1987 and September 20, 1989 between
Beaverton-Redmond Tech Properties and the
Registrant.....................................
10.16 (3) Registration Rights Agreement dated as of
February 5, 1996 among the Registrant,
Polyscan, Inc. and the stockholders of
Polyscan, Inc..................................
Credit Agreement among Registrant and the
Lenders named therein and ABN-AMRO Bank, N.V.
10.17 (4) as agent for Lenders, dated May 24, 1996.......
10.18 (1) Amendment and Assumption Agreement dated May
14, 1992 by and between the
Registrant, SEMATECH, INC. and ATEQ
Corporation....................................
</TABLE>
- --------
* See NOTE reference at end of this Exhibit Index.
51
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER NOTE DESCRIPTION OF DOCUMENT PAGE
------- ---- ----------------------- ------------
<C> <C> <S> <C>
10.19 (5) Investor Agreement dated June 28, 1996 by and among
the Registrant and Intel Corporation...............
10.20 (5) Agreement dated as of July 23, 1996 by and between
Registrant and SEMATECH, INC.......................
10.21 (6) Amended and Restated Lease Agreement, dated January
31, 1997, by and between Registrant and ESI(CA) QRS
12-6, Inc..........................................
10.22 (7) First Amendment to Credit Agreement dated April 23,
1997 by and between Registrant, the Lenders named
therein, and ABN-AMRO Bank, N.V. amending Credit
Agreement dated May 24, 1996.......................
10.23 Agreement to Purchase Real Property dated May 22,
1997 by and between Registrant and Royal Neighbors
of America......................................... 52
10.24 Letter Agreement dated as of June 30, 1997 between
Registrant and Corporate Property Associates 12
Incorporated and ESI (CA) QRS 12-6, Inc............ 68
11 Statement of computation of earnings per share..... 75
23 Consent of Price Waterhouse LLP.................... 76
24 Power of Attorney.................................. 77
27 Financial Data Schedule............................ 78
</TABLE>
- --------
(1) Incorporated herein by reference to Registrant's Registration Statement
on Form S-1(File No. 33-95648).
(2) Incorporated herein by reference to Exhibit 3.1 of Registrant's Quarterly
Report on Form 10-Q for the quarter ended January 26, 1996.
(3) 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.
(4) Incorporated herein by reference to Registrant's Registration Statement
on Form S-1 (File No. 333-04363).
(5) Incorporated herein by reference to the exhibit of the same number to the
Registrant's Annual Report on Form 10-K for the year ended July 31, 1996.
(6) Incorporated herein by reference to Exhibits 2, 10.2, and 10.1,
respectively, to the Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1997
(7) Incorporated herein by reference to Exhibits 10.1 and 10.2, respectively,
to the Registrant's Quarterly Report on Form 10-Q for the quarter ended
May 2, 1997.
* Confidential treatment has been previously granted.
52
<PAGE>
EXHIBIT 11
ETEC SYSTEMS, INC.
COMPUTATION OF EARNINGS PER COMMON SHARE AND EQUIVALENTS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED JULY 31,
----------------------
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Weighted average common shares outstanding............. 20,787 16,554 839
Common equivalent shares from options, warrants, and
convertible preferred stock(1)........................ -- -- 4,524
Weighted average common stock equivalents calculated by
the treasury stock method applied to options and
warrants issued....................................... 1,216 1,742 1,205
Weighted average common equivalent shares from
convertible preferred stock, calculating using the if-
converted method...................................... -- -- 8,026
------- ------- ------
Weighted average common shares and equivalents......... 22,003 18,296 14,594
======= ======= ======
Net income............................................. $34,439 $36,861 $9,936
======= ======= ======
Net income per share................................... $ 1.57 $ 2.02 $ 0.68
======= ======= ======
</TABLE>
- --------
(1) Pursuant to the requirements of the Securities and Exchange Commission,
common equivalent shares relating to the stock options and warrants, using
the treasury stock method and the assumed initial public offering ("IPO")
price of $9.50 per share, and common equivalent shares from convertible
preferred stock, using the if-converted method, issued during the year
prior to the IPO are included in the computation for the year ended July
31, 1995.
<PAGE>
EXHIBIT 10.23
AGREEMENT TO PURCHASE
---------------------
THIS AGREEMENT is made this 22nd day of May 1997, by and between ROYAL
NEIGHBORS OF AMERICA, an Illinois fraternal benefit society ("Seller"), and ETEC
SYSTEMS, INC., a Nevada corporation ("Purchaser").
RECITALS:
A. Seller is the fee owner of the land, building, and improvements
located on an approximately 4.2-acre parcel of land legally described on Exhibit
A attached hereto.
B. Seller desires to sell and Purchaser desires to purchase, the
"Property" (as hereinafter defined) upon and subject to the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
contained in this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, Seller and Purchaser
agree as follows:
ARTICLE 1
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DEFINITIONS
1.1 DEFINITIONS. When used herein, the following terms shall have
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the respective meanings set forth opposite each such term:
AGREEMENT: This Agreement to Purchase including the Exhibits attached
hereto which are by this reference incorporated herein and made
a part hereof.
BROKER: Grubb & Ellis Company.
CLOSING That certain document provided by Seller to Purchaser at
CERTIFICATE: Closing under the terms of the Agreement reaffirming that the
warranties and representations provided to Purchaser by Seller
in this Agreement continue to remain valid in all material
respects unless otherwise noted therein.
CLOSING DATE: Thirty days after receipt of Notice of Completion of Demolition
or such later date as the Closing is extended pursuant to the
terms of this Agreement.
CLOSING: The date of recording of the Deed.
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DEED: That certain recordable Grant Deed to be delivered by
Seller to Purchaser at the Closing conveying the Real
Property to Purchaser (or to Purchaser's designee)
subject only to the Permitted Title Exceptions.
DEPOSIT: The sum of $30,000 in the form of a check made payable
to Title Insurer, which will be deposited by Purchaser
with Title Insurer, to be held as earnest money subject
to the terms of this Agreement. Deposit also includes
the additional $120,000 deposited pursuant to paragraph
4.3 of this Agreement.
EFFECTIVE DATE: Date listed in the first unnumbered paragraph of this
Agreement.
