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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT
OF 1934
For the fiscal year ended December 31, 1996.
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For the transition period from to .
Commission file number 0-19507
SubMicron Systems Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3607944
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6620 Grant Way, Allentown, PA 18106 18106
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (610) 391-9200
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 par value
(Title of Class)
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 the 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 the 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. [X].
Based on the closing sale price of March 3, 1997, the aggregate market value of
the voting stock held by nonaffiliates of the Registrant was $49,140,720.
The number of shares outstanding of the Registrant's Common Stock was 16,890,014
at March 3, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy Statement with respect
to the Registrant's 1997 Annual Meeting of Stockholders, to be filed no later
than 120 days after the end of the Registrant's fiscal year.
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PART I
ITEM 1. BUSINESS
General
SubMicron Systems Corporation (the "Company" or "SubMicron"), through its
subsidiaries, designs and manufactures and markets silicon wafer surface
preparation equipment, chemical delivery and management systems, and other
technologies for use in the production of semiconductor wafers and integrated
circuits (ICs).
SubMicron Systems, Inc. (SSI)
SSI designs, manufactures and markets advanced wet processing equipment
for sale primarily to the semiconductor and silicon wafer manufacturing
industries. Utilizing advanced robotics systems and sophisticated software, this
equipment carries out precise and highly controlled critical cleaning, etching
and stripping steps in the production process. Modular in design, SSI wet
stations provide the customer with the flexibility to reconfigure or extend the
systems to meet future needs by replacing or adding individual modules.
Universal Plastics (UP)
Complementing the product line offered by SSI, UP manufactures a broad
line of wet processing equipment, including manual and semi-automatic models
which require greater operator assistance to accomplish wafer processing tasks.
UP also offers wet stations which incorporate a higher degree of automation and
robotics. The utilization of UP's systems extends beyond the semiconductor
sector to include such applications as circuit boards, parts cleaning, plating,
and substrates of other electronic devices. The systems are typically utilized
in research and development, and pilot line applications as well as volume
manufacturing.
Systems Chemistry Incorporated (Systems Chemistry)
Systems Chemistry provides automated chemical distribution and management
systems to the semiconductor, flat-panel display, recording head and related
industries. The systems control and dispense high purity acid, caustic,
oxidizer, and solvent chemicals throughout a factory, typically from bulk
chemical storage to point-of-use locations. Delivery methods vary with
individual installations and customer specifications and have included the three
basic industry methodologies of pumping, vacuum/pressure, and pump/pressure.
Advanced control capabilities provide the customer with improved chemical
quality, lower emissions, reduced consumption, special mixing techniques and
safety. Systems Chemistry also offers chemical waste collection and the ability
to interface with chemical reprocessors.
IMTEC Acculine, Inc. (IMTEC)
IMTEC designs, develops, tests, manufactures and markets temperature
regulated baths, megasonics systems, as well as a number of ancillary products
for the semiconductor manufacturing and related industries. Many of IMTEC's
products are developed for use in wet processing equipment. The company's
megasonics systems, for instance, produce high-frequency acoustical waves in
tank baths to augment chemical action taking place on the wafers.
PRIMAXX(TM) Corporation
In July 1996, the company formed a new subsidiary, PRIMAXX Corporation.
PRIMAXX was created to design, manufacture and market tools for single-wafer
processing. Using gas-phase chemistries to remove organics, particulates and
metals from wafer substrates, PRIMAXX provides the foundation for the thin films
necessary for high-yield production of advanced ICs. Based on the PRIMAXX
platform, the PRIMAXX2F(TM) has been designed to deposit ferroelectric material
on wafer surfaces.
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Industry Background
The need for new processes and systems capable of manufacturing silicon
wafers and high performance electronic devices with increasingly complex
circuits has increased the demand for new semiconductor production equipment.
Since 1980, the semiconductor industry has met the growing demand for more
advanced Dynamic Random Access Memory (DRAM) by providing integrated circuits
with smaller circuit designs and increased memory capacity. With the successive
development of the 64KB, 256KB, 1MB, 4MB and 16MB DRAMs, feature sizes of the
circuits have declined from a size greater than 2.0 microns to 0.5 micron for a
16MB DRAM. At the same time, the size of the wafers has increased from four
inches (100mm) in diameter to eight inches (200mm) in diameter. The first wafer
fabrication facility built specifically to process 12-inch wafers (300mm) is
scheduled to begin production in 1998.
Silicon wafers are transformed into semiconductor chips in a specialized
production facility known as a wafer fabrication line. Integrated circuit
manufacturing involves a complex series of repetitive process steps to transform
a raw silicon wafer into an integrated circuit The number of steps involved in
the manufacture of DRAMs has increased from approximately 60 process steps for
the 64KB (64 thousand bits) circuit to over 250 process steps for the 16MB (16
million bits) circuit. A critical part of the fabrication process is the
cleaning of the wafers to remove particles, oxides and metal contamination
which, if not removed, can render a circuit inoperable, particularly if the size
of the contaminant particle is larger than the geometry of the integrated
circuitry. As the circuits on DRAMs have become smaller, the tolerance levels
for contaminants on the wafer surface have declined in order to maintain
commercially acceptable yields.
Wafer and Semiconductor Device Fabrication
The basic component in the manufacture of semiconductor devices is a thin,
circular crystalline wafer, typically 100mm to 200mm in diameter, composed of
silicon or another semiconductor material. During the fabrication process,
several layers of conductive or dielectric materials are sequentially grown or
deposited on the wafer surface through a series of thermal or chemical
procedures. Production occurs in a controlled environment known as a "clean
room," which is a manufacturing facility separated from the outside environment
and which employs specialized filters to reduce the number of particulates in
the air within the facility. Each layer undergoes a series of processes to etch
and strip away a portion of the layer, leaving the desired integrated circuit
pattern. The wafers are ultimately separated into individual integrated circuits
or discrete components and are then packaged, assembled and tested.
The typical integrated circuit fabrication process takes between eight and
twelve weeks. The primary stages of this process are discussed below. The
typical "base" silicon wafer fabrication process takes between three and six
weeks.
Cleaning. The wafer surface must be cleaned and prepared in order to begin
the IC fabrication. As the integrated circuits' geometry becomes smaller and
more complex, the reduction of organic, metal and particle contamination of the
wafer becomes a critical factor in wafer processing. Specific contaminants are
organic, oxide films and metals. These contaminants can destroy individual
circuits and must be removed prior to the growth or deposit of subsequent layers
on the wafer. Contamination removal is also required prior to high-temperature
operations so that the contamination is not diffused into the wafer during such
operations. The wafer must also be cleaned at various other stages in the
fabrication process to continue to remove contaminants and particulates.
Cleaning is generally performed by exposing the wafer to a sequence of
liquid chemical baths or gas vapors. SSI's products are designed to perform
these functions throughout the integrated circuit fabrication process. As many
as 50 of the 300 process steps involved in manufacturing an advanced IC take
place in a wet station. In addition to contamination from particles left over
from the various steps in the fabrication process, such as etching or stripping,
contaminants may also be introduced from the equipment and chemicals utilized in
the manufacturing process.
SSI has designed its automated wet stations to reduce the level of
contamination to which the wafer is exposed during operation of its equipment.
SSI's "rear-mounted" system has two-axis robots which permit the front of the
system to be closed off to the outside environment, thereby reducing particulate
contamination. The Company's GAMA-1(TM) is a self contained system not exposed
to the outside environment. Both types of equipment are assembled in a clean
room, which reduces the risk of equipment contamination during assembly.
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Layering. After initial cleaning and wafer surface preparation, a thin
film of either conductive or dielectric material is grown or deposited on the
wafer surface. Depending upon its particular electrical properties, a layer
functions as an insulator, semiconductor or conductor.
Photolithography. After the film layer is deposited on the wafer, it is
covered with photoresist, a light sensitive material. Integrated circuit
patterns are then projected onto the photoresist by exposing it to an energy
source. Chemical changes occur in the portion of the photoresist exposed to the
energy source. These changes result in a transfer of the image of the desired
circuit onto the wafer.
Etching. After a circuit pattern has been imprinted, the image on the film
is developed, which creates precisely defined areas of protected and unprotected
photoresist. The next step in the fabrication process is etching, which involves
removal of the unprotected areas of the patterned film, leaving behind the
desired circuit pattern. The etching can be accomplished with either a wet
chemistry process, using liquid chemicals, or a dry chemistry (typically plasma)
process, using chemical gases. The circuit is then electrically charged, or
doped, through the diffusion or implantation of ions.
Stripping. After the surface has been electrically charged, the
remaining areas of photoresist are stripped off the wafer with either a wet
chemistry or a dry chemistry process.
These operations are repeated numerous times during the fabrication
process; the exact number depends upon the type and complexity of the
semiconductor device. A finished integrated circuit consists of a number of film
layers which together form thousands of extremely small electronic components
that combine to perform the desired electrical functions. Each step in the
fabrication process requires precision and must be rigorously controlled to
attain commercially acceptable yields and cost performance.
Products
Automated Wet Stations. SubMicron's primary business is the design and
manufacture of automated wet stations, accounting for approximately 60% of net
sales for the year ended December 31, 1996. A wet station consists of an
interconnected series of chemical processing modules, each programmed to apply
specific chemicals, gases or vapors to the wafer surface in order to remove
particles and other contaminants, to etch deposited layers or strip photoresist
from the wafer. Wafers are processed in the wet station primarily by immersing
the wafer in a chemical bath or by placing the wafer into a vapor chamber. Other
modules in a system are used to rinse and dry the wafer. Wafers are transported
from module to module by a robotic arm. The robot and specific chemical or vapor
used with each module, including the chemical or vapor concentration and
temperature, are controlled by a computer and customized software included with
each system.
SubMicron's automated systems are designed to minimize the level of
contaminants introduced into the fabrication process by reducing both the
contamination level of its components and the chemicals used in its systems as
well as the degree of operator interaction necessary for operation. Each system
is based on a standardized modular design which is intended to permit
reconfiguration of the system to meet particular customer needs and
specifications. The modular design also provides certain flexibility in
reconfiguring or expanding the system as integrated circuits become more complex
and processing requirements change.
SubMicron's new generation of automated wet station, called GAMA-1(TM), is
designed to achieve the future industry requirements for fabrication of silicon
wafers of up to 300mm and device features as small as 0.25/0.35 microns,
required for manufacturing 64MB DRAMs.
GAMA-1(TM) is designed to provide lower operating costs and reduced
emissions compared to other cleaning systems. The GAMA-1(TM) incorporates the
following features:
Reduced Exhaust Emissions: GAMA-1(TM) utilize a proprietary Class 1
mini-environment which emits less exhaust emission compared to
conventional systems. This makes the tool more environmentally
friendly and safer for human operators than certain other systems.
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Point-of-Use Concentration Control: Each chemical bath incorporates
a point-of-use concentration control called In-situ Chemical
Efficiency (ICE) which extends the useful chemical life, thus
reducing chemical consumption and waste.
Semi-Cassetteless Carriers: Typical wet stations utilize a cassette
to hold the silicon wafers, which requires the equipment and
chemical tanks to perform the cleaning process on the cassette as
well as the wafers. A semi-cassetteless system reduces the cleaning
load by enabling a reduction in the size of tanks and the volume of
the chemical required to process wafers.
Smaller footprint: The GAMA-1(TM) station incorporates chemical
dispense and mix units, which in the past had been remote, into the
design of the wet station. This enables a reduction in overall floor
space required.
To further reduce the level of contaminants introduced into the
fabrication process by its automated wet stations, SSI assembles and packages
all of its automated wet station systems in a Class 10 clean room (fewer than
ten particles per cubic foot of air per minute contained in the air circulating
through the clean room).
SSI's systems also offer the following features, many of which are sold
separately as additions to, or replacements for, existing systems:
Megasonic Cleaning System (Phaser). SubMicron's high frequency/high power energy
cleaning system (the "TurboPhaser") uses high frequency energy waves to remove
particle contamination from a batch of wafers immersed in a chemical bath. This
process, also known as megasonic cleaning, is designed to assist in the removal
of contaminants from the wafer surface which generally cannot be removed by
standard spray wafer processing. The TurboPhaser is operated by an electronic
controller and possesses transducer assemblies capable of operating (from a
single power supply) at a frequency range of .75 Mhz to 1.2 Mhz and emitting
over 1600 watts per transducer utilized in a wet station. There are patent
applications pending for portions of the megasonic cleaning system. The
TurboPhaser may be used in both UP and SSI wet benches, and is also available as
an OEM subsystem for incorporation or retrofit into other wet benches. This
technology has been transferred to IMTEC to complement and extend its line of
products.
Point-of-Use Chemical Generation System (POUCG). This patented system mixes
liquid chemicals at the point of use (the particular tank in the wet station) by
injecting specific gases into purified water contained in station processing
tanks. Many semiconductor manufacturing facilities supply chemicals to
processing tanks from a central plant system often located hundreds of feet from
the processing tanks. Because chemicals can be transported from a central plant
system with few contaminants, the POUCG system is generally able to produce
purer chemicals for application in processing tanks than those distributed in
liquid form from a central plant system. Furthermore, this system reduces the
need to utilize certain commercially prepared liquid chemicals which typically
are not at the purity levels attained by the chemicals generated by SubMicron's
system.
Point-of-Use Chemical Concentration System (ICE, In-situ Chemical Efficiency).
The concentration of chemicals utilized in process tanks, whether supplied in
liquid form from a central plant system or generated from gas at the
point-of-use, diminish over time. SubMicron's system continuously monitors the
chemical concentration in the process tanks and injects chemical gases into
processing tank solutions as necessary in order to maintain chemical
concentration. The system's ability to replenish depleting chemicals reduces the
need to replace chemicals, resulting in lower customer chemical usage and
disposal costs. SubMicron has patented a portion of this system.
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High-Temperature Recirculation/Filtration System. The continuous recirculation
and filtration of the chemicals in a tank provides an alternative to
conventional, stagnant process solutions which require more frequent chemical
changes. Although this product has a higher initial cost than conventional
recirculation systems, the Company believes the system is generally less
expensive to operate than conventional systems because it reduces chemical
consumption, contamination and disposal costs.
Sulfuric Ozone Injection and Recirculation System. This system, for which
SubMicron has received a patent, is designed for continuous sulfuric filtration
and solution oxidation. The system has certain advantages over conventional
liquid oxidized solutions, including the reduction of the contaminants and
chemical consumption and disposal, the minimization of sulfuric dilution, the
extension of sulfuric bath life and the elimination of certain metal cleaning
process steps.
Chemical Mix/Bulk Dispense System. This system offers precise mass ratio mixing
and high purity recirculation and filtration for dispensing chemicals utilized
in the cleaning, stripping and etching of wafers.
All Teflon Recirculation/Filtration System. This product offers a high-purity
process recirculation and filtration system for chemicals utilized in SSI's
process tanks. The system features a pneumatic pump surge suppressor designed to
extend pump and filter life and to provide continuous flow and standard
aspirated draining of the entire wet station system.
Turbo DI Water Rinse. SubMicron's Turbo DI (Deionized) Water Rinse is a
processing tank utilized for combination quick-dump/spray/high-flow cascade
rinsing and gas injection. SubMicron has received a patent for this processing
tank's design. The design allows for uniform chemical application to wafer
surfaces, and the tank may be programmed for continuous variable temperature
liquid injection.
Cluster Tool Dry Cleaning System (PRIMAXX(TM) Corporation product line).
SubMicron's current automated chemical process systems make primary use of
liquid (wet) chemical processing. SubMicron believes that as semiconductor
devices become more complex, the industry will move towards single wafer
processing and that gas (dry) processing techniques will be employed in more
phases of the fabrication process. Several companies are utilizing dry chemical
vapor deposition (CVD) techniques to deposit layers on single wafers for
subsequent process applications. These CVD techniques are most effective when
performed in a nonatmospheric (vacuum) environment. In order to maintain a
vacuum as wafers proceed through the fabrication process, a standard industry
interface, called MESC, has been established which permits processing tools to
be connected to each other so that wafers may be transferred between processing
steps without being exposed to atmospheric or human contact. The MESC interface
provides the means for tools to be clustered together, thereby taking up less
space in a fabrication line. Moreover, cluster tools are completely closed to
the outside environment and do not need to be kept in clean room conditions.
In order to successfully perform dry CVD processing, the wafer must first
be cleaned. Wet stations, which use liquid chemicals in atmospheric conditions,
permit oxidation contamination on the wafer surface and therefore cannot be used
in the cluster module. PRIMAXX(TM) has been designed to remove certain
contaminants as well as moisture in a vacuum, and permits vacuum wafer transfer
to the CVD reactor, thereby preventing oxidation contamination. SubMicron has
obtained a patent relating to the dry cluster cleaning tool and has developed
proprietary processes used in connection with the dry cluster cleaning tool.
Accordingly, SubMicron is expending a significant portion of its research
and development efforts in the area of dry processing. It has provided a grant
through December 1996 to Pennsylvania State University which funds research to
evaluate prospects for extending PRIMAXX(TM) technology for further use in the
semiconductor manufacturing industry.
SubMicron does not believe that dry cluster tools will replace the need
for its automated wet station. Dry cluster cleaning tools remove moisture,
organics, oxides and metals from wafer surfaces but the technology cannot clean
heavily contaminated wafers, nor can it remove particles. SubMicron's wet
stations, which remove particle contamination with the aid of
megasonics-enhanced chemical processing tanks (acoustical energy cannot be
transmitted in a vacuum/gas environment) is still expected to be needed to
prepare the wafer surface prior to cluster tool processing and for other
processing steps which do not utilize dry technology.
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The Company also has developed an extension of PRIMAXX(TM) to perform
etching steps as well as a deposition tool called the PRIMAXX2F(TM) which is
designed to deposit uniform films of ferroelectric materials used in advanced
applications, such as non-volatile memory devices.
Research and Development
The market for semiconductor manufacturing equipment is characterized by
rapid technological change and product innovation. SubMicron believes that
continued and timely development of new products and enhancements to existing
products are necessary to maintain its competitive position within the industry.
Accordingly, SubMicron is committed to an active research and development
program and regularly consults with customers, industry groups and academic
institutions to determine the changing needs of the industry.
SubMicron's research and development programs are primarily focused on
devising methods for producing cleaner wafer surfaces required for smaller
geometry integrated circuits, increasing process control and flexibility through
monitoring and software management systems, and further developing robotic
automation in the clean room for single wafer processing. The Company believes
that evolving technological challenges in the manufacturing process of advanced
semiconductor devices present significant opportunities and challenges.
SubMicron maintains a 2,600 square-foot Class 1 Applications Laboratory in
a portion of its Allentown facility. The Applications Lab provides the Company's
customers with the ability to process their wafers on the Company's equipment.
The equipment in the Applications Lab includes a GAMA-1(TM) station, a
PRIMAXX(TM) module, a semi-automatic wet station and a rear mount station. The
Applications Lab also contains equipment for analytical process performance data
on the quality of the Company's equipment. This capability includes defect
analysis for particles and ionics as well as oxide uniformity analysis. The
Applications Lab also provides a test facility for the Company's future
products. SubMicron currently maintains a research and development process
engineering staff of 48.
Expenditures for research and development are charged to expense as
incurred. During 1996, 1995 and 1994 research and development expenses were
approximately $9.4 million, $5.7 million and $3.4 million, respectively.
Marketing, Sales and Service
SubMicron markets and sells its products for use in both new fabrication
lines and as replacement systems or components for existing fabrication lines.
Potential customers for SubMicron's products include advanced semiconductor
manufacturers worldwide. Geographically, four principal markets exist: Japan;
the United States; Europe; and the Far East.
In 1996, approximately 70% of the Company's net sales were to major chip
manufacturers in the United States and, therefore, the Company has directed the
majority of its sales and marketing efforts in the U.S. SubMicron sells its
products in the United States through a combination of a direct sales force and
manufacturer's representatives.
SubMicron is increasing its marketing effort in Europe and the Far East.
SubMicron has a sales office in France and a subsidiary in Singapore. SubMicron
also has a joint venture agreement with a Japanese company, whereby SubMicron
has given exclusive manufacturing and distribution rights in Japan for one of
its products. In exchange, SubMicron receives exclusive manufacturing and
distribution rights in the United States for one of the Japanese company's
products. The Company believes this agreement enhances its ability to penetrate
the Japanese market.
SubMicron has experienced and expects to continue to experience variations
in its customer mix. The timing of an order for SubMicron's products is
primarily dependent upon the customer's expansion program, replacement needs or
requirements to improve semiconductor device fabrication productivity and
yields. Consequently, a customer that places significant orders in one year may
not necessarily place significant orders in subsequent years.
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Due to the substantial operational and financial commitments customers
make when they purchase a system, SubMicron believes that its ability to provide
prompt and effective field support is critical to its marketing efforts.
SubMicron employs 122 full-time field service engineers to assist and train its
customers in performing preventative maintenance and to service SubMicron's
equipment. For certain large domestic and international orders, SubMicron
provides full-time on-site technical support and maintenance for the first year.
After the first year, SubMicron offers maintenance contracts whereby one or more
employees of SubMicron will work full time at the customer's facility and
provide service, maintenance and/or training for customer's personnel on a fee
basis. SubMicron typically provides its customers with a one-year
parts-and-labor warranty on products, which generally begins two months after
delivery of a product. In an attempt to reduce the cost of such warranties,
SubMicron generally requires its vendors to provide a comparable parts warranty
on the component parts not manufactured by SubMicron.
Backlog
SubMicron schedules production of its systems based upon order backlog.
SubMicron includes in its backlog only those customer orders for which it has
accepted purchase orders and assigned shipment dates within the next
twelve-month period. As of December 31, 1996 and 1995, SubMicron's backlog was
approximately $71.8 million and $113.5 million, respectively. Because of
possible changes in delivery schedules and cancellations of orders, SubMicron's
backlog at any particular date is not necessarily representative of actual sales
for any succeeding period.
Manufacturing and Assembly
SubMicron performs a performance/cost analysis of each component of its
products and manufactures only those component parts for which it believes there
is a functional, quality or major cost advantage. Other components are purchased
from third-party vendors. Many of these purchased items are standard products,
although certain parts are made to SubMicron's specifications. Accordingly,
SubMicron's manufacturing activities consist primarily of assembling and testing
components and subassemblies, and integrating them into a finished system.
SubMicron believes that this method allows it to achieve relatively flexible
manufacturing capacity, while lowering overhead expenses.
SubMicron assembles its automated wet systems in a Class 10 clean room
environment which is similar to the clean rooms used by many semiconductor
manufacturers for wafer fabrication. Universal Plastics and Systems Chemistry
also assemble and test their finished products in clean rooms. This procedure is
intended to reduce the amount of particulate and other contaminants in its
system, thereby improving yield for its customers. Following assembly, the
completed system is packaged in a clean room environment to maintain clean room
standards prior to shipment.
SubMicron attempts to maintain minimal inventory and to order component
part supplies only as needed to manufacture a system for which a purchase order
has been received. This approach subjects SubMicron to the risk that a component
part or supply will be unavailable. SubMicron has attempted to reduce this risk
by maintaining multiple approved vendors of component parts and supplies
necessary for the manufacture of its systems and attempting to forecast
requirements. To date, SubMicron has not experienced any material delay in the
manufacture of its products caused by the inability to obtain component parts or
supplies, although there can be no assurance that SubMicron will not experience
any such delays in the future.
Competition
The semiconductor equipment manufacturing industry is highly competitive.
The principal competitive factors in the industry are the quality, performance,
reliability, price and operating cost of the processing equipment. There can be
no assurance that levels of competition in SubMicron's particular product
markets will not intensify or that SubMicron's technological advantages may not
be reduced or lost as a result of technological or other advantages by
competitors or changes in semiconductor processing technology. Many of
SubMicron's competitors have greater financial and other resources than
SubMicron.