IMPROVEMENTS: The building and all improvements located on the Real
Property as hereinafter defined.
NOTICE OF COMPLETION The notice given by Seller to Purchaser along with
OF DEMOLITION: certificate of completion from the city indicating that
all demolition work has been properly performed.
NOTICE OF INTENT A notice given by Purchaser to Seller indicating that it
TO PROCEED: has reviewed all necessary documentation, performed its
physical inspection, and has otherwise completed its
review of all necessary items and either is satisfied
with the results, or is willing to waive any objections
to proceeding with Closing.
PROPERTY: The Real Property.
PURCHASE The consideration payable by Purchaser to Seller for the
PRICE: Property, as provided in Article III.
PURCHASER: Etec Systems, Inc., a Nevada corporation.
REAL PROPERTY: The Real Property described on Exhibit A attached
hereto, the Improvements, all right, title and interest
of Seller in and to (l) all public and private streets,
roads, avenues, alleys, and passageways, opened or
proposed in front of or abutting said real property and
(ii) any strips or gores of land adjoining said real
property, and all and singular the estates, rights,
privileges, easements, and appurtenances owned by Seller
and in any way appurtenant to or related to the
properties described in this paragraph.
SELLER: Royal Neighbors of America, a fraternal benefit society
organized under the laws of the state of Illinois.
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TITLE A commitment for an ALTA 1992 Owners Title Insurance Policy
COMMITMENT: for the Real Property issued by the Title Insurer in the full
amount of the Purchase Price, covering title to the Real
Property, dated on or after the date hereof, showing Seller as
owner of the Property in fee simple, and showing Purchaser as
the prospective named insured.
TITLE INSURER Chicago Title Insurance Company, or such other title insurer as
the parties may mutually agree upon.
ARTICLE II
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PURCHASE AND SALE
2.1 PURCHASE AND SALE. Subject to the conditions and on the terms
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contained in this Agreement, Purchaser agrees to purchase and acquire from
Seller, and Seller agrees to sell and transfer to Purchaser, the Real Property
by the Deed, and the Personal Property by the Bill of Sale.
ARTICLE III
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PURCHASE PRICE
3.1 PURCHASE PRICE. The Purchase Price shall be NINE HUNDRED
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THIRTY-THREE THOUSAND DOLLARS ($933,000) payable as hereinafter provided.
Purchaser agrees to pay to Seller and Seller agrees to accept payment of the
Purchase Price as follows:
(a) The Deposit shall be applied against the Purchase Price at
Closing.
(b) Purchaser shall provide at Closing such additional sums as is
necessary to pay to Seller the agreed upon Purchase Price.
ARTICLE IV
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CLOSING MATTERS
4.1 TITLE. No later then ten (10) business days from the Effective
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Date of this Agreement, Seller shall deliver the Title Commitment to Purchaser,
together with legible copies of all exceptions or conditions to title identified
therein.
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<PAGE>
4.2 FINANCING. Purchaser shall have (30) days from the Effective
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Date of this Agreement in which to obtain financing on terms and conditions
which meet its approval. However, unless Purchaser notifies Seller on or before
the thirtieth (30th) day after the Effective Date that it has not found
satisfactory financing, Purchaser shall be deemed to have waived this financing
requirement as a condition of Closing. Should Purchaser notify Seller within the
thirty-day time limit that it has not found satisfactory financing, then this
Agreement shall be declared null and void without further obligation of either
party, except that the Deposit delivered to the Title Insurer shall be returned
to Purchaser.
4.3 NOTICE OF INTENT. Purchaser shall have forty-five (45) days from
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the Effective Date of this Agreement to review all matters related to its
decision as to whether it wishes to close this transaction. On or before the end
of business on the 45th day after the Effective Date of this Agreement,
Purchaser shall deliver to Seller either a Notice of Intent to Proceed or a
notice that it no longer wishes to consummate the transaction. Such notice shall
be in compliance with Section 9.1 of this Agreement. Should Purchaser elect to
deliver a Notice of Intent to Proceed, Purchaser shall contemporaneously
therewith deliver to Title Insurer the sum of $120,000 to be held as Deposit, as
that term is defined herein. Unless Purchaser delivers both the Notice of Intent
to Proceed and the $120,000 additional Deposit on or before the 45th day
following the Effective Date of this Agreement, this Agreement shall be declared
terminated without further obligation by either party, except that the Deposit
delivered to Title Insurer will be returned to Purchaser.
4.4 DEMOLITION.
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(a) Within fifteen (15) days of receipt of the Notice of Intent to
Proceed and payment of the additional deposit, Seller shall enter into a
contract for the demolition of the building under terms substantially similar to
the contract attached hereto, marked as Exhibit "B", and by this reference
incorporated herein. The demolition shall proceed in accordance with the terms
of the contract. When the demolition is completed, Seller shall be entitled to
submit to Title Insurer a request for payment. Upon receipt of such request,
along with appropriate lien waivers from the demolition contractor, Title
Insurer shall pay out of the Deposit sums due the demolition contractor.
(b) Seller shall deliver to Purchaser within ten days of receipt of
payment from Title Insurer a Notice of Completion of Demolition. Upon receipt of
such notice, Purchaser shall conduct such inspection of the Premises and records
concerning the demolition. Purchaser shall have fifteen (15) days within which
to notify Seller that it objects to the condition of the Property after
demolition. Only such items as affect the scope of the demolition work not being
performed in accordance with the Demolition Contract attached hereto as Exhibit
B, or which affect the environmental condition of the Property and were not
discovered or could not reasonably be discovered by Purchaser prior to
Purchaser's original delivery of its Notice of Intent to Proceed may be raised
by the Purchaser at this time. Unless Purchaser provides Seller with notice of
objection to the condition of Property within fifteen (15) days of its receipt
of Notice of Completion of Demolition from Seller, all matters which could have
been raised by Purchaser
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after its receipt of Notice of Completion of Demolition shall be deemed to have
been waived by Purchaser and Parties shall proceed to closing.