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The primary competition to SubMicron's automated wet station equipment is
from Japanese companies, principally DaiNippon Screen Manufacturing Co., Ltd.,
Sugai Chemical Industry Co., and Sankyo Engineering Co., Ltd. SubMicron also
competes with a number of non-Japanese companies, including Santa Clara Plastics
Manufacturing Co., a U.S. company. In addition, SubMicron faces competition from
a number of domestic companies which supply manual wet stations at a price
significantly lower than the price of SubMicron's automated system.
Patents and Trademarks
SubMicron holds 10 United States patents, has 3 allowed United States
patent applications and has several patent applications pending in the United
States covering various features of its products and products under development.
SubMicron currently has 6 foreign patents and 5 patent applications pending
outside of the United States. Although SubMicron believes that the protection of
its proprietary technologies and products is important, it believes that patent
protection is less important to its success than other competitive factors such
as a skilled workforce, technical expertise and the ability to adapt quickly to
changes in the marketplace. SubMicron attempts to protect its proprietary
information through non-disclosure agreements with its key employees.
Employees
At December 31, 1996, the Company had 667 full time employees, of whom 211
were engaged in manufacturing, 122 were engaged in field service, 83 were
engaged in research and development, 155 were engaged in engineering and in
sales and marketing and 96 held general and administration positions.
SubMicron is not subject to any collective bargaining agreements.
Company History
Trinity Capital Enterprise Corp. (Trinity) was formed in March 1991 to
serve as a vehicle to effect a merger, exchange of capital stock, asset
acquisition or other similar business combination with an operating business. On
August 31, 1993, SSI merged into a subsidiary of Trinity, and Trinity changed
its name to SubMicron Systems Corporation (the Company). Under the terms of the
merger, Trinity issued a total of 5,666,440 shares of its Common stock in
exchange for all outstanding shares of SSI Common stock. For financial reporting
purposes, the acquisition was treated as a recapitalization of SSI with SSI as
the acquirer (reverse merger).
In May 1994, the Company acquired the assets of DiPiero, Inc. (d/b/a
Universal Plastics) in exchange for assuming liabilities of approximately $2.3
million. For financial reporting purposes, the acquisition was accounted for as
a purchase. In February 1995, the Company acquired all of the outstanding stock
of Systems Chemistry for 3,400,000 shares of Common stock. In March 1996, the
Company acquired all of the outstanding Common stock of IMTEC Acculine, Inc. for
575,000 shares of Common stock. Each of the Systems Chemistry and IMTEC
transactions was accounted for as a pooling of interests and, accordingly,
historical financial data has been restated.
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ITEM 2. PROPERTIES
SubMicron's principal manufacturing and design facilities of SSI occupy
approximately 90,000 square feet of three separate buildings in Allentown,
Pennsylvania. The lease for these facilities expires in January 1998. The
current monthly rental expense, including expenses, is $58,125.
In November 1996, the Company entered into a lease with a related party
for a 35,000 square foot facility near its main Allentown operations. The
facility is being used for additional office and manufacturing space and to
provide a training facility for the Company. The seven year lease provides for
monthly rental expense ranging from $21,565 to $23,453 with rental adjustments
on the second and fourth anniversary of the lease agreement.
Systems Chemistry occupies 38,019 square feet of a building in Santa
Clara, California with current monthly rental expense of $29,559. UP occupies
26,340 square feet of a building in Santa Clara, California with current monthly
rental expense of $18,916. IMTEC occupies 16,400 square feet of a building in
Sunnyvale, California, with a current monthly rental expense of $7,360. The
Company's Singapore subsidiary occupies 700 square feet of office space in
Singapore. SubMicron also leases four sales offices, two in Texas, one in
California and one in France. The Company's facilities are expected to be
adequate to support its operations.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to lawsuits arising, from time to time, in the
ordinary course of its business. In the opinion of management, the ultimate
resolutions of such matters will not have a material impact on SubMicron's
financial position, liquidity or results of operations.
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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 the fiscal year covered by this report.
Item A. Executive Officers of the Registrant
Name Age Positions with the Company
- ---- --- --------------------------
David F. Levy 52 Chairman of the Board and Chief Executive Officer
Daniel G. Hajjar 58 Chief Operating Officer
R.G. Holmes 49 Chief Financial Officer and Treasurer
Mr. Levy, the founder of SSI, was SSI's Chairman of the Board, President
and Chief Executive Officer from its inception in October 1988 until its merger
with the Company. He assumed these positions with the Company upon consummation
of the merger. In addition, Mr. Levy was Treasurer of the Company from the date
of the merger until December 1995. Prior to his founding of SSI, Mr. Levy was
Vice President - Automation Division of Dexon from February 1988 to November
1988 and Vice President, Sales and Marketing of Dexon, from November 1985 to
February 1988. From 1983 to 1985, Mr. Levy was Vice President of Sales and
Marketing for Micron Air Systems and from 1978 to 1982, he was head of the
Manufacturing Systems and Procedures Group for Signetics Corporation. Mr. Levy
has a BS degree in Mechanical Engineering from Pontifica Universidade Catolica
and an MBA from John F. Kennedy University of Orinda, California.
Daniel G. Hajjar has been Chief Operating Officer since September 1995,
and was Vice President, Business Operations from 1993 to such time. From 1985 to
1993, Mr. Hajjar held a number of management positions in Operations, Business
Development and Engineering with Matrix Integrated Systems, Inc., most recently
as Vice President of Operations. Prior thereto, Mr. Hajjar was in operations
management with GCA Corp., and President/CEO of Trans-International Trading,
Inc. Mr. Hajjar holds a BS degree in Industrial Technology from Northeastern
University.
R.G. Holmes has been Chief Financial Officer since July 1995 and
Treasurer since December 1995. From 1987 to 1994, Mr. Holmes was Vice
President Finance and Chief Financial Officer of Celgene Corporation. From
1982 to 1987 he held senior management positions in corporate planning and
finance with Ziyad, Inc. Mr. Holmes holds a BS degree in Industrial
Engineering from Lehigh University and an MBA from Harvard University.
11
<PAGE> 12
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under
the symbol "SUBM." The following table sets forth for the periods indicated the
closing price range of the Common stock as furnished by Nasdaq.
<TABLE>
<CAPTION>
Common Stock
Quarter Ended High Low
- ------------- ---- ---
<S> <C> <C>
March 31, 1995 $7-3/16 $4-1/8
June 30, 1995 12 6-3/4
September 30, 1995 14 8-3/8
December 31, 1995 11-7/8 9-3/8
March 31, 1996 11-1/4 8
June 30, 1996 11-11/16 7-7/8
September 30, 1996 8-7/8 4-5/8
December 31, 1996 5-9/16 3-41/64
</TABLE>
At March 3, 1997, there were 940 record holders of the Company's Common
stock. The Company has not paid any dividends on its Common stock. The Company
does not anticipate paying dividends on its Common stock in the foreseeable
future, and its banking agreements also restrict the Company's ability to pay
dividends.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------
1996 1995(1) 1994(1) 1993(1) 1992(1)
--------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Net sales $ 171,484 $123,068 $86,119 $ 57,607 $ 34,408
Cost of sales 142,748 84,352 57,882 37,839 23,598
--------- -------- ------- -------- --------
Gross profit 28,736 38,716 28,237 19,768 10,810
Selling, general and
administrative 41,337 29,109 21,465 12,860 7,791
Research and development 9,373 5,678 3,357 2,059 1,574
Special charges -- -- -- 787 397
--------- -------- ------- -------- --------
Operating (loss) income (21,974) 3,929 3,415 4,062 1,048
Other (expense) income, net (4,701) 1,258 72 (259) (245)
--------- -------- ------- -------- --------
(Loss) income before income
taxes and cumulative effect
of accounting change (26,675) 5,187 3,487 3,803 803
Income tax (benefit) expense (6,566) 1,498 1,454 1,049 (302)
--------- -------- ------- -------- --------
(Loss) income before
cumulative effect of
accounting change (20,109) 3,689 2,033 2,754 1,105
--------- -------- ------- -------- --------
Cumulative effect of
accounting change -- -- -- 440 --
--------- -------- ------- -------- --------
Net (loss) income $ (20,109) $ 3,689 $ 2,033 $ 3,194 $ 1,105
========= ======== ======= ======== ========
Net (loss) income per
common share $ (1.20) $ 0.23 $ 0.13 $- $-
========= ======== ======= ======== ========
PRO FORMA INCOME DATA
(UNAUDITED):
Income before income taxes $- $- $- $ 3,803 $ 803
Pro forma income tax
expense (benefit) -- -- -- 1,738(2) (151)(2)
Cumulative effect of
accounting change -- -- -- 440 --
--------- -------- ------- -------- --------
Pro forma net income $- $- $- $ 2,505 $ 954
========= ======== ======= ======== ========
Pro forma net income per
common share $- $- $- $ 0.16 $ 0.06
========= ======== ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Total assets $125,934 $119,948 $59,992 $48,309 $17,006
Long-term debt $ 25,195 $ 18,909 $ 2,390 $ 1,607 $ 1,883
Working capital $ 25,618 $ 47,100 $24,178 $28,128 $ 2,557
Stockholders' equity $ 28,676 $ 46,023 $31,808 $28,783 $ 2,762
</TABLE>
- ------------------ (1) In February 1995, the Company acquired all of the
outstanding stock of Systems Chemistry in exchange for 3,400,000 shares of
Common stock. In March 1996, the Company acquired all of the outstanding Common
stock of IMTEC in exchange for 575,000 shares of Common stock. Each transaction
was accounted for as a pooling of interests and, accordingly, historical
financial data has been restated to include Systems Chemistry and IMTEC.
(2) Effective January 1, 1990 and through the date of the merger, SSI was an S
Corporation under the Internal Revenue Code and was not subject to federal (and
some state) corporate income taxes. On August 31, 1993, SSI terminated its S
Corporation status as a result of the merger. The pro forma tax provisions for
1993 and 1992 reflect the appropriate tax provisions as if the Company and its
subsidiaries had been a C Corporation for all periods presented.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
SubMicron, through its subsidiaries, designs, manufactures and markets
automated chemical processing and delivery systems for use in the production of
semiconductor wafers and integrated circuits. Revenue related to system sales is
recognized at the time of title transfer, which ordinarily occurs at the time of
shipment. Revenue related to service activities and sales of items from
inventory is recognized when the service has been performed or when the items
are shipped. Revenue from construction services is recognized when the service
has been performed or when the items are shipped. Revenue from construction
services is recognized on a method similar to the percentage-of-completion
basis. SubMicron's results of operations have varied significantly from quarter
to quarter. These fluctuations, which are likely to continue, are a result of
several factors including, in particular, the relatively high price of
SubMicron's products in relation to quarterly sales and the lead time to
manufacture such products. Accordingly, quarterly results are likely to
fluctuate and the results for any fiscal quarter may not be indicative of the
results for future fiscal quarters.
Cost of systems sold consists of materials, labor and related expenses
associated with the production of a system and are charged to expense when the
revenue related to the system is recognized. Cost of other sales consists
primarily of resale goods which includes only the cost of materials as no parts
or labor are incurred as "added costs" to resale items. Cost of service includes
labor and related expenses on service contracts.
In March 1996, the Company acquired all of the outstanding stock of IMTEC
in exchange for 575,000 shares of Common stock. In February 1995, the Company
acquired all of the outstanding stock of Systems Chemistry in exchange for
3,400,000 shares of Common stock. Each of the transactions was accounted for as
a pooling of interests and, accordingly, historical financial data has been
restated.
The following table sets forth, for the periods indicated, the percentage
of net sales represented by certain items in the Company's consolidated
statements of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF NET SALES
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Total net sales 100.0% 100.0% 100.0%
Total cost of sales 83.2 68.5 67.2
------ ------ ------
Gross Profit 16.8 31.5 32.8
------ ------ ------
Operating Expenses:
Selling, general and administrative 24.1 23.7 24.9
Research and development 5.5 4.6 3.9
------ ------ ------
Total operating expenses 29.6 28.3 28.8
------ ------ ------
Operating (loss) income (12.8) 3.2 4.0
Other (expense) income, net (2.7) 1.0 0.1
------ ------ ------
(Loss) income before income taxes (15.5) 4.2 4.1
Income tax (benefit) expense (3.8) 1.2 1.7
------ ------ ------
Net (loss) income (11.7) 3.0 2.4
====== ====== ======
</TABLE>
14
<PAGE> 15
RESULTS OF OPERATIONS
Year ended December 31, 1996 compared to the year ended December 31, 1995
Net sales consist of revenues from sales of systems, construction and
installation of systems, spare parts and service contracts. Net sales increased
$48.4 million, or 39%, to $171.5 million for the year ended December 31, 1996
from $123.1 million for the year ended December 31, 1995. Systems sales
accounted for a majority of the increase. Systems sales for the year ended
December 31, 1996 increased 54% to $140.8 million as compared to system sales
for the year ended December 31, 1995 of $91.2 million. The increase in system
sales is primarily attributed to the ability of the Company to conform its
systems to the needs of its customers. Service and other sales remained near
1995 levels.
Gross profit decreased 26% to $28.7 million for the year ended December
31, 1996 as compared to gross profit of $38.7 million for the year ended
December 31, 1995. Gross profit, as a percentage of net sales, decreased to 17%
of net sales for the year ended December 31, 1996 from 31% of net sales for the
year ended December 31, 1995. The decrease in 1996 gross profit is in part
attributed to a cyclical slowdown in the semiconductor industry which has led to
pricing pressures and an increase in the number of customized systems. A
majority of the costs associated with the deterioration of the gross profit
margins occurred in the third quarter of 1996, primarily due to higher than
anticipated production costs on several customized orders. During 1996 the
Company recorded significant increases in its inventory, warranty and
installation reserves. In addition, the Company recorded a $3 million writedown
of inventory in the third quarter of 1996 representing approximately 9% of net
inventories at December 31, 1995, due to the inability of a customer to complete
a scheduled purchase of eleven SSI units. The writedown represents approximately
40% of the total cost of the units produced under this order. As of February 28,
1997, the Company had customer orders for three of these units with selling
prices in excess of the original cost before writedown.
Selling, general and administrative expenses were approximately 24% of net
sales for the year ended December 31, 1996 and 1995. Selling general and
administrative expenses were $41.3 million for the year ended December 31, 1996
as compared to $29.1 million for the year ended December 31, 1995, representing
a 42% increase. The increase in selling, general and administrative expenses
relates primarily to an increase in sales volume and related sales and
marketing expenses. The increase was also due to professional fees incurred in
connection with the Company's financing activities, an increase in the Company's
allowance for uncollectable accounts, and a charge for value ascribed to
warrants and options issued for professional services.
Research and development expenses consist of salaries, project materials,
laboratory costs, consulting fees and other costs associated with the Company's
research and development efforts. Research and development expenses were $9.4
million, or 5% of net sales, for the year ended December 31, 1996 compared to
$5.7 million, or 5% of net sales, for the comparable period of the prior year.
Spending on research and development increased $3.7 million, or 65%, over the
prior year due to an increased complexity and testing of the Company's PRIMAXX
gas phase products.
Other expense, net, was $4.7 million or 3% of net sales for the year ended
December 31, 1996 as compared with other income net of $1.3 million or 1% of net
sales for the year ended December 31, 1995. Other expense for the year ended
December 31, 1996 consists primarily of interest charges associated with
borrowings on the Company's line of credit, 9% convertible subordinated notes,
and capital leases. Other income for the year ended December 31, 1995 represents
interest expense on the Company's line of credit and convertible notes offset by
interest income on investments and income recognized from the favorable outcome
of a lawsuit.
The effective tax rate in 1996 of approximately 25%, less than the
statutory federal and state rates, is principally a result of the Company's
recording a valuation allowance of $2.6 million against its deferred tax asset
as of December 31, 1996, thereby reducing the benefit realized on the Company's
1996 net operating loss. In 1995, the effective tax rate of approximately 29%,
is benefited principally from the implementation of a foreign sales corporation.
15
<PAGE> 16
Year ended December 31, 1995 compared to the year ended December 31, 1994
Total net sales in 1995 were $123.1 million, a 43% increase over 1994
total net sales of $86.1 million. The increase was primarily attributable to an
increase in market demand for the Company's products. Systems sales increased to
$91.2 million for the year ended December 31, 1995, as compared to $67.6 million
for the year ended December 31, 1994, an increase of 35%. The increase in demand
for the Company's products also contributed to the increase in the Company's
service and other sales. Service and other sales increased to $31.9 million for
the year ended December 31, 1995 as compared to $18.5 million for the year ended
December 31, 1994, an increase of 72%.
Gross profit increased 37% to $38.7 million in 1995 compared to gross
profit of $28.2 million in 1994. Gross profit as a percentage of sales decreased
to 31% of sales for the year ended December 31, 1995 compared to 33% of sales
for the year ended December 31, 1994. The decrease in the gross profit
percentage is due primarily to introductory pricing and certain cost overruns in
the startup production for GAMA-1(TM) units in the second quarter of 1995.
Selling, general and administrative expenses were $29.1 million for the
year ended December 31, 1995, a 36% increase over the selling, general and
administrative expenses for the year ended December 31, 1994 of $21.5 million.
The increase is primarily attributable to an increase in commission expense and
the hiring of additional sales personnel to accommodate the growth in sales for
the year ended December 31, 1995 as compared to the year ended December 31,
1994. Selling, general and administrative expenses, as a percentage of sales,
decreased to 24% for the year ended December 31, 1995 as compared to 25% for the
year ended December 31, 1994. The decrease as a percentage of sales is
attributable to the significant increase in 1995 sales and the effects of fixed
costs included in selling, general and administrative expenses.
Research and development expenses increased 69% to $5.7 million for the
year ended December 31, 1995 from $3.4 million for the year ended December 31,
1994. Research and development expenses, as a percentage of sales, were 5% for
the year ended December 31, 1995 and 4% of sales for the year ended December 31,
1994. The increase in research and development expense is primarily attributable
to the hiring of personnel to increase the amount of research and development
efforts and to expand the applications laboratory.
Other income (expense) consists of interest income on the Company's
investments offset by interest charges on the Company's lines of credit, capital
leases, and term note. Other income for the year ended December 31, 1995,
includes amounts collected from the favorable outcome of a lawsuit, and is shown
net of legal fees incurred.
The effective tax rate decreased to 29% in 1995 from 42% in 1994,
primarily due to tax benefits received from the use of a foreign sales
corporation.
LIQUIDITY AND CAPITAL RESOURCES
In 1996 cash and cash equivalents decreased $10.6 million to $5.4 million
at December 31, 1996 from $16.0 million at December 31, 1995. SubMicron's cash
used in operating activities varies significantly between periods, and is
primarily due to the timing of shipments and cash receipts. For the years ended
December 31, 1996, 1995 and 1994, SubMicron's operations used cash of
approximately $21.3 million, $20.7 million and $13.3 million, respectively.
Investing activities utilized cash of approximately $6.9 million, $5.9 million
and $3.7 million in 1996, 1995 and 1994, respectively, primarily to purchase
equipment to increase production capacity. Financing activities provided cash of
approximately $17.6 million, $30.0 million and $9.6 million in 1996, 1995 and
1994, respectively. Financing activities in 1996 provided approximately $17.6
million primarily from borrowing on the Company's line of credit, proceeds from
a sale-leaseback transaction and exercises of options and warrants. In 1995,
financing activities provided $19.0 million from the issuance of convertible
notes with detachable warrants, $7.2 million from borrowings on the Company's
lines of credit, approximately $6.4 million from a sale of common stock and $4
million in short term financing by the Company's principals. The financing
activities in 1995 were partially offset by principal payments on long term debt
and capital lease obligations of $5.9 million. The $4 million in short term
financing borrowed by the Company in October 1995 was repaid by the Company in
December 1995. Financing activities in 1994 provided cash through borrowings on
the Company's line of credit, of approximately $8.4 million, and through
proceeds of approximately $1.9 million received from a sale-leaseback
transaction.
16
<PAGE> 17
Working capital decreased approximately $21.4 million to $25.6 million as
of December 31, 1996, from $47.1 million as of December 31, 1995. Accounts
receivable increased approximately $955,000 to approximately $47.6 million as of
December 31, 1996, from approximately $46.6 million at the end of fiscal 1995.
Inventories increased $819,000 to approximately $35.0 million at December 31,
1996 from approximately $34.1 million at December 31, 1995 due principally to an
anticipated increase in projected future sales and the purchasing of several key
manufacturing components to avoid anticipated material shortages. The Company
believes its investment in inventories will continue to require a significant
portion of working capital and, as such, the Company may be subject to an
increasing risk of inventory obsolescence, which could materially adversely
affect the Company's operating results.
In November 1995, the Company received approximately $6 million in net
proceeds from the sale of approximately 700,000 shares of Common stock in a
private placement. In December 1995, the Company issued $19 million principal
amount convertible subordinated notes and detachable warrants to purchase
1,140,000 shares of Common stock. The notes were recorded at $16.5 million, net
of the estimated fair value ascribed to the warrants of $2.5 million. The
warrants are exercisable at $14 per share and expire in December 2000. The note
discount is being amortized over the two year term of the debt.
In February 1996, the Company entered into a $30.0 million credit facility
with a banking group. The Company used the proceeds from the credit facility to
refinance its previous lines of credit and to provide working capital.
Borrowings under the credit facility bear interest at prime, as defined, plus
3.0% and are secured by substantially all of the assets of the Company. As of
December 31, 1996, the Company was not in compliance with certain requirements
of the credit facility, at which date $28.1 million was outstanding. The banking
group has agreed not to accelerate the due date of the credit
facility from its maturity date of August 18, 1997, assuming the Company's
continued compliance with the terms of a new agreement entered into on March
31, 1997. Borrowings under the new agreement may not exceed $28.1 million, and
the interest rate will be prime, as defined, plus 4.0%, effective June 1, 1997.
In March 1997, the Company issued shares of its Series A Convertible
Non-Redeemable Preferred Stock convertible into approximately 2.7 million shares
of Common Stock and approximately $9 million principal amount of its 8%
Convertible Subordinated Notes due March 26, 2002 to previous holders of its 9%
Convertible Subordinated Notes due December 1997 and associated Warrants. The
New Notes are convertible, after stockholder approval, into shares of Common
Stock at $3.70 per share, subject to adjustment. Under the agreement pursuant to
which the Preferred Stock and the New Notes were issued, the Company is required
to undertake certain registration obligations and to obtain stockholder approval
of the convertibility feature of the New Notes. If such obligations are not
fulfilled by January 31, 1998, the New Notes will become due as of such date. As
a result of this transaction, $17.1 million of the 9% convertible subordinated
notes have been classified in the noncurrent portion of long-term debt in the
balance sheet at December 31, 1996.
Management of SubMicron has budgeted approximately $3 million for capital
expenditures in 1997 to expand its production facilities.
In recent years, the Company has been substantially dependent upon
borrowings to finance its operations. Management's estimates of the cash
requirements to fund operating, investing and financing activities in 1997 will
require replacement of the funds currently available under the credit facility.
Without the availability of a sufficient credit facility, the Company is
susceptible to severe cash shortages which may impact its ability to operate.
To provide for the Company's cash and working capital requirements, management
is pursuing additional funding arrangements and believes it can improve the
Company's operating performance and cash flows sufficiently as follows:
- - In response to the combination of the Company's rapid growth, and the
semiconductor industry slowdown which severely impacted the Company's
operations, management has instituted programs designed to reduce costs and
improve performance. Management believes that margin improvements will result
from improvements in quality control already implemented, more controlled
operations resulting from the reduction in the direct labor workforce that
occurred during 1996, and management review of all contract bidding. The Company
also has engaged a consulting firm specializing in high-technology companies to
suggest further operational improvements. Additionally, the Company has altered
its strategy from that of revenue growth to pursuing balanced, controlled growth
with emphasis on operating efficiency. The Company is focusing on application
specific products where it has significant market acceptance and concentrating
its resources accordingly to improve margins. Further, management believes that
its state-of-the-art products, such as the DIO3 process for photo-resist
stripping and organic cleaning, PRIMAXX tools (including the ferroelectric
deposition model), and GAMA3 wet bench for 300 mm wafers, strategically enhance
the Company's position as a key supplier of next-generation technology.
- - Management is in active negotiations with a number of lending organizations
to replace its existing credit facility and to expand the amounts available to
the Company under such a facility at more favorable interest rates.
- - Under the terms of the agreement pursuant to which the new Preferred Stock
and 8% Convertible Subordinated Notes were issued, management plans to seek
shareholder approval of the conversion privileges and register the notes with
the Securities and Exchange Commission.
- - Management intends to evaluate its alternatives and currently plans to sell
certain nonstrategic assets to generate liquidity. Management expects to
complete this process by the maturity date of the credit facility.
- - As needs require or market opportunities arise, management, from time to
time, may consider raising additional funds through equity financing or
strategic partnering arrangements.
- - Management is confident that its cost reduction and performance improvement
programs, controlled growth strategy, current negotiations with lending
organizations, and pursuit of other alternatives will result in the successful
funding of its 1997 working capital and cash requirements; however, if 1997's
financial results do not meet management's expectations and sufficient
additional financings are not available, management has the ability and intent
to reduce certain expenditures, accelerate collection of receivables, or factor
receivables not encumbered by existing loan agreements to minimize additional
capital requirements.
The Company believes that future results of operations will be influenced
by a number of factors, including general economic conditions, timely new
product introduction, the volume, mix and timing of orders received and numerous
other factors. The Company anticipates continued sales growth primarily through
sales of new products. Sales of existing products are expected to remain at 1996
levels. Additionally, the semiconductor industry has experienced a softening
demand which could lead to reduced future sales and increased pricing pressures.
17
<PAGE> 18
The Company believes that with current and future adjustments to its
operating profile it will have sufficient working capital to finance the
Company's operations at current levels. The Company currently has the ability to
finance large orders, expand its facilities, and maintain its research and
development efforts.
The Company's future results will depend upon its ability to achieve
profitable sales growth of its existing products and to successfully introduce
new products to its customers in the semiconductor industry. Due to the inherent
risk in the timing of the development and testing of new products, the Company's
operating results may fluctuate significantly. The Company's results will also
be affected by the condition of the semiconductor industry, as well as the
general economy.
Inflation has not significantly affected the Company's financial position
or operations. Inflation will have the general effect of increasing the
Company's operating expenses. A substantial portion of the Company's
indebtedness bears interest that fluctuates with the prime rate. No assurance
can be given that the prime rate of interest will not fluctuate significantly,
which could have an adverse effect on operations.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended, and is subject to the safe-harbor created by such
sections. Such forward-looking statements concern the Company's operations,
economic performance and financial condition, including in particular sales and
the Company's financing arrangements. Such statements involve known and unknown
risks, uncertainties and other factors that may cause the actual results,
performance or achievements of the Company, or industry results, to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
among others, the following: general economic and business conditions; changes
in customer preferences; competition; changes in technology; changes in business
strategy; the indebtedness of the Company; quality of management, business
abilities and judgment of the Company's personnel; the availability, terms and
deployment of capital; and various other factors references in this Report. The
forward-looking statements are made as of the date of this Report, and the
Company assumes no obligation to update the forward-looking statements or to
update the reasons why actual results could differ from those projected in the
forward-looking statements.
18
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Index to Consolidated Financial Statements and Supplemental Schedule Page
----
<S> <C>
Reports of Independent Auditors 20-22
Consolidated Balance Sheets as of December 31, 1996 and 1995 23
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 24
Consolidated Statements of Stockholders' Equity for the Years
Ended December 31, 1996, 1995 and 1994 25
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994 26
Notes to Consolidated Financial Statements 27 - 38
Supplemental Schedule 44
</TABLE>
19
<PAGE> 20
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
SubMicron Systems Corporation
We have audited the accompanying consolidated balance sheet of SubMicron
Systems Corporation and subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. Our audit also included the financial statement schedule
listed in the Index at Item 14(a). These financial statements and schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the 1996 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of SubMicron
Systems Corporation and subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for the year then ended, in conformity
with generally accepted accounting principles. Also, in our opinion, the
related financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We also have audited, as to combination only, the accompanying consolidated
balance sheet of SubMicron Systems Corporation and subsidiaries as of December
31, 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the two years in the period ended December
31, 1995. We have also audited, as to combination only, the accompanying
financial statement schedule for the years ended December 31, 1995 and 1994. As
discussed in Note 3 to such statements, these statements and schedule have been
combined from the consolidated statements of SubMicron Systems Corporation and
subsidiaries and Imtec Acculine, Inc. which statements are not presented
separately herein. The reports of other auditors who have audited these
statements and schedule appear elsewhere herein. In our opinion, the
accompanying consolidated financial statements and schedule for 1995 and 1994
have been properly combined on the basis described in Note 3.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 8, 1997, except Notes 2 and 8
as to which the date is April 15, 1997
20
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To SubMicron Systems Corporation:
We have audited the consolidated balance sheet of SubMicron Systems Corporation
(a Delaware Corporation) and Subsidiaries as of December 31, 1995, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the two years in the period ended December 31, 1995, prior to
restatement for the merger with Imtec Acculine, Inc. discussed in Note 3 to the
consolidated financial statements. We have not audited any financial statements
of Imtec Acculine, Inc. Our audits also included the financial statement
schedule listed in the Index at Item 14(a) for 1994 and 1995. These consolidated
financial statements and schedule are not presented separately herein. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these statements and
schedule based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of SubMicron Systems
Corporation and Subsidiaries as of December 31, 1995, and the results of their
operations and their cash flows for each of the two years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, the related financial statement schedule, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects to the information set forth therein.
ARTHUR ANDERSEN LLP
Philadelphia, PA
March 6, 1996 (except with respect to the
matter discussed in Note 3, as to which
the date is March 26, 1996)
21
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors and Shareholders
Imtec Acculine, Inc.
We have audited the balance sheet of Imtec Acculine, Inc. (a California
Corporation) as of December 31, 1995, and the related statements of operations,
shareholder's equity and cash flows for each of the two years then ended. 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 in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imtec Acculine, Inc. at
December 31, 1995, and the results of its operations and its cash flows for each
of the two years then ended, in conformity with generally accepted accounting
principles.
/s/IRELAND SAN FILIPPO, LLP
- ---------------------------
IRELAND SAN FILIPPO, LLP
Palo Alto, California
February 23, 1996
22
<PAGE> 23
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
ASSETS 1996 1995
--------- ---------
<S> <C> <C>
Current assets: (Note 3)
Cash and cash equivalents $ 5,426 $ 16,010
Accounts receivable, net 47,574 46,619
Inventories 34,951 34,132
Prepaids and other 7,307 2,736
Deferred income taxes 2,423 1,886
--------- ---------
Total current assets 97,681 101,383
Property and equipment, net 21,082 12,631
Goodwill, net 1,684 1,912
Intangibles and other assets, net 5,487 4,022
--------- ---------
$ 125,934 $ 119,948
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Lines of credit $ 28,100 $ 16,239
Current portion of long-term debt 2,294 1,194
Accounts payable 21,741 25,300
Accrued expenses and other 16,823 8,934
Deferred revenues 3,105 2,616
--------- ---------
Total current liabilities 72,063 54,283
--------- ---------
Deferred income taxes -- 628
--------- ---------
Deferred revenues -- 105
--------- ---------
Long-term debt 25,195 18,909
--------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Preferred stock $.01 par value, 5,000 shares
authorized, none issued and outstanding -- --
Common stock, $.0001 par value, 100,000,000
shares authorized, 16,890,014 and 16,562,796
shares issued and outstanding 2 2
Additional paid-in capital 41,680 39,223
Retained earnings (deficit) (13,006) 7,103
Deferred compensation -- (224)
Notes receivable -- (81)
--------- ---------
Total stockholders' equity 28,676 46,023
--------- ---------
$ 125,934 $ 119,948
========= =========
</TABLE>
See accompanying notes.
23
<PAGE> 24
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994
------------ ------------ ------------
(Note 3) (Note 3)
<S> <C> <C> <C>
Systems sales ............................................. $ 140,823 $ 91,198 $ 67,627
Service and other sales ................................... 30,661 31,870 18,492
------------ ------------ ------------
Total net sales ..................................... 171,484 123,068 86,119
------------ ------------ ------------
Cost of systems sales ..................................... 118,800 62,925 45,738
Cost of service and other sales ........................... 23,948 21,427 12,144
------------ ------------ ------------
Total cost of sales ................................. 142,748 84,352 57,882
------------ ------------ ------------
Gross profit ................................... 28,736 38,716 28,237
------------ ------------ ------------
Selling, general and administrative ....................... 41,337 29,109 21,465
Research and development .................................. 9,373 5,678 3,357
------------ ------------ ------------
Total operating expense ............................. 50,710 34,787 24,822
------------ ------------ ------------
Operating (loss) income ........................ (21,974) 3,929 3,415
Other (expense) income:
Interest income ......................................... 383 400 436
Interest expense and other .............................. (5,244) (1,840) (364)
Other income ............................................ 160 2,698 --
------------ ------------ ------------
Total other (expense) income ........................ (4,701) 1,258 72
------------ ------------ ------------
(Loss) income before income taxes ......................... (26,675) 5,187 3,487
Income tax (benefit) expense .............................. (6,566) 1,498 1,454
------------ ------------ ------------
Net (loss) income ......................................... $ (20,109) $ 3,689 $ 2,033
============ ============ ============
Net (loss) income per Common share ........................ $ (1.20) $ 0.23 $ 0.13
============ ============ ============
Weighted average number of shares
of Common stock outstanding ............................. 16,712,610 16,159,687 15,712,339
============ ============ ============
</TABLE>
See accompanying notes.
24
<PAGE> 25
<TABLE>
<CAPTION>
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
(IN THOUSANDS)
Additional Retained
Common Stock Paid-in Earnings Deferred Notes
Shares Amount Capital (Deficit) Compensation Receivable Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993
as previously reported 14,479 $ 1 $ 28,371 $ 217 $ (941) $ (47) $ 27,601
Adjustment for Imtec pooling
of interest 575 1 20 1,164 - - 1,185
-------------------------------------------------------------------------------------------
Balance, December 31, 1993,
as adjusted 15,054 2 28,391 1,381 (941) (47) 28,786
Exercise of stock options 55 - 122 - - - 122
Exercise of Systems
Chemistry stock options 95 - 42 - - (9) 33
Sale of Systems Chemistry
Common stock 73 - 112 - - (112) -
Exercise of warrants 5 - 25 - - - 25
Issuance of Common shares
upon litigation settlement 80 - 430 - - - 430
Amortization of deferred
compensation - - - - 381 - 381
Net income - - - 2,033 - - 2,033
-------------------------------------------------------------------------------------------
Balance, December 31, 1994 15,362 2 29,122 3,414 (560) (168) 31,810
Exercise of stock options
and warrants 147 - 461 - - - 461
Exercise of Systems
Chemistry stock options 286 - 337 - - (271) 66
Tax benefit on nonqualified
stock option exercises - - 440 - - - 440
Payment on notes receivable - - - - - 358 358
Issuance of Common stock 697 - 5,986 - - - 5,986
Issuance of Common stock
under employee stock
purchase plan 71 - 369 - - - 369
Value ascribed to warrants
issued with convertible
debt - - 2,508 - - - 2,508
Amortization of deferred
compensation - - - - 336 - 336
Net income - - - 3,689 - - 3,689
-------------------------------------------------------------------------------------------
Balance, December 31, 1995 16,563 2 39,223 7,103 (224) (81) 46,023
Exercise of stock options
and warrants 181 - 979 - - - 979
Payment on notes receivable - - - - - 81 81
Issuance of Common stock
under employee stock
purchase plan 146 - 627 - - - 627
Value ascribed to warrants
and options issued for
services - - 851 - - - 851
Amortization of deferred
compensation - - - - 224 - 224
Net loss - - - (20,109) - - (20,109)
-------------------------------------------------------------------------------------------
Balance, December 31, 1996 16,890 $ 2 $ 41,680 $ (13,006) $ - $ - $ 28,676
===========================================================================================
</TABLE>
See accompanying notes.
25
<PAGE> 26
SUBMICRON SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1996 1995 1994
-------- -------- --------
(Note 3) (Note 3)
<S> <C> <C> <C>
Cash flows used in operating activities:
Net (loss) income ........................................... $(20,109) $ 3,689 $ 2,033
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Depreciation and amortization ............................... 5,124 2,685 1,579
Provision for valuation allowances .......................... 2,831 77 700
Amortization of deferred compensation ....................... 224 336 381
Deferred tax (benefit) expense .............................. (4,222) 624 (833)
Loss on the disposal of fixed assets ........................ -- -- 39
Accretion of note discount .................................. 1,179 127 --
Non cash compensation for services .......................... 851 -- --
Changes in operating assets and liabilities:
Increase in accounts receivable ............................ (1,779) (26,008) (8,863)
Increase in inventories .................................... (6,537) (20,552) (8,156)
Increase in prepaid expenses and other ..................... (1,514) (1,772) (451)
Increase in other assets ................................... (1,294) (1,372) (272)
(Decrease) increase in accounts payable .................... (4,348) 16,384 2,164
Increase in accrued expenses ............................... 7,889 3,454 1,580
Increase (decrease) in deferred revenues ................... 384 2,412 (3,265)
Decrease (increase) in accrued income taxes ................ -- (770) 26
-------- -------- --------
Net cash used in operating activities ......................... (21,321) (20,686) (13,338)
-------- -------- --------
Cash flows used in investing activities:
Capital expenditures ........................................ (6,724) (5,730) (3,221)
Purchase of intangible assets ............................... (182) (181) (519)
-------- -------- --------
Net cash used in investing activities ....................... (6,906) (5,911) (3,740)
-------- -------- --------
Cash flows provided by financing activities:
Net borrowings on lines of credit ........................... 11,861 7,539 8,197
Proceeds from sales-leaseback ............................... 5,287 -- 1,890
Proceeds from issuance of convertible debt .................. -- 19,000 --
Deferred debt issuance costs ................................ -- (1,594) --
Proceeds from term notes .................................... -- 4,032 --
Collection on notes receivable .............................. 81 358 --
Proceeds from exercise of stock options and
warrants ................................................... 1,606 527 181
Net proceeds from sale of Common stock ...................... -- 6,355 --
Principal payments on long-term debt and capital
lease obligations .......................................... (1,192) (6,169) (677)
-------- -------- --------
Net cash provided by financing activities ................... 17,643 30,048 9,591
-------- -------- --------
Net (decrease) increase in cash and cash equivalents ..........
(10,584) 3,451 (7,487)
Cash and cash equivalents, beginning of year .................. 16,010 12,559 20,046
-------- -------- --------
Cash and cash equivalents, end of year ........................ $ 5,426 $ 16,010 $ 12,559
======== ======== ========
</TABLE>
See accompanying notes.
26
<PAGE> 27
SUBMICRON SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BACKGROUND:
SubMicron Systems Corporation (the "Company") designs, manufactures and
markets advanced chemical processing and distribution systems used in the
fabrication of semiconductors.
In May 1994, the Company acquired the assets of DiPiero, Inc. (d/b/a
Universal Plastics) by assuming its net liabilities of approximately $2.3
million. For financial accounting purposes, the acquisition was accounted for as
a purchase. In February 1995, the Company acquired all of the outstanding stock
of Systems Chemistry Incorporated (Systems Chemistry) for 3,400,000 shares of
Common stock. In March 1996, the Company acquired all of the outstanding stock
of IMTEC Acculine, Inc. (IMTEC) for 575,000 shares of Common stock. The Systems
Chemistry and IMTEC transactions have each been accounted for as a pooling of
interests and, accordingly, historical financial data has been restated (see
Note 3).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries: SubMicron Systems, Inc. (SSI), Systems
Chemistry (see Note 3), SubMicron Wet Process Stations, Inc. (Universal
Plastics), IMTEC (see Note 3), SubMicron Systems Investment Corporation,
SMICRON(S) PTE., LTD. (a Singapore Corporation), SubMicron Systems International
Ltd., and PRIMAXX Corporation. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Use of Estimates in the Preparation of Financial Statements
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
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents which generally consist
of weekly and overnight repurchase agreements.
Inventories
Inventories consist principally of raw materials and work-in-process and
are stated at the lower of cost (first-in, first-out basis) or market.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the related assets,
ranging from three to fifteen years. Amortization of assets under capital leases
and leasehold improvements, which is included in depreciation, is determined
using the straight-line method over the shorter of the lease term or the
economic life of the asset, ranging from three to five years.
27
<PAGE> 28
Long-Lived Assets, including Intangibles
Goodwill represents the excess of liabilities assumed over the estimated
fair value of assets acquired. Goodwill of approximately $2.3 million is being
amortized on a straight-line basis over ten years and is presented net of
accumulated amortization of approximately $586,000 and $358,000 at December 31,
1996 and 1995, respectively.
Intangible assets consist of patent, trademark and deferred financing
costs and are presented net of accumulated amortization. Patents and trademarks
are stated at cost and amortized using the straight-line method over five years.
Deferred financing costs consist of fees incurred as part of the issuance of
debt which are being amortized over the term of the debt.
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, which required impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. SFAS No. 121 also addresses the
accounting for long-lived assets that are expected to be disposed of. The
Company adopted SFAS No. 121 in 1996 and the effect of adoption was not
material.
The carrying amounts of the long-lived assets, including intangibles, are
reviewed if facts and circumstances suggest that they may be impaired. If this
review indicates that book value of assets to be held or disposed of exceed the
undiscounted future cash flows, an impairment loss would be recognized for the
excess of book over fair values.
Revenue recognition
Revenue related to system sales is recognized at the time of title
transfer, which ordinarily occurs at the time of shipment. From time to time,
customers request delayed shipment, usually because of construction or other
scheduling problems at their facilities. If the Company's substantial
performance obligations otherwise have been fulfilled, revenue on such delayed
shipment transactions generally is recognized upon acceptance of goods by the
customer at the Company's facility. Revenue related to service activities and
sale of items from inventory is recognized when the service has been performed
or when the items are shipped. Revenue from construction services is recognized
on a method similar to the percentage-of-completion basis.
Warranty and installation
The Company generally provides its customers with a warranty on systems
for a 14-month period commencing upon shipment. A provision for the estimated
cost of warranty and installation is recorded when the related revenue is
recognized. In 1996, the Company revised its warranty and installation provision
estimate, increasing its net loss by approximately $2.7 million, or $.16 per
Common share.
Research and development
Research and development costs are charged to expense as incurred.
Accounting for stock-based compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation." This Statement establishes
financial accounting and reporting standards for stock-based employee
compensation plans. The Statement encourages all entities to adopt a fair value
based method of accounting, but allows an entity to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to
Employees." The Company implemented SFAS No. 123 on January 1, 1996. Management
did not adopt the measurement provisions of SFAS No. 123, although the Company
has complied with the pro forma disclosure requirements of the Statement.
28
<PAGE> 29
Income taxes
The Company files a consolidated federal tax return and separate state tax
returns. Certain income and expense items are recorded for financial reporting
purposes in different time periods than for income tax purposes. Provisions for
current and deferred taxes are made in recognition of the temporary differences
and are computed in accordance with Statement of Financial Accounting Standards
No. 109 (SFAS No. 109).
Earnings per share
Earnings per share is based on the weighted average number of shares of
Common stock and Common stock equivalents (dilutive stock options and warrants
using the treasury stock method) outstanding during the year. All share and per
share amounts have been adjusted retroactively for the acquisitions of Systems
Chemistry and IMTEC discussed in Note 3.
Reclassifications
Certain prior year amounts have been reclassified to conform with current
year presentations.
Company Operations
The Company's consolidated financial statements have been presented on a
going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. In 1996, 1995,
and 1994, the Company's operating activities have required a net use of cash
totaling $21.3 million, $20.7 million, and $13.3 million, respectively. During
these years, sufficient debt and other credit arrangements were in place to
fund the net cash needs from operations. In addition, the Company incurred a
net loss of $20.1 million in 1996. Further at December 31, 1996, the Company
was not in compliance with certain requirements of its $30.0 million bank
credit facility. However, the banking group has agreed not to accelerate the
August 18, 1997 due date of the credit facility, assuming the Company's
continued compliance with the terms of a new agreement entered into on March
31, 1997 (see Note 8). Borrowings under the new agreement may not exceed $28.1
million. Management's estimates of the cash requirements to fund operating,
investing and financing activities in 1997 will require replacement of the
funds currently available under the credit facility. Without the availability
of a sufficient credit facility, the Company is susceptible to severe cash
shortages which may impact its ability to operate. To provide for the Company's
1997 cash and working capital requirements, management is pursuing additional
funding arrangements and believes that it can improve the Company's operating
performance and cash flows sufficiently as follows:
- In response to the combination of the Company's rapid growth, and the
semiconductor industry slowdown which severely impacted the Company's
operations, management has instituted programs designed to reduce costs and
improve performance. Management believes that margin improvements will result
from improvements in quality control already implemented, more controlled
operations resulting from the reduction in the direct labor workforce that
occurred during 1996, and management review of all contract bidding. The
Company also has engaged a consulting firm specializing in high-technology
companies to suggest further operational improvements. Additionally, the
Company has altered its strategy from that of revenue growth to pursuing
balanced, controlled growth with emphasis on operating efficiency. The Company
is focusing on application specific products where it has significant market
acceptance and concentrating its resources accordingly to improve margins.
Further, management believes that its state-of-the-art products, such as the
DIO3 process for photo-resist stripping and organic cleaning, PRIMAXX tools
(including the ferroelectric deposition model), and GAMA3 wet bench for 300mm
wafers, strategically enhance the Company's position as a key supplier of
next-generation technology.
- Management is in active negotiations with a number of lending
organizations to replace its existing credit facility and to expand the amounts
available to the Company under such a facility at more favorable interest
rates.
- In March 1997, the Company issued shares of its Series A Convertible
Non-Redeemable Preferred Stock convertible into approximately 2.7 million
shares of Common Stock and approximately $9 million principal amount of its 8%
Convertible Subordinated Notes due March 26, 2002 to previous holders of its 9%
Convertible Subordinated Notes due December 1997 and associated Warrants. Under
the terms of the agreement pursuant to which the new Preferred Stock and 8%
Convertible Subordinated Notes were issued, management plans to seek
shareholder approval of the conversion privileges and register the notes with
the Securities and Exchange Commission (see Note 10).
- Management intends to evaluate its alternatives and currently plans
to sell certain nonstrategic assets to generate liquidity. Management expects
to complete this process by the maturity date of the credit facility.
- As needs require or market opportunities arise, management, from time
to time, may consider raising additional funds through equity financing or
strategic partnering arrangements.
- Management is confident that its cost reduction and performance
improvement programs, controlled growth strategy, current negotiations with
lending organizations, and pursuit of other alternatives will result in the
successful funding of its 1997 working capital and cash requirements; however,
if 1997's financial results do not meet management's expectations and
sufficient additional financings are not available, management has the ability
and intent to reduce certain expenditures, accelerate collection of
receivables, or factor receivables not encumbered by existing loan agreements
to minimize additional capital requirements.
3. ACQUISITIONS:
On March 26, 1996, the Company acquired IMTEC, a Sunnyvale, California
company. IMTEC's principal business is designing, developing, testing,
manufacturing and marketing temperature regulated baths and high resolution
photo plates for the semiconductor market and related industries. The Company
acquired all the outstanding stock of IMTEC in exchange for 575,000 shares of
Common stock. The transaction was accounted as a pooling of interests and,
accordingly, historical financial data has been restated to include IMTEC.
On February 28, 1995, the Company acquired Systems Chemistry, a Santa
Clara, California manufacturer of advanced ultra-high purity chemical
distribution systems primarily for the semiconductor industry. The Company
acquired all the outstanding stock of Systems Chemistry in exchange for
3,400,000 shares of Common stock. The transaction was accounted for as a pooling
of interests and, accordingly, historical financial data has been restated to
include Systems Chemistry.
On May 31, 1994, the Company established SubMicron Wet Process Stations,
Inc. (SPSI), a California corporation, to effect the acquisition of DiPiero,
Inc. (d/b/a Universal Plastics). SPSI acquired the assets of DiPiero, Inc. in
consideration for assuming its net liabilities of approximately $2.3 million.