(c) Should Purchaser notify Seller that it objects to the condition of
the Property after demolition, Purchaser shall provide a written notice to
Seller detailing the nature of the objection. Seller shall have ten days to
notify Purchaser whether it intends to cure the objection and proceed with
closing or declare this agreement null and void. Should Seller decide to cure
the objection, Seller may extend the Closing for up to 120 days if Seller is
diligently pursuing curing Purchaser's objection. If Seller determines that it
cannot or will not cure Purchaser's objection, then this agreement shall be
terminated without further rights by either party, except the full Deposit shall
be returned to Purchaser, including any funds drawn by Seller to pay for the
demolition.
4.5 POSSESSION, PRORATIONS AND EXPENSES.
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(a) Sole and exclusive possession of the Property shall be delivered to
Purchaser on the Closing Date.
(b) General and special real estate and other ad valorem taxes and
assessments and other state or city taxes, fees, charges and assessments
affecting the Property, utility charges and deposits, if any, and all other
customarily proratable items shall be prorated as of Closing Date on the basis
of the most recent ascertainable amounts of or other reliable information in
respect to each such item of income and expense and the net credit to Purchaser
or Seller shall be paid in cash or as a credit against the Purchase Price. The
foregoing notwithstanding, any general or special assessment payable in
installments shall be paid by Seller in full at Closing. All prorations will be
calculated as of the end of the day immediately prior to the Closing Date.
(c) Seller shall pay one-half (1/2) of the closing charges, and all
state and county transfer taxes in connection with the transaction contemplated
hereby. Purchaser shall pay title charges for the Title Commitment, the owner's
title policy required, including any endorsements thereto, one-half (1/2) of the
closing charges, municipal transfer taxes, and all charges for recordation of
the Deed. The parties shall each be solely responsible for the fees and
disbursements of their respective counsel and other professional advisers.
4.6 CLOSING.
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(a) The transaction contemplated hereby shall close at 10:00 a.m. on the
30th day after Seller's delivery to Purchaser of the Notice of Completion of
Demolition ("Closing Date") at the offices of the Title Insurer in Hayward,
California, unless the parties agree to an earlier date.
(b) On the Closing Date, Seller shall deposit the Title Insurer the
following:
(i) The Deed;
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(ii) An affidavit that Seller is not a foreign person as described
in the Foreign Investment in Real Property Tax Act, which shall include
Seller's tax identification number;
(iii) A California Form 590-RE Real Estate Witholding Exemption
Certificate.
(iv) An assignment of the indemnification provision relating to
environmental matters contained in the agreement between Seller and Criton
Technologies guaranteed by Dyson-Kissner-Moran Corporation dated October
24, 1994.
(v) An extended coverage ALTA 1992 Policy of Title Insurance (the
"Owner's Title Policy") issued by the Title Insurer conforming to the
requirements of Section 4.1 insuring Purchaser's title in indefeasible
fee simple in the amount of the Purchase Price, containing no exceptions
other than those exceptions listed in the title commitment and not
objected to by Purchaser and excluding coverage for Survey.
(vi) A Closing Certificate.
(vii) Such other documents, instruments, certifications and
confirmations as may be reasonably required and designed by Purchaser to
fully effect and consummate the transaction contemplated hereby.
(c) On the Closing Date, Purchaser shall deposit with the Title Insurer
the following:
(i) The balance of the Purchase Price as provided in Section
3.1(b); and
(ii) Such other documents, instruments, certifications and
confirmations as may be reasonably required and designated by Seller to
fully effect and consummate the transaction contemplated hereby.
(d) Seller and Purchaser shall jointly deliver to each other at Closing
an agreed proration statement and certificates complying with the provisions of
state, county and local law applicable to the determination of documentary and
transfer taxes.
ARTICLE V
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BROKERAGE
5.1 BROKERAGE. Seller hereby agrees to pay to Broker for Seller a
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commission for such sale on condition that the sale is consummated as herein
provided. Commission shall be paid out of Seller's funds at the closing.
Seller hereby represents and warrants to Purchaser that Seller has not dealt
with any other broker or finder in respect to the transaction contemplated
hereby except John McManus, who was originally affiliated with Broker but
currently works for
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<PAGE>
White Commercial Real Estate. Mr. McManus has agreed to look solely to Broker
for payment. Purchaser hereby represents and warrants to Seller that Purchaser
has not dealt with any other broker or finder in respect to the transaction
contemplated hereby. Purchaser and Seller each hereby agree to indemnify the
other for any claim for brokerage commission or finder's fee asserted by a
person, firm, or corporation, claiming to have been engaged by them.
ARTICLE VI
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DESTRUCTION, DAMAGE OR CONDEMNATION
6.1 DESTRUCTION OR DAMAGE. The parties understand that Purchaser is
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buying the Property as vacant land. Therefore, Purchaser agrees to assume all
risk of loss associated with the destruction of the building or other
improvements on the Property and agrees to take the Property in its condition at
the time of Closing, subject to the Seller completing Demolition pursuant to
Section 4.4 hereof. Seller may elect to continue its insurance coverage on the
Property and will be entitled to receive any and all proceeds associated with
any damage or destruction between the Effective Date and the Closing Date.
6.2 CONDEMNATION. If, subsequent to the Effective Date and prior to the
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Closing Date, any proceeding, judicial, administrative or otherwise, which shall
relate to the proposed taking of any portion of the Real Property by
condemnation or eminent domain or any action in the nature of eminent domain, or
the taking or closing of any right of access to the Real Property, is
threatened, instituted or commenced, Purchaser shall have the right and opinion
to terminate this Agreement. Unless Purchaser notifies Seller within 20 days of
Purchaser's receipt of notice from Seller that the Property may be condemned
that it intends to accept the Property subject to the Condemnation, this
Agreement shall be declared terminated without further liability to either
party, except the Deposit shall be returned to Purchaser along with any funds
received by Seller from Purchaser for extending the Closing Date. If Purchaser
notifies Seller of its intent to accept the Property after Condemnation,
Purchaser shall be credited with or be assigned all Seller's right to any
proceeds therefrom. Seller agrees to furnish Purchaser written notification
with respect to any such proceedings within forty-eight hours of Seller's
receipt of any such notification or learning of the institution or threatened
institution of such proceedings.