For financial reporting purposes, the acquisition was accounted for as a
purchase. The assets acquired and liabilities assumed were included in the
balance sheet of the Company at their estimated fair market values on the date
of the acquisition. The amount of liabilities assumed in excess of assets
acquired was recorded as goodwill. The consolidated results of operations and
cash flows include SPSI after May 31, 1994. The Company's unaudited pro forma
results of operations and cash flows for 1994 would not be materially different
assuming that the acquisition occurred as of the beginning of 1994.
4. ACCOUNTS RECEIVABLE:
<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Billed ................................. $ 39,942 $ 42,776
Unbilled ............................... 8,929 4,316
-------- --------
48,871 47,092
Allowance for doubtful accounts ........ (1,297) (473)
-------- --------
$ 47,574 $ 46,619
======== ========
</TABLE>
29
<PAGE> 30
5. INVENTORIES:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Raw Materials and Parts ..........................$ 23,007 $ 20,231
Work in progress and finished goods .............. 14,669 14,619
-------- --------
37,676 34,850
Excess and obsolescence reserve .................. (2,725) (718)
-------- --------
$ 34,951 $ 34,132
======== ========
</TABLE>
The 1996 increase in the excess and obsolescence reserve increased the net loss
per Common share by approximately $.07.
6. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Production equipment ........................... $ 10,200 $ 7,038
Office furniture equipment and leasehold
improvements ................................. 8,415 6,139
Equipment under capital lease .................. 10,771 4,425
-------- --------
29,386 17,602
Less - Accumulated depreciation and
amortization.................................. (8,304) (4,971)
-------- --------
$ 21,082 $ 12,631
======== ========
</TABLE>
Accumulated amortization on equipment under capital leases was approximately
$1.3 million and $445,000 at December 31, 1996 and 1995, respectively.
7. INTANGIBLES AND OTHER ASSETS:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Deferred income taxes ...................... $ 3,057 $ --
Patent filing costs and trademarks ......... 720 857
Deferred financing costs ................... 914 1,594
Security deposits .......................... 288 494
Restricted cash ............................ -- 625
Other ...................................... 813 768
------- -------
5,792 4,338
Less - Accumulated amortization ............ (305) (316)
------- -------
$ 5,487 $ 4,022
======= =======
</TABLE>
8. CREDIT FACILITY:
In February 1996, the Company entered into a $30.0 million credit facility
with a banking group. The Company used the proceeds from the credit facility to
refinance its previous lines of credit and to provide working capital.
Borrowings under the credit facility bear interest at prime, as defined, plus
3.0%, and are secured by substantially all of the assets of the Company. As of
December 31, 1996, the Company was not in compliance with certain requirements
of the credit facility, at which date $28.1 million was outstanding. The banking
group has separately agreed not to accelerate the due date of the credit
facility from its maturity date of August 18, 1997, assuming the Company's
continued compliance with the terms of a new agreement entered into on March
31, 1997. Borrowings under the new agreement may not exceed $28.1 million, and
the interest rate will be prime, as defined, plus 4.0%, effective June 1, 1997.
The Banking Agreement also restricts the Company's ability to pay dividends.
30
<PAGE> 31
9. ACCRUED EXPENSES AND OTHER:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Warranty and installation costs ........... $ 6,883 $2,332
Commissions ............................... 2,676 2,219
Other ..................................... 7,264 4,383
------- ------
$16,823 $8,934
======= ======
</TABLE>
10. LONG-TERM DEBT:
<TABLE>
<CAPTION>
December 31,
-------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
9%convertible subordinated notes, face value of
$19,000,000 (net of unamortized discount of
$1,202,000 and $2,381,000 at December 31, 1996
and 1995, respectively) with warrants to purchase
1,140,000 shares of Common stock. Interest is
payable quarterly in arrears ..................... $ 17,798 $ 16,619
Various capital lease obligations with interest
from 5% to 14%, payable monthly with varying
maturities through October 2002 .................. 9,670 3,442
Other .............................................. 21 42
-------- --------
27,489 20,103
Less current portion ............................. (2,294) (1,194)
-------- --------
$ 25,195 $ 18,909
======== ========
</TABLE>
In December 1995, the Company issued $19 million principal amount of 9%
convertible subordinated notes with warrants to purchase 1,140,000 shares of
Common stock. The notes were recorded at $16.5 million, net of the estimated
fair value ascribed to the warrants of $2.5 million. Amortization of the debt
discount was $1.2 million and $127,000 for the years ended December 31, 1996 and
1995, respectively. The warrants are exercisable at $14 per share and expire in
December 2000. The debt discount is being amortized over the two-year term of
the debt.
In March 1997, the Company issued shares of its Series A Convertible
Non-Redeemable Preferred Stock convertible into approximately 2.7 million shares
of Common Stock and approximately $9 million principal amount of its 8%
Convertible Subordinated Notes due March 26, 2002 to previous holders of its 9%
Convertible Subordinated Notes due December 1997 and associated Warrants. The
New Notes are convertible, after stockholder approval, into shares of Common
Stock at $3.70 per share, subject to adjustment. Under the agreement pursuant to
which the Preferred Stock and the New Notes were issued, the Company is required
to undertake certain registration obligations and to obtain stockholder approval
of the convertibility feature of the New Notes. If such obligations are not
fulfilled by January 31, 1998, the New Notes will become due as of such date. As
a result of this transaction, $17.1 million of the 9% convertible subordinated
notes have been classified in the noncurrent portion of long-term debt in the
balance sheet at December 31, 1996.
31
<PAGE> 32
The following is a schedule of aggregate long-term debt maturities and
future minimum capital lease payments at December 31, 1996, which considers the
effects of the transaction described above:
<TABLE>
<CAPTION>
Long-Term Capital
Debt Leases
----------------------------
(in thousands)
<S> <C> <C>
1997 .......................... $ 643 $1,651
1998 .......................... 6 1,759
1999 .......................... -- 1,922
2000 .......................... -- 1,888
2001 .......................... -- 1,147
Thereafter .................... 8,667 1,303
------ ------
$9,316 $9,670
====== ======
</TABLE>
In September 1996, the Company completed a sale-leaseback transaction
which included a refinancing of an existing capital lease, for net proceeds of
$5.3 million. The capital leases have an effective interest rate of 8%, and are
payable over a five-year period. The assets in this transaction were sold at
cost; therefore, no gain or loss was recognized.
In December 1994, the Company entered into a sale-leaseback agreement for
three applications processing units that were installed into the Company's new
applications laboratory. The lease is a capital lease and the units were
transferred from inventory to property and equipment at their cost of
approximately $1.9 million.
11. COMMITMENTS AND CONTINGENCIES:
In 1993, the Company entered into five-year employment agreements with two
key executives, subject to automatic extensions for an additional year. The
Company is obligated to continue to pay the executives' salaries for a period of
three years or five years, depending on which of the following occurs: the sale
of the Company, upon termination of employment by the Company without cause (as
defined), or termination of the employee with valid reason (as defined).
The Company leases its office and production facilities and several
vehicles under long-term non-cancelable operating leases which expire at various
dates through 2003. Rent expense was approximately $1.4 million, $1.1 million
and $654,000 in 1996, 1995 and 1994, respectively. Minimum annual payments for
the operating leases for each of the next five years are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1997 ................... $1,599
1998 ................... 1,586
1999 ................... 1,550
2000 ................... 1,546
2001 ................... 1,560
Thereafter ............. 559
------
$8,400
======
</TABLE>
On July 14, 1992, an action was commenced against the Company for patent
infringement. The complaint alleged that SSI infringed on three of the
plaintiff's patents embodying their megasonic cleaning apparatus and method. On
March 31, 1995, the Company and the plaintiff reached a settlement whereby the
Company obtained a license to use the patented technology. The Company can
utilize this technology for sale of replacement parts only for units that are
already in the market. The Company agreed to a paid-up licensing fee of $2
million. The licensing fee is being charged to expense based on the number of
parts shipped as a percentage of total estimated parts to be shipped. Charges of
approximately $142,000, $107,000 and $1.0 million were recorded in the 1996,
1995 and 1994 statements of operations, respectively, based on the units shipped
through December 31, 1996, 1995 and 1994, respectively. Management will continue
to evaluate the total estimated units to be shipped and adjust the prepaid
licensing fee accordingly.
32
<PAGE> 33
The Company is subject to claims, from time to time, arising in the
ordinary course of business. Other claims, although presently unasserted, may
also be raised in the future based on decisions made and certain actions taken
and the reporting thereof. Management believes the ultimate resolution of all
such claims will not have a material adverse effect on its financial position
and results of operations.
12. CUSTOMER AND GEOGRAPHIC INFORMATION:
The Company's operations are conducted in one business segment and sales
are primarily made to customers in the business of manufacturing semiconductors.
Sales are made on an international basis and foreign sales (Europe and Far East)
were 30%, 45% and 32% of net sales in 1996, 1995 and 1994, respectively. Sales
to foreign customers are transacted in U.S. dollars.
The following table summarizes significant customers with sales in excess
of 10% of total net sales for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Customer A .............................................. 14%
Customer B .............................................. 12%
Customer C ................................. 11%
Customer D ....................... 13%
-- -- --
13% 11% 26%
== == ==
</TABLE>
At December 31, 1996, approximately 34% of the Company's accounts
receivable were due from three customers.
13. OTHER INCOME:
Other income in 1995 consists of a settlement of litigation related to
unfair trade practices of approximately $2.7 million, which is net of legal fees
incurred.
14. INCOME TAXES:
The Company's income tax (benefit) expense for 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
------- ------ -------
(in thousands)
<S> <C> <C> <C>
Federal
Current .................................. $(2,344) $ 650 $ 1,629
Deferred ................................. (3,012) 464 (690)
------- ------ -------
Total .................................. (5,356) 1,114 939
------- ------ -------
State
Current .................................. -- 182 631
Deferred ................................. (1,210) 202 (116)
------- ------ -------
Total .................................. (1,210) 384 515
------- ------ -------
$(6,566) $1,498 $ 1,454
======= ====== =======
</TABLE>
33
<PAGE> 34
The following is a reconciliation of the statutory federal income tax
(benefit) expense to the effective tax (benefit) expense for 1996, 1995 and 1994
(dollars in thousands):
<TABLE>
<CAPTION>
% of % of % of
Pretax Pretax Pretax
1996 Loss 1995 Income 1994 Income
------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
Statutory income tax ........ $(9,336) (35.0)% $ 1,764 34.0% $1,186 34.0%
State income taxes, net of
federal benefit ........... (577) (2.2) 386 7.4 281 8.1
Effect of foreign sales
corp ...................... -- -- (402) (7.7) --
Other nondeductible costs ... 222 0.8 172 3.3 103 2.9
Research and development
credit .................... -- -- (100) (1.9) (95) (2.7)
Valuation allowance ......... 2,600 9.7 -- -- -- --
Other ....................... 525 2.1 (322) (6.2) (21) (0.6)
------- ----- ------- ---- ------ ----
$(6,566) (24.6)% $ 1,498 28.9% $1,454 41.7%
======= ===== ======= ==== ====== ====
</TABLE>
The net deferred tax assets consist of the following:
<TABLE>
<CAPTION>
December 31,
------------------------
1996 1995
-------- -------
(in thousands)
<S> <C> <C>
Deferred tax assets
Warranty and installation reserve ...................$ 2,730 $ 933
Allowance for doubtful accounts ..................... 531 190
Allowance for excess and obsolete inventories ....... 1,114 287
Accrued licensing fees .............................. 102 100
Deferred compensation ............................... 412 314
Uniform inventory capitalization .................... 484 314
Salary and benefit accruals ......................... 225 68
Net operating loss carryforwards .................... 3,625 --
Federal credit carryforward ......................... 320 --
Amortization ........................................ 48 48
Commissions ......................................... 260 78
Other ............................................... 165 155
-------- -------
Total deferred tax assets ........................ 10,016 2,487
Valuation allowance for deferred tax assets ......... (2,600) --
-------- -------
7,416 2,487
-------- -------
Deferred tax liabilities
Depreciation ....................................... (238) (149)
Gain on litigation settlement ...................... (1,080) (1,080)
Other .............................................. (618) --
-------- -------
Total deferred tax liabilities ................... (1,936) (1,229)
-------- -------
Net deferred tax assets .............................$ 5,480 $ 1,258
======== =======
</TABLE>
At December 31, 1996, the Company had approximately $10 million of federal
and $1 million of state net operating loss carryforwards available. These
carryforwards generally expire in 2011.
At December 31, 1996, the Company recorded a valuation allowance of $2.6
million against the deferred tax assets of $10.0 million. Such allowance will be
available to offset future income tax expense when it becomes more likely than
not that such deferred tax assets will be realized.
34
<PAGE> 35
15. RELATED-PARTY TRANSACTIONS:
Commencing in November 1996, the Company leased a building from 6620 Grant
Way Limited Partnership whose principals are officers and shareholders of the
Company. Rent expense in 1996 on this lease was $43,000. The initial term of the
lease expires on November 6, 2003 and requires monthly lease payments of $21,600
for the first two years; $22,200 for the second two years; and $23,500 for the
final three years. The lease is on a triple net basis. The building was sold to
a third party in March 1997.
In October 1995, the Company borrowed $4 million from two officers who are
also stockholders of the Company for working capital purposes. The entire
borrowing, plus interest of $136,000, was repaid by the Company in December
1995.
16. STOCK OPTIONS AND WARRANTS:
The Company has stock options outstanding to participants under three
stock option plans: its Stock Option Plan for Non-Employee Directors, its
Amended and Restated 1991 Stock Option Plan and its Executive Stock Option Plan.
The Company has granted nonqualified stock options to officers, directors and
key employees under these plans at prices not less than fair market value on the
date of grant. Generally, options become exercisable over a four-year period
after the date of grant and expire ten years after the date of grant.
In 1995, the Company adopted a Stock Option Plan for Non-Employee
Directors. Under the Plan, non-employee directors of the Company are granted
options to purchase 5,000 shares of the Company's common stock upon the
appointment to the Board and thereafter receive annual option grants for 3,000
shares per year on the day following the Company's annual meeting of
stockholders. The aggregate number of options that may be issued under the plan
is 200,000, subject to adjustment upon the occurrence of a stock dividend, stock
split, recapitalization or certain other capital adjustments. At December 31,
1996, 24,000 options have been granted under the Stock Option Plan for
Non-Employee Directors. Exercise prices range from $9.75 to $10.38.
The Company's Amended and Restated 1991 Stock Option Plan provides both
incentive and non-qualified stock options to be granted to officers, employees,
consultants and advisors. Under the plan, options may be granted for the
purchase of up to 1,500,000 shares of Common stock, subject to adjustments for
stock dividends, stock splits, recapitalization or certain other adjustments. In
September 1996, the Company's Board of Directors approved an amendment to the
plan, subject to approval by the Company's stockholders, to increase the
aggregate maximum number of the Company's Common stock issuable under the plan
to 3,500,000 shares. As of December 31, 1996, 95,157 options had been
granted, subject to stockholder approval, in excess of the 1.5 million shares
currently available under the 1991 plan. The number of options to be granted and
the option prices are determined by the Board of Directors or the stock option
plan committee in accordance with the terms of the plan. The exercise price of
incentive stock options granted under the plan must be at least equal to the
fair market value of such shares on the date of grant and the maximum exercise
period is ten years. The Company also has an Executive Stock Option Plan that
provides for the issuance of up to 588,495 shares of Common stock.
35
<PAGE> 36
Summary information with respect to options under the plans, is as follows:
<TABLE>
<CAPTION>
Amended and Restated Executive
1991 Stock Option Plan Stock Option Plan
------------------------------- ------------------------------
Outstanding Option Outstanding Option
Options Prices Options Prices
------- ------ ------- ------
<S> <C> <C> <C> <C>
Outstanding Options
- -------------------
Balance, January 1, 1994 167,546 $2.39-$ 7.75 588,495 $ .57-$6.00
Granted 190,000 4.50- 6.00 -- --
Exercised (49,864) 2.39 (5,500) 0.57
Canceled (40,000) 4.50- 7.75 -- --
---------- ------------ -------- -----------
Balance, December 31, 1994 267,682 2.39- 6.00 582,995 .57-6.00
Granted 646,000 4.06- 11.13 -- --
Exercised (65,305) 2.39- 6.00 (46,745) .57
Canceled (10,209) 2.39- 4.50 -- --
---------- ------------ -------- -----------
Balance, December 31, 1995 838,168 2.39- 11.13 536,250 6.00
Granted 1,046,066 5.00- 11.25 -- --
Exercised (118,628) 2.39- 6.00 -- --
Canceled (170,449) 2.39- 11.25 -- --
---------- ------------ -------- -----------
Balance, December 31, 1996 1,595,157 $2.39-$11.13 536,250 $ 6.00
========== ============ ======== ===========
</TABLE>
At December 31, 1996, there were 511,099 exercisable options under the
Amended and Restated 1991 Stock Option Plan, 536,250 exercisable options under
the Executive Stock Option Plan and 15,000 exercisable options under the stock
option plan for non-employee directors.
For options granted below fair market value, the Company recognizes as
deferred compensation the difference between the aggregate fair market value of
the Common stock issuable upon exercise of the options over the aggregate price
of such options. Deferred compensation of $1,008,150 was recognized in 1993
relating to 536,250 stock options issued under the Executive Stock Option Plan
which is being amortized over the vesting period of the options, and in this
regard $224,334, $336,050 and $380,856 was charged to expense in 1996, 1995 and
1994 respectively.
In December 1995, the Company issued $19.0 million principal amount 9%
convertible subordinated notes (see Note 10) with warrants to purchase 1,140,000
shares of Common stock. The warrants are exercisable at $14 per share and expire
in December 2000. In March 1997, the Company issued shares of its Series A
Convertible Non-Redeemable Preferred Stock and approximately $9 million
principal amount of its 8% convertible subordinated notes due March 26,2002 in
consideration for substantially all of the 9% convertible subordinated notes due
December 1997 and associated warrants (see Note 10).
In August 1993, the Company issued warrants to purchase 150,000 share of
Common stock at $5 per share and 63,750 shares at $6 per share. Warrants to
purchase 63,750 shares at $6 were exercised during 1996. Warrants to purchase
35,000 and 5,000 shares at $5 per share were exercised in 1995 and 1994,
respectively, and the remaining warrants are exercisable through August 1998.
The Company applies APB opinion 25 and related interpretations in
accounting for its plans. Accordingly, no compensation cost has been recognized
for the Company's stock option plans or stock purchase plan. Had compensation
cost for the Company's stock-based compensation plans been determined based on
the fair value at the grant dates for awards under those plans consistent with
the method of FASB statement 123, the Company's pro forma net loss for loss per
share purposes for 1996 would have been increased by $2.9 million, or $0.17 per
share. 1995 pro forma net income for earnings per share purposes would have
decreased by $2.2 million or $0.14 per share.
36
<PAGE> 37
Activity in the stock option plans is summarized as follows:
<TABLE>
<CAPTION>
Shares Under Weighted Average
Options Exercise Price
------------ ----------------
<S> <C> <C>
Balance, January 1, 1995 850,677 $ 5.25
Options granted 646,000 6.12
Options exercised (112,050) 2.56
Options canceled (10,209) 5.82
-------- ---------
Balance, December 31, 1995 1,374,418 5.81
Options granted 1,046,066 8.40
Options exercised (118,628) 5.04
Options canceled (170,449) 8.87
-------- ---------
Balance, December 31, 1996 2,131,407 $ 6.91
========= =========
</TABLE>
Stock options outstanding at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Range of Weighted Average Weighted
Exercise Number Remaining Average
Prices Outstanding Contractual Life Exercise Price
<S> <C> <C> <C>
$ 2.39- 5.50 663,824 7.8 years $ 4.79
5.51-11.13 1,467,583 8.2 years 7.87
---------- ----------- ----------- ----------
$ 2.39-11.13 2,131,407 8.1 years $ 6.91
=========== =========== =========== ==========
</TABLE>
The fair value of options granted during 1996 and 1995 was $3.40 and $4.89
per share, respectively. Fair value is estimated based on the Black-Scholes
option-pricing model with the following weighted average assumptions for grants
in 1996 and 1995: dividend yield of 0%; expected volatility of 48%; risk-free
interest rates of 6.5% in 1996 and 5.4% in 1995; and expected lives of four
years.
17. PREFERRED STOCK:
The Company has authorized 5,000 shares of Preferred stock, $.01 par value
per share. The Board of Directors can designate and issue from time to time one
or more classes or series of Preferred stock and may fix and determine the
relative rights, preferences and limitations of each class or series so
authorized. In March 1997, the Company issued 1,299 shares of Series A
Convertible Preferred Stock (the "Series A Stock") convertible into
approximately 2.7 million shares of Common Stock (see Note 10). Holders of
Series A Stock receive a liquidation preference of $7,400 per share.
18. BENEFIT PLANS:
The Company maintains a defined contribution savings and investment
retirement plan under section 401(k) of the Internal Revenue Code whereby all
employees are eligible to participate after completing six months of service.
Participants may contribute from 1% to 15% of their compensation each year. The
Company does not make matching contributions and does not maintain any other
pension or post-retirement benefit plans.
In 1994, the Company established an employee stock purchase plan whereby
up to 300,000 shares of Common stock can be purchased by employees. Purchases
are made each June 30 and December 31 at a price equal to the lower of 85% of
the fair market value of the stock on the first day or the last day of the
six-month period then ended. Purchases are limited as defined in the plan. The
plan is available to all eligible employees of the Company and its subsidiaries
who are not beneficial owners of 5% or more of the outstanding Common stock.
During 1996 and 1995, 145,730 and 70,657 shares, respectively, were sold under
the plan.
37
<PAGE> 38
IMTEC maintains qualified retirement plans for eligible employees. IMTEC
maintains a Money Purchase Pension Plan, contributions to which are based on a
percentage of the employee's wages. Contributions to the plan for the years
ended December 31, 1996, 1995 and 1994 were $81,000, $69,000 and $59,000,
respectively.
IMTEC maintains a 401(k) Profit Sharing Plan for eligible employees. The
plan is designed to provide employees with an accumulation of funds at
retirement. IMTEC may make contributions to the plan at the discretion of the
Board of Directors. Contributions to the plan for the years ended December 31,
1996, 1995 and 1994 were $43,000, $41,000, and $15,000, respectively.
IMTEC's money purchase pension plan and its 401(k) Profit Sharing Plan
will be discontinued during 1997. IMTEC employees will be eligible for
participation in the Company's 401(k) Plan and Employee Stock Purchase Plan.
19. SUPPLEMENTAL CASH FLOWS DISCLOSURES:
Cash paid for interest was $5.2 million , $2.0 million and $376,000 in
1996, 1995 and 1994, respectively. Cash paid for taxes was $364,000 in 1996,
$1.7 million in 1995 and $2.2 million in 1994.
During 1996, 1995 and 1994, capital lease obligations of approximately
$6.5 million, $2.1 million and $1.9 million were incurred when the Company
entered into a lease for equipment.
During 1994, 80,000 shares of Common stock totaling $430,000 were issued
upon the settlement of litigation.
38
<PAGE> 39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company previously filed a Form 8-K and a Form 8-K/A on
December 24, 1996 and January 9, 1997, respectively, regarding the
above matters.
39
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
This information will be contained in the Company's definitive proxy
statement with respect to the Company's 1997 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year, and is hereby incorporated by reference
thereto.
ITEM 11. EXECUTIVE COMPENSATION
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1997 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year and is hereby incorporated by reference
thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1997 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year and is hereby incorporated by reference
thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
This information will be contained in the Company's definitive Proxy
Statement with respect to the Company's 1997 Annual Meeting of Stockholders, to
be filed with the Securities and Exchange Commission within 120 days following
the end of the Company's fiscal year and is hereby incorporated by reference
thereto.