ARTICLE VII
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COVENANTS, REPRESENTATIONS, WARRANTIES
7.1 AFFIRMATIVE COVENANTS, REPRESENTATIONS AND WARRANTIES OF SELLER.
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Seller took possession of this Property through default by its ground lessee
under a net lease transaction. Seller has not conducted a thorough inspection of
the property nor is it aware of all the activities that took place at the
Property prior to its taking possession of the Property.
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<PAGE>
(a) Seller hereby represents and warrants as of the Effective Date and
as of the Closing Date that, to its actual knowledge and without any
investigation or obligation or duty to so investigate, that:
(i) there are no leases with respect to the occupancy of the
Property and no party has any right to the use or occupancy of any part
thereof;
(ii) there is no pending condemnation or similar proceeding
affecting the Real Property or any portion thereof, and Seller has not
received any written notice and has no knowledge that any such proceeding
is contemplated;
(iii) except for the demolition proposal attached as Exhibit "B" to
this Agreement, there are no contracts of employment, management,
maintenance, service, supply, or rental outstanding which affect any
portion of the Property;
(iv) no work has been performed or is in progress and no materials
have been furnished, which might give rise to mechanic's, materialman's,
or other liens against the Property or any portion thereof;
(v) Seller is duly organized, validly existing, and in good
standing under the laws of the state of its origin and has full right,
title, authority, and capacity to execute and perform this Agreement and
to consummate all of the transactions contemplated herein, and the
individual of the Seller who executes and delivers this Agreement and all
documents to be delivered to Purchaser hereunder is and shall be duly
authorized to do so;
(vi) except for the items which are to be assumed by Purchaser or
to be prorated as hereinbefore or hereinafter set forth, Seller shall be
solely liable for payment of all costs and expenses, liabilities,
obligations, and claims arising out of Seller's ownership and Seller's
operation of the Property prior to Closing; and Seller hereby agrees to
defend, indemnify, and hold Purchaser (any designee) forever harmless
therefrom;
(vii) all information given to Purchaser or by or on behalf of
Seller and pertaining to the Property or the operations thereon is true
and correct in all respects, and fully and accurately depicts the matters
set forth therein; further, neither Seller nor any officer of Seller knows
of any facts, conditions, or other information which have not been
disclosed fully to Purchaser and which could reasonably be expected to
have a material bearing or effect upon Purchaser's decision to enter into
this Agreement and Purchaser's decision to consummate the transactions
contemplated hereby;
(viii) that except for such matters as are disclosed to the
Purchaser pursuant to Paragraph 7.1(d) of this Agreement, there are no
transactions, suits, proceedings (including zoning or other land use
regulation proceedings), litigation governmental actions, or
investigations pending or threatened against or affecting Seller or the
Property, which would prevent Seller from meeting any of its obligations
under this Agreement or
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<PAGE>
which would result in a material adverse change in the condition or
operation of the Property.
(ix) that since Seller took possession of the Property in August
1993, Seller has not placed or caused to be placed any hazardous materials
on the Property.
All of Seller's warranties and representations shall survive any inspection or
investigation made by or on behalf of Purchaser and shall not merge with
delivery of the Deed but shall survive for a period of eighteen months from
delivery of said Deed. Seller agrees to indemnify Purchaser for any damages
incurred by Purchaser as a result of a breach of the warranties and
representations given by Seller in this Agreement.
(b) From the Effective Date to the Closing Date or earlier termination
of this Agreement, Seller shall not do, suffer or permit or agree to do any of
the following:
(i) Enter into any transaction in respect to or affecting the
Property out of the ordinary course of business, except a contract for
demolition of the existing structure on the Property;
(ii) Sell, encumber, or grant any interest in the Property or any
part thereof in any form or manner whatsoever, or otherwise perform or
permit any act which will diminish or otherwise affect Purchaser's
interest under this Agreement or in the Property which will prevent
Seller's full performance of its obligations hereunder.
(c) Seller shall permit Purchaser and representatives, agents,
employees, lenders, contractors, appraisers, architects, and engineers
designated by Purchaser access to and entry upon the Real Property and the
Improvements to examine, inspect, measure and test the Property (the "Physical
Inspection"). Purchaser acknowledges that the improvements have been severely
damaged and are scheduled to be torn down as part of this Agreement. Purchaser
agrees to take the Property in an "as-is", "where-is" condition at time of
closing, subject to Seller completing the demolition pursuant to Section 4.4
hereof, and will have ample opportunity to conduct a full inspection of the
Property. In the event Purchaser elects not to proceed with this transaction,
Purchaser agrees to return the Property to the condition it was in prior to the
Purchaser conducting its inspection. Purchaser agrees to assume the risk of harm
in inspecting the Property and agrees to indemnify Seller for any third party
claims resulting from Purchaser's inspection of the Property. Purchaser's
obligations under this subsection shall survive any termination or nullification
of this Agreement.
(d) Seller shall deliver to Purchaser not later than ten (10) business
days following the Effective Date, true, correct and complete copies of the
following to the extent in Seller's possession:
(i) Real estate tax bills received by Seller pertaining to the
Real Property;
(ii) Any environmental studies and engineering reports in Seller's
possession;
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(iii) A list of all known actions, suits, and legal or
administrative proceedings relating to the Property.
(e) Seller shall notify Purchaser promptly if Seller becomes aware of
any transactions or occurrence prior to the Closing Date which would have an
adverse impact on the Property or Seller's ability to Close this Agreement.
(f) At Closing Seller shall deliver the Property free and clear of all
debris, scrap material, oil drums, and other like material. Purchaser may
inspect the Property prior to Closing to insure Seller's compliance with this
requirement. Seller shall deliver to Purchaser evidence that any asbestos or
asbestos containing material contained in the Improvements have been removed
from the Property and disposed of properly by the Seller.