40
<PAGE> 41
ITEM 14. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) The following financial statements are included in Part II,
Item 8:
Report of Independent Auditors
Financial Statements:
Consolidated Balance Sheets at December 31, 1996 and 1995
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity
for the Years Ended December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
(2) The following financial schedule is submitted herewith:
Schedule II - Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable or
the required information is shown in the consolidated financial
statements or notes thereto.
(3) Exhibits included herein:
2.1 Agreement and Plan of Merger dated April 27, 1993, among
SubMicron Systems Corporation (formerly Trinity) (the
"Company"), SubMicron Systems, Inc. ("SubMicron"), and
David Levy and James Molinaro (1)
2.2 Agreement and Plan of Merger dated January 13, 1995,
among the Company, SysChem Acquisition Corp. and Systems
Chemistry Incorporated (2)
2.3 Agreement and Plan of Merger dated March 21, 1996, among
the Company, SubImtec Acquisition Corp., IMTEC Acculine,
Inc. and the sole shareholder of IMTEC (5)
3.1 The Company's Certificate of Incorporation (1)
3.2 The Company's By-Laws (1)
3.3 Certificate of Designations, Preferences and Rights of
Series A Convertible Non- Redeemable Preferred Stock
4.1 Warrant Agreement dated September 19, 1991 between the
Company and GKN Securities Corp. (1)
4.2 Form of 9% Convertible Subordinated Promissory Note due
December 15, 1997 (6)
4.3 Form of Warrant to Purchase Common Stock (6)
4.4 Form of 8% Convertible Subordinated Note
9.1 Voting Agreement between David F. Levy and James S.
Molinaro (1)
41
<PAGE> 42
10.1 Amended and Restated 1991 Stock Option Plan (3)(4)
10.2 Executive Stock Option Plan (1)(3)
10.3 1994 Employee Stock Purchase Plan (3)(4)
10.4 1995 Stock Option Plan for Non-Employee Directors (3) (6)
10.5 Employment Agreement between the Company and David F.
Levy (1)(3)
10.6 Employment Agreement between the Company and James S.
Molinaro (1)(3)
10.7 Lease Agreement, as amended, dated as of January 16,
1992, between Rouse and Associates ("Rouse) and SSI, as
amended by Letter Agreement dated February 13, 1992,
between Realprop Management, Inc., (an affiliate of
Rouse) and SubMicron (1)
10.8 Credit Agreement, dated February 27, 1996, among the
Company, certain subsidiaries of the Company and
CoreStates Bank, N.A., as Agent, and the several Lenders
parties thereto, including form of Revolving Credit Note
and Security Agreement (6)
10.9 Tax Indemnification Agreement dated May 22, 1992, among
SubMicron, David F. Levy and James S. Molinaro (1)
10.10 Agreement, dated April 27, 1993, among SubMicron, David
Levy, James Molinaro and Edison Venture Fund II, L.P. and
Edison Venture Fund II-PA, L.P. (1)
10.11 Indemnity Agreement, dated April 1992, by and among
SubMicron, David Levy and James Molinaro (1)
10.12 Agreements of Sale and Purchase, dated February 23, 1996,
between D&M Properties and the Company (6)
10.13 Form of Subordinated Note and Preferred Stock Purchase
Agreement
21 List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ireland Sanfilippo & Company
27 Financial Data Schedule
- --------------
(1) Incorporated by reference to an Exhibit filed as part of the Company's
Registration Statement on Form S-4, File No. 33-64500.
(2) Incorporated by reference to an Exhibit filed as part of the Company's
Current Report on Form 8- K and dated February 28, 1995.
(3) Constitutes a compensatory plan or arrangement required to be filed as
an exhibit to this Form.
42
<PAGE> 43
(4) Incorporated by reference to an Exhibit filed as part of the Company's
Annual Report on Form 10- K for the year ended December 31, 1994.
(5) Incorporated by reference to an exhibit filed as part of the Company's
Current Report on Form 8-K dated March 26, 1996.
(6) Incorporated by reference to an Exhibit filed as part of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to an Exhibit filed as part of the Company's
Current Report on Form 8-K/A and dated January 9, 1997.
(b) Reports on Form 8-K:
8-K filed March 26, 1996
8-K filed December 24, 1996
8-K/A filed January 9, 1997
43
<PAGE> 44
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at
Beginning Charged to Costs Other Balance at
Description of Period and Expenses Accounts Deductions End of Period
----------- --------- ------------ -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31, 1996:
Allowances for doubtful
accounts receivable $473,000 $824,000 $-- $ -- $1,297,000
======== ======== === ====== ==========
FOR THE YEAR ENDED
DECEMBER 31, 1995
Allowances for doubtful
accounts receivable $446,000 $ 27,000 $-- $ -- $ 473,000
======== ======== === ====== ==========
FOR THE YEAR ENDED
DECEMBER 31, 1994
Allowances for doubtful
accounts receivable $109,000 $502,000 $-- $165,000 $ 446,000
======== ======== === ====== ==========
</TABLE>
44
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
SUBMICRON SYSTEMS CORPORATION
By: /s/David F. Levy
----------------------------
David F. Levy, President
Date: April 15, 1997
Pursuant to the requirements to the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/David F. Levy President and Director April 14, 1997
- -----------------------------
David F. Levy (Principal Executive Officer)
/s/R.G. Holmes Chief Financial Officer April 14, 1997
- -----------------------------
R. G. Holmes (Principal Financial and
Accounting Officer)
/s/Ronald B. Booth Director April 14 , 1997
- -----------------------------
Ronald B. Booth
/s/Richard J. Busis Director April 14, 1997
- -----------------------------
Richard J. Busis
/s/Maurice J. Gallagher, Jr. Director April 14, 1997
- -----------------------------
Maurice J. Gallagher, Jr.
/s/James S. Molinaro Director April 14, 1997
- -----------------------------
James S. Molinaro
/s/Barry W. Ridings Director April 14, 1997
- -----------------------------
Barry W. Ridings
</TABLE>
45
<PAGE> 46
<TABLE>
<CAPTION>
Signature Capacity Date
- --------- -------- ----
<S> <C> <C>
/s/John P. Traub Director April 14, 1997
- -----------------------------
John P. Traub
/s/Leonard R. Weisberg Director April 14, 1997
- -----------------------------
Leonard R. Weisberg
</TABLE>
46
<PAGE> 47
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------------------------------------------------------------
Exhibits included herein:
<S> <C>
2.1 Agreement and Plan of Merger dated April 27, 1993, among
SubMicron Systems Corporation (formerly Trinity) (the
"Company"), SubMicron Systems, Inc. ("SubMicron"), and
David Levy and James Molinaro (1)
2.2 Agreement and Plan of Merger dated January 13, 1995,
among the Company, SysChem Acquisition Corp. and Systems
Chemistry Incorporated (2)
2.3 Agreement and Plan of Merger dated March 21, 1996, among
the Company, SubImtec Acquisition Corp., IMTEC Acculine,
Inc. and the sole shareholder of IMTEC (5)
3.1 The Company's Certificate of Incorporation (1)
3.2 The Company's By-Laws (1)
3.3 Certificate of Designations, Preferences and Rights of
Series A Convertible Non-Redeemable Preferred Stock
4.1 Warrant Agreement dated September 19, 1991 between the
Company and GKN Securities Corp. (1)
4.2 Form of 9% Convertible Subordinated Promissory Note due
December 15, 1997 (6)
4.3 Form of Warrant to Purchase Common Stock (6)
4.4 Form of 8% Convertible Subordinated Note
9.1 Voting Agreement between David F. Levy and James S.
Molinaro (1)
10.1 Amended and Restated 1991 Stock Option Plan (3)(4)
10.2 Executive Stock Option Plan (1)(3)
10.3 1994 Employee Stock Purchase Plan (3)(4)
10.4 1995 Stock Option Plan for Non-Employee Directors (3) (6)
10.5 Employment Agreement between the Company and David F.
Levy (1)(3)
10.6 Employment Agreement between the Company and James S.
Molinaro (1)(3)
10.7 Lease Agreement, as amended, dated as of January 16,
1992, between Rouse and Associates ("Rouse") and SSI, as
amended by Letter Agreement dated February 13, 1992,
between Realprop Management, Inc., (an affiliate of
Rouse) and SubMicron (1)
10.8 Credit Agreement, dated February 27, 1996, among the
Company, certain subsidiaries of the Company and
CoreStates Bank, N.A., as Agent, and the several Lenders
parties thereto, including form of Revolving Credit Note
and Security Agreement (6)
10.9 Tax Indemnification Agreement dated May 22, 1992, among
SubMicron, David F. Levy and James S. Molinaro (1)
10.10 Agreement, dated April 27, 1993, among SubMicron, David
Levy, James Molinaro and Edison Venture Fund II, L.P. and
Edison Venture Fund II-PA, L.P. (1)
10.11 Indemnity Agreement, dated April 1992, by and among
SubMicron, David Levy and James Molinaro (1)
10.12 Agreements of Sale and Purchase, dated February 23, 1996,
between D&M Properties and the Company (6)
10.13 Form of Subordinated Note and Preferred Stock Purchase
Agreement
21 List of Subsidiaries
23.1 Consent of Ernst & Young LLP
23.2 Consent of Arthur Andersen LLP
23.3 Consent of Ireland Sanfilippo & Company
27 Financial Data Schedule
</TABLE>
- --------------
(1) Incorporated by reference to an Exhibit filed as part of the Company's
Registration Statement on Form S-4, File No. 33-64500.
(2) Incorporated by reference to an Exhibit filed as part of the Company's
Current Report on Form 8-K and dated February 28, 1995.
(3) Constitutes a compensatory plan or arrangement required to be filed as
an Exhibit to this Form.
(4) Incorporated by reference to an Exhibit filed as part of the Company's
Annual Report on Form 10-K for the year ended December 31, 1994.
(5) Incorporated by reference to an Exhibit filed as part of the Company's
Current Report on Form 8-K dated March 26, 1996.
(6) Incorporated by reference to an Exhibit filed as part of the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
(7) Incorporated by reference to an Exhibit filed as part of the Company's
Current Report on Form 8-K/A and dated January 9, 1997.
(b) Reports on Form 8-K:
8-K filed March 26, 1996
8-K filed December 24, 1996
8-K/A filed January 9, 1997
47
<PAGE> 1
EXHIBIT 3.3
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES A CONVERTIBLE NON-REDEEMABLE PREFERRED STOCK
OF
SUBMICRON SYSTEMS CORPORATION
SubMicron Systems Corporation, a corporation organized and
existing under the laws of the State of Delaware (the "Company"), by its
Secretary, does hereby certify that, pursuant to authority conferred upon the
Board of Directors by Article FOURTH of the Certificate of Incorporation of the
Company, which authorized the issuance of 5,000 shares of Preferred Stock of the
Company, $.01 par value per share, and pursuant to the provisions of Section 151
of the General Corporation Law of the State of Delaware, as amended (the
"Delaware Code"), the Board of Directors of the Company has duly adopted
resolutions providing for the issuance out of such Preferred Stock of 1,349
shares of Series A Convertible Non-Redeemable Preferred Stock, and setting forth
the voting powers, designations, preferences and relative, participating,
optional and other special rights, and the qualifications, limitations and
restrictions thereof, which resolution is as follows:
RESOLVED, that pursuant to the authority vested in the Board
of Directors of the Company pursuant to the provisions of the
Delaware Code and the Company's Certificate of Incorporation,
the Company is authorized to issue, out of the 5,000 shares of
Preferred Stock of the Company authorized in Article Fourth of
its Certificate of Incorporation, a series of Preferred Stock
of the Company to be designated as "Series A Convertible
Non-Redeemable Preferred Stock," $.01 par value per share,
with the voting powers, designations, preferences and
relative, participating, optional and other special rights,
qualifications, limitations and restrictions set forth below.
1. Designation and Number of Shares. The Preferred Stock of
the Company authorized by this resolution shall be designated and known as the
"Series A Convertible Non-Redeemable Preferred Stock." The number of shares of
the Series A Convertible Non-Redeemable Preferred Stock authorized hereby shall
be 1,349 shares, which shall be issuable in whole or fractional shares.
2. Voting Rights. Except as otherwise expressly provided by
law, the holders of Series A Convertible Non-Redeemable Preferred Stock shall
have full voting rights and powers; they shall be entitled to vote on all
matters as to which holders of the Company's Common Stock, $.0001 par value per
share ("Common Stock"), shall be entitled to vote, voting together with the
holders of Common Stock as one class; and each share or fraction thereof shall
be entitled to one vote for each share of Common Stock into which such share or
fraction thereof of Series A Convertible Non-Redeemable Preferred Stock may be
converted in accordance with Section 5 herein.
<PAGE> 2
3. Dividends. There is no dividend preference. In the event
that the Company declares a cash dividend, the holders of the Series A
Convertible Non-Redeemable Preferred Stock shall be entitled to participate with
the holders of the Common Stock in any such dividends paid, such that holders of
the Series A Convertible Non-Redeemable Preferred Stock shall receive, with
respect to each share of Series A Convertible Non-Redeemable Preferred Stock
held, an amount equal to (i) the dividend payable with respect to each share of
Common Stock, multiplied by (ii) the number of shares (or a fraction of a share,
if any) of Common Stock into which such share of Series A Convertible Non-
Redeemable Preferred Stock is convertible as of the record date for such
dividend.
4. Preemptive Rights: No Cumulative Voting. The holders of
Series A Convertible Non-Redeemable Preferred Stock shall not have preemptive
rights to purchase additional shares of capital stock and shall not have the
right to vote cumulatively in the election of directors.
5. Conversion Rights of Series A Convertible Non- Redeemable
Preferred Stock.
(a) Conversion at the Option of the Holder.
(i) Conversion Rate. The holder of record of
any shares or fractional shares of Series A Convertible Non- Redeemable
Preferred Stock shall have the right, at any time, at such holder's option, to
convert (the"Optional Conversion"), without the payment of any additional
consideration, each two-thousandth (1/2000th) of a share of Series A
Convertible Non-Redeemable Preferred Stock into one (1) fully paid and
non-assessable share of Common Stock (so that each whole share of Series A
Convertible Non-Redeemable Preferred Stock is convertible into two thousand
(2,000) fully paid and non-assessable shares of Common Stock), subject to
adjustment as described below. The number of shares of Common Stock into which
the Series A Convertible Non-Redeemable Preferred Stock may be converted shall
be the "Conversion Rate."
(ii) Adjustment to Conversion Rate for
Certain Changes in the Company's Capitalization. If there shall be issued
additional shares of Common Stock solely by reason of stock dividends, stock
splits, combinations or exchanges of shares, or if the Company shall reduce the
number of outstanding shares of its Common Stock by any capital reorganization
or reclassification of the capital stock of the Company, the Board of Directors
of the Company shall adjust the Conversion Rate to reflect such transaction such
that immediately after any of the foregoing events, the Series A Convertible
Non-Redeemable Preferred Stock shall be convertible into the same proportion of
issued and outstanding shares of Common Stock into which the Series A
Convertible Non-Redeemable Preferred Stock would have been convertible prior to
such event; provided, however, that in
- 2 -
<PAGE> 3
no event shall fractional shares of Common Stock be issuable in respect of any
conversion.
(b) Automatic Conversion. Each share or fractional
share of Series A Convertible Non-Redeemable Preferred Stock shall automatically
convert (the "Automatic Conversion"), upon the transfer, sale, pledge,
assignment or other disposition of such share or fractional share, into shares
of Common Stock (other than fractional shares) at the Conversion Rate in effect
at the time of such transfer, sale, pledge, assignment or other disposition.
After any such transfer, sale, pledge, assignment or other disposition, the
certificate representing any share or fractional share of Series A Convertible
Non-Redeemable Preferred Stock shall represent the number of shares of Common
Stock into which such share or fractional share was converted and the holder
thereof shall have no further rights as a holder of Series A Convertible
Non-Redeemable Preferred Stock.
(c) Mergers, Consolidations, Etc. In the event the Company
shall merge, consolidate or take any other similar action in which the Common
Stock shall be exchanged for securities or assets, whether of the Company or of
another entity, the Series A Convertible Non-Redeemable Preferred Stock shall be
automatically converted into such other securities or assets as if the Series A
Convertible Non-Redeemable Preferred Stock had been converted into Common Stock
immediately prior to such merger, consolidation or such other similar action.
(d) Mechanics of Conversion.
(i) Automatic Conversion. The original holder shall
provide the Company prompt notice of any transfer, sale, pledge, assignment or
other disposition of any share or fractional share of Series A Convertible
Non-Redeemable Preferred Stock. Thereafter, any share or fractional share of
Series A Convertible Non-Redeemable Preferred Stock so transferred, sold,
pledged, assigned or otherwise disposed of shall represent the number of shares
of Common Stock into which such share or fractional share was converted and the
holder thereof shall have no further rights as a holder of Series A Convertible
Non-Redeemable Preferred Stock. Certificates for such converted shares or
fractional shares of Series A Convertible Non-Redeemable Preferred Stock may be
exchanged for certificates for the shares of Common Stock into which the shares
or fractional shares of Series A Convertible Non-Redeemable Preferred Stock were
converted, by returning such certificates to the Company or the Company's
transfer agent for the Common Stock.
(ii) Optional Conversion. If a holder of shares of
Series A Convertible Non-Redeemable Preferred Stock desires to exercise his
right of Optional Conversion pursuant to subsection 5(a), such holder shall give
written notice to the Company of his election to convert a stated number of
shares of Series A Convertible Non-Redeemable Preferred Stock into shares of
Common Stock, at the Conversion Rate then in effect, which notice shall
- 3 -
<PAGE> 4
be accompanied by the certificate or certificates representing such shares or
fractional shares of Series A Convertible Non-Redeemable Preferred Stock which
shall be converted into Common Stock. The notice also shall contain a statement
of the name or names in which the certificate or certificates for Common Stock
shall be issued. Promptly after the receipt of the aforesaid notice and
certificate or certificates representing the Series A Convertible Non-Redeemable
Preferred Stock surrendered for conversion, the Company shall cause to be issued
and delivered to the holder of the Series A Convertible Non-Redeemable Preferred
Stock surrendered for conversion or to his nominee or nominees, a certificate or
certificates for the number of shares of Common Stock issuable upon conversion
of such Series A Convertible Non-Redeemable Preferred Stock and the
certificates representing shares of Series A Convertible Non-Redeemable
Preferred stock surrendered for conversion shall be cancelled by the Company. If
the number of shares represented by the certificate or certificates surrendered
for conversion shall exceed the number of shares to be converted, the Company
shall issue and deliver to the person entitled thereto a certificate
representing the balance of any unconverted shares of the Series A Convertible
Non-Redeemable Preferred Stock.
(e) Reservation of Common Stock. The Company shall at all
times reserve and keep available out of its authorized but unissued Common
Stock, solely for issuance upon conversion of shares of Series A Convertible
Non-Redeemable Preferred Stock as herein provided, such number of shares of
Common Stock as shall be issuable from time to time upon the conversion of all
of the shares of Series A Convertible Non-Redeemable Preferred Stock at that
time issued and outstanding.
6. Liquidation Rights. In the event of any liquidation,
dissolution or winding up (either voluntary or involuntary) of the Company, the
holders of Series A Convertible Non-Redeemable Preferred Stock shall be entitled
to receive $3.70 for each two-thousandth (1/2000th) of a share before any
amounts are paid to holders of Common Stock. After such payments shall have been
made in full to the holders of Series A Convertible Non-Redeemable Preferred
Stock shall have no further rights upon any such event.
IN WITNESS WHEREOF, the Company has caused this Certificate to
be signed by its Secretary on this 26th day of March, 1997.
SUBMICRON SYSTEMS CORPORATION
By: /s/ R. G. HOLMES
__________________________
R. G. Holmes, Secretary
- 4 -
<PAGE> 1
EXHIBIT 4.4
NEITHER THIS NOTE NOR THE SECURITIES UNDERLYING THIS NOTE HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NEITHER
THIS NOTE, NOR ANY PORTION THEREOF, NOR ANY INTEREST THEREIN, NOR THE SECURITIES
UNDERLYING THIS NOTE, MAY BE OFFERED OR SOLD EXCEPT PURSUANT TO (I) AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE ACT, OR (II) AN AVAILABLE EXEMPTION FROM
REGISTRATION UNDER THE ACT, PROVIDED THE HOLDER HAS FURNISHED TO PAYOR AN
OPINION OF ITS COUNSEL SATISFACTORY TO PAYOR TO THE EFFECT THAT AN EXEMPTION
FROM REGISTRATION UNDER SUCH ACT IS AVAILABLE.
SUBMICRON SYSTEMS CORPORATION
8% CONVERTIBLE SUBORDINATED PROMISSORY NOTE DUE MARCH 26, 2002
$___________________ March 26, 1997
FOR VALUE RECEIVED, the undersigned, SubMicron Systems Corporation, a
Delaware corporation ("Payor" or the "Company"), having its executive office at
6620 Grant Way, Allentown, Pennsylvania 18106, hereby promises to pay to
__________________________ or registered assigns (the "Payee"), having an
address at ______________________________, at the Payee's address set forth
hereinabove or, at such other place as the holder of this Note (the "Holder")
shall hereafter specify in writing, on March 26, 2002 (the "Maturity Date"), the
principal sum of ___________________________ ($________) Dollars, in such coin
or currency of the United States of America as at the time shall be legal tender
for the payment of public and private debt.
This Note is one of a series of promissory notes of Payor (the "New
Notes") issued in connection with the Subordinated Note and Preferred Stock
Purchase Agreements, effective March 15, 1997, between the Company and certain
existing securityholders of the Company (the "Purchase Agreements"). This Note
shall rank pari passu with all other New Notes.
1. Interest and Payment.
Section 1.1. Payment of the full amount of principal
will be due and payable on the Maturity Date unless this Note is redeemed or
converted or otherwise becomes due on an earlier date in accordance with the
terms hereof.
<PAGE> 2
Section 1.2. The unpaid principal amount of this Note
outstanding from time to time shall bear simple interest from, but not
including, the date hereof until the Maturity Date at the rate of 8% per annum.
Section 1.3. Interest pursuant to Section 1.2 is
payable in arrears on the last day of each of the months of March, June,
September and December during the term of this Note (each, an "Interest Payment
Date"), commencing June 30, 1997, to holders of record of this Note on the March
15, June 15, September 15 and December 15, as the case may be, preceding the
applicable Interest Payment Date or the next business day preceding such record
date if such March 15, June 15, September 15 or December 15, as the case may be,
is not a business day (each an "Interest Payment Record Date"). Interest is
payable at the same address designated for payment of principal. In the event of
acceleration pursuant to Section 5 below, interest accrued through the date of
acceleration shall be payable upon such acceleration.
Section 1.4. If an Event of Default set forth in
Sections 5.4, 5.5, 5.6, 5.7, 5.8 or 5.9 hereof shall occur and continue for five
(5) days, whether or not the Holder shall (if permitted hereunder) declare the
unpaid principal amount of this Note, together with accrued and unpaid interest
thereon, to be immediately due and payable, and whether or not such Event of
Default occurs after the occurrence of any other Event of Default described in
Section 5 hereof, then interest shall begin to accrue on the outstanding
principal balance of this Note from the date of such Event of Default to the
earlier of (i) the date of payment in full of the outstanding principal of this
Note and all accrued and unpaid interest hereunder or (ii) the date the Event of
Default is cured, at the rate of 16% per annum as to Events of Default under
Sections 5.4, 5.5 or 5.9 and 10% per annum as to Events of Default under
Sections 5.6, 5.7 or 5.8 (in either event, the "Default Rate").
Section 1.5. In no event shall the Holder be
entitled to receive interest, however characterized, at an effective rate in
excess of the maximum rate permitted by law. In the event that a court of
competent jurisdiction shall finally determine that such amounts paid or agreed
to be paid by the Payor in connection with this Note causes the effective
interest rate on this Note to exceed the maximum rate permitted by law, such
interest or other consideration shall automatically be reduced to a rate which
results in an effective interest rate under this Note equal to the maximum rate
permitted by law over the term hereof, and, in such event, the Holder shall
apply to the reduction of the unpaid principal balance of this Note any amounts
received by it deemed to constitute excessive interest. For purposes of this
Note, where appropriate the term "Holder" shall include the Payee.
-2-
<PAGE> 3
Section 1.6. The Company may pay principal and
interest due under this Note by Company check. The Holder must surrender this
Note to the Company to receive payment of the principal amount of the Note.
2. Replacement of Note.
Section 2.1. In case this Note is mutilated,
destroyed, lost or stolen, the Payor shall, at its sole expense, after receipt
of notice from the Holder, execute, register and deliver a new Note, in exchange
and substitution for this Note, if mutilated, or in lieu of and substitution for
this Note, if destroyed, lost or stolen. In the case of destruction, loss or
theft, the Holder shall furnish to the Payor indemnity reasonably satisfactory
to the Payor, and in any such case, and in the case of mutilation, the Holder
shall also furnish to the Payor evidence to its reasonable satisfaction of the
mutilation, destruction, loss or theft of this Note and of the ownership
thereof. Any substitute Note so issued shall be in the same outstanding
principal amount as this Note and dated the date to which interest shall have
been paid on this Note, or if no interest shall have yet been paid, dated the
date of this Note.
Section 2.2. Every Note issued pursuant to the
provisions of Section 2.1 hereof in substitution for this Note shall constitute
an additional contractual obligation of the Payor, whether or not this Note
shall be found at any time, or be enforceable by anyone.
3. Conversion.
Section 3.1.
(a) Subject to the terms and provisions of this Note,
the Holder shall have the right, at its option ("Optional Conversion"), at any
time after the Approval Date (as defined below) and until the Conversion
Termination Date (as defined below), to convert the outstanding principal amount
of this Note as of the date this Note is surrendered for conversion into shares
of Common Stock in accordance with Section 3.1(f) (the "Conversion Shares") at
the Conversion Price hereinafter provided. For purposes of this Note: "Approval
Date" means the earlier of (i) the date the Company definitively determines that
stockholder approval of the issuance by the Company of the Conversion Shares
underlying all of the New Notes is not required by the principal national
securities exchange or market on which the Company's Common Stock is traded or
(ii) the day immediately following the date the stockholders of the Company
approve the issuance of the Conversion Shares pursuant to Section 9(a) of the
Purchase Agreements; and "Conversion Termination Date" means 5:00 p.m. New York
City Time on the earlier of (x) the Maturity Date (or such later date as all
outstanding principal and accrued and unpaid interest under this Note is paid in
full) or (y) the business day immediately preceding the Redemption Date (as
hereinafter defined).
-3-
<PAGE> 4
In the event this Note is redeemed in part, the Conversion Termination Date with
respect to such partial redemption shall only apply to the principal amount of
this Note which is called for redemption.
(b) Subject to the terms and provisions of this Note,
if at any time the Closing Bid Price (as defined below) of the Company's Common
Stock is at least $5.10 per share (as such price shall be adjusted from time to
time pursuant to Sections 3.3, 3.4 or 3.5 to the same extent and in the same
relative proportion as the Conversion Price), for a period of twenty (20)
consecutive trading days (provided that the Approval Date and the Registration
Date (as defined in Section 5.8) each have occurred on or before such twentieth
day), then the Holder shall, if notice is given pursuant to Section 3.1(d)
below, be required to convert (the "Mandatory Conversion") the outstanding
principal amount of this Note as of the date this Note is surrendered for
conversion into Conversion Shares at the Conversion Price in effect on the last
trading day of the 20-day period referred to above (such day hereinafter
referred to as the "Trigger Date"). As of the Trigger Date, the Holder shall
have no further rights under this Note (including, without limitation, any
rights under Section 3 of this Note), except as provided in subsection 3.1(d) or
3.1(e) below. "Closing Bid Price" for the purpose of this Note shall mean (i)
the last reported bid price, on the primary exchange on which the Common Stock
is traded, if the Common Stock is traded on a national securities exchange,
including the Nasdaq National Market, or (ii) the closing bid price of the
Common Stock as reported by the Nasdaq Small Cap Market, or (iii) if the Common
Stock is not traded on a national securities exchange or Nasdaq, the closing bid
price of the Common Stock as reported by the National Quotation Bureau, Inc.
(c) To convert this Note, in whole or in part in
connection with an Optional Conversion after the Approval Date, the Holder shall
surrender this Note to the Payor during usual business hours at the Payor's
principal executive office, accompanied by written notice to the Payor in form
reasonably satisfactory to the Payor of the Holder's intention to convert,
stating the portion of the Note that is to be converted and the name and address
of each person in whose name a share or shares of Common Stock issuable upon
such conversion is to be registered. When surrendered for conversion in
connection with an Optional Conversion, this Note shall, unless the shares
issuable on conversion are to be issued in the same name as the name in which
this Note is then registered, be duly endorsed, or accompanied by instruments of
transfer in form reasonably satisfactory to the Payor duly executed, by the
Holder or his or its duly authorized attorney. As promptly as practical after
the surrender and giving of notice to convert as herein provided, the Payor
shall deliver or cause to be delivered at its office or agency maintained for
that purpose to or upon written order of the Holder of the Note, certificates
representing the number of fully paid and nonassessable Conversion Shares into
which said Note is converted and, in the event of partial conversion, a new Note
in an aggregate principal amount equal to the unconverted
-4-
<PAGE> 5
portion of said Note, dated as of the date to which interest has been paid, and
if no interest has been paid, dated as of the date of the Note converted in
part, and in all other respects identical to the Note converted.
(d) If there shall be a Mandatory Conversion, at the
election of the Company, the Holder shall be given ten (10) days prior written
notice of the date on which the Company shall effect such Mandatory Conversion
(the "Mandatory Conversion Date). On or before the Mandatory Conversion Date,
the Holder shall surrender this Note to the Payor at the Payor's principal
executive office, together with written notice to the Payor of the name and
address of each person in whose name a share or shares of Common Stock issued
upon such conversion is to be registered. When surrendered for conversion upon a
Mandatory Conversion, this Note shall, unless the shares issuable on conversion
are to be issued in the same name as the name in which this Note is then
registered, be duly endorsed, or accompanied by instruments of transfer in form
reasonably satisfactory to the Payor duly executed, by the Holder or his or its
duly authorized attorney. On the Mandatory Conversion Date, the Payor shall have
prepared and ready to deliver or cause to be delivered at its office or agency
maintained for that purpose to the Holder of the Note, certificates representing
the number of fully paid and nonassessable Conversion Shares into which said
Note is converted. Such Conversion Shares shall be delivered only upon receipt
by the Company of the certificates for the Notes being converted. From and after
the Mandatory Conversion Date, interest on this Note will cease to accrue and
the sole right of the Holder of this Note shall be to receive the Conversion
Shares and accrued and unpaid interest on the Note up to the Mandatory
Conversion Date.
(e) Upon either an Optional Conversion or a Mandatory
Conversion, the Payor shall pay to the Payee any unpaid interest accrued on the
converted portion of the Note through the date of conversion. If a Note is
surrendered for conversion during the period from the close of business on any
Interest Payment Record Date to the opening of business on the succeeding
Interest Payment Date, Holder must surrender this Note accompanied by payment by
check or other method reasonably acceptable to the Payor of an amount equal to
the interest payable from the date of conversion to such Interest Payment Date;
provided, however, that no such payment need be made if there shall exist at the
time of conversion a default in the payment of interest on the Notes.
(f) Upon conversion as provided herein, this Note (or
any Note(s) issued upon transfer or exchange) shall convert into such number of
shares of Common Stock equal to the outstanding principal amount of this Note or
portion thereof which is being converted, divided by $3.70 (the "Conversion
Price"); provided, however, that the Conversion Price shall be adjusted to an
amount equal to the greater of (i) $2.50 per share (as adjusted from time to
time pursuant to Section 3.5 to the same extent and in the same relative
proportion as the Conversion Price) and (ii) the average
-5-
<PAGE> 6
Closing Bid Price for the twenty (20) consecutive trading days beginning on
March 15, 1999; provided that in no event shall the adjusted Conversion Price as
aforesaid be greater than the Conversion Price in effect immediately prior to
such adjustment. In addition to the foregoing, the Conversion Price may be
adjusted from the time in accordance with Sections 3.3, 3.4 and 3.5 hereof;
provided, however, that in no event (other than pursuant to Section 3.5) shall
the Conversion Price be reduced, upon any adjustment, to less than $2.50.
Section 3.2
(a) The Payor covenants and agrees that it has
reserved and shall at all times reserve and keep available out of its authorized
but unissued Common Stock, solely for the purpose of issuing such shares upon
the conversion of this Note, the full number of Conversion Shares then
deliverable upon the conversion hereof, free of preemptive rights. The Payor
covenants and agrees that the Conversion Shares shall, at the time of delivery
of the certificates for such shares of Common Stock, be duly authorized, validly
issued and fully paid and nonassessable shares of Common Stock.
(b) Each person in whose name any certificate for the
Conversion Shares is issuable upon the conversion of this Note shall for all
purposes be deemed to have become the holder of record of the Common Stock
represented thereby on, and such certificate shall be dated, with respect to an
Optional Conversion, the date upon which the Note was duly surrendered and
notice of conversion was given in accordance with the provisions of this Note,
and with respect to a Mandatory Conversion, the Mandatory Conversion Date;
provided, however, that if the date of such surrender and notice is a date upon
which the stock transfer books of the Payor are closed, such person shall be
deemed to have become the record holder of such shares on, and such certificate
shall be dated, the next business day on which the stock transfer books of the
Payor are open.
Section 3.3. Except as hereinafter provided, in case
the Payor shall at any time after the date hereof issue or sell any shares of
Common Stock (other than the issuances or sales referred to in Section 3.5 or
3.7 hereof), including shares held in the Payor's treasury and shares of Common
Stock issued upon the exercise of any options, rights or warrants to subscribe
for shares of Common Stock (other than the issuances or sales of Common Stock
pursuant to rights to subscribe for such Common Stock distributed to all the
stockholders of the Payor) and shares of Common Stock issued upon the direct or
indirect conversion or exchange of securities for shares of Common Stock, for a
consideration per share less than the Conversion Price in effect immediately
prior to the issuance or sale of such shares, or without consideration, then
forthwith upon such issuance or sale, the Conversion Price shall (until another
such issuance or sale or other adjustment) be reduced to the price (calculated
to the nearest full cent)
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<PAGE> 7
determined by dividing (I) an amount equal to the sum of (A) the product of (X)
the total number of shares of Common Stock outstanding immediately prior to such
issuance or sale, multiplied by (Y) the Conversion Price in effect on the date
immediately prior to the issuance or sale of such shares, plus (B) the aggregate
amount of all consideration, if any, received by the Payor upon such issuance or
sale, by (II) the total number of shares of Common Stock outstanding immediately
after such issuance or sale; provided, however, that in no event shall the
Conversion Price be adjusted pursuant to this computation to an amount in excess
of the Conversion Price in effect immediately prior to such computation.
For the purposes of any computation to be made in accordance
with this Section 3.3, the following provisions shall be applicable:
(i) In case of the issuance or sale of
shares of Common Stock for a consideration part or all of which shall be cash,
the amount of the cash consideration therefor shall be deemed to be the amount
of cash received by the Payor for such shares (or, if shares of Common Stock are
offered by the Payor for subscription, the subscription price, or, if such
securities shall be sold to underwriters or dealers for public offering without
a subscription offering, the initial public offering price) before deducting
therefrom any compensation paid or discount allowed in the sale, underwriting or
purchase thereof by underwriters or dealers or others performing similar
services, or any expenses incurred in connection therewith.
(ii) In case of the issuance or sale
(otherwise than as a dividend or other distribution on any stock of the Payor)
of shares of Common Stock for a consideration part or all of which shall be
other than cash, the amount of the consideration therefor other than cash shall
be deemed to be the value of such consideration as determined in good faith by
the Board of Directors of the Payor.
(iii) Shares of Common Stock issuable by way
of dividend or other distribution on any stock of the Payor shall be deemed to
have been issued immediately after the opening of business on the day following
the record date for the determination of stockholders entitled to receive such
dividend or other distribution and shall be deemed to have been issued without
consideration.
(iv) The reclassification of securities of
the Payor, other than shares of Common Stock, into securities including shares
of Common Stock shall be deemed to involve the issuance of such shares of Common
Stock for a consideration other than cash immediately prior to the close of
business on the date fixed for the determination of security holders entitled to
receive such shares, and the value of the consideration allocable to such shares
of Common Stock shall be determined as provided in subsection (ii) of this
Section 3.3.
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<PAGE> 8
(v) The number of shares of Common Stock at
any one time outstanding shall include the aggregate number of shares issued or
issuable upon the exercise of options, rights or warrants and upon the
conversion or exchange of convertible or exchangeable securities.
Section 3.4. Except in the case of the Payor issuing
rights to subscribe for shares of Common Stock to all the stockholders of the
Payor or issuances or sales referred to in Section 3.7, if the Payor shall at
any time after the date hereof issue options, rights or warrants to subscribe
for shares of Common Stock, or issue any securities convertible into or
exchangeable for shares of Common Stock, (i) for a consideration per share less
than the Conversion Price in effect immediately prior to the issuance of such
options, rights, or warrants, or (ii) without consideration, the Conversion
Price in effect immediately prior to the issuance of such options, rights or
warrants, or such convertible or exchangeable securities, as the case may be,
shall be reduced to a price determined by making a computation in accordance
with the provisions of Section 3.3 hereof, provided that:
(a) The aggregate maximum number of shares of Common
Stock, as the case may be, issuable under all the options, rights or warrants so
issued shall be deemed to be issued and outstanding at the time all such
options, rights or warrants were issued (without giving effect to any additional
shares of Common Stock that may be issued after the date of issuance of such
options, rights or warrants pursuant to future adjustments resulting from the
anti-dilution provisions contained in such options, rights or warrants ("Future
Adjustments")), and for a consideration equal to the minimum purchase price per
share (without giving effect to any Future Adjustments) provided for in the
options, rights or warrants at the time of issuance, plus the consideration
(determined in the same manner as consideration received on the issue or sale of
shares in accordance with the terms of such options, rights or warrants), if
any, received by the Payor for the options, rights or warrants, and if no
minimum price is provided in such options, rights or warrants, then the
consideration shall be equal to zero; provided, however, that upon the
expiration or other termination of the options, rights or warrants, if any
thereof shall not have been exercised, the number of shares of Common Stock
deemed to be issued and outstanding pursuant to this subsection (a) (and for the
purposes of subsection (v) of Section 3.3 hereof) shall be reduced by such
number of shares as to which options, warrants and/or rights shall have expired
or terminated unexercised, and such number of shares shall no longer be deemed
to be issued and outstanding, and the Conversion Price then in effect shall
forthwith be readjusted in such event (and also if the options, rights or
warrants are exercised for a price in excess of the minimum price provided in
such securities) and thereafter be the Conversion Price which it would have been
had adjustment been made on the basis of the issuance only of shares actually
issued or issuable upon the exercise of those options, rights or warrants as to
which the
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<PAGE> 9
exercise rights shall not have expired or terminated unexercised; provided,
further, that no such readjustment to the Conversion Price, if any, shall affect
any portion of this Note that is converted or redeemed prior to the effective
date of such readjustment.
(b) The aggregate maximum number of shares of Common
Stock issuable upon conversion or exchange of any convertible or exchangeable
securities shall be deemed to be issued and outstanding at the time of issuance
of such securities(without giving effect to any Future Adjustments), and for a
consideration equal to the consideration received by the Payor for such
securities, plus the minimum consideration (without giving effect to any Future
Adjustments), if any, receivable by the Payor upon the conversion or exchange
thereof; provided, however, that upon the actual conversion or exchange or
termination of the right to convert or exchange such convertible or exchangeable
securities (whether by reason of redemption or otherwise), the number of shares
deemed to be issued and outstanding pursuant to this subsection (b) (and for the
purpose of subsection (v) of Section 3.3 hereof) shall be reduced by such number
of shares as to which the conversion or exchange rights shall have expired or
terminated unexercised, and such number of shares shall no longer be deemed to
be issued and outstanding and the Conversion Price then in effect shall
forthwith be readjusted in such event (and also if the options, rights or
warrants are exercised for a price in excess of the minimum price provided in
such securities) and thereafter be the price which it would have been had
adjustment been made on the basis of the issuance only of the shares actually
issued or issuable upon the conversion or exchange of those convertible or
exchangeable securities as to which the conversion or exchange rights shall not
have expired or terminated unexercised; provided, further, that no such
readjustment to the Conversion Price, if any, shall affect any portion of this
Note that is converted or redeemed prior to the effective date of such
readjustment.
(c) If any change shall occur in the price per share
provided for in any of the options, rights or warrants referred to in subsection
(a) of this Section 3.4, or in the price per share at which the securities
referred to in subsection (b) of this Section 3.4 are convertible or
exchangeable, the options, rights or warrants or conversion or exchange rights,
as the case may be, shall be deemed to have expired or terminated on the date
when such price change became effective in respect of shares not theretofore
issued pursuant to the exercise or conversion or exchange thereof, and the Payor
shall be deemed to have issued upon such date new options, rights or warrants or
convertible or exchangeable securities at the new price in respect of the number
of shares issuable upon the exercise of such options, rights or warrants or the
conversion or exchange of such convertible or exchangeable securities.
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<PAGE> 10
Section 3.5.
(a) In case the Payor shall: (i) declare a dividend
of Common Stock on its Common Stock, (ii) subdivide outstanding Common Stock
into a larger number of shares of Common Stock by reclassification, stock split
or otherwise, or (iii) combine outstanding Common Stock into a smaller number of
shares of Common Stock by reclassification or otherwise, the Conversion Price
then in effect immediately prior to any such event shall be adjusted
proportionately so that thereafter the Holder shall be entitled to receive upon
conversion of this Note the number of Conversion Shares which such Holder would
have owned after the happening of any of the events described above had this
Note been converted immediately prior to the happening of such event, provided
that the Conversion Price shall in no event be reduced to less than the par
value of the shares issuable upon conversion. An adjustment made pursuant to
this Section 3.5 shall become effective immediately after the record date in the
case of a dividend or immediately after the payment date in the event no record
date is fixed to determine the stockholders entitled to receive such dividend
(and readjusted back to the Conversion Price in effect prior to such adjustment
if the dividend is not paid) and shall become effective immediately after the
effective date in the case of a subdivision or combination.
(b) In case of any reclassification or change of
outstanding shares of Common Stock issuable upon conversion of this Note (other
than change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a subdivision or combination), or in case
of any consolidation or merger with or into another corporation (other than a
consolidation or merger in which the Payor is the continuing corporation and
which does not result in any reclassification or change of outstanding shares of
Common Stock, other than a change as a result of a subdivision or combination of
such shares or a change in par value, as aforesaid), or in case of any sale or
conveyance to another corporation of the property of the Payor as an entirety or
substantially as an entirety, the holder of this Note shall have the right
thereafter to convert this Note into the kind and amount of shares of stock and
other securities and property receivable upon such reclassification, change,
consolidation, merger, sale or conveyance by a holder of the number of shares of
Common Stock of the Payor for which the Note might have been converted
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance.
The above provisions of this Section 3.5(a) and (b)
shall similarly apply to successive reclassifications and changes of shares of
Common Stock and to successive consolidations, mergers, sales or conveyances.
Section 3.6. In the event that the Payor shall at any
time prior to the conversion of all of the New Notes declare a dividend (other
than a dividend consisting solely of shares of
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<PAGE> 11
Common Stock or a cash dividend or distribution payable out of current or
retained earnings) or otherwise distribute to its stockholders any monies,
assets, property, rights, evidences of indebtedness, securities (other than
shares of Common Stock), whether issued by the Payor or by another person or
entity, or any other thing of value, the Company shall promptly thereafter give
the Holder the notice set forth in Section 3.8 hereof. If the Payor fails to
give such notice, the Holder shall be entitled to receive, upon the conversion
of the Notes, the same monies, property, assets, rights, evidences of
indebtedness, securities or any other thing of value that such Holder would have
been entitled to receive at the time of such dividend or distribution. The Payor
shall make appropriate provisions to ensure the timely performance of the
provisions of this Subsection 3.6.
Section 3.7. Notwithstanding anything contained in
this Note to the contrary, no adjustment of the Conversion Price shall be made
(i) upon the issuance of options or stock pursuant to the Payor's stock plans in
effect on the date hereof or subsequently approved by the Payor's stockholders
and the issuance or sale by the Payor of any shares of Common Stock pursuant to
the exercise of any such option, or (ii) upon the issuance or sale by the Payor
of any shares of Common Stock pursuant to the exercise of any options or
warrants or upon conversion of any outstanding convertible security, in any such
case if previously issued and outstanding as of the date of this Note or (iii)
if the amount of such adjustment shall be less than 1% of the Conversion Price;
provided, however, that in such case any adjustment that would otherwise be
required to be made shall be carried forward and shall be made at the time of
and together with the next subsequent adjustment which, together with any
adjustment so carried forward, shall amount to at least 1% of the Conversion
Price.
Section 3.8.
(a) In case the Payor proposes to take any action
referred to in Section 3.6 above, or to effect the liquidation, dissolution or
winding up of the Payor, then the Payor shall cause notice thereof to be mailed
to the Holder, at Holder's address appearing in the Payor's records, at least
thirty (30) days prior to the date on which the transfer books of the Payor
shall close or a record be taken for such stock dividend, sale or issuance or
the date when such reclassification, liquidation, dissolution or winding up
shall be effective, as the case may be. Neither the failure to give such notice
referred to in Section 3.8(a) or (b) nor any defect therein or in the mailing
thereof shall affect the validity of any action taken in connection with such
transaction.
(b) Whenever the Conversion Price shall be adjusted
as provided in Section 3.3, 3.4 or 3.5 above, the Payor shall forthwith file at
the office designated for the conversion of the Note, a statement, signed by the
Chairman of the Board, the President, any Vice President, the Treasurer or
Secretary of the Payor, showing in reasonable detail the facts requiring such
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<PAGE> 12
adjustment and the Conversion Price that will be effective after such
adjustment. The Payor shall also cause a notice setting forth any such
adjustment to be sent by mail, first class, postage prepaid, to the Holder at
its address appearing on the Note register maintained by the Payor.
(c) No fractional shares of Common Stock shall be
issuable upon conversion of this Note, but a payment in cash will be made in
respect of any fraction of a share which would otherwise be issuable upon the
surrender of this Note, or portion hereof, for conversion. Such payment shall be
based on the Closing Bid Price of the Common Stock on the date of conversion.
Section 3.9. No Holder of this Note shall be entitled
to vote or receive dividends or be deemed the holder of Common Stock or any
other securities of the Payor which may at any time be issuable on the
conversion hereof for any purpose, nor shall anything contained herein be
construed to confer upon the Holder of this Note, as such, any of the rights of
a stockholder of the Payor or any right to vote for the election of directors or
upon any matters submitted to stockholders at any meeting thereof, or to give or
withhold consent to any corporate action (whether upon any recapitalization,
issue of stock, reclassification of stock, change of par value or change of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive dividends or subscriptions rights or otherwise until the Note shall have
been converted and the Common Stock issuable upon the conversion hereof shall
have become deliverable as provided herein.
4. Redemption.
Section 4.1. On not less than fifteen (15) days
notice given at any time, if, and only if the Approval Date and the Registration
Date each have occurred on or prior to the Redemption Date, this Note may be
redeemed, in whole or in part, at the option of the Payor, at a redemption price
(the "Redemption Price") equal to (i) 100% of the principal amount of the Note
at the time outstanding and (ii) accrued interest on the Note unpaid as of the
Redemption Date. The date fixed for redemption of this Note, or a portion
thereof, is referred to herein as the "Redemption Date."
Section 4.2. In the event that not all of the New
Notes are to be redeemed, the Payor shall select the New Notes, or portions
thereof, to be redeemed on either a pro rata basis or by lot, or such other
method as is fair and appropriate. The Company may select for redemption
portions of New Notes that have denominations in integral multiples of $1,000.