ARTICLE VIII
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CONDITIONS PRECEDENT AND TERMINATION
8.1 CONDITIONS TO PURCHASER'S OBLIGATIONS. The obligations of the
Purchaser under this Agreement are subject to satisfaction of all of the
conditions set forth in this Section 8.1. Purchaser may waive any or all of such
conditions in whole or in part but any such waiver shall be effective only if
made in writing. After the Closing, any such condition that has not been
satisfied shall be treated as having been waived in writing. Provided Purchaser
has not already terminated this Agreement pursuant to either Section 4.2,
Section 4.3, or Section 4.4(c), no such waiver shall constitute a waiver by
Purchaser of any of its rights or remedies if Seller defaults in the performance
of any material covenant or agreement to be performed by Seller or if Seller
breaches any representation or warranty made by Seller or in Seller's Closing
Certificate. If any condition set forth in this Section 8.1 is not fully
satisfied or waived in writing by Purchaser or by the applicable dates set forth
below, this Agreement shall, at Purchaser's option, terminate, but without
releasing Seller from liability if Seller defaults in the performance of any
such material covenant or agreement to be performed by Seller or if Seller
materially breaches any such representation or warranty made by Seller before
such termination.
(a) Before Closing Date Purchaser has not notified Seller of intent to
terminate due to lack of satisfactory financing pursuant to Paragraph 4.2 of
this Agreement.
(b) Before Closing Date Purchaser has notified Seller of Purchaser's
intent to proceed with this Agreement prior to the expiration of the 45-day
period referenced in paragraph 4.1 of this Agreement.
(c) On the Closing Date, Seller shall not be in default in the
performance of any material covenant or agreement to be performed by Seller
under this Agreement since Purchaser's acceptance of the Property after Seller
has provided its Notice of Completion of Demolition. Seller shall not have
given purchaser an Environmental Notice from any appropriate
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<PAGE>
Governmental Agency and there shall not have been a release of Hazardous
Materials or a violation of Environmental Laws at the Real Property since Seller
provided its Notice of Completion of Demolition.
(d) On the Closing Date, Purchaser shall have received written
confirmation from Broker that all leasing commissions owed to Broker as to any
leases entered into with respect to the Real Property shall have been paid or,
alternatively, that Broker acknowledges and agrees that Purchaser and its
successors shall have no obligation for payment of such pre-existing
commissions.
8.2 CONDITIONS TO SELLER'S OBLIGATIONS. The obligation of Seller to
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close the transaction contemplated hereby is, at Seller's option, subject to all
obligations of Purchaser which were to have been performed on or before the
Closing Date having been timely and duly performed. If any condition precedent
to Closing of Seller as set forth in this Section 8.2 has not been fulfilled and
satisfied on or before the Closing Date, Seller may elect by written notice
within 10 days of Closing Date, to extend the Closing Date for a period not to
exceed 30 days to permit Purchaser to fulfill such conditions, or may elect to
terminate this Agreement, provided that the Seller is not itself in default, and
shall be entitled, as its sole remedy, to retain the Deposit as full and
complete liquidated damages pursuant to Paragraph 8.3 (and not as a penalty or
forfeiture) and all other funds and documents theretofore delivered hereunder or
deposited in escrow by either party, except for such funds as may have been paid
to Seller as consideration for extending the Closing Date, shall be promptly
returned to such party.
8.3 LIQUIDATED DAMAGES. IF ESCROW FAILS TO CLOSE DUE TO BUYER'S
------------------
DEFAULT UNDER THIS AGREEMENT, SELLER WILL BE DAMAGED AND WILL BE ENTITLED TO
COMPENSATION FOR THOSE DAMAGES. SUCH DAMAGES WILL, HOWEVER, BE EXTREMELY
DIFFICULT AND IMPRACTICAL TO ASCERTAIN FOR THE FOLLOWING REASONS: (1) THE
DAMAGES TO WHICH SELLER WOULD BE ENTITLED IN A COURT OF LAW WILL BE BASED IN
PART ON THE DIFFERENCE BETWEEN THE ACTUAL VALUE OF THE PROPERTY AT THE TIME SET
FOR THE CLOSE OF ESCROW AND THE PURCHASE PRICE FOR THE PROPERTY AS SET FORTH IN
THIS AGREEMENT; (2) PROOF OF THE AMOUNT OF SUCH DAMAGES WILL BE BASED ON
OPINIONS OF VALUE OF THE PROPERTY, WHICH CAN VARY IN SIGNIFICANT AMOUNTS; AND
(3) IT IS IMPOSSIBLE TO PREDICT AS OF THE DATE ON WHICH THIS AGREEMENT IS MADE
WHETHER THE VALUE OF THE PROPERTY WILL INCREASE OR DECREASE AS OF THE DATE SET
FOR THE CLOSE OF ESCROW. BUYER DESIRES TO LIMIT THE AMOUNT OF DAMAGES FOR WHICH
BUYER MIGHT BE LIABLE SHOULD BUYER BREACH THIS AGREEMENT. BUYER AND SELLER WISH
TO AVOID THE COSTS AND LENGTHY DELAYS WHICH WOULD RESULT IF SELLER FILED A
LAWSUIT TO COLLECT ITS DAMAGES FOR A BREACH OF THIS AGREEMENT.
THEREFORE, IF ESCROW FAILS TO CLOSE DUE TO BUYER'S DEFAULT, THE SUM
REPRESENTED BY BUYER'S DEPOSIT AND EXTENSION DEPOSITS DELIVERED TO TITLE
INSURER, IF ANY, IF BUYER EXERCISES ITS RIGHT TO THE EXTENSION
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<PAGE>
PERIODS SHALL BE DEEMED TO CONSTITUTE A REASONABLE ESTIMATE OF SELLER'S DAMAGES
UNDER THE PROVISIONS OF SECTION 1671 OF THE CALIFORNIA CIVIL CODE, AND SELLER'S
SOLE AND EXCLUSIVE REMEDY IN THE EVENT OF THE FAILURE TO CLOSE ESCROW RESULTING
FROM BUYER'S DEFAULT SHALL BE LIMITED TO SUCH SUM AND SUCH SUM SHALL BE PAID TO
SELLER AS LIQUIDATED DAMAGES UPON BUYER'S DEFAULT. BY INITIALING THIS PROVISION
IN THE SPACES BELOW, SELLER AND BUYER EACH SPECIFICALLY AFFIRM THEIR RESPECTIVE
AGREEMENTS CONTAINED IN THIS AGREEMENT AND AGREE THAT SUCH SUM IS A REASONABLE
SUM CONSIDERING THE CIRCUMSTANCES AS THEY EXIST ON THE DATE OF THIS AGREEMENT.