Section 4.3. The notice of redemption shall specify
(i) the principal amount of the Note to be redeemed, (ii) the Redemption Price,
(iii) the Redemption Date, (iv) the place where the Note shall be delivered and
the redemption price paid, and (v) that the right to convert the Note shall have
terminated as of the business day immediately preceding the Redemption Date. No
failure
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<PAGE> 13
to mail such notice nor any defect therein or in the mailing thereof shall
affect the validity of the proceedings for such redemption, except as to a
Holder (a) to whom notice was not mailed or (b) whose notice was materially
defective. An affidavit of the Secretary or an Assistant Secretary of the Payor
that notice of redemption has been mailed shall, in the absence of fraud, be
prima facie evidence of the facts stated therein.
Section 4.4. On and after the Redemption Date,
Holders of the Notes shall have no further rights with respect to the portion of
the Note redeemed except to receive, upon surrender of the Note, the Redemption
Price.
Section 4.5. From and after the Redemption Date, the
Payor shall, at the place specified in the notice of redemption, upon
presentation and surrender to the Payor by or on behalf of the Holder thereof of
one or more Notes to be redeemed, deliver or cause to be delivered to or upon
the written order of such Holder a sum in cash equal to the Redemption Price of
each such Note. From and after the Redemption Date such Notes shall expire and
become void and all rights hereunder shall cease, except the right to receive
payment of the Redemption Price and, if the Note is redeemed only in part, to
receive a new Note equal in principal amount to the unredeemed portion of the
Note surrendered.
5. Events of Default. The following shall be Events of
Default:
Section 5.1. The liquidation, dissolution or winding
up of the Payor or any vote in favor thereof by the Board of Directors and
stockholders of the Payor without making provision for the payment in full of
the New Notes in accordance with their terms; or
Section 5.2. Payor shall make an assignment for the
benefit of creditors, or shall file with a court of competent jurisdiction an
application for the appointment of a receiver for itself or a material part of
its assets, or shall commence a voluntary case or proceeding under any provision
of the Federal Bankruptcy Code or any other federal or state statute affording
relief to debtors or shall in any manner consent to the filing against it of an
involuntary case or proceeding under any such law; or there shall be commenced
against the Payor an involuntary case or proceeding under any such federal or
state statute or there shall be filed against the Payor, without the consent of
Payor, any application under any such federal or state statute for the
appointment of a receiver for itself or a material part of its assets which
case, proceeding or application is not dismissed or withdrawn within sixty (60)
days of commencement or filing thereof as the case may be; or
Section 5.3. The sale by the Payor of all or
substantially all of its assets (other than the sale of inventory in the
ordinary course of business), or the merger or consolidation
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<PAGE> 14
by the Payor with or into another corporation, except for such mergers where the
Payor is the surviving entity or in which the surviving entity in such merger or
consolidation expressly assumes and agrees to pay all of the obligations of the
Payor under all of the New Notes; or
Section 5.4. The failure by the Payor to pay when due
(other than in connection with an acceleration of principal and interest due
under this Note) the principal of, or accrued interest under, this Note, or any
of the other New Notes, as and when the same shall become due and payable; or
Section 5.5. Payor or any of its subsidiaries shall
default in the payment when due (after any grace period provided therefor) of
the principal of, or interest on, any institutional indebtedness of Payor or any
such subsidiary with an aggregate principal amount in excess of $250,000
(whether such principal or interest shall become due at scheduled maturity, by
required prepayment, by acceleration, by demand or otherwise); or
Section 5.6. If the Approval Date has not occurred by
January 31, 1998; or
Section 5.7. The failure by Payor to consummate, on
or prior to September 30, 1997, the Exchange Offer (as defined in Section 9(b)
of the Purchase Agreements) due to the failure by Payor to have an effective
Registration Statement covering the Exchange Notes (as defined in Section 9(b)
of the Purchase Agreements) pursuant to the Act; provided, however, that the
foregoing default shall be deemed cured upon the date a Registration Statement
covering the Exchange Notes is declared effective pursuant to the Act; or
Section 5.8. Assuming the Approval Date has occurred,
if on or prior to January 31, 1998 the Company has failed to deliver an opinion
of its counsel to the Holder (or if the Holder is not the original Holder of
this Note, has not delivered to a prior holder of this Note) that the
Registration Date as to such person has occurred. "Registration Date" for the
purpose of this Note shall be the date upon which the Conversion Shares first
become saleable under the Act, whether pursuant to Rule 144(k) of the Act or any
successor provision, an effective Registration Statement which covers the
Exchange Notes of the Holder or would have covered such Exchange Notes had the
Holder participated in the Exchange Offer (if such Registration Statement also
permits the sale of the Conversion Shares), or an effective Registration
Statement covering the resale of the Conversion Shares; or
Section 5.9. The failure by Company to comply in any
material respect with Sections 6, 9(a), 9(b), 9(c) or 9(d) of the Purchase
Agreement signed by the Holder; provided, however, that an Event of Default
under this Section 5.9 for failure of the Company to use its best efforts shall
be deemed cured upon the date the event for which the Company was to use its
best efforts to
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<PAGE> 15
cause to occur shall actually occur (by way of illustration, if the Company
failed to use its best efforts pursuant to Section 9(b) of the Purchase
Agreement to cause to be effective a Registration Statement permitting the sale
of the Conversion shares by a specified date, such default shall be deemed cured
upon the date such shares first become freely saleable under the Act, whether
pursuant to Rule 144(k) of the Act or any successor provision or an effective
Registration Statement).
If an Event of Default pursuant to Sections 5.1,
5.2, 5.3, 5.4, 5.5, 5.6 or 5.8 hereof shall occur and, other than with respect
to Sections 5.1, 5.2, 5.5, 5.6 or 5.8 shall continue uncured for five (5) days,
and at any time thereafter, while such event is continuing, the Holder shall
have the right to declare the unpaid principal amount of this Note, together
with accrued interest thereon, to be immediately due and payable, whereupon the
same shall be forthwith due and payable.
Payor shall promptly provide the Holder with written
notice after the occurrence of any Event of Default known by the Payor setting
forth the facts constituting such Event of Default.
6. Subordination.
Section 6.1. The payment of the principal of, and
accrued interest on this Note is hereby expressly subordinated in right of
payment, in the manner and to the extent hereinafter expressly set forth, to the
prior payment in full of all Senior Indebtedness (as hereinafter defined),
whether outstanding on the date hereof or hereafter created, incurred or
assumed. The Holder and the Payee, by his or its acceptance hereof, agrees to
and shall be bound by the provisions hereof.
As used in this Section 6, "Senior Indebtedness"
means (i) indebtedness consisting of the principal of, premium, if any, interest
on and any fees, charges and expenses relating to, (A) Money Borrowed, or (B)
the deferred purchase price of any business, properties or assets acquired by
the Payor or any of its subsidiaries from any third party, or (C) secured by any
mortgage, security interest, lien, pledge or encumbrance upon property of the
Payor or any of its subsidiaries; (ii) guarantees, direct or indirect, of any
indebtedness referred to in clause (i) above; and (iii) all renewals,
replacements, extensions, refundings, amendments, modifications, or increases of
any indebtedness referred to in clause (i) above.
The term, "Money Borrowed," as used in the definition
of "Senior Indebtedness," means indebtedness evidenced by bonds, debentures
notes or similar instruments, provided that such obligations have been secured
by a substantial amount of the assets of the Payor or any material subsidiary of
the Payor.
Section 6.2. In the event of any distribution,
division or application, partial or complete, voluntary or
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<PAGE> 16
involuntary, by operation of law or otherwise, of all or any part of the assets
of the Payor, whether in cash or kind, upon any dissolution, winding up,
liquidation, readjustment or reorganization of the Payor or its property,
whether in bankruptcy, insolvency or receivership proceedings or at execution
sale or upon an assignment for the benefit of creditors or any other marshalling
of the assets and liabilities of the Payor or otherwise, the Payor and the
Holder, by his or its acceptance of this Note, agree that:
(a) The holders of all Senior Indebtedness shall
first be entitled to receive payment in full, in accordance with the terms of
such Senior Indebtedness, of the principal thereof and interest thereon, before
the Holder shall be entitled to receive any payment on account of the principal
of, or interest on, this Note.
(b) The Holder, by his or its acceptance of this
Note, assigns to the holders of Senior Indebtedness for the purposes and to the
extent set forth in this Section 6, all his right, title and interest to and in
any payment or distribution of assets of the Payor of any kind or character,
whether in cash, property or securities, other than securities of the Payor as
reorganized or readjusted or securities of the Payor or any other corporation
provided for by a plan of reorganization or readjustment the payment or
distribution of which is subordinate, at least to the extent provided in this
Section 6 with respect to this Note, to the payment in full of the principal of,
and interest on all Senior Indebtedness to which the Holder would be entitled
except for the provisions of this Section 6(b) ("Subordinated Securities"). The
Holder authorizes and directs the Payor (or any receiver, trustee in bankruptcy,
liquidating trustee or agent or other Person acting for the Payor) to take such
steps as may be reasonably necessary or appropriate to entitle the holders of
Senior Indebtedness to receive such payment or distribution from the liquidating
trustee or agent or other person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or otherwise, ratably
according to the aggregate amounts remaining unpaid on the Senior Indebtedness
held by each such holders, all to the extent necessary to provide for payment in
full of the principal of, and interest on, all Senior Indebtedness, in
accordance with the terms of such Senior Indebtedness, but prior to any payment
of principal of, or interest on, this Note, and in connection therewith and for
such purpose, the holders of the Senior Indebtedness are hereby authorized and
permitted to assert, file, prosecute and vote any claim or other interest on
account of this Note which may be required in order to seek and obtain payment
on account of this Note under the circumstances described in this Section 6.2;
and
(c) In the event that, notwithstanding the provisions
of Section 6.2(b) hereof, any payment or distribution of assets of the Payor of
any kind or character, whether in cash, property or securities (other than
Subordinated Securities), shall be received by the Holder before the payment in
full of the
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<PAGE> 17
principal of and interest on Senior Indebtedness in accordance with the terms of
such Senior Indebtedness, such payment of distribution shall be held in trust
for the benefit of, and shall be paid over to, the holders of Senior
Indebtedness, ratably according to the aggregate amount remaining unpaid on such
Senior Indebtedness held by each such holder, to the extent necessary to pay in
full the principal of and interest on such Senior Indebtedness, in accordance
with the terms of such Senior Indebtedness.
Section 6.3. The Payor shall not make any payment of
the principal of, or interest on, this Note (a) at any time when it is in
default in the payment of principal of, or interest on, any Senior Indebtedness,
or (b) if at the time of such payment or immediately after giving effect
thereto, there shall exist any default (other than a default specified in clause
(a) above) specified in any Senior Indebtedness which shall have continued
uncured for the period of grace (or the period after notice), if any, specified
in such Senior Indebtedness if such default shall give the holders of Senior
Indebtedness the right to accelerate the maturity thereof, provided that Payor
shall have given the Holder written notice of the occurrence of any such
default, unless and until such default shall have been cured or waived or shall
have ceased to exist. Any payment of principal of, or interest on, this Note
under circumstances described in clause (a) and (b) above shall be held by the
Holder in trust for the holders of Senior Indebtedness, provided Payor shall
give the Holder written notice of the occurrence of any default referred to in
the preceding sentence.
Section 6.4. Prior to the date on which the Senior
Indebtedness shall have been paid in full, the Holder shall not:
(a) Sue for, take or receive from Payor, in cash or
other property or by set off or in any other manner, payment of all or any of
the amounts due under this Note; provided, however, that absent the occurrence
and continuance of any default under the terms of the Senior Indebtedness, the
Holder may receive payments of the principal when due at maturity without
prepayment or acceleration (and without creating a default under the Senior
Indebtedness held or agented by Corestates Bank, N.A. or any replacement lender,
the absence of such default to be evidenced by the prior written acknowledgement
of Corestates Bank, N.A. or its successors or such replacement lender, which
acknowledgement will not be unreasonably withheld), and interest on this Note,
pursuant to this Note.
(b) Foreclose or attempt to foreclose upon any of the
property of Payor, seek or obtain the appointment of a receiver for the Payor,
exercise any right or power of sale or repossession, or attempt to realize upon
any portion of the property of the Payor, any interest therein, seek relief from
any stay imposed by the Bankruptcy Code or exercise any other right or remedy
granted in connection with this Note against the Payor and/or the property of
the Payor.
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<PAGE> 18
(c) Pursue any other remedies at law, in equity or
otherwise available to the Payee in connection with this Note against the Payor
and/or the property of the Payor.
(d) Accept any casualty insurance or other insurance
proceeds or condemnation aware proceeds from the Payor or otherwise on account
of this Note.
(e) Assert any demand, objection, defense and/or
counterclaim (including any rights of marshalling or equitable subordination)
relating to this Note and the Senior Indebtedness, against the holders of the
Senior Indebtedness.
Notwithstanding any provision to the contrary set
forth in this Section 6, (a) interest at the Default Rate shall commence, and
shall continue to, accrue as provided as in Section 1.4, upon the occurrence of
any of the Events of Default referred in such Sections; (b) the Holder of this
Note shall not be prevented from, to the extent permitted under this Note,
accelerating the maturity of the principal of, and accrued interest on, this
Note upon or following the occurrence of an Event of Default (other than an
Event of Default specified in Section 5.2) during any period of one hundred
eighty (180) days after written notice of the occurrence of a default specified
in any Senior Indebtedness shall have been given to Holder by Payor or any
holder of Senior Indebtedness, provided that only one such notice may be given
to the Holder pursuant to this clause in any one hundred twenty (120) day period
and no notice may be given in respect of any such Senior Indebtedness default,
the existence of which any holder of Senior Indebtedness had knowledge at the
time any other notice was delivered pursuant to this clause.
Section 6.5. Subject to the payment in full of the
principal of, and interest on, any Senior Indebtedness in accordance with the
terms of such Senior Indebtedness, the Holder shall be subrogated to the rights
of the holder or holders of such Senior Indebtedness to receive payments or
distributions of assets of the Payor applicable to such Senior Indebtedness, to
the extent of the application thereto of moneys or other assets which would have
been received by the Holder but for the provisions of this Section 6, until the
principal of, and interest on, this Note shall be paid in full; it being
understood that the provisions of this Section 6 are, and are intended, solely
for the purpose of defining the relative rights of the Holder, on the one hand,
and the holders of Senior Indebtedness, on the other hand. Except as set forth
in Sections 6.2, 6.3 and 6.4, nothing in this Section 6 or this Note is intended
to or shall impair the obligations of Payor hereunder, subject to the rights of
the Holder and creditors of the Payor other than the holders of Senior
Indebtedness, nor shall anything in this Note prevent the Holder from exercising
all remedies otherwise permitted by this Note or by applicable law upon default
under this Note, subject, in any event, to the rights, if any, under this
Section 6 of the holders of Senior Indebtedness in respect of any payment or
distribution of cash, property or
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<PAGE> 19
securities of the Payor (other than Subordinated Securities) received upon the
exercise of any such remedy.
7. Restriction on Transfer. By its acceptance of this Note,
the Holder and the Payee, as the case may be, acknowledge that neither this Note
nor the securities underlying this Note has been registered under the securities
laws of the United States of America or any state thereof and represents that
this Note has been acquired for investment and, neither this Note, nor any
portion thereof, no interest in this Note nor the Conversion Shares may be
offered for sale, sold, delivered after sale, transferred, pledged, or
hypothecated in the absence of registration of this Note and such Conversion
Shares, as the case may be, under applicable federal and state securities laws
or the receipt by the Payor of an opinion of counsel of the Holder or Payee, as
the case may be, reasonably satisfactory to the Payor that such registration is
not required by reason of an available exemption from registration under such
securities laws.
8. Amendments. No amendment, modification or waiver of any
provision of this Note, and no consent to departure from performance or
compliance with any such provision, shall in any event be effective unless the
same is in writing and signed by the Holders of 51% or more in the aggregate
principal amount of the New Notes at the time outstanding, except that no such
amendment may (i) extend the Maturity Date of any New Note, or reduce the
principal amount thereof, or reduce the rate or extend the time or payment of
interest thereon, without the consent of the holder of each of the New Notes so
affected; (ii) modify the provisions of the Note with respect to the
subordination of the Notes in a manner adverse to the holders thereof or alter
the provisions in respect of the right to convert the Notes, without the consent
of the holders of 100% in aggregate principal amount of the New Notes at the
time outstanding; or (iii) reduce the aforesaid percentage of the New Notes, the
consent of the holders of which is required for any amendment, without the
consent of the holders of 100% in aggregate principal amount of the New Notes at
the time outstanding.
9. Miscellaneous.
Section 9.1. The headings of the various paragraphs
of this Note are for convenience of reference only and shall in no way modify
any of the terms or provisions of this Note.
Section 9.2. All notices required or permitted to be
given hereunder shall be in writing and shall be deemed to have been duly given
when personally delivered or sent by registered or certified mail, return
receipt requested, postage prepaid, to the address of the intended recipient set
forth in the preamble to this Note or at such other address as the intended
recipient shall have hereafter given to the other party hereto pursuant to the
provisions hereof.
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<PAGE> 20
Section 9.3. If any date that may at any time be
specified in this Note as a date for the making of any payment of principal or
interest under this Note shall fall on Saturday, Sunday or on a day which in
Philadelphia, Pennsylvania shall be a legal holiday, then the date for the
making of that payment shall be the next subsequent day which is not a Saturday,
Sunday or legal holiday.
Section 9.4. This Note and the obligations of Payor
and the rights of the Holder hereunder shall be governed by, and construed in
accordance with the applicable laws of the Commonwealth of Pennsylvania without
giving effect to the choice of law principles thereof.
Section 9.5. (a) AS A SPECIFICALLY BARGAINED
INDUCEMENT FOR HOLDER TO ACCEPT THIS NOTE, AND AFTER HAVING THE OPPORTUNITY TO
CONSULT COUNSEL, PAYOR AND THE HOLDER OF THIS NOTE, BY ITS OR HIS ACCEPTANCE
HEREOF EACH HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT IT
MAY HAVE TO TRIAL BY JURY IN RESPECT OF ANY ACTION OR PROCEEDING ARISING OUT OF,
UNDER OR IN CONNECTION WITH THIS NOTE, AND IN CONNECTION WITH ANY CLAIM,
COUNTERCLAIM, OFFSET OR DEFENSE ARISING IN CONNECTION WITH SUCH ACTION OR
PROCEEDING, WHETHER ARISING UNDER ANY STATUTE (INCLUDING ANY FEDERAL OR STATE
CONSTITUTION) OR UNDER THE LAW OF CONTRACT, TORT OR OTHERWISE AND, INCLUDING,
WITHOUT LIMITATION, ANY CHALLENGE TO THE LEGALITY, VALIDITY, BINDING EFFECT OR
ENFORCEABILITY OF THIS PROVISION OR THIS NOTE. FURTHER, PAYOR HEREBY CERTIFIES
THAT NO REPRESENTATIVE OR AGENT OF THE HOLDER HAS REPRESENTED, EXPRESSLY OR
OTHERWISE, THAT THE HOLDER WOULD NOT, IN THE EVENT OF ANY SUCH ACTION OR
PROCEEDING, SEEK TO ENFORCE THIS WAIVER OF JURY TRIAL PROVISION. PAYOR HEREBY
ACKNOWLEDGES THAT THE HOLDER HAS BEEN INDUCED TO ACCEPT THIS NOTE BY, INTER
ALIA, THE PROVISIONS OF THIS SECTION.
(b) PAYOR AGREES TO THE PERSONAL JURISDICTION OF ANY
STATE OR FEDERAL COURT WITHIN THE COMMONWEALTH OF PENNSYLVANIA (PHILADELPHIA
COUNTY) IN ANY LITIGATION COMMENCED BY THE HOLDER OF THIS NOTE IN RESPECT OF ANY
MATTER ARISING UNDER OR IN CONNECTION WITH THIS NOTE, AND WAIVES PERSONAL
SERVICE OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SERVICE OF PROCESS
MAY BE MADE BY CERTIFIED MAIL DIRECTED TO PAYOR AT THE ADDRESS INDICATED ABOVE
AND SERVICE SO MADE SHALL BE DEEMED TO BE COMPLETED FIVE (5) DAYS AFTER THE SAME
SHALL HAVE BEEN DEPOSITED IN THE UNITED STATES MAIL, POSTAGE PREPAID. PAYOR
WAIVES, AT THE OPTION OF THE HOLDER, ANY OBJECTION BASED ON FORUM NON CONVENIENS
AND ANY OBJECTION TO VENUE OF ANY ACTION INSTITUTED HEREUNDER AND CONSENTS TO
THE GRANTING OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY THE
COURT. NOTHING CONTAINED IN THIS PROVISION SHALL AFFECT THE RIGHT OF THE HOLDER
TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR AFFECT ITS RIGHT
TO BRING ANY ACTION OR PROCEEDING AGAINST PAYOR OR ANY OF ITS PROPERTY IN THE
COURTS OF ANY OTHER JURISDICTION.
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<PAGE> 21
(c) PAYOR AGREES THAT ANY ACTION COMMENCED BY IT
ASSERTING ANY CLAIM OR COUNTERCLAIM ARISING UNDER OR IN CONNECTION WITH THIS
NOTE SHALL BE BROUGHT IN THE COURTS OF THE COMMONWEALTH OF PENNSYLVANIA
(PHILADELPHIA COUNTY), OR IN THE COURTS OF THE UNITED STATES OF AMERICA FOR THE
EASTERN DISTRICT OF PENNSYLVANIA AND THAT SUCH COURTS SHALL HAVE EXCLUSIVE
JURISDICTION WITH RESPECT TO ANY SUCH ACTION.
(d) Payor agrees that in the event of any litigation
in respect of any matter arising under or in connection with this Note, Payor
will not interpose any counterclaim, setoff, recoupment, defense, rescission or
adjustment of any nature.
(e) Payor agrees that if the Holder shall institute
any action to enforce the collection of any amount of principal of, and/or
interest on or any other amount due hereunder this Note, there shall be
immediately due and payable from the Payor, in addition to the then unpaid sum
of this Note, all reasonable costs and expenses incurred by the Holder in
connection therewith, including, without limitation, reasonable attorneys' fees
and disbursements.
(f) No forbearance, indulgence, delay or failure to
exercise any right or remedy with respect to this Note shall operate as a
waiver, nor as an acquiescence in any default, nor shall any single or partial
exercise of any right or remedy preclude any other or further exercise thereof
or the exercise of any other right or remedy.
(g) The Payor hereby expressly waives demand and
presentment for payment, notice of nonpayment, notice of dishonor, protest,
notice of protest and diligence in taking any action to collect amounts called
for hereunder, and shall be directly and primarily liable for the payment of all
sums owing and to be owing hereon, regardless of and without any notice,
diligence, act or omission with respect to the collection of any amount called
for hereunder or in connection with any right, lien, interest or property at any
and all times which the Payee had or is existing as security for any amount
called for hereunder.
10. Transfers. The transfer of this Note is registrable by the Payor,
and the registered Holder hereof, in person or by his attorney duly authorized
in writing, on the books of the Payor to be kept for that purpose at the office
of the Payor, upon surrender and cancellation of this Note and upon presentation
of a duly executed written instrument of transfer in form satisfactory to Payor,
and thereupon a new Note or Notes, of authorized denominations for the same
aggregate principal amount will be issued to the transferee or transferees in
exchange herefor with payment by the Holder of any stamp or other tax or
governmental charge in connection therewith. Prior to due presentment of this
Note for registration of transfer, the Payor may deem and treat the person in
whose name this Note is registered as the absolute owner hereof for the purpose
of receiving payment hereof or on account
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<PAGE> 22
hereof or of interest hereon (subject to the provisions of the first paragraph
on the face hereof) and for all other purposes.
IN WITNESS WHEREOF, this Note has been executed and delivered
as a sealed instrument on the date first above written by the duly authorized
representative of the Payor.
SUBMICRON SYSTEMS CORPORATION
By:____________________________
Name:
Title:
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<PAGE> 1
EXHIBIT 10.13
SUBORDINATED NOTE AND PREFERRED STOCK PURCHASE AGREEMENT
THIS SUBORDINATED NOTE AND PREFERRED STOCK PURCHASE AGREEMENT
(this "Agreement"), effective March 26, 1997 (the "Effective Date"), is between
each of the persons or entities identified on Schedule 1 attached hereto (the
"Buyer") and SUBMICRON SYSTEMS CORPORATION, a Delaware corporation (the
"Company"). All of the persons or entities identified on Schedule 1 are
hereinafter collectively referred to as the "Buyers."
In consideration of the mutual agreements, undertakings and
covenants herein contained, the parties, intending to be legally bound hereby,
agree as follows:
1. Purchase and Sale. Subject to the terms and conditions of
this Agreement, effective on the Effective Date, the Company shall issue and
sell to the Buyer, and the Buyer shall purchase from the Company, the securities
set forth below.
(a) The Company's 8% Convertible Subordinated Note
due March 15, 2002 in the aggregate principal amount set forth on Schedule 2
attached hereto (the "8% Note"). The 8% Note shall be in the form attached
hereto as Exhibit "A".
(b) The number of shares of the Company's Series A
Preferred Stock as is set forth on Schedule 2 attached hereto (the "Preferred
Stock"). The Preferred Stock shall be convertible into shares of the Common
Stock of the Company, par value $.01 per share (the "Common Stock"), at the
rate, and otherwise shall have the designations, preferences, limitations and
rights, provided for in the Certificate of Designations and Preferences of the
Preferred Stock in the form attached hereto as Exhibit "B".
The Preferred Stock, the 8% Note and the Common Stock underlying the Preferred
Stock and 8% Note shall be hereinafter collectively referred to as the "New
Securities."
2. Consideration and Exchange. In consideration and exchange
for the New Securities, effective on the Effective Date, Buyer shall deliver to
the Company the Company's 9% Convertible Subordinated Note due December 15, 1997
held by Buyer in the aggregate principal amount set forth on Schedule 2 attached
hereto (the "9% Note") and the Warrants held by Buyer to purchase the shares of
Common Stock set forth on Schedule 2 attached hereto (the "Warrants"), each
marked "Cancelled." The 9% Note and the Warrants are hereinafter collectively
referred to as the "Old Securities."
<PAGE> 2
3. Closing Deliveries.
(a) The Company shall deliver or cause to be
delivered to Buyer as soon as practicable following the date hereof, the
following:
(i) The 8% Note;
(ii) Certificate(s) evidencing the shares of
Preferred Stock purchased hereby;
(iii) An opinion of Cozen and O'Connor,
counsel to the Company, in form and substance reasonably satisfactory to Company
and Robert Goldberg, Esquire ("Goldberg") of Ellis, Funk, Goldberg, Labovitz &
Dokson, P.C., counsel to Buyers;
(iv) A check in an amount not to exceed
$10,000, made payable to Goldberg, as payment of the fee for his services on
behalf of Buyers in connection with the review and negotiation of this Agreement
and related documents and agreements; and
(v) A letter signed by David F. Levy and
James S. Molinaro, addressed to the Buyers, pursuant to which Messrs. Levy and
Molinaro will agree to vote their shares of Common Stock in favor of the
Nominees in accordance with Section 9(c) of this Agreement.
(b) Buyer hereby delivers to Cozen and O'Connor,
counsel for the Company, the 9% Note of Buyer and Buyer's Warrants, each marked
"Cancelled." Such securities shall be held by Cozen and O'Connor in escrow and
shall only be released to the Company once the deliveries to be made pursuant to
Paragraph 3(a) above have been made.
4. Representations and Warranties of the Company. The Company
hereby represents and warrants to Buyer as follows:
(a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware.
The Company has all requisite corporate power and authority to own and lease its
properties and to conduct its business as presently conducted.
(b) The New Securities, when issued in accordance
with or as contemplated by their terms or the terms of this Agreement, as the
case may be, will be validly issued and outstanding. The shares of Preferred
Stock and the shares of Common Stock underlying the shares of Preferred Stock
and the 8% Note have been (or will have been prior to the Effective Date) duly
and validly authorized and reserved for issuance (subject,
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<PAGE> 3
as to the Common Stock underlying the 8% Note, to approval of the Company's
stockholders pursuant to Paragraph 9(a)), and, if and when issued, will be fully
paid and non-assessable. Upon transfer and delivery of the New Securities to
Buyer, Buyer shall obtain full and legal title to the New Securities, free and
clear of any lien, charge or other encumbrance of any nature, except for any
restrictions set forth in the respective New Security.
(c) The Company has all necessary corporate power to
enter into this Agreement, to issue and deliver the New Securities, and to carry
out all of the transactions contemplated hereby and thereby, subject to the
proviso in the following sentence. The execution, delivery and performance of
this Agreement by the Company and the consummation of the transactions
contemplated hereby, including, without limitation, the issuance of the New
Securities, have been duly authorized by all requisite corporate action on the
part of the Company; provided, however, that the 8% Note, by its terms, will not
be convertible into Common Stock unless and until the Company's stockholders
approve the convertibility of the 8% Notes in accordance with Paragraph 9(a) of
this Agreement. This Agreement constitutes a valid and binding obligation of the
Company, enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles.
(d) The Company has previously furnished Buyer true and
correct copies of the following documents which have been filed by the Company
with the Securities and Exchange Commission ("SEC") pursuant to the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (such documents are
hereinafter collectively called the "SubMicron SEC Filings"): (i) its Annual
Report on Form 10-K for the year ended December 31, 1995; (ii) quarterly reports
on Form 10-Q for the quarters ended March 31, 1996, June 30, 1996 and September
30, 1996; (iii) Proxy Statement dated May 1, 1996; and (iv) all reports on Form
8-K filed by the Company with the SEC during the period from and after January
1, 1996. The SubMicron SEC Filings constitute all reports the Company was
required to file under the Exchange Act since January 1, 1996. At the time of
filing with the SEC, the SubMicron SEC Filings (i) were prepared in all material
respects in accordance with the applicable requirements of the Exchange Act and
the rules and regulations thereunder, (ii) did not contain any untrue statement
of a material fact, and (iii) did not omit to state a material fact necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading. The audited and unaudited financial statements contained
in the SubMicron SEC Filings are true and correct in all material respects and
present fairly the consolidated financial condition and results of operations
and changes in stockholders' equity and cash flows as of the dates and for the
period indicated, except
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<PAGE> 4
as may otherwise be stated in such financial statements. For purposes of this
Agreement, all financial statements of the Company shall be deemed to include
any notes to such financial statements.
(e) The authorized capital stock of the Company consists of
100,000,000 shares of Common Stock, $.0001 par value per share, of which
16,879,643 Shares were issued and outstanding as of March 1, 1997, and 5,000
Shares of Preferred Stock, $.01 par value, none of which are issued and
outstanding (before giving effect to the transactions contemplated by this
Agreement). The outstanding shares of Common Stock have been duly authorized and
validly issued, and are fully paid and nonassessable. As of March 1, 1997, the
Company had reserved 2,310,378 shares of Common Stock for issuance upon the
exercise of warrants or options that have been granted prior to the date hereof
(other than shares of Common Stock underlying the 9% Notes (as defined in
Paragraph 8) and all of the Warrants issued to the Buyers) or that may hereafter
be granted under the Company's stock option plans.
(f) Except as described in the SubMicron SEC Filings, there
are no current actions, claims, suits, proceedings or, to the best of the
Company's knowledge, investigations, pending against the Company or its
properties before any court, governmental agency, arbitration board or other
tribunal, nor has the Company received any written notice of any threat thereof
which would be required to be disclosed by the Company on an Annual Report on
Form 10-K pursuant to Item 103 of Regulation S-K under the Exchange Act.
(g) Neither the Company nor any of its "affiliates" (as such
term is defined in Rule 12b-2 under the Exchange Act) has filed a petition or
request for reorganization or protection or relief under the bankruptcy laws of
the United States or any state or territory thereof; made any general assignment
for the benefit of creditors; or consented to the appointment of a receiver or
trustee, including a custodian under the United States bankruptcy laws, whether
such receiver or trustee is appointed in a voluntary or involuntary proceeding
which has not been discharged prior to the date hereof.
5. Representations and Warranties of Buyer. Buyer hereby
represents and warrants to the Company as follows:
(a) This Agreement has been duly executed and
delivered by Buyer and constitutes the valid and legally binding obligation of
the Buyer, enforceable in accordance with its terms, subject, as to enforcement,
to bankruptcy, insolvency, reorganization and other laws of general
applicability relating to or affecting creditors' rights and to general
equitable principles.
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<PAGE> 5
(b) Buyer is acquiring the New Securities for
investment for Buyer's own account and not with a view to, or for resale in
connection with, any distribution of the New Securities. Buyer understands that
the New Securities have not been registered under the Securities Act of 1933, as
amended (the "Securities Act"), or under any state securities or blue sky laws,
and, as a result thereof, are subject to substantial restrictions on transfer.
Buyer acknowledges that the New Securities must be held indefinitely unless
subsequently registered under the Securities Act and any applicable state
securities or blue sky laws, or exemptions from registration under the
Securities Act.
(c) Upon transfer and delivery of the Old Securities
to the Company, the Company shall obtain full and legal title to the Old
Securities, free and clear of any lien, charge or other encumbrance of any
nature.
(d) Buyer has read, understands and is familiar with
the risk factors set forth on Exhibit "C" attached hereto (the "Risk Factors"),
is familiar with the nature of the risks associated with acquiring the New
Securities in consideration of the Old Securities, and has determined that the
purchase of the New Securities is consistent with Buyer's investment objectives.
(e) Buyer has been provided with a copy of and has
reviewed the SubMicron SEC Filings. Buyer acknowledges that he is familiar with
the condition of the Company, financial and otherwise, and with its business
operations and prospects (including the information contained in the Risk
Factors), and further acknowledges that Buyer and Buyer's advisors have been
provided with or have been given access to all of the financial and other
information requested by them or deemed by them to be necessary or material for
Buyer to make the investment decision to acquire the New Securities in
consideration for the Old Securities and that Buyer has based such decision
solely on the foregoing.
6. Payment of Accrued Interest and Release. The Company
acknowledges and agrees that all interest which accrued but was not paid on the
9% Note prior to the Effective Date will be paid in cash on the Effective Date,
with such interest to be calculated in accordance with the terms and conditions
of the 9% Note. Subject to the foregoing, Buyer, for the consideration set forth
in this Agreement, hereby releases the Company and its officers, directors,
stockholders, employees, agents, successors and assigns and any persons
controlling any of the foregoing from any and all liability, claims and causes
of action of any and all kinds which Buyer may have against the Company to the
date hereof in connection with the compliance by Company (or failure to comply)
with the terms and conditions of the Old Securities.
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<PAGE> 6
7. Legends. Each certificate or instrument representing the
New Securities shall be endorsed with the following legend:
"The securities represented by this certificate or
instrument have been acquired for investment and have
not been registered under the Securities Act of 1933,
as amended, or the securities laws of any state. The
securities may not be transferred in the absence of
such registration or exemptions therefrom under such
Act and such laws."
8. Exit Consent. The 9% Notes contain certain restrictions on
the payment of dividends and other distributions and the incurrence of certain
unsecured debt (Sections 7 and 8, respectively, of the 9% Notes). In addition,
the 9% Notes provide that it shall be an Event of Default if the Company has
earnings per share of less than $.20 for fiscal years 1995 or 1996 (Section 5.7
of the 9% Notes). Further, the 9% Notes contain anti-dilution provisions that
adjust the conversion price at which the 9% Notes are converted into shares of
Common Stock and, therefore, the number of shares of Common Stock issuable upon
conversion of the 9% Notes. Issuance of the New Securities pursuant to this
Agreement would likely cause an adjustment to the conversion price and the
number of shares issuable upon subsequent conversion of any of the 9% Notes
which remain outstanding after the Effective Date. With full knowledge of the
foregoing, Buyer hereby consents to (i) modify the 9% Notes by eliminating
Sections 7 and 8 thereof (the restrictions on dividends and distributions and on
certain indebtedness, respectively), Section 5.7 (the earnings-per-share Event
of Default), Section 5.8 (the Event of Default for non-compliance with Sections
7 or 8) and all references in the 9% Notes to the foregoing provisions and (ii)
the waiver of any anti-dilution adjustments with respect to the conversion price
or the number of shares issuable upon conversion of the 9% Notes as a result of
this Agreement or the issuance of any of the New Securities. In order for the
foregoing consent and waiver to be effective, such consent and waiver must be
agreed to by Buyers holding at least 51% of the aggregate principal amount of
the 9% Notes outstanding. For purposes of this Paragraph 8, the term "9% Notes"
shall mean all of the Company's 9% Subordinated Convertible Notes due December
15, 1997 issued in connection with the Company's Confidential Private Placement
Memorandum dated December 1, 1995.
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<PAGE> 7
9. Post-Effective Date Covenants.
(a) Covenant to Obtain Stockholder Approval. To the
extent required by the rules and regulations of the principal national
securities exchange or market on which the Common Stock is traded, the Company
hereby agrees to use its best efforts to obtain, on or before September 30,
1997, approval by the Company's stockholders of the convertibility feature of
the Company's 8% Subordinated Convertible Notes being acquired by the Buyers and
any replacement notes thereof (collectively, the "Aggregate 8% Notes"). The
Company agrees, subject to receiving any and all necessary approvals from the
SEC, and if stockholder approval is necessary to permit the convertibility
feature of the Aggregate 8% Notes, to hold a meeting of its stockholders on or
before September 30, 1997 (the "1997 Meeting") for the purpose of seeking
approval of its stockholders as aforesaid, and that the 1997 Meeting will be
held pursuant to a proxy statement which the Company, among other matters,
proposes and recommends voting FOR such approval. In connection with the
foregoing, Buyer hereby constitutes and appoints David F. Levy, Buyer's true and
lawful attorney-in-fact and agent with respect to Buyer's Preferred Stock or any
Common Stock held by Buyer, with full power of substitution and resubstitution,
for Buyer and in Buyer's name, place and stead, in any and all capacities, to
vote FOR approval of the convertibility feature of the Aggregate 8% Notes at the
1997 Meeting. This power of attorney shall be deemed to be a power coupled with
an interest and therefore irrevocable and shall to the fullest extent permitted
by applicable law survive the bankruptcy, death, incapacity, disability or
incompetence of the undersigned.
(b) Exchange Offer. Within 90 days from the Effective
Date, the Company hereby agrees to file with the SEC an offer to exchange (the
"Exchange Offer") all of the Aggregate 8% Notes for a like aggregate principal
amount of debt securities of the Company (the "Exchange Notes") which are
substantially similar to the Aggregate 8% Notes (and which shall be issued
pursuant to, and entitled to the benefits of, a trust indenture qualified under
the Trust Indenture Act of 1939, as amended ("TIA")), except that the Exchange
Notes shall have been registered pursuant to an effective Registration Statement
under the Securities Act (the "Notes Registration Statement") and will contain
such other changes as may be required to comply with the TIA. The Company shall
use its best efforts to cause the Notes Registration Statement to become
effective under the Securities Act by no later than September 30, 1997. If, as
of the consummation of the Exchange Offer, the shares of Common Stock underlying
Buyer's Exchange Notes are freely saleable pursuant to Rule 144(k) under the
Securities Act or any successor provision or the Notes Registration Statement,
the Company shall deliver to Buyer an opinion of the Company's counsel to that
effect. If, as of the consummation of the Exchange Offer, the shares of Common
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<PAGE> 8
Stock underlying Buyer's Exchange Notes are not freely saleable pursuant to Rule
144(k) under the Securities Act or any successor provision or as a result of the
Notes Registration Statement (or would not have been freely saleable pursuant to
the Notes Registration Statement had Buyer participated in the Exchange Offer),
the Company agrees to use its best efforts to file a Registration Statement on
Form S-3 or other appropriate form covering the resale of such shares of Common
Stock; to use its best efforts to cause such Registration Statement to become
effective under the Securities Act by no later than September 30, 1997; and to
maintain the effectiveness of such Registration Statement to the same extent and
subject to the same limitations and conditions as set forth in Paragraph 9(d)
below until the later of (i) the date all of the Common Stock underlying Buyer's
Exchange Notes have been sold or (ii) the date all such shares may be sold
pursuant to Rule 144(k) under the Act (or any successor provision). Each of the
Buyers who participates in the Exchange Offer will be required to represent that
any Exchange Notes received by such Buyer will be acquired in the ordinary
course of Buyer's business, that at the time of the consummation of the Exchange
Offer such Buyer will have no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes, and that such Buyer is
not affiliated with the Company within the meaning of Rule 405 promulgated under
the Securities Act and if it is such an affiliate, that it will comply with the
registration and prospectus delivery requirements of the Securities Act, to the
extent applicable.
(c) Board Representation. At the Company's next Board
of Directors Meeting after the Effective Date (currently scheduled for April 4,
1997) (the "Date of Election"), the Board of Directors of the Company will elect
as Directors of the Company of such class as the Company may determine two
individuals (the "Nominees") that are mutually agreeable to the Company and the
Representative (as defined below) for a minimum term of one year. Unless
otherwise agreed to by the Company and the Representative, the Nominees shall be
Ronald Booth and Maurice Gallagher, each of whom is acceptable to Company. Upon
the expiration of the term of either such Nominee, (i) if more than 50% of the
principal amount of the Aggregate 8% Notes remains outstanding at the expiration
of such term or was outstanding at any time within the six months prior to the
end of such term, the Company will, at the request of the Representative and
such Nominee, nominate such Nominee, or another nominee mutually agreeable to
the Company and the Representative, for reelection as a director of the Company,
and (ii) if more than 25% but not more than 50% of the principal amount of the
Aggregate 8% Notes remains outstanding at the expiration of such term or was
outstanding at any time within the six months prior to the end of such term, the
Company will, if at such time such Nominee is the sole Nominee serving on the
Board of Directors, at the request of the Representative and such Nominee,
nominate such
- 8 -
<PAGE> 9
Nominee, or another nominee mutually agreeable to the Company and the
Representative, for reelection as a director of the Company. Notwithstanding
anything contained in this Subparagraph 9(c) to the contrary, the foregoing
obligations of the Company are subject to the Nominees agreeing, in writing,
prior to service on the Board, that one such Nominee will resign as a Director
effective on the later of (i) the first anniversary of the Date of Election or
(ii) the date that is six months following the date more than 50% of the
original aggregate principal amount of the Aggregate 8% Notes is no longer
outstanding for any reason, and that the other such Nominee will so resign
effective on the later of (x) the first anniversary of the Date of Election or
(y) the date that more than 25% of the original aggregate principal amount of
the Aggregate 8% Notes is no longer outstanding for any reason. For purposes of
this Subsection 9(c), the term Representative shall mean that person designated
by the holders of more than 50% of the outstanding principal amount of the
Aggregate 8% Notes as the Representative of the Buyers for purposes of this
Subsection 9(c). If the Representative is a Buyer or an affiliate of a Buyer and
at any time after his designation the Representative (if he is a Buyer) or such
Buyer (if the Representative is an affiliate of a Buyer) shall no longer hold an
8% Note, the Buyers shall designate a new Representative. If a Representative is
not designated as aforesaid, the Representative shall be the holder of the
largest outstanding principal amount of the Aggregate 8% Notes at the time the
Nominees are required to be designated. This paragraph 9(c) supersedes any prior
agreements of the Company in connection with the Old Securities with respect to
the election or appointment of directors or advisors to the Board of Directors.
(d) The Company's Registration Statement on Form S-3
(File No. 333-4516) covering, among others, the Common Stock underlying the 9%
Notes and Warrants of the Buyers, has been declared effective by the SEC (the
"Registration Statement"). As soon as reasonably practicable, but in no event
later than 45 days following the date hereof, the Company agrees to file with
the SEC an amendment to the prospectus constituting part of the Registration
Statement, modified to, among other things, include the Common Stock underlying
Buyer's Preferred Stock (such prospectus, as amended or supplemented, being
hereinafter referred to as the "Prospectus"), which Prospectus will be usable by
Buyer, if necessary, in connection with the sale, if any, of the Common Stock
underlying the Preferred Stock. The Company hereby agrees to maintain the
effectiveness of the Registration Statement until the later of (i) the date all
of the Common Stock underlying the Preferred Stock purchased by Buyer has been
sold or (ii) the date all such shares may be sold pursuant to Rule 144(k) under
the Act (or any successor provision); provided, however, that if the Company is
unable to maintain the effectiveness of the Registration Statement due to the
fact that the Company is engaged in negotiations with respect to an
- 9 -
<PAGE> 10
acquisition or other material event that would, in the written opinion of
Company's counsel, require the filing with the SEC of a Form 8-K (other than
pursuant to Item 5 of Form 8-K) or in the event that such acquisition or other
material event would require the inclusion in the Registration Statement of
information not readily available to the Company (collectively a "Deferral
Event"), the Company may postpone (the "Postponement") maintaining the
effectiveness of the Registration Statement until the later of (i) the date such
information becomes available or the Form 8-K is filed, as the case may be, or
(ii) 60 days. The Company shall promptly advise Buyer of the Postponement (the
"Notice of Postponement"), and the Company shall not be permitted to give any
such Notice of Postponement and to so postpone maintaining the effectiveness of
the Registration Statement more than once in any twelve month period.
10. Further Assurances. From time to time hereafter, at the
request of the other party, the Company or Buyer, as the case may be, shall
execute and deliver such other instruments or documents as may be requested by
such requesting party to more fully vest and perfect title to the New Securities
or the Old Securities, as the case may be, and all rights thereunder, in favor
of such party.
11. Miscellaneous.
(a) This Agreement shall be for the benefit of and
shall be binding upon Buyer and the Company and their respective successors and
assigns.
(b) This Agreement and the documents executed and
delivered pursuant thereto, constitute the entire agreement between the parties
with respect to the subject matter contained herein, and supersedes all prior
and contemporaneous oral and written communications and agreements with respect
thereto.
- 10 -
<PAGE> 11
(c) This Agreement shall be governed by the laws of
the Commonwealth of Pennsylvania.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the date first above written.
THE BUYER
_____________________________
SUBMICRON SYSTEMS CORPORATION
By:__________________________
Name:
Title:
- 11 -
<PAGE> 1
Exhibit 21
SubMicron Systems Corporation
List of Subsidiaries
Company Name
SubMicron Systems Inc., a Pennsylvania Corporation
SMICRON (S) PTE, LTD, a Singapore Corporation
SubMicron Systems Investment Corporation, a Delaware Corporation
SubMicron Systems International Ltd., a Barbados Corporation
SubMicron Wet Process Stations Inc., a California Corporation
(d/b/a Universal Plastics)
Systems Chemistry Incorporated, a California Corporation
Imtec Acculine Inc., a California Corporation
PRIMAXX Corporation, a Delaware Corporation
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-8 Nos. 33-71900, 33-91986, and 333-4514 and Form S-3 Nos. 33-64500 and
333-4516) of our report dated April 8, 1997, with respect to the consolidated
financial statements and schedule of SubMicron Systems Corporation included in
the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Philadelphia, Pennsylvania
April 15, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into SubMicron Systems Corporation's
previously filed Form S-8 Registration Statements File Nos. 33-71900, 33-91986
and 333-4514 and Form S-3 Registration Statements File Nos. 33-64500 and
333-4516.
ARTHUR ANDERSEN LLP
Philadelphia, PA
April 11, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the inclusion of our report, dated February 23, 1996, on
the financial statements of Imtec Acculine, Inc. as of December 31, 1995, and
for the two years then ended, in this Annual Report on Form 10-K, and to the
incorporation by reference of this report into Registration Statements on Form
S-3 Nos. 33-64500 and 333-4516 and Registration Statements on Form S-8 Nos.
33-71900, 33-91986, and 333-4154.
/s/ Ireland San Filippo, LLP
IRELAND SAN FILIPPO, LLP
April 11, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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