SELLER HEREBY WAIVES ANY RIGHT TO AN ACTION FOR SPECIFIC PERFORMANCE OF ANY
PROVISIONS OF THIS AGREEMENT.
/s/ R.E.S. /s/ M.J.M.
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Seller's Initials Purchaser's Initials
ARTICLE IX
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NOTICES
9.1 NOTICES. Any notice, request, demand, instrument or other
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document to be given or served hereunder shall be in writing and shall be
delivered personally or sent by registered or certified mail, return receipt
requested, postage prepaid, or by overnight express courier with next business
day delivery specified, or by facsimile transmission and addressed to the
parties at their respective addresses set forth below, and the same shall be
effective upon receipt if delivered personally, or five (5) business days after
deposit in the mails, if mailed, or upon receipt if deposited with an overnight
express courier or sent by facsimile transmission. A party may change its
address for receipt of notices by service of a notice of such change in
accordance herewith.
If to Purchaser:
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Etec Systems, Inc.
Attention: Saul E. Arnold, Esq.
26460 Corporate Avenue
Hayward, California 94545
Facsimile (510) 887-2870
If to Seller:
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Royal Neighbors of America
Attention: Jeffrey H. Martell
230 Sixteenth Street
Rock Island, Illinois 61201
Facsimile: (309) 788-2129
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<PAGE>
Copy to:
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Grubb & Ellis Commercial Real Estate Services
Attention: _______________________
1111 Broadway, Suite 2150
Oakland, California 94607
Facsimile (510) 891-9756
ARTICLE X
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ADDITIONAL COVENANTS
10.1 ENTIRE AGREEMENT, AMENDMENTS AND WAIVERS. This Agreement contains
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the entire agreement and understanding of the parties with respect to the
subject matter hereof, and the same may not be amended, modified or discharged
nor may any of its terms to waived except by an instrument in writing signed by
the party to be bound thereby.
10.2 FURTHER ASSURANCES. The parties each agree to do, execute,
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acknowledge and deliver all such further acts, instruments and assurances and to
take all such further action before or after the Closing as shall be necessary
or desirable to fully carry out this Agreement and to fully consummate and
effect the transaction contemplated hereby.
10.3 SURVIVAL AND BENEFITS. All representations, warranties, agreements,
---------------------
obligations and indemnities of the parties shall, notwithstanding any
investigation made by any party hereto, survive Closing and the same shall inure
to the benefit of and be binding upon the Purchaser's designee and the
respective successors and assigns of the parties.
10.4 NO THIRD PARTY BENEFITS. This Agreement is for the sole and
-----------------------
exclusive benefit of the parties hereto, the designee of Purchaser herein
referred to, and their respective successors and assigns, and no third party is
intended to or shall have any rights hereunder. Purchaser reserves the right to
assign its rights under this Agreement and/or designate at Closing to accept
title to the Property.
10.5 INTERPRETATION.
--------------
(a) The headings and captions herein are inserted for convenient
reference only and the same shall not limit or construe the paragraphs or
sections to which they apply or otherwise affect the interpretation hereof.
(b) The terms "hereby", "hereof", "hereto", "herein", "hereunder" and
any similar terms shall refer to this Agreement, and the term "hereafter" shall
mean after, and the term "heretofore" shall mean before, the date of this
Agreement.
13
<PAGE>
(c) Words of the masculine, feminine or neuter gender shall mean and
include the correlative words of other genders and words importing the singular
number shall mean and include the plural number and vice versa.
(d) Words importing persons shall include firms, associations,
partnerships (including limited partnerships), trusts, corporations and other
legal entities, including public bodies, as well as natural persons.
(e) The terms "include", "including", and similar terms shall be
construed as if followed by the phrase "without being limited to".
(f) This Agreement and any document or instrument executed pursuant
hereto may be executed in any number of counterparts each of which shall be
deemed an original, but all of which together shall constitute the same
instrument.
(g) Whenever under the terms of this Agreement the time for performance
of a covenant or condition falls upon a Saturday, Sunday or holiday, such time
for performance shall be extended to the next business day, otherwise all
references herein to "day" shall mean calendar days.
(h) This Agreement shall be governed by and construed in accordance with
the laws of the State of California.
(i) In any action to enforce or interpret any of the terms of this
Agreement, the prevailing party shall be entitled to recover its expenses,
including reasonable attorneys fees and costs of litigation.
(j) Time is of the essence of this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed and delivered by
Seller and Purchaser on the date first above written.
Purchaser:
ETEC SYSTEMS, INC., a Nevada corporation
By: /s/ Melanie J. Mock
-------------------
Name: Melanie J. Mock
-------------------
Title: Treasurer
-------------------
14
<PAGE>
Seller:
ROYAL NEIGHBORS OF AMERICA, an Illinois
fraternal benefit society
By: /s/ Ronald E. Schorg
---------------------
Name: Ronald E. Schorg
------------------
Title: Investment Manager
------------------
15
<PAGE>
EXHIBIT A
Lots 19 and 20, as shown on the map of "Tract 2898, EDEN LANDING INDUSTRIAL
PARK, CITY OF HAYWARD, ALAMEDA COUNTY, CALIFORNIA", filed June 30, 1967, in Book
55 of Maps, Pages 25 to 29, inclusive, in the office of the County Recorder of
Alameda County.
Assessors Parcel No. 461-0001-021-01
ADDRESS OF PROPERTY: 26415 Corporate Avenue
Hayward, California
16
<PAGE>
Exhibit 10.24
June 30, 1997
Etec Systems, Inc.
26460 Corporate Avenue
Hayward, CA 94545
Re: Purchase of Improvements and Parcel
-----------------------------------
Ladies and Gentlemen:
This letter, when signed by Etec Systems, Inc. (the "Company") and by
Creditanstalt Corporate Finance, Inc. ("Creditanstalt") will (i) supersede in
its entirety the August 7, 1996 commitment ("August Commitment") of Corporate
Property Associates 12 Incorporated ("CPA:12") to provide funds to its
subsidiary ESI (CA) QRS 12-6, Inc. (the "Owner") to fund the Second Disbursement
and the Third Disbursement (as these terms are defined in the August Commitment)
and (ii) will constitute the commitment of CPA:12 to provide funds to Owner
(A) to purchase modifications (the "Improvements") to the headquarters buildings
of the Company located at 26460 Corporate Avenue, Hayward, California (the
"Site") and leased by Owner to the Company pursuant to an Amended and Restated
Lease Agreement dated as of January 31, 1997 (the "Lease") and, at the option of
the Company, (B) to purchase a to be vacant parcel of land (the "Parcel")
described in Exhibit "A" attached hereto and made a part hereof. The acquisition
of the Improvements, a schedule of which is attached hereto as Schedule "1" and
the possible acquisition of the Parcel are referred to collectively in this
commitment as the "Project". Any capitalized terms used herein without
definition or reference shall have the meaning specified in the Lease.
This commitment has the following terms and conditions:
1. The total amount of the commitment by Owner to purchase the
Improvements and Parcel is a maximum of $11 million plus an acquisition fee
payable by Owner to W.P. Carey & Co., Inc. and/or its affiliates. A maximum of
$1 million will be available, at the Company's option, for the purchase of the
<PAGE>
Etec Systems, Inc. -2- June 30, 1997
Parcel. If the Company elects not to use the funds to purchase the Parcel, the
$1 million will be available to pay for the Improvements.
2. Payments in respect of the costs of the Project (to the general
contractor for the Improvements, the seller of the Parcel or others) will be
paid by the Company.
3. The closing (the "Closing") will be the purchase by the Owner
of the Improvements (which will be designated by the Company, such designation
to be satisfactory to Owner and Creditanstalt) and the Parcel (if the Company
elects to purchase the Parcel) and payment of the purchase price ("Purchase
Price") in the amount of the sum of (i)(A) the lesser of certified costs of the
Improvements or $10 million (or $11 million if the Company elects not to use the
funds to purchase the Parcel) plus (B) the lesser of the appraised value of the
----
Parcel or $1 million (if the Company elects to purchase the Parcel), plus
----
(ii) an acquisition fee equal to the difference between (X) the amount
specified in the foregoing clause (i), divided by .955, minus (Y) the amount
---------- -----
specified in the foregoing clause (i). The acquisition fee will be payable by
Owner to W.P. Carey & Co., Inc. and/or its affiliates. Concurrently with the
closing of the transactions contemplated by this letter, certain modifications
to the Lease as described in Exhibit "B" and to the documents securing the
Initial Loan from Creditanstalt to Owner will be made in order to conform the
Initial Loan documents to the terms of this letter and the relevant
modifications to the Lease and will be effective.
4. The commitment of CPA:12 hereunder is subject to (a) compliance
by the Company with the terms of this commitment, (b) there being no material
adverse change in the financial condition of the Company on the date of Closing
relative to the financial condition of the Company as of the end of the
Company's fiscal year ending July, 1996 (except as disclosed in the unaudited
quarterly statements of the Company through April 30, 1997) and (c) no Event of
Default existing under the Lease.
5. The Company agrees to take all steps reasonably necessary to
cause the Improvements to be completed in a first class manner and to provide to
Owner and Creditanstalt in connection therewith all customary documentation
(such as the issuance of a permanent certificate of occupancy, title
<PAGE>
Etec Systems, Inc. -3- June 30, 1997
insurance, and, if applicable, an acceptable survey), legal opinions and
corporate documents.
6. Owner's obligation to purchase the Parcel shall be subject to
Owner's and Creditanstalt's approval in their sole discretion applying prudent
business judgment of the environmental condition of the Parcel, the title to the
Parcel, the zoning classification, et cetera. If the Company elects to have
-- ------
Owner purchase the Parcel, the Company shall provide to the Owner and
Creditanstalt with respect to the Parcel environmental reports, evidence of
disposal of any Hazardous Substances resulting from the demolition of the
building on the Parcel, title insurance, a survey and other customary due
diligence materials available to the Company all in form and substance
satisfactory to Owner and Creditanstalt.
7. To the extent required by the Lease, the Owner and Creditanstalt
hereby consent to the construction of the Improvements. The Company agrees to
comply with the provisions of Paragraph 13 of the Lease regarding construction
of the Improvements.
8. If the Company does not elect to have Owner purchase the Parcel
the commitment of the Owner to purchase the Improvements will remain in effect,
subject to the terms hereof.
9. Regardless of whether the purchase of the Project is completed,
the Company agrees to pay all reasonable costs and expenses incurred by CPA:12,
Owner and Creditanstalt in connection with the preparation, negotiation and
execution of this commitment, and the documents necessary to carry out the
transactions contemplated hereby. If Creditanstalt commits to increase the
Initial Loan, the Company further agrees to pay all reasonable costs and
expenses associated with a failure of the Initial Loan to close by reason of a
default by the Company under its obligations expressed in paragraph 5 hereof
(including "breakage" costs incurred by Creditanstalt associated with a failure
to fund any fixed rate commitment), but the Company shall not be responsible for
such costs and expenses associated with a failure of the Initial Loan increase
to close for any other reason.
10. The Closing shall occur, if at all, no later than December 30,
1997, time being of the essence.
<PAGE>
Etec Systems, Inc. -4- June 30, 1997
If the foregoing is acceptable, please sign a copy of this letter and
return it to us.
Very truly yours,
CORPORATE PROPERTY ASSOCIATES
12 INCORPORATED
By: /s/ Gordon J. Whiting
--------------------------
Name: Gordon J. Whiting
------------------------
Title: First Vice President
-----------------------
ESI (CA) QRS 12-6, INC.
By: /s/ Gordon J. Whiting
--------------------------
Name: Gordon J. Whiting
------------------------
Title: First Vice President
-----------------------
We agree to the foregoing.
ETEC SYSTEMS, INC.
By: /s/ Melanie J. Mock
--------------------------
Melanie Mock
Treasurer
<PAGE>
Creditanstalt agrees to the provisions of this commitment and consent to
the amendments of the Lease as provided in Exhibit "B" attached hereto.
CREDITANSTALT CORPORATE
FINANCE, INC.
By: /s/ Jack Bertges
--------------------------------
Name: Jack R. Bertges
------------------------------
Title: Senior Vice President
-----------------------------
By: /s/ J. McCann
--------------------------------
Name: James F. McCann
------------------------------
Title: Vice President
-----------------------------
<PAGE>
Exhibit "B"
Amendments to Lease Upon Closing
The following amendments to the Lease shall take effect at the
Closing under the letter agreement to which this Exhibit "B" is attached.
1. Leased Premises: The Leased Premises shall be expanded to
---------------
include the Improvements and, if applicable, the Parcel.
2. Term: The Initial Term shall be extended to the end of the month
----
falling 15 years after the Closing. The Company will have five-year renewal
options thereafter upon the terms and conditions of the Lease, extending for a
total (including the Initial Term) of 34 years and nine months (or such shorter
period as may be designated by the Company) from the Closing.
3. Rent: Basic Rent under the Lease will be equal to the sum of the
----
following:
(a) Then current Basic Rent, plus
(b) An amount equal to the equal monthly amortization payment
required to pay in full the Purchase Price over the remainder of the Initial
Term (modified as provided in paragraph 1 above) at an annual interest rate
equal to 8.38%.
The portion of Basic Rent described in (b) above shall not be
adjusted as of March 1, 1998. Other portions of Basic Rent shall be adjusted as
the Lease provides. CPI adjustments on the entire amount of Basic Rent every
three years after March 1, 1998 during the Initial Term, but the first such
adjustment of the portion of Basic Rent described in (b) above (as of March 1,
2001) shall be by reference to the CPI which was in effect at the Closing.
4. Earthquake Insurance: Paragraph 16(a)(i) of the Lease will be
--------------------
amended to provide that earthquake insurance will be required in a amount equal
to the sum of (a) $7,000,000 and (b) 41% of the cost paid by Owner for the
Improvements (such sum to be capped at $10,000,000 until May 1, 1998) and with a
20% deductible.
<PAGE>
5. Prepayment Premium: The definition of "Prepayment Premium" will
------------------
be amended to provide that the Prepayment Premium payable by the Company shall
not exceed the amount thereof that would be payable if the outstanding principal
amount of the Loan being prepaid were the sum of $8,221,345 and 60% of the
Purchase Price.
6. Termination Values: The Termination Values shall be revised as
------------------
follows:
<TABLE>
<CAPTION>
Amended Lease Year Termination Value ("TV")
- ------------------ ------------------------
<S> <C>
1 Then current TV + 101.50% of
Purchase Price ("PP")
2 Then current TV + 101.25% of PP
3 Then current TV + 88.75% of PP
4 Then current TV + 88.75% of PP
5 Then current TV + 80.00% of PP
6 Then current TV + 80.00% of PP
7 Then current TV + 80.00% of PP
8 Then current TV + 80.00% of PP
9 Then current TV + 70.50% of PP
10 Then current TV + 70.50% of PP
11 Then current TV + 70.50% of PP
12 Then current TV + 70.50% of PP
13 Then current TV + 69.00% of PP
14 Then current TV + 69.00% of PP
15 and thereafter Then current TV + 69.00% of PP
</TABLE>
"PP" means the amount of the Purchase Price.
7. Definition of "Acquisition Cost": The amount of the Acquisition
--------------------------------
Cost shall be increased by the amount of the Purchase Price plus the Acquisition
Fee.
<PAGE>
EXHIBIT 23
ETEC SYSTEMS, INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (File Nos. 333-33645, 333-00390, 333-00386, 333-00352,
333-00388, and 333-00392) of Etec Systems, Inc. of our report dated August 27,
1997 appearing on page 27 of the Annual Report on Form 10-K for the year ended
July 31, 1997.
Price Waterhouse LLP
San Jose, California
October 23, 1997
<PAGE>
EXHIBIT 24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on October 23, 1997.
Etec Systems, Inc.
By /s/ William D. Snyder
_____________________________________
William D. Snyder
Vice President and Chief Financial
Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints jointly and severally, Stephen E. Cooper and
William D. Snyder, and each of them, his or her true and lawful attorneys-in-
fact, each with the power of substitution, for him or her in any and all
capacities, to sign any and all amendments to this Annual Report on Form 10-K
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each said attorneys-in-fact, or his substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant in the capacities.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Stephen E. Cooper President, Chief Executive October 23, 1997
____________________________________ Officer (Principal Executive
Stephen E. Cooper Officer) and Chairman of the
Board.
/s/ William D. Snyder Vice President and Chief October 23, 1997
____________________________________ Financial Officer (Principal
William D. Snyder Financial Officer and
Principal Accounting
Officer)
/s/ Edward L. Gelbach Director October 23, 1997
____________________________________
Edward L. Gelbach
* Director October 23, 1997
____________________________________
Jack H. King
/s/ Catherine P. Lego Director October 23, 1997
____________________________________
Catherine P. Lego
/s/ John McBennett Director October 23, 1997
____________________________________
John McBennett
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John Suzuki Director October 23, 1997
____________________________________
John Suzuki
* Director October 23, 1997
____________________________________
Thomas Michael Trent
/s/ Robert L. Wehrli Director October 23, 1997
____________________________________
Robert L. Wehril
</TABLE>
/s/ William D. Snyder
*By ___________________________
Attorney-in-Fact
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUL-31-1997
<PERIOD-START> AUG-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 55,975
<SECURITIES> 34,262
<RECEIVABLES> 56,015
<ALLOWANCES> 1,136
<INVENTORY> 67,202
<CURRENT-ASSETS> 238,462
<PP&E> 56,741
<DEPRECIATION> 14,728
<TOTAL-ASSETS> 284,543
<CURRENT-LIABILITIES> 82,159
<BONDS> 0
0
0
<COMMON> 217
<OTHER-SE> 197,424
<TOTAL-LIABILITY-AND-EQUITY> 284,543
<SALES> 206,561
<TOTAL-REVENUES> 240,914
<CGS> 98,416
<TOTAL-COSTS> 124,287
<OTHER-EXPENSES> 38,247<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 988
<INCOME-PRETAX> 53,274
<INCOME-TAX> 18,835
<INCOME-CONTINUING> 34,439
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,439
<EPS-PRIMARY> 1.57
<EPS-DILUTED> 1.57
<FN>
<F1>EXCLUDES SG&A AS SG&A IS PART OF 5-03(b)(4).
</FN>
</TABLE>